Entergy Arkansas rebuts critics of power plant capacity transfer

The transfer of certain coal and nuclear capacity from related companies to the retail load of Entergy Arkansas (EAI) would be the best way to address an imminent capacity deficit, utility officials reiterated in Oct. 10 rebuttal testimony filed at the Arkansas Public Service Commission.

The utility, a unit of Entergy (NYSE: ETR), applied with the commission on June 13 for the capacity transfer. Much of the EAI case was outlined by Kurtis Castleberry, the Director, Resource Planning at Entergy Arkansas, in opening testimony.

“My testimony supports the Company’s requests to acquire additional generation needed for post-System Agreement operation and a cost recovery mechanism for that and potentially other generation,” Castleberry wrote. “The generation for which recovery and approval is sought is a portion of generating units EAI already owns that formerly were used to serve wholesale customers and more recently have been sold to other Entergy Operating Companies until EAI’s participation in the System Agreement ends (the ‘Available WBL Capacity’). The Available WBL Capacity will become available to serve EAI’s customers in two segments, one in 2013 and the remaining capacity in 2014.”

EAI controls by ownership or long-term purchase contract about 5,100 MW of capacity. The mix includes around 2,285 MW of nuclear, 1,209 MW of coal, 1,528 MW of natural gas/oil capacity, and 94 MW of hydroelectric. The construction of two coal units each at the White Bluff and Independence plants and two nuclear units at Arkansas Nuclear One (ANO) was part of a strategy developed in the 1960s and 1970s to diversify the reliance on natural gas and fuel oil.

About 572 MW of the company’s existing coal and nuclear capacity, the WBL capacity, is allocated to the wholesale sector and not in retail rates. About 227 MW of this 572 MW has been sold through life-of-unit transactions to other Entergy companies, and about 59 MW represented the retained share of the Grand Gulf nuclear plant capacity. The remaining 286 MW is the Available WBL Capacity. The Available WBL Capacity is at ANO Units 1-2, Independence Unit 1, White Bluff Units 1-2 and Grand Gulf.

Castleberry, in Oct. 10 rebuttal testimony, responded to critics, which are the Arkansas PSC General Staff, the Arkansas Attorney General and the Association of Electric Energy Consumers.

“My rebuttal testimony will demonstrate that the opportunity to use the Available WBL Capacity to serve EAI’s customers is unique because there is unlikely to be a comparable opportunity to add coal and nuclear resources in the foreseeable future, with a comparable amount of capacity and at the cost represented by these units,” Castleberry noted. “The value of these assets in serving EAI’s customers, as estimated by an analysis conducted by EAI witness Charles DeGeorge, depends significantly upon the price of natural gas. Based on EAI’s reference case natural gas price projections, the Available WBL Capacity is of modest economic value to EAI’s customers. In higher natural gas price scenarios, the Available WBL Capacity represents a significant economic value to customers. Conversely, the capacity would be a cost to customers if natural gas prices are lower than expected (i.e., a low natural gas price scenario).”

McDonald says EAI willing to split this case in two

Also submitting Oct. 10 rebuttal testimony was Hugh McDonald, President and CEO of EAI. Among other things, McDonald addressed the Arkansas AG’s proposal to bifurcate this proceeding to allow additional time to evaluate the value of the full Available WBL Capacity portfolio for EAI’s customers.

“A portfolio of coal and nuclear generation that is a portion of EAI’s existing coal and nuclear generation is available to serve EAI’s customers,” McDonald wrote. “This capacity will be available as short-term contracts to sell this capacity expire, first for 100 MW beginning January 2013, and then for the full portfolio of 286 MW on December 19, 2013. EAI provided an analysis in its direct case that demonstrated this total portfolio was economical compared to new coal, nuclear and natural gas construction. Further analysis of the value of this capacity assuming EAI’s operation in MISO confirms the value is highest for customers if natural gas prices are high, a modest value under current projections of natural gas prices, and a cost if natural gas prices are lower than expected. The total portfolio is an economical resource for EAI’s customers in three of four planning scenarios used in developing EAI’s 2012 Integrated Resource Plan assuming various views of the future.”

If the commission votes against this plan, then EAI has asked the PSC to allow it to sell the capacity on a life-of-unit basis to a third party, McDonald said.

“EAI also would support, with modification, a proposal by the Attorney General (‘AG’) that would allow more time to evaluate the total portfolio by allowing EAI to use the initial 100 MW segment of the portfolio to serve its customers in 2013 and allow EAI to recover in current rates through the Capacity Cost Recovery Rider (‘Rider CCR’) the cost of that capacity equivalent to the projected energy savings and defer the balance of the costs for recovery over a five year period,” McDonald said. “A second phase of the proceeding focusing on whether the total portfolio should be used to serve retail customers would need to be completed by May 31, 2013 so that EAI could finish its post-System Agreement supply plans.”

EAI also would agree that the issues of cost recovery associated with two Power Purchase Agreements (PPAs) that EAI plans to use as part of its resource plan could be taken up in phase 2 of this proceeding, and the use of a rider mechanism for recovery of costs for bilateral contracts for similar PPAs can be addressed in the company’s planned rate case in 2013, McDonald added. If the PSC decides to bifurcate the proceeding, then EAI requests that it resolve in phase 2 all issues related to whether the two PPAs should be part of EAI’s supply plan so it can finalize arrangements for its post-System Agreement operations, he noted.

Charles DeGeorge, Manager, Supply Planning & Analysis for Entergy Services, said in his Oct. 10 rebuttal: “The initial evaluation of the Available WBL Capacity relied on a fundamental analysis of these resources compared to new build alternatives. Considering the type and expected supply role of the Available WBL Capacity, analysis of this type is an appropriate method of evaluating these resources because these resources are expected to operate at high utilization rates. Additional analysis of the Available WBL Capacity using production costing simulation was performed as part of the development of EAI’s 2012 Integrated Resource Plan (‘EAI 2012 IRP’). These additional analyses are divided into two timeframes. The first timeframe, calendar year 2013, represents the period when EAI is still a participant in the Entergy System Agreement and is not yet a participant in a Regional Transmission Organization (‘RTO’). The second timeframe, 2014 and beyond, represents the period when EAI no longer participates in the Entergy System Agreement and is assumed to be a participant in the Midwest Independent Transmission System Operator, Inc. (‘MISO’) RTO.”

Entergy looked at CO2 regulation, natural gas price uncertainties

DeGeorge said one of the model inputs that the company used in evaluating this plan was uncertainty about future CO2 regulation, which would negatively impact the coal part of this capacity but perhaps aid the nuclear part. “The Company’s Point-of-View (‘POV’) is that national carbon regulation for the power generation sector will occur at some point in the future,” he noted. “Regulation could take many forms including Cap and Trade, a carbon tax, command and control, and other restrictions on the deployment or operation of resources that emit CO2. The timing, design, and outcome of any carbon control program are highly uncertain.”

He added: “The Company’s CO2 POV recognizes this uncertainty through a bandwidth of potential CO2 cost outcomes. The bandwidth ranges from a $0 direct cost per ton (low case) up to a high case that starts at about $24 per ton (nominal) in 2023 and escalates at inflation plus approximately 5 percent. Accordingly, the economic analysis considered, two scenarios reflecting no CO2 regulation (Scenario 1 and Austerity Reigns), one scenario reflecting a mid-level of CO2 regulation (Economic Rebound), and one scenario reflecting the upper range of the POV bandwidth of CO2 regulation (Green Growth).”

The value of the Available WBL Capacity depends on assumptions about both CO2 regulation and natural gas prices. “However, of the two variables, natural gas price assumptions have a more significant effect than CO2 assumptions,” DeGeorge noted. “The results demonstrate the value of the coal and nuclear assets as a hedge against higher natural gas prices. In three of the four IRP scenarios the Available WBL Capacity represents an economic resource for EAI’s customers.”

Karen Radosevich, employed by Entergy Services as Manager, Forecasting Analysis for the System Planning and Operations organization, detailed EAI’s natural gas price forecasting in an Oct. 10 rebuttal.

“In recent years, natural gas prices have exhibited significant volatility,” Radosevich noted. “For the decade prior to 2000, real natural gas prices averaged $2.84/mmBtu (2011$). From 2000 through 2008, prices increased to a real average of $6.84/mmBtu (2011$). This rise in prices reflected increasing natural gas demand, primarily in the power sector, and increasingly tight supplies. The upward trend in natural gas prices continued to the summer of 2008 when nominal Henry Hub prices exceeded $13.00/mmBtu. Since that time, natural gas prices have declined sharply, with recent Henry Hub prices again less than $3.00/mmBtu. Current natural gas prices, which are below the real long term average price of $4.65/mmBtu (2011$), can be attributed in part to weak demand from a slow economic recovery, but more importantly, to the emergence of shale gas, the technology breakthrough of hydraulic fracturing (‘fracking’), and the production economics of liquid-rich plays and associated gas that enable gas production at historically low price levels.”

In the near term, natural gas prices are expected to increase from the current low levels, Radosevich added. For 2013, the average of all forecasts, including the reference case used in the Available WBL Capacity analysis, has the price of gas increasing to $3.93/mmBtu and by 2014, the average jumps to $4.27/mmBtu. “Finally, I note that current, third party natural gas price forecasts are well bounded by the high and low case natural gas price forecasts used in the economic evaluation,” Radosevich wrote.

Critics said not enough known yet about whether this is a good deal

Here is a summary of positions that EAI was responding to in the Oct. 10 rebuttals.

  • Kevin Woodruff of consulting firm of Woodruff Expert Services, testifying on behalf of the state Attorney General, said in a Sept. 26 filing that EAI is offering the Available WBL Capacity to its customers on an “all or nothing” basis. That is, the commission has the option to either accept on behalf of EAI customers all of the Available WBL Capacity on EAI’s proposed terms or to take none of it. “I cannot say this is a commercially reasonable proposal for EAI to make to its customers and this Commission,” Woodruff added. Woodruff said he believes the commission does not have enough information now to decide on EAI’s proposal.
  • Consultant Randall Falkenberg, representing Arkansas Electric Energy Consumers, sounded a similar note in his Sept. 26 testimony. He said that EAI has not provided adequate data and analyses to demonstrate that the transfer of all of the WBL Resources at this time to the retail jurisdiction would be the lowest cost option for its retail ratepayers. Falkenberg said the commission should reject EAI’s request, without prejudice, and require the company to re-file its request to transfer the WBL resources as part of its expected 2013 general rate case. 
  • John Athas of consulting firm La Capra Associates, testifying for the commission’s General Staff, said that EAI has shown a significant capacity deficit for meeting retail load only in a capacity retirements scenario that EAI is still evaluating. He said that EAI has not been consistent in presenting its resource needs and planning assumptions over the past three years, hindering the analysis. The levelized cost analysis EAI presents in support of its application falls short of providing adequate support of EAI’s proposal to include the Available WBL Capacity in retail rates, Athas wrote. The WBL resources as a portfolio may be beneficial in the long-run according to a preliminary analysis, but not under all market conditions, Athas said.
About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.