direct testimony rled

1DIRECT TESTIMONY RLED

2 OF MAY- 1 2015

P. A. (TONY) SMITH WilSS.PUBLICSERVICECOMMISSION

4 On Behalf of

5 MISSISSIPPI POWER COMPANY

6 BEFORE THE MISSISSIPPI PUBLIC SERVICE COMMISSION

7 DOCKET NO. 2015-UA-

8

9 Q. Would you please state your name, position and business?

10 A. My name is P. A. (Tony) Smith. I am the Air QualityPrograms Manager for

11 Mississippi Power Company (MPC or the Company). My business address is

12 P. O. Box 4079, Gulfport, MS, 39501.

13 Q. Please describe your education and professional experience.

14 A. I've been employed by MPC for over 33 years and have held positions in several

15 areas of the Company including Generation, Marketing, and Compliance. Prior to

16 my current position as Air QualityPrograms Manager in our Environmental

17 Affairs department, I managed two of the smaller generating plants in the MPC

18 fleet. I've been involved in the assessment of renewable energy opportunities

19 since 2009 and received a Renewable Energy Professional certification from the

20 Association of Energy Engineers in 2011. I'm a graduate of the University of

21 Southern Mississippi with a BSBA and have an associate's degree from Jones

22 Junior College in Forestry.

Direct Testimony of P. A. (Tony) SmithOn Behalf of Mississippi Power Company

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**MPSC Electronic Copy ** 2015-UA-72 Filed on 05/01/2015 **

l Q. Have you previously testified before the Mississippi Public Service

2 Commission (MPSC or the Commission)?

3 A. Yes, I have.

4 Q. What is the purpose of your testimony?

5 A. The purpose of this testimony is to support MS Solar 2, LLC (MS Solar)' and

6 MPC's Joint Petition for a Certificate of Public Convenience and Necessity to

7 permit the construction, ownership and operation of a new solar electric

8 generating facility by MS Solar and the corresponding proposed Power Purchase

9 Agreement (PPA) between MPC and MS Solar for the sale and purchase of the

10 electric energy to be generated by the proposed project.

11 Q. Do you sponsor any exhibits with your testimony?

12 A. Yes. I am sponsoring eight exhibits:

13 Exhibit (PAS-1) PPA Term Sheet - Confidential

14 Exhibit (PAS-2) PPA Term Sheet - Redacted

15 Exhibit (PAS-3) Scenario Analysis Results - Confidential

16 Exhibit (PAS-4) Scenario Analysis Results - Redacted

17 Exhibit (PAS-5) Gas Price Forecasts - Confidential

18 Exhibit (PAS-6) Gas Price Forecasts - Redacted

19 Exhibit (PAS-7) Solar Price vs. Solar-Weighted Avoided Energy Cost -

20 Confidential

' MS Solar 2, LLC, a Delaware limited liability company, is a special purpose entity created solely for thepurpose of owning and operating the solar energy facility described herein. MS Solar 2, LLC is a whollyowned, direct subsidiary of Origis International, Ltd. (Origis).


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i Exhibit (PAS-8) Solar Price vs. Solar-Weighted Avoided Energy Cost -

2 Redacted

3 Q. Were these exhibits prepared under your supervision and control?

4 A. Yes, they were.

5 Q. Do any of these exhibits contain information that is confidential in nature?

6 A. Yes. Exhibit (PAS-1), Exhibit (PAS-3), Exhibit (PAS-5), and

7 Exhibit (PAS-7) contain confidential commercial and financial information or

8 information in the nature of a trade secret that are confidential and proprietary and

9 that have commercial value and would place the Company and MS Solar at a

10 competitive disadvantage if publicly known. Additionally, MPC and MS Solar

11 have reciprocal contractual commitments to protect each party's confidential

12 information. These Exhibits have been appropriately marked "confidential" and

13 filed under separate confidential cover with the Commission and Mississippi

14 Public Utilities Staff (Staff) pursuant to Mississippi law and the Commission's

15 Rules.

16 Q. Why is MPC pursuing renewable resources?

17 A. The Company recognizes that renewable facilities like those currently before the

18 Commission present numerous potential benefits to MPC and its customers. MPC

19 has taken great care to identify projects where energy will be provided below the

20 Company's avoided cost over the term of the PPA, and, because the Company is

2l paying only for energy received, no capital investment or fixed cost will be

22 required. Furthermore, purchasing renewable energy allows the Company to

23 mitigate the risk of future costly environmental regulations and provides


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1 additional fuel diversity to the Company's wholesale generation portfolio. These

2 factors all provide direct benefits to MPC's customers.

3 Q. Please describe the structure of the PPA.

4 A. MPC will take the entire output of solar energy as it is generated and will pay a

5 rate per megawatt-hour of energy delivered according to a fixed price schedule.

6 The term of the PPA is 25 years commencing on commercial operation of the

7 facility (anticipated in the fourth quarter of 2016). MPC will receive title to all

8 renewable energy credits (REC's) associated with the energy received, which it

9 may use to serve its customers with renewable energy or resell, either bundled

10 with energy or separately, to third parties. An overview of the PPA is provided in

11 confidential Exhibit (PAS-1).

12 Q. Will MPC make any capacity payments under the proposed PPA?

13 A. No, MPC will not. As stated above, the Company is paying only for energy

14 received; the proposed PPA will not provide capacity, but will provide energy at a

15 price that is below MPC's solar-weighted avoided energy cost, and which,

16 therefore, will benefit our customers.

17 Q. Please describe the process MPC used to test the market and how this

18 proposal was selected.

19 A. The Project was identified through an unofficial, targeted solicitation process. In

20 early 2014, MPC recognized through its competitive intelligence efforts that solar

21 prices had dropped significantly since its 2011 Renewable RFP. However, since

22 that attractive pricing was predicated in part on the benefits received from Federal

23 Investment Tax Credits, it was determined that there was an insufficient amount


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1 of time to issue a formal RFP and make a selection in time to take advantage of

2 those tax credits. The loss of tax credits would result in effectively raising the

3 price of solar by 20% and would make all solar projects less attractive. MPC

4 identified and approached four developers with the opportunity to submit a solar

5 proposal in the state of Mississippi. After further evaluation and negotiation,

6 MPC ultimately determined that this project with MS Solar would benefit MPC's

7 customers.

8 Q. Who will construct, own, operate, and maintain the facility?

9 A. MS Solar will construct, own, operate and maintain the facility.

10 Q. Will MPC have to make a capital investment or pay any fixed costs?

11 A. No. This PPA requires no capital investment by MPC, nor any fixed cost

12 payment. The construction of all facilities associated with this PPA will be

13 funded and owned entirely by MS Solar.

14 Q. How did you evaluate this PPA?

15 A. The PPA was evaluated based upon its expected energy benefits to customers

16 relative to MPC's expected avoided energy cost throughout the PPA term. To

17 determine this expected benefit, MPC multiplied the hourly expected output of the

18 facility (MWh) by the PPA price ($/MWh) to determine the hourly expected cost

19 of the PPA. We then took the same hourly expected output of the facility and

20 multiplied it by the hourly avoided energy cost ($/MWh). The difference between

21 the hourly avoided energy cost and the price, as calculated above is the expected

22 benefit to customers. The term "solar-weighted" avoided energy cost is a way to

23 express this hourly analysis on an annualized basis.


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l Q. What is meant by "solar-weighted" avoided energy cost?

2 A. MPC's avoided energy cost is expressed in terms of $/MWh and is determined by

3 the incremental cost of the generating unit that is on the margin at a particular

4 time, or the "marginal unit". The marginal unit is the highest cost generating unit

5 that is in service and regulating above its minimum output. The marginal unit

6 changes constantly as the load rises and falls, units come on and off line, off-

7 system sales and purchases commence and terminate, and other conditions

8 change. Because the marginal unit is different every hour, we project a unique

9 avoided cost for each hour (i. e. 8,760 values for each year in the period being

10 examined). The PPA price is provided in terms of single annual values.

1i Although we calculate economic benefits on an hourly basis, we can represent

12 that analysis in an annualized solar-weighted avoided cost that is appropriate for

13 comparison to the single annual PPA price. This single annual value is based on

14 the 8,760 individual avoided cost values and the hourly solar generating profile of

15 the specific project being evaluated. It is calculated as the sum of the products of

16 the hourly avoided costs and the hourly solar generation, divided by the annual

17 solar generation. The solar-weighted avoided cost therefore is an easy way to

18 visualize the benefits relative to the PPA price.

19 Q. Was the data and pricing from MPC's biennial PURPA filing or the

20 Company's Commission approved Cogeneration and Small Power

21 Production Purchases Rate Schedule "CSPP-3" used in evaluating this PPA?

22 A. No. The solar-weighted avoided energy cost approach described above more

23 accurately assesses the benefit of the specific generation profile of this large solar


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1 facility for the entire term of the contract. In addition, MPC's evaluation of the

2 MS Solar project uses the most current assumptions regarding load and gas price

3 forecasts as well as other significant variables. MPC's PURPA filing and CSPP

4 rates are not appropriate for evaluating this PPA for the following reasons:

5 1. The 52 MW size of the proposed facility is much larger than the 100 kW

6 maximum size permitted under the CSPP rate. These larger, utility-scale

7 facilities should not be evaluated on the same basis as smaller scale

8 distributed generation facilities.2

9 2. The PURPA filing and CSPP rates are based on assumptions from

10 previous planning cycles.

11 3. They do not address the entire 25-year term of the PPA. The PURPA

12 filing is calculated for six years and the CSPP rate is calculated for two

13 years.

14 4. The avoided costs in the PURPA filing and the CSPP rate are straight

15 averages of hourly avoided costs. Using these average values would

16 inappropriately overvalue the solar PPA in hours in which there is little or

17 no generation and undervalue it during hours in which it is generating its

18 peak output.

19 5. The CSPP rate is designed for "as available energy" delivered without

20 schedule commitment, notice, or minimum delivery commitment. The

2 The CSPP rate is made available to distributed generation customers with much smallerfacilities. The rigorous analysis conducted with regard to the MS Solar PPA would not be appropriate forCSPP customers, given the likelihood that the cost and administrative burden of this analysis wouldoutweigh any benefits of the analysis to the customer or to the Company.


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1 MS Solar PPA includes negotiated minimum energy delivery with

2 liquidated damages and a multi-year term.

3 Q. Did your economic evaluation indicate that the PPA is in the public interest?

4 A. Yes. The primary test related to customer benefit analyzes whether the economic

5 value of the contract to MPC is greater than or equal to the associated incremental

6 contract costs. The PPA is within the public interest. A summary of MPC's

7 economic analysis is presented in in confidential Exhibit (PAS-3).

8 Q. What are the risks associated with this PPA?

9 A. There are two potential risks associated with this PPA. One risk is that the fuel

10 prices assumed in MPC's avoided cost calculations do not materialize exactly as

11 projected. If future gas prices turn out to be lower, over the entire term of the

12 contract, than our current fuel forecast, the Project would be less attractive. There

13 is also a risk that the counterparty MS Solar defaults during the PPA term. Both

14 risks, and the steps taken to mitigate each, are discussed in greater detail below.

15 Q. How did you address the fuel risk in your economic evaluation?

16 A. To address the fuel price risk, MPC also evaluated this PPA under a range of

17 reasonably possible fuel views that include assumptions regarding shale gas

18 recoverable reserves, production costs, and exports. The result of the economic

19 evaluation of this PPA over the range of fuel views is summarized in confidential

20 Exhibit (PAS-3).

21 Q. How does your gas price forecast compare to the Energy Information

22 Administration's (EIA) Reference case forecast?


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1 A. The EIA produces an Annual Energy Outlook (AEO). The AEO includes a

2 Reference case that assumes that the EPA will not ever promulgate any more

3 regulations beyond those that currently exist. In fact, the AEO does not assume

4 that there will be any future changes in law or regulation:

5 The AEO2014 Reference case is a business-as-usual trend6 estimate, given known technology and technological and7 demographic trends ... The main cases in AEO20148 generally assume that current laws and regulations are9 maintained throughout the projections. Thus, the

10 projections provided policy-neutral baselines that can be11 used to analyze policy initiatives.3

12 Because of this characteristic, the Reference case does not provide a singular,

13 proper forecast which might be relied upon for long term planning decisions.

14 Even the EIA admits that its reference case "should serve as an adjunct to, not a

15 substitute for, a complete and focused analysis of public policy initiatives."4 b

16 contrast to the EIA's Reference case, MPC's fuel forecasts make reasonable

17 assumptions regarding a variety of factors that could influence fuel prices. In the

18 latest AEO, the EIA also produced 29 sensitivity forecasts to predict the result of

19 certain regulatory, supply, and demand assumptions. In order to assist the

20 Commission's review of the Company's underlying gas price assumptions, I am

21 providing confidential Exhibit (PAS-5), comparing MPC's scenario gas price

22 forecasts to the entire range of sensitivities included in the 2014 AEO. All of

23 MPC's scenario gas price forecasts are within the range of EIA's 30 forecasts.

24 EIA's Reference case falls within MPC's range of fuel forecasts.

3 EIA, "Annual Energy Outlook 2014" (page iii), available athttp://www.eia.gov/forecasts/AEO/pdf/0383(20 14).pdf.

4


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1 Q. Does the PPA benefit customers assuming EIA's gas price forecast?

2 A. Although--for the reasons stated above-the EIA's Reference case is not a

3 reliable utility tool for utility planning, the PPA would provide a net present value

4 benefit to customers over the term of the contract if analyzed under the EIA's

5 Reference case gas prices.

6 Q. How does this PPA align with MPC's efforts to maintain fuel diversity that

7 protects customers from fuel price swings?

8 A. This PPA provides a known price for a certain amount of energy for 25 years.

9 This energy will not be subject to price fluctuations that we have seen for natural

10 gas in the past, and expect to see again in the future. So this PPA would provide

11 some measure of protection to customers from gas price fluctuations.

12 Q. How did you address the counterparty risk in your economic evaluation?

13 A. We addressed this risk by requiring both pre- and post-commercial collateral from

14 MS Solar. Such collateral may, subject to the terms of the PPA, be in the form of

15 cash provided pursuant to a pledge agreement and a control agreement, a letter of

16 credit or a parent guaranty.

17 Q. Is MS Solar a reliable counterparty for a long term PPA?

18 A. Yes, we believe that MS Solar is a reliable counterparty for the reasons explained

19 in MS Solar's testimony. Nevertheless, to ensure that MPC's customers remain

20 adequately protected, MS Solar is also required to post collateral under the PPA,

21 thereby reducing the credit risk exposure.

22 Q. Is MPC taking any financial risk associated with the government subsidies

23 assumed in the proposed PPA's pricing?


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i A. No, MPC is not. Although MPC and MS Solar are jointlyrequesting that the

2 Commission conduct a timely review of this filing due to the deadlines associated

3 with the Project's Investment Tax Credits (ITC), MPC is not taking any financial

4 risk related to the expiration of these credits. The relevant deadlines and

5 expiration dates associated with ITC's are discussed in greater detail in MS

6 Solar's testimony.

7 Q. Will MPC have to bear the costs of any of the installation, operation, and/or

8 maintenance of the interconnection facilities for this solar facility?

9 A. No. Under the PPA, MS Solar is responsible for all costs and expenses incurred

10 by MPC that are associated with the facilities and transmission system upgrades

i i required in order to interconnect the solar facility to the MPC electric system

12 (without reimbursements, refunds or credits to MS Solar).

13 Q. What transmission improvements will be required to accommodate this PPA,

14 and who will pay for them?

15 A. A formal study to answer this question will be performed when MPC officially

16 identifies this PPA as a designated network resource under the Southern Open

17 Access Tariff. If the study does identify necessary improvements, MPC has the

18 right to either pay for such improvements, request that the developer pay for such

19 improvements, or terminate the agreement.

20 Q. How does MPC propose to recover the PPA payments?

21 A. MPC proposes to treat the PPA payments for the MS Solar project in the same

22 manner as other purchased power payments and include these costs in the

23 Company's annual Fuel Cost Recovery (FCR) filing.


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1 Q. What impact will this PPA have on customers' rates?

2 A. As shown in confidential Exhibit (PAS-7), the price to be paid for energy

3 delivered to the Company from the MS Solar project is less than the Company's

4 projected solar-weighted avoided energy cost in every year of the contract. In

5 2017, the bill impact is estimated to be a decrease of be 1¢ per 1,000 kWh. In

6 2018, the bill impact is estimated to be a decrease of 3¢ per 1,000 kWh. After

7 2018, the PPA is expected to continue to put downward pressure on rates over the

8 remaining term of the contract.

9 Q. Do you believe that issuing a Certificate of Public Convenience of Necessity

10 for the contemplated solar facilities and approving the Company's proposed

11 PPA with MS Solar is in the public interest and will benefit MPC's

12 customers?

13 A. Yes, the Project will deliver affordable and reliable energy that is expected to

14 provide needed fuel diversity benefits to MPC's customers and, therefore, is in the

15 public interest.

16 Q. Does this conclude your testimony?

17 A. Yes, it does.


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FILEDMAY- 1 2015

BEFORE THE MISSISSIPPI PUBLIC SERVICE COMMISSIoISS.PUBUCSERVICE

COMMISSIONMISSISSIPPI POWER COMPANYE€-120-0097-00

MS SOLAR 2, LLC DOCKET NO.

IN RE: JOINT PETITION OF MISSISSIPPI POWER COMPANY AND MSSOLAR 2, LLC FOR APPROVAL OF A POWER PURCHASEAGREEMENT AND FOR A CERTIFICATE OF PUBLICCONVENIENCE AND NECESSITY TO CONSTRUCT, OPERATE,AND MAINTAIN SOLAR GENERATING FACILITIES IN LAMARCOUNTY, MISSISSIPPI

AFFIDAVIT OF P.A. (TONY) SMITH

PERSONALLY appeared before the undersigned officer authorized to administer oaths, P.A.

(Tony) Smith, who being duly sworn, deposes and says; that the foregoing testimony was

prepared by him or under his supervision; that said testimony was prepared for use as direct

testimony on behalf of Mississippi Power Company in the captioned proceeding; that the facts

stated therein are true the best of his knowledge, information and belief; and that if asked the

questions appearing therein, his answers, under oath, would be the same.

This the3 D day of April, 2015.

P.A. (Tony)

Sworn to and subscribed before me this the3e day of April, 2015.

My Commission Expires: ..• ••, Notary Pub

: MARGI L. DAVIS


direct testimony rled

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