EXHIBIT 99.2
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RESPONDENT'S EXHIBIT MTM-1
STATE OF INDIANA
INDIANA UTILITY REGULATORY COMMISSION
IN THE MATTER OF THE PETITION OF )
THE CITY OF GARY, INDIANA )
REQUESTING THE INDIANA UTILITY )
REGULATORY COMMISSION ESTABLISH )
THE TERMS AND CONDITIONS OF THE )
SALE OF CERTAIN PROPERTY OF )
NORTHERN INDIANA PUBLIC SERVICE ) Cause No. 42643
COMPANY TO THE CITY OF GARY AND )
FOR A DETERMINATION OF THE VALUE )
OF SUCH PROPERTY UNDER INDIANA )
CODE SECTIONS 8-1-2-92 AND 8-1-2-93 )
RESPONDENT: NORTHERN INDIANA )
PUBLIC SERVICE COMPANY. )
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PREPARED DIRECT TESTIMONY OF
MARK T. MAASSEL
ON BEHALF OF NORTHERN INDIANA PUBLIC SERVICE COMPANY
======================================================
Daniel W. McGill, Atty No. 9489-49
Claudia J. Earls, Atty No. 8468-49
Barnes & Thornburg LLP
11 S. Meridian St.
Indianapolis, IN 46204
Telephone: (317) 231-7229
Fax: (317) 231-7433
Email: dmcgill@btlaw.com
Attorneys for Respondent
July 9, 2004 NORTHERN INDIANA
PUBLIC SERVICE COMPANY
PREPARED DIRECT TESTIMONY OF MARK T. MAASSEL
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Q: Please state your name and business address.
A: My name is Mark T. Maassel and my business address is 801 E. 86th
Avenue, Merrillville, Indiana 46410.
Q: What is your current position with Northern Indiana Public
Service Company ("NIPSCO")?
A: I am the President of NIPSCO. In this role, I am responsible for
maintaining strong relationships in NIPSCO's marketplace,
particularly in the regulatory, legislative, and public affairs
areas.
Q: What is your educational background?
A: I earned a bachelor's degree in civil engineering from the
University of Minnesota, and a juris doctorate degree with high
honors from the Chicago-Kent College of Law at the Illinois
Institute of Technology.
Q: Please describe your employment history.
A: I have served in various leadership roles with NIPSCO and its
parent company, NiSource Inc. ("NiSource"), including vice
president, Regulatory and Governmental Policy for NiSource; vice
president, Marketing and Sales for NiSource; vice president of
Electric Service and Sales for NIPSCO; director of the Central
Region for NIPSCO; and manager of Environmental Programs at
NIPSCO. In these roles, I have been involved in virtually all
aspects of NIPSCO's business.
Q: You previously testified before this or any other regulatory
commissions?
A: Yes, I have previously testified before the Indiana Utility
Regulatory Commission, the Kentucky Public Service Commission,
the Pennsylvania Public Utilities Commission, the Massachusetts
Department of Telecommunications and Energy, the Maine Public
Utilities Commission, and the New Hampshire Public Utilities
Commission.
Q: What is the purpose of your Direct Testimony in this proceeding?
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A: The purpose of my Direct Testimony is to provide the Commission
with a brief overview of NIPSCO's response to the City of Gary's
filing, including: (i) issues related to the uncertainty
concerning the evolving electric marketplace, (ii) implications
to NIPSCO and its customers that are related to the Midwest
Independent Transmission System Operator, Inc. ("MISO"),
including its recently proposed energy markets tariff - the
Midwest Market Initiative ("MMI"), (iii) the operating
capabilities of the temporarily shutdown Dean H. Mitchell
Generating Station ("Mitchell") in relation to NIPSCO's
customers' needs and load characteristics in particular, (iv) and
NIPSCO's assessment of whether starting up Mitchell is the most
reasonable decision in consideration of NIPSCO's customers,
investors, and the regional economy. Finally, I will introduce
the other witnesses who will be providing detailed Direct
Testimony on various aspects of NIPSCO's response.
Q: Please describe the City of Gary's Petition.
A: The City of Gary ("City"), in its Petition filed May 7, 2004, has
stated its intention to acquire certain NIPSCO property, namely,
NIPSCO's Dean H. Mitchell Generating Station ("Mitchell"),
located within the City's boundaries. The City's stated purpose
for the acquisition of Mitchell is for expansion of the Gary
airport, as well as for commercial, residential and recreational
development. The City's Petition goes on to ask the Commission
to value the site for the City's acquisition, and establish the
terms and conditions upon which the City may exercise its claimed
right to acquire the Mitchell property. Mayor King's Direct
Testimony further elaborates on these issues, and the City's
position regarding its intended acquisition of the Mitchell site.
Q: Please briefly describe Mitchell, and how it fits into NIPSCO's
electric supply portfolio.
A: NIPSCO has 4 major generating stations and 2 hydroelectric
facilities, with a total net demonstrated capability of 3,392
MWs, as described below.
Coal Gas Water
Station Capacity (MW) Capacity (MW) Capacity (MW)
------- ------------- ------------- -------------
Michigan City 469 120 0
Mitchell 485 17 0
Bailly 480 31 0
R.M. Schahfer 1625 155 0
Norway/Oakdale 0 0 10
As later described in more detail by Mr. Jerome B. Weeden in his
Direct Testimony, Mitchell has several of the oldest generating
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units in NIPSCO's fleet. Mitchell is primarily a coal-fired
station, with a net demonstrated capability of 502 MWs, as set
forth below:
Year In Net Primary
Unit No. Service Capacity Fuel
-------- ------- -------- -------
4 1956 125 MW Nat. Gas/Coal
5 1959 125 MW Coal
6 1959 125 MW Coal
9A 1968 17 MW Nat. Gas
11 1970 110 MW Coal
Mitchell is located along the shore of Lake Michigan, just north
of the Gary airport, and was originally built beginning in the
1950's. Mitchell was designed and built during a completely
different era, reflecting power needs that were vastly different
than what NIPSCO experiences today and will likely experience
tomorrow. Mitchell was built to serve as a base load plant (a
plant intended to operate steadily at constant output for longer
periods of time, except for scheduled outages). Mitchell has
extremely limited ramp capability - that is, its ability to
rapidly increase or decrease the amount of generation measured in
megawatts per minute. For this reason, Mitchell is a less
attractive generating resource in both the short and long term
for purposes of serving NIPSCO's current electric retail
customers. This lack of ramping capability is primarily due to
the fact that the plant is old and its technology is outdated.
Mr. Frank A. Venhuizen describes the impacts related to this
limiting characteristic in more detail in his Direct Testimony.
Mitchell was temporarily shutdown in January 2002, due to the
declining economy in general, weakening industrial demand for
electricity on NIPSCO's system (including during the off-peak
periods) and environmental concerns.
Q: What has been NIPSCO's position with respect to starting up
Mitchell?
A: NIPSCO has been continually reviewing its options for starting up
Mitchell, including consideration of whether operating and
economic conditions warrant a startup.
Q: Please briefly describe today's energy marketplace in the region
in which NIPSCO operates, and tomorrow's expectations regarding
this energy marketplace.
A: As early as 1996, the Federal Energy Regulatory Commission
("FERC") began to promote the regional operation of electric
transmission facilities among public utilities in an effort to
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encourage wholesale competition. MISO has since become an
official regional transmission organization by order of FERC, and
has continued to evaluate its role as congestion manager and
energy market operator for its footprint. Through various
filings and declaratory orders at FERC, this has ultimately led
to MISO's current proposal at FERC regarding a revised Open
Access Transmission and Energy Markets Tariff - the Midwest
Market Initiative ("MMI"), whereby MISO would implement a
centralized, security constrained economic dispatch for its
entire region, which would be supported by a day-ahead and real-
time energy markets, and congestion management provisions based
on locational marginal pricing and financial transmission rights.
NIPSCO has joined MISO as a transmission owner and provider -
through its membership in GridAmerica LLC; in addition, NIPSCO
has registered as a market participant in MISO's proposed energy
market.
Q: Why is the MISO proposal important to NIPSCO?
A: The MISO proposal will fundamentally affect the manner in which
NIPSCO provides adequate and reliable electric service to its
retail customers in many ways. MISO's energy market filing
will change the manner in which NIPSCO's generation will operate
in conjunction with its transmission and distribution facilities.
Under MISO's proposal, loads within its entire region will be
served by the resources that are the least expensive to dispatch,
based upon any transmission or other constraints across the
region. No longer will NIPSCO's control area dispatch its own
generating resources within its own selected resource order; MISO
proposes to calculate location-specific prices for practically
every major substation and generating unit in its region, in an
effort to reflect the most economical dispatch, taking into
account transmission constraints, for all generating resources in
its region. MISO also has proposed, as part of the MMI, a five-
minute forecast of NIPSCO's control area that will be used in the
determination of generating unit set points (five minute
balancing rule). Although still being reviewed at FERC, this
five minute balancing rule represents a new energy market
paradigm that will change the coordination and operation of
generating resources used by NIPSCO to adequately and reliably
serve NIPSCO's retail electric customers.
Q: How will MISO's location-specific pricing affect the use of
NIPSCO's generating resources?
A: MISO's location-specific pricing, i.e., "locational marginal
pricing," is the calculation of the cost of the next available
unit of energy for a specific location, taking into account the
deliverability of energy due to transmission congestion and line
losses. The purpose of this pricing initiative is to implement a
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security constrained economic dispatch system across the entire
MISO footprint in order to essentially ramp up the next lowest
incremental megawatt available from a greater number of
generating resources (as opposed to individual control areas),
when that next megawatt is needed to serve customers across the
MISO footprint. Since NIPSCO's generation is located within
MISO's footprint, NIPSCO's generation will be subject to the
economic dispatch calculations across the entire Midwest as
opposed to NIPSCO's control area.
Q: How does the five minute balancing rule affect NIPSCO?
A: As a result of the five minute forecast discussed above, MISO
will direct each online generator to ramp up or down to a certain
output every five minutes. Failure to comply with such direction
within a certain tolerance band will result in uninstructed
deviations, and may ultimately yield financial consequences in
the form of penalties.
Q: What are uninstructed deviations?
A: As explained in greater detail by Mr. Venhuizen, MISO's proposed
uninstructed deviation requirements are designed to encourage
compliance with MISO's dispatch schedules. MISO considers
significant deviations from dispatch schedules as additional
costs for the entire market that must be recovered from market
participants. At this time, it is unclear what the MISO
requirements and parameters regarding uninstructed deviations
will look like over the long term, but due to its limited ramping
capabilities, Mitchell is not likely to contribute significantly
to NIPSCO's compliance efforts with any uninstructed deviation
requirements.
Q: Given NIPSCO's current performance against reliability standards
as described by Mr. Venhuizen, what does this new paradigm mean
for NIPSCO and its customers?
A: Effectively, even after considering the uncertainty surrounding
the longer-term implications of MISO's proposed five minute
balancing rule, NIPSCO will likely need to purchase electric
supplies from generators that have the capability to regulate -
that is, ramp up and down quickly. Whether Mitchell is on-line
and generating or not, NIPSCO will probably be required to obtain
resources capable of regulation in order to comply with the North
American Electric Reliability Council's ("NERC") standards and
potential MISO operating parameters. I will discuss NERC's
standards below.
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Q: Given a reasonable anticipation of what MISO's balancing
requirements might look like in the short term, what specific
kind of energy product will NIPSCO need to satisfy MISO's five
minute balancing rule?
A: Intermediate dispatchable power, which is power that has the
ability to cycle and ramp up or down more than typical base load
facilities, without damaging or decreasing the useful life of the
generating unit. In order to be assured that the electricity
will be there when needed on very short notice, and that the
price is not prohibitive, a term power purchase agreement with
the characteristics described above will probably be required. A
term power purchase agreement will likely require NIPSCO to pay
demand, i.e., capacity reservation, charges. NIPSCO recently
conducted a Request for Proposal ("RFP") for electricity, and of
the responses received, seventeen offered to provide dispatchable
power, and all seventeen required some sort of demand charge.
Additionally, logic further suggests that capacity reservation
and associated fees will be necessary, since in today's market,
no rational generator would agree to build or maintain capacity
and hold it in reserve on a purely speculative basis.
Q: So far, your Direct Testimony has discussed MISO's operating
requirements. Can you further discuss the NERC operating
requirements?
A: NERC has established operating requirements concerning the
performance of control areas. As Mr. Venhuizen discusses more
fully, the relevant operating standards are Control Performance
Standards 1 and 2.
Q: Is complying with MISO and NERC requirements optional?
A: NIPSCO will not knowingly violate MISO's approved tariffs or
NERC's standards. While taking every step necessary to reliably
serve its customers, NIPSCO cannot pick and choose which
requirements it will comply with. If NERC and FERC (through the
approval of MISO's energy markets tariff) require utilities to
improve regulation on their systems, then NIPSCO will take the
steps necessary to comply. In his Direct Testimony, Mr.
Venhuizen explains that NIPSCO essentially considers current
NERC's standards mandatory, and Mr. Pierre R. H. Landrieu
describes some of the implications of violating these standards
in his Direct Testimony.
Q: Under what conditions does NIPSCO utilize purchased power to
serve its interruptible customers?
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A: In circumstances when NIPSCO's generating capability is
unavailable (e.g., forced outages), NIPSCO currently purchases
power on the spot market in order to serve its interruptible
customers, primarily consisting of large industrial customers
served under Rate Schedule 845 and Rider 846. Those customers
have insisted that NIPSCO not purchase power under forward
contracts in order to serve them; thus, all of the power
purchased to serve this segment of NIPSCO's customer base is
purchased on the spot market.
Q: Does NIPSCO purchase power to serve its firm customers?
A: As further explained by Mr. Venhuizen, as part of its short-term
planning process for serving firm customers, NIPSCO performs an
evaluation to determine whether market prices are less expensive
than NIPSCO's own internal generating resources. If market
prices are below NIPSCO's internal generating resources' cost,
then economy purchases are made to offset these more expensive
resources. If the load exceeds available resources, a
determination is made to purchase forward or spot market power.
Additionally, in order to serve NIPSCO's firm electric customers
during those limited peak hours for 2005, 2006 and 2007 as
described by Mr. Venhuizen, NIPSCO would evaluate those needs as
part of its intermediate planning process, and secure any short
term purchased power resources as needed.
Q: What will the impact be on NIPSCO's customers if the Commission
grants the City's Petition and Mitchell is permanently closed?
A: Residential, commercial and small industrial customers should see
only minimal price impacts directly attributable to Mitchell not
being started up. In light of all of the uncertainties
surrounding today's energy marketplace, it is possible that
NIPSCO's industrial customers served under Rate Schedule 845 and
Rider 846 will see some increases in costs associated with their
load. However, those increases will not be significantly related
to Mitchell not being utilized. NIPSCO's current assumption is
that NIPSCO will likely need to purchase adequate levels of
intermediate dispatchable power with capabilities to meet NERC
reliability requirements, as well as MISO's five minute balancing
rule, because NIPSCO's existing fleet is not capable of meeting
these requirements. This intermediate dispatchable power may be
more costly than the current cost of forward purchased power, or
power generated from the Mitchell station. Mr. Venhuizen
provides more specific information on NIPSCO's need for
alternative capacity. Of course, NIPSCO will continue to make
every reasonable effort to seek the least cost purchased power
possible, consistent with maintaining system reliability and
consistent with NERC and MISO requirements.
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Q: Does Mitchell's availability impact NIPSCO's reliability?
A: No. As described in more detail by Mr. Venhuizen, NIPSCO does
not need the base load generating capacity that Mitchell
represents in order to reliably serve its firm electric retail
customers' needs. Further, Mitchell's availability would not
improve NIPSCO's compliance with NERC requirements, based upon
the volatile load characteristics of certain of NIPSCO's
industrial customers' applications and processes.
Q: Could NIPSCO build new generating facilities with ramping
capability sufficient to handle the interruptible load of its
large industrial customers' applications and processes?
A: In his Direct Testimony, Mr. Weeden states that this could be
accomplished in four to eight years. Mr. Venhuizen argues that
market forces may make such construction unnecessary. From my
perspective, I do not believe new construction should be
considered at the moment, because the primary purpose of that
construction would be to serve the needs of NIPSCO's large
industrial customers. A certain portion of NIPSCO's large
industrial customers' load is interruptible, and under the terms
of NIPSCO's interruptible tariffs, those customers generally have
favorable pricing terms consistent with taking service under an
interruptible rate schedule. That is, in return for paying
reduced demand costs, interruptible customers have assumed more
risk of interruption and are encouraged to avoid operating during
the peak hours of the day. Thus, when considering that
interruptible customers are paying reduced demand costs in return
for accepting greater risk of interruption, it is fairly easy to
conclude that the burden of building such a new facility would
fall on either firm customers, who may not need it, or
shareholders, who should not have to pay for new infrastructure
without having an opportunity to earn a fair return on the
investment.
Q: Does NIPSCO need Mitchell?
A: After considering the uncertainties of the current energy
marketplace, along with its expected changes, Mitchell is not
necessary to serve NIPSCO's firm electric customers with reliable
power. Additionally, Mitchell does not fully satisfy the needs
of NIPSCO's large industrial customers, who will likely be
subject to different costs associated with new operating
requirements, as described by Mr. Venhuizen.
Q: Does this analysis differ from that in NIPSCO's latest Integrated
Resource Plan ("IRP") filed on November 1, 2003?
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A: Yes.
Q: Please explain why.
A: As discussed previously, since the temporary shutdown of Mitchell
from service, NIPSCO has continually monitored Mitchell's
efficacy under certain factors - e.g., economy, reliability, and
environmental costs. Although NIPSCO has been a member of MISO,
through its memberships in GridAmerica LLC (as approved by this
Commission on September 24, 2003), sorting through the many
complexities involved with the development of the evolving RTO-
supported and - controlled marketplace is difficult. NIPSCO has
continued to evaluate and assess Mitchell's role in NIPSCO's
electric supply portfolio, and the value it may bring to serving
our electric customers. Based upon new factors since the most
recent IRP filed on November 1, 2003, NIPSCO now believes that it
will likely require intermediate dispatchable power in order to
adequately and reliably serve its electric customers.
Q: Please explain these new factors and what impact they have had on
any steps NIPSCO has taken towards utilizing Mitchell.
A: As described in greater detail by Mr. Weeden, NIPSCO prepared for
starting up Mitchell, including the development of cost estimates
of activities associated with a start up, and a timeline for the
start up. NIPSCO originally anticipated beginning the process of
starting up Mitchell in late 2003; however, the City informed
NIPSCO of its desire to acquire the Mitchell site in late 2003,
which caused NIPSCO to reevaluate the risks of starting up
Mitchell. At the same time, MISO's energy marketplace dynamics
continued to evolve, including NIPSCO's understanding of its
impacts. In light of the uncertainties of the evolving
marketplace and the City's intended acquisition, NIPSCO has
suspended its plans to start up Mitchell.
Q: Please estimate the costs associated with a startup of Mitchell.
A: The operation and maintenance expenses associated with the
startup of Mitchell are estimated to be in the vicinity of $1.6
million. The capital costs associated with the start up of
Mitchell are estimated to be in the vicinity of $3.9 million.
These costs are discussed in further detail by Mr. Weeden.
Q: Are there any other costs to consider?
A: Yes. As described by Mr. Arthur E. Smith Jr., in his Direct
Testimony, NIPSCO anticipates that there will be significant
costs related to environmental permitting and compliance issues
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associated with operating the Mitchell plant. As described by
Mr. Smith, NIPSCO expects to begin incurring these costs in the
next few years. As these costs are incurred, Mitchell's
operation becomes more costly.
Q: Given all of the issues you have identified thus far, including
the uncertain energy marketplace that exists today and that
NIPSCO anticipates will exist in the future, as well as economic
and operational requirements you have noted, what is NIPSCO's
position on selling Mitchell to the City of Gary?
A: Although NIPSCO does not have a crystal ball, it is clear that
the energy marketplace is evolving in ways that are not conducive
to operating Mitchell. Adding to this consideration are the
costs associated with starting up Mitchell, the costs associated
with maintaining an old generating station, and the costs
associated with environmental permitting that will be incurred
prospectively. At this time, NIPSCO does not believe that
starting up Mitchell makes sense for customers or shareholders
from either an operating or economic viewpoint. As indicated
earlier, the generating station operating environment and energy
marketplace are much different now than they were even at the
time of Mitchell's temporary shutdown. Faced with these moving
and various factors, NIPSCO must endeavor to balance all of them
in an effort to achieve its main priority as a public utility -
providing safe, reliable service now and in the future. Mitchell
does not serve a clear purpose that would cause NIPSCO to reject
the City of Gary's attempt to purchase the plant.
Simply stated, starting up and continuing to invest in
Mitchell at this time does not make sense given all of the points
discussed above, and discussed in further detail by other
witnesses in this proceeding. Starting Mitchell will not enhance
NIPSCO's ability to meet current or anticipated MISO and NERC
requirements. Mitchell does not provide the type of responsive
generating resources that NIPSCO needs today and into tomorrow -
that is, intermediate dispatchable power. Starting and operating
Mitchell will not change the fact that NIPSCO will likely be
compelled to acquire intermediate dispatchable power resources in
order to meet MISO and NERC requirements, and allow NIPSCO to
continue to serve NIPSCO's unique industrial load profile.
Additionally, there are greater policy issues involved that
this proceeding has raised, issues that were not present before
last fall. The City's intention to acquire the Mitchell site
raises issues concerning the highest and best use of the land
along the lakeshore, and whether those redevelopment plans
constitute a greater economic benefit for the region - perhaps
the entire state of Indiana - than the start up of Mitchell.
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Even before, and definitely since, the City's announcement
in early 2004 of its intention to acquire the Mitchell site,
NIPSCO has been engaged in reviewing its options with regard to
Mitchell, and trying to determine whether utilization of Mitchell
makes operating and economic sense for our customers and
shareholders. At this time, it appears that Mitchell is not
necessary for and does not meet our customers' needs, and
operating Mitchell does not make operating or economic sense.
NIPSCO will continue to ensure that its customers have reliable
and sustainable power supplies at competitive prices. NIPSCO
will work with its customers in an attempt to find solutions for
them, in an effort to serve them economically and efficiently,
while protecting the interests of NIPSCO's firm customer base.
In summary, one of NIPSCO's top criteria in reviewing its
future supply needs is the impact on the safety, reliability and
cost of electric service to our customers. As a public utility,
NIPSCO must always endeavor to assure its customers that the
electricity will be there when the customer flips on the switch,
including residential, commercial and industrial customers. From
lighting a home to supplying manufacturing with the necessary
energy it needs to fuel our economy, NIPSCO takes very seriously
its public charter and the provision of reliable electric
service. The ability to supply our customers with reliable power
is critical, and NIPSCO believes that Mitchell is not necessary
for such provision of electric service.
Q: Please introduce NIPSCO's witnesses and generally describe their
Prepared Direct Testimony.
A: In addition to my testimony, the following witnesses are offering
Prepared Direct Testimony in support of NIPSCO in this
proceeding:
* Pierre R. H. Landrieu, Managing Consultant at PLP3, is
providing Prepared Direct Testimony supporting his analysis
and recommendations concerning the viability of Mitchell in
light of MISO and NERC requirements, and the impending MISO
energy market. Mr. Landrieu draws on his knowledge and
experience regarding the PJM marketplace, which is
operational today and has been for some time.
* Jerome Weeden, Vice President, Generation for NIPSCO, is
offering Prepared Direct Testimony concerning NIPSCO's
generating resources, Mitchell and its operating
characteristics in particular, and the steps and costs
associated with a potential start up of Mitchell.
* Arthur E. Smith, Jr., Senior Vice President and
Environmental Counsel, NiSource, is providing Prepared
Direct Testimony regarding the environmental requirements
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and related costs associated with (i) a start up and (ii)
the operation of Mitchell.
* Frank A. Venhuizen, Director of Electric Transmission and
Market Services for NIPSCO, is providing Prepared Direct
Testimony regarding the evolving energy marketplace, MISO
and NERC requirements, and NIPSCO's efforts to obtain
electricity to support its customers' load requirements.
Q: Does this complete your Prepared Direct Testimony?
A: Yes, it does.
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