BEFORE THE NEW MEXICO PUBLIC REGULATION COMMISSION

Transcription

1 BEFORE THE NEW MEICO PUBLIC REGULATION COMMISSION IN THE MATTER OF EL PASO ) ELECTRIC COMPANY'S 0 ) PROCUREMENT PLAN PURSUANT ) TO THE RENEWABLE ENERGY ACT ) AND NMAC ) ) CASE NO UT DIRECT TESTIMONY OF JULY,0

2 TABLE OF CONTENTS Subject I. INTRODUCTION AND QUALIFICATIONS II. PURPOSE OF TESTIMONy 3 III. RENEWABLE ENERGY PORTFOLIO COSTS 5 IV. REASONABLE COST THRESHOLD IMPACTS V. SMALL SYSTEM RENEWABLE ENERGY CERTIFICATE PURCHASE PROGRAM VI. CONCLUSION 3 EHIBITS Exhibit EDE-I.Exhibit EDE- Estimated Costs of Renewable Resource Procurement Estimated Total Billing Impact Exhibit EDE-3 Cost Impacts on Large Non-Governmental Customers. Exhibit EDE-4 Small System Renewable Energy Certificate Purchase Tariff Exhibit EDE-5 Payback Calculation for Small System REC Purchases - PV Generation Exhibit EDE- Exhibit EDE-7 Exhibit EDE- Payback Calculation for Small System REC Purchases - Wind Generation Medium System Renewable Energy Certificate Purchase Tariff Payback Calculation for Medium System REC Purchases - PV Generation Exhibit EDE-9 Payback Calculation for Medium System REC Purchases - Wind Generation

3 Q. I. INTRODUCTION AND QUALIFICATIONS PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 3 A. 4 5 My name is Evan D. Evans My business address is 00 N. Stanton, EI Paso, Texas Q. 7 A. HOW ARE YOU EMPLOYED? I am employed by El Paso Electric Company eepe" or "Company") as Assistant Vice President - Regulatory Services and Rates. 9 0 Q. PLEASE SUMMARIZE YOUR EDUCATIONAL AND PROFESSIONAL BACKGROUND AND EPERIENCE. A. I graduated from Texas Tech University with a Bachelor of Business Administration 3 Degree in Finance in May 0. Upon graduation, Iwas employed as a Rate Analyst 4 at West Texas Utilities Company, a wholly-owned subsidiary of Central and South 5 West Corporation ("CSW"), which was acquired by American Electric Power Company ("AEP") in June 000. Iwas employed with various CSW subsidiaries and later with AEP until September 000. During my 0-year career with CSW and AEP, Iheld a variety of professional analytical, consultant and management positions in the rates, regulatory services and marketing and business development areas. 0 During my employment with CSW and AEP, I was heavily involved in the areas of costing and pricing. I prepared numerous wholesale and retail cost-ofservice studies filed with the Federal Energy Regulatory Commission and the Public

4 3 Utility Commission of Texas ("PUCT"). I participated in the development of marginal cost and avoided cost studies used for rate design, for determining payments for power purchased from cogenerators and in analyzing marketing programs. I also 4 5 had extensive involvement system loss analyses. in designing retail and wholesale rates and in performing In October, 000 I joined C.R 7 Guernsey & Company, which is an employeeowned, professional consulting firm offering engineering, architectural, economic and 9 0 construction management services to utilities, industries and government agencies throughout the United States and internationally. While employed with C.H. Guernsey, I managed the firm's Dallas regional office and served as a consultant to electric utility industry clients in a variety of areas, including regulatory compliance, integrated resource planning, electric utility cost of service issues, rate studies, financial analysis, economic feasibility analysis, retail electric choice and wholesale power supply contract negotiations. In September, 00, I left C.H. Guernsey and accepted the position of Director - Regulatory Services with EPE. I was promoted to Assistant Vice President Regulatory Services and Rates in July, 00. Q. 0 A. PLEASE DESCRIBE YOUR CURRENT RESPONSIBILITIES WITH EPE. My primary responsibilities include coordination and management of regulatory filings, management of regulatory accounting, and direction of the rate design, cost analysis and energy efficiency activities for the Company.

5 Q. 3 A. 4 5 HAVE YOU PREVIOUSLY PRESENTED TESTIMONY BEFORE UTILITY REGULATORY BODIES? Yes, I have previously presented testimony before the New Mexico Public Regulation Commission ("NMPRC" or "Commission"), Georgia Public Service Commission, the Oklahoma Corporation Commission and the PUCT. 7 II. PURPOSE OF TESTIMONY Q. 9 A WHAT ARE THE PURPOSES OF YOUR TESTIMONY? The purposes of my testimony are to address portions of EPE's 0 Procurement Plan ("0 Plan") relating to the application of the Reasonable Cost Threshold ("RCT") and non-governmental cap, and EPE's proposed changes to its approved customer-installed distributed generation ("DG") programs. The New Mexico Renewable Energy Act ("Act") requires EPE to file annually a Procurement Plan that sets forth EPE's plan for compliance with the Act. EPE's 0 Plan is presented in EPE's Application and the Direct Testimony of Ricardo Acosta. EPE's 0 Plan is designed to meet its RPS requirements for 0 and 03 through previously requested and approved contracts to purchase Renewable Energy Certificates ("RECs") either separately or bundled with the associated renewable energy from wind, biomass, solar resources, and through customer participation in EPE's distributed generation resource programs. EPE Witness Acosta's testimony specifically addresses EPE's purchases from selected projects to meet EPE's RPS requirements for 0 and 03. He also addresses EPE's plans for meeting the 3

6 minimum percentage requirements by resource type required by the Commission's Renewable Energy Rule.9.57 NMAC ("Rule") beginning in 0. 3 My testimony presents the cost of procurement in the next two calendar years 4 for the renewable energy resources EPE is using to comply with its Renewable 5 Portfolio Standard ("RPS") obligations. I address whether EPE anticipates reducing the RPS due to the RCT and how that determination was made. My testimony 7 provides estimates of the impact of the costs on all customers' aggregated overall annual electric charges that EPE will incur to comply with the Act and the 9 Commission's Rule. I also address whether EPE anticipates reducing the amount of 0 renewable energy to be provided in calendar years 0 and 03 to account for statutory caps associated with non-governmental customers with consumption exceeding ten million kilowatt hours ("kwh") per year, and how that determination 3 has been made. 4 In addition, my testimony sets forth EPE's proposed changes to its Small 5 System Renewable Energy Certificate Purchase ("Small System REC") Program and its Medium System Renewable Energy Certificate Purchase ("Medium System REC") Program, which offers incentives to customers who install renewable energy generating units of 0 kw AC or less and renewable energy generating units of greater than 0 kw AC to 00 kw AC, respectively, that interconnect with EPE's 0 system at the distribution level. 4

7 Q. 3 4 A. 5 7 III. RENEWABLE ENERGY PORTFOLIO COSTS PLEASE OUTLINE THE FILING REQUIREMENTS FOR EPEtS ESTIMATED COSTS ASSOCIATED WITH ITS 0 PLAN. The Act and Rule require that EPE's 0 Plan estimate procurement costs for renewable energy resources in the next calendar year needed to comply with the RPS. The Act and Rule also require that EPE determine whether the RCT will be exceeded in 0 and 03; and whether the cap for individual large, nongovernmental customers requires that the RPS obligation for 0 and 03 be reduced. 9 0 Q. A HAS EPE ESTIMATED THE COSTS ASSOCIATED WITH MEETING THE RENEWABLE ENERGY PORTFOLIO REQUIREMENTS? Yes. EPE has calculated the estimated overall net cost of meeting the RPS requirements for 0 and 03 based on EPE's 0 Plan. In calculating the impacts to customers for 0 and 03, I have used the total estimated costs for REC procurement and the net cost of the purchased energy and RECs from the renewable resources discussed by EPE Witness Acosta. EPE's costs include previously approved purchases of wind RECs from Public Service Company of New Mexico ("PNM") and Southwestern Public Service Company ("SPS"); the previously approved purchase of energy and RECs from the Southwest 0 Environmental Center ("SWEC"), the previously approved purchases of solar energy and RECs from NRGs Road Runner Project (previously known as the SunTower project), SunEdison, and NextEra; and through RECspurchased pursuant to EPE's 5

8 3 4 Small System REC and Medirun System REC programs. EPE also includes in its 0 Plan costs associated with the previously approved REC costs of $0.05 per kwh EPE is paying to Camino Real Landfill Gas to Energy Facility (ItCRLEFIt). EPE does not include any other costs associated with 5 the energy purchase ofnmprc Rule 570 renewable energy from CRLEF, because it is a renewable Qualifying Facility (ItQF It ) and EPE is required to purchase energy from a QF under EPE's avoided cost rates, in the ordinary course of business. Finally, EPE includes the costs of the Western Renewable Energy Generation Information System (ItWREGIS n ), which have also been previously approved by the Commission. The calculation of the total net cost of the Company's 0 Plan and the total net cost impact applicable to all kwh sales are shown in Exhibit EDE-l. 3 4 Q. 5 A. HOW WILL THE COSTS TO PROCURE RECS UNDER EPE'S 0 PLAN BE RECOVERED? EPE will recover the costs of RECs acquired with the purchase of renewable energy through its monthly FPPCAC calculation. EPE will defer, with carrying costs, all other costs associated with its 0 Plan for recovery in a general rate proceeding. 0 Q. IV. REASONABLE COST THRESHOLD IMP ACTS DID EPE COMPARE ITS PROCUREMENT COSTS WITH THE RATE CLASS CALCULATIONS TO EVALUATE THE COST THRESHOLD

9 A IMPACT TO CUSTOMERS? Yes, although EPE is not seeking approval of new resources that require a calculation of the RCT. To evaluate the impact of EPE's procurement actions, EPE has added the total incremental cost (in $/kwh) of EPE's 0 Plan to total billing for New Mexico retail customers for 0 and 03, and compared that amount to the calculated billing prior to the inclusion of the renewable resource acquisition costs. This is 7 shown is Exhibit EDE-. The same process was applied to evaluate the impact to 9 0 large, nongovernmental customers. Exhibit EDE-3 shows the percentage impact to those customers' charges. As stated below, Exhibits EDE- and EDE-3 demonstrate that EPE's 0 Plan costs are well within the statutory and Commission-established limits. 3 Q. 4 5 A. HOW DID EPE CALCULATE THE INCREMENTAL COSTS OF THE RENEWABLE RESOURCES? The incremental cost included the entire cost of the unbundled RECs plus the incremental cost of the bundled renewable resources. The incremental cost of the bundled renewable resources was calculated as the levelized cost of the renewable resource less the leveized capacity cost of a comparable non-renewable technology, less associated non-fuel fixed and variable costs, and less the levelized fuel-related 0 cost for the non-renewable technology. Because no RCT methodology has been adopted by the Commission, EPE has applied the same methodology used in its last two procurement proceedings, NMPRC Case Nos UT and UT, 7

10 . EVAND.EVANS 3 consistent with the methodology developed from workshops in NMPRC Case No. 0-00l9-UT, Inquiry into a Standard Methodology for Determining Renewable Energy Costs for the Purpose of NMAC. 4 5 Q. 7 A. 9 0 PLEASE DESCRIBE THE COSTS OF THE NON-RENEWABLE TECHNOLOGY ALTERNATIVES THAT WERE USED IN THE CALCULATION. The calculation of the costs for non-renewable technology alternatives for biomass generation applications was based on the costs and operating characteristics for a -on-l combined cycle from the EPRI Technical Assessment Guide and the Energy Information Administration's (!lela") March 0 Annual Energy Outlook price 3 forecast for natural gas delivered to electric generation facilities. levelized cost ofthis generation is $07.4 per MWh. The forecasted 4 5 The calculation of the costs for non-renewable technology alternatives for solar generation applications was based on the costs and operating characteristics for age LMS00 gas turbine from the EPRI Technical Assessment Guide and the EIA March 0 Annual Energy Outlook price forecast for natural gas delivered to electric generation facilities. The forecasted levelized cost of this generation is 0 $5. per MWh. In addition, due to a variety of factors, including the inability to dispatch the generation and the fact that solar generation's full capacity is not available all hours of the day, EPE credits solar generation with 5 % of its rated capacity for resource planning purposes. Consequently, the forecasted levelized cost

11 of a gas turbine is multiplied by 5 %. 3 Q. WILL EPE'S PROCUREMENT COSTS FOR 0 AND 03 ECEED THE 4 REASONABLE COST THRESHOLD? 5 A. No. As shown in Exhibit EDE-, EPE's estimated costs of its 0 Plan to meet the 0 and 03 RPS requirements will not exceed the RCT standard for those years. 7 Q. 9 0 A DOES THE ACT AND RULE REQUIRE EPE TO REDUCE ITS RPS REQUIREMENTS IF THE COSTS ECEED A CERTAIN DOLLAR OR PERCENTAGE AMOUNT FOR LARGE NONGOVERNMENTAL CUSTOMERS? The costs of EPE's 0 plan (that fully meets the requirement for 0 and 03) have been previously approved by the Commission. EPE's demonstration that these costs were within the Commission's RCT has been accepted by the Commission. The Act and Rule require EPE to reduce, as necessary, the kwh of renewable energy procured for large, nongovernmental customers if the additional cost of the RPS obligation, inclusive of all interconnection and transmission costs, exceeds the lower of.5 % or $0,54 for 0, and the lower of.5 % or $0,5 for 03. The limits of $0,54 for 0 and $0,5 for 03 reflects the application of NMPRC Rule (C) NMAC, which provides for the application of a forecasted change in the consumer price index, urban (CPI-U) based upon the CPI-U for the month period ended May 0 as published by the Bureau of Labor 9

12 Statistics on June 5, 0. 3 Q. IS EPE PROPOSING TO REDUCE ITS RENEWABLE ENERGY 4 5 REQUIREMENTS CUSTOMERS? IN 0 OR 03 FOR LARGE, NONGOVERNMENTAL A. No. Based on EPE's forecasted customer energy consumption and the estimated procurement price of renewable resources for 0 and 03, as provided by EPE Witness Acosta, EPE will not need to reduce its renewable energy requirements in 0 or 03 to limit procurement for large, nongovernmental customers. The additional cost of the RPS will not cause the individual annual charges to these customers to exceed the statutory limitations. Exhibit EDE-3 demonstrates that EPE's large, nongovernmental customers will not reach the cap established in the Act and Rule. 4 5 Q. A. 0 HOW DID EPE DETERMINE WHETHER INDIVIDUAL ANNUAL CHARGES FOR RENEWABLE ENERGY PROCUREMENT WOULD ECEED THE STATUTORY LIMITS? To determine whether EPE's procurement costs are within the overall ReT or the limits for individual nongovernmental customers, EPE has assumed that base rates in effect on the day of the 0 plan filing will be in effect for 0 and 03, as required by NMPRC Rule 57. For the purposes of EPE's 0 Plan, EPE's evaluation is based on EPE's current rates that went into effect in January, 0, 0

13 together with the Fuel and Purchased Power Adjustment Clause ("FPPCAC") charges that were charged during 00, as required by the Rule. 3 4 V. SMALL SYSTEM REC PURCHASE PROGRAM 5 Q. PLEASE DISCUSS EPE'S PROPOSED MODIFICATIONS SYSTEM REC PROGRAM. TO THE SMALL 7 A Pursuant to the Final Order approving EPE's 009 Plan in NMPRC Case No UT, the Commission expanded participation in the Company's Small System REC program from only solar renewable generation rated 0 kw or less to also include wind generation rated 0 kw or less. In the Final Order in NMPRC Case No. O-0000-UT(,,00 RPS Filing"), neither the structure nor the applicability of the program was modified. In addition, pursuant to the Final Order in the 00 RPS Filing, EPE was ordered to submit with this renewable procurement plan, a tiered incentive payment plan for both its Small System and Medium System REC Purchase Programs and to provide testimony explaining why the use of such an incentive plan is, in EPE's view, appropriate or inappropriate for EPE's system and customers. The Company does not believe it is necessary to make any changes to the applicability of this program at this time. However, the Company is proposing to 0 update the price paid to solar and wind facilities and to institute a tiered incentive payment structure for both types of facilities, consistent with the Commission's directives. In addition, EPE is proposing to reduce the term of the incentive

14 EV AND. EVANS guarantee to eight years from the current term of years. The proposed revised tariff for the Small System REC Purchase Program is provided in Exhibit EDE Q. 5 PLEASE DISCUSS THE SMALL RENEWABLE DG FACILITIES CURRENTLY CONNECTED TO EPE'S SYSTEM AND THE PARTICIPATION IN EPE'S CURRENT SMALL SYSTEM REC PROGRAM. 7 A. As of June, 0, 30 customer-owned small renewable DO facilities are connected 9 0 to EPE's system and participating in the Small System REC Program. Of these facilities, 307 are solar generation QFs and 3 of these systems are wind generation QFs. At the time EPE submitted its renewable procurement plan in 00, EPE had 3 total customer-owned small renewable DG facilities connected to EPE's system and participating in the Small System REC Program, including 9 solar generation 3 QFs and three wind generation QFs. Therefore, EPE's Small System REC Purchase Program experienced an increase of, or 35%, in total small renewable DG facilities in the last year. An additional 33 small solar QFs are under construction or otherwise in the process of completing the steps necessary to participate in the program. The construction on all 33 systems and the completion of the process to participate in the program should be completed this summer. Furthermore, the Company is regularly responding to inquiries from additional customers interested in installing small PV or wind generation systems. The total peak capacity for all the currently installed and participating Small

15 DG systems is 9 kw and the total peak capacity for the systems under construction is kw. The increase in small DG renewable systems connected to EPE's system 3 has been significant since EPE's program became effective as of March,009. At the time EPE filed its 00 Plan, on July, 00, the Company had 3 customerinstalled systems, including two wind generation systems, in New Mexico. At the time EPE filed its 009 Plan, the number of customer-installed systems in New Mexico had increased to 45. Therefore, EPE has experienced a 59% growth in 9 customer-installed small DG facilities connected to EPE's system in the last 3 years. 0 Q. WHAT IS EPE'S PROJECTED PARTICIPATION IN THE SMALL SYSTEM REC PROGRAM AND THE PROJECTED NUMBER OF RECS PROVIDED BY THE PROGRAM? 3 A. EPE projects it will have at least 4 systems participating in the Small System REC 4 Program by the end of 0. In addition, EPE expects the number of participants to 5 increase by 00 systems per. year in 0 and 03. This projection is based upon the activity EPE has experienced in 0 and the expectation for additional systems in the future. However, the actual growth of this program will be impacted by the economy, the installed cost of systems, customers' expectations for future changes in 0 system costs and electric utility costs, the actions and quality of work performed the contractors and a variety of other factors. by 3

16 Q. 3 PLEASE EPLAIN YOUR PROPOSED UPDATE TO THE INCENTIVE PRICE FOR SOLAR GENERATION FACILITIES PARTICIPATING IN THE PROGRAM. 4 A. The proposed incentive price for small solar generation facilities participating in the 5 Tier is $0.0 per kwh. The proposed incentive price for small solar generation facilities participating in the Tier and Tier 3 are $0.0 per kwh and $0.0 per kwh, 7 respectively. The proposed contract term for all tiers is eight years. The proposed incentive price calculations are provided on Exhibit EDE-5. The Company calculated the incentive price to reflect the payback calculation for the average size facility currently connected to EPEls system, the estimated current costs for small PV facilities installed, current federal and state tax incentives, and the fact that the vast majority of current facilities are owned by and connected to Residential Service customers. 4 5 Q. A. WHAT IS THE BASIS OF THE ESTIMATED INSTALLED COSTS FOR SMALL PV FACILITIES USED IN THE INCENTIVE PRICE CALCULATION? The estimated installed costs for small PV facilities is based upon an average installed cost estimate that was provided to EPE from one of the most active PV contractors in 0 EPEls New Mexico service area. That PV contractor informed EPE representatives that the average installed cost for a typical, residential system is $.00 per Watt. In addition, EPE compared that average cost estimate it was given to the 4

17 typical costs of a residential solar PV system provided by Solar San Antonio of $5.50 per Watt and based upon analysis of the typical "rule of thumb" ratio relative to 3 module costs. Based on the June 0 U. S. average retail module price of $3.09 per 4 5 Watt, as published by Solarbuzz, and the module cost typically represents 50-0% of the total installed cost of a solar energy system the average installed cost would be $5.5 to $. per Watt. 7 In EPE's incentive price calculation, EPE used an installed cost of $.00 per Watt. This reflects the fact that the installed cost for PV systems has declined significantly since the Small System REC Program was initially approved in December 00 and the costs are generally expected to continue to decline. This declining cost trend is reflected in Exhibit EDE-, which contains a graph of the combined retail cost of solar modules and inverters by month in the U.S. for the period of January 009 through June Q. HOW DO THE PROPOSED INCENTIVE PRICES FOR SOLAR GENERATION UNDER THE SMALL SYSTEM PROGRAM COMPARE TO THE CURRENT INCENTIVE PRICE? A. The current incentive price for solar generation is $0. per kwh for a guaranteed 0 period of years. EPE's proposed Tier incentive price is $0.0 per kwh, the Tier incentive price is $0.0 per kwh and the Tier 3 incentive price is $0.0 per kwh. The proposed guaranteed price period for all tiers is reduced to eight years. The proposed changes would only apply to new participants; current participants 5

18 would not be affected. 3 Q. 4 5 A. PLEASE EPLAIN THE BASIS FOR THE PROPOSED INCENTIVE PRICE REDUCTIONS FOR TIER AND TIER 3. The price for Tier 3 was established at the current, typical market price for RECs that can be used in New Mexico. Therefore, at that level, customers are provided a 7 guaranteed price per REC equal to what they would receive if they could sell their RECs on the market. The price for Tier was established at the mid-point between 9 the proposed Tier price and the typical price at which EPE can purchase RECs on 0 the market. This approach was taken in order to provide a more gradual decline to the market prices and to reflect the expectation expressed commonly in publications 3 4 that the installed costs of PV are expected to decline significantly incentives are no longer needed. to a point where 5 Q. DO SOLAR FACILITIES ALSO RECEIVE INCENTIVES FROM SOURCES OTHER THAN THE REC INCENTIVES? A. 0 Yes. Both the federal government and the State of New Mexico have established incentives through income tax credits for these solar generation facilities. The State of New Mexico provides a 0 % personal income tax credit incentive for residential, commercial and agriculture customers through its Solar Market Development Tax Credit. The federal government provides a 30 % personal income tax credit incentive for residential customers through its Residential Renewable Energy Tax Credit and

19 provides a 30 % corporate tax credit for commercial, industrial and agricultural customers through its Business Energy Investment Tax Credit In addition, all DO facilities receive significant the benefit of net metering. economic incentives through Q. PLEASE DESCRIBE THE TIERED PRICING STRUCTURE THE 7 COMPANY IS PROPOSING FOR SMALL DG SYSTEMS THAT BEGIN 9 PARTICIPATION IN 0. IN THE SMALL SYSTEM REC PURCHASE PROGRAM 0 A. As discussed previously, EPE proposes a three tier, incentive pricing structure for both the Small System REC Purchase Program and the Medium System REC Purchase Program. The Company proposes that the first tier incentive prices will be 3 applicable for solar and wind systems that participate in either the Small System or 4 5 the Medium System REC Purchase Program until the combined, total of the ac rated capacity of both programs exceed,000 kw. The second tier incentive prices will be applicable for all systems that participate in either program until the combined, total of the ac rated capacity of both programs exceed,500 kw. The third tier incentive prices will be applicable for all systems that participate in either program after the combined, total rated capacity of both programs exceed,500 kw. 0 Q. PLEASE EPLAIN THE BASIS FOR THE LEVELS OF PARTICIPATION AT WHICH THE TIERS ARE ESTABLISHED.

20 A. As of June, 0, the total installed capacity of small and medium systems participating in EPE's programs was,00 kw-ac. Based upon an estimated 3 generation for solar facilities of 0 kwh per kw-ac from Kyocera Solar, Inc., this 4 will produce,9 MWh of energy, which converts into,9 RECs. As stated in 5 Mr. Acosta's testimony, EPE's DG renewable REC requirements for 0 and 03 are only,3 and,775 RECs, respectively. Therefore, the systems participating in 7 EPE's program as of June, 0 are expected to meet more than % of EPE's DG renewable requirements in 0 and 03. With a total installed capacity of 9,000 kw-ac, the programs should produce 3,0 RECs, which is 45% and 3% of 0 the DG requirements in 0 and 03, respectively. At a total installed capacity of,500 kw-ac, the programs should produce % and % of the DG requirements in 0 and 03, respectively. However, the renewable energy requirements and the 3 diversity requirements for DG increase beginning in EPE expects the total installed capacity in the DG programs to exceed 5,000 kw in 0 and to exceed,500 kw by early 04. Therefore, establishing the tiers at the proposed levels would allow for a more gradual reduction in the incentives over the next two years, while enabling these programs to meet a significant portion of the DG requirement in Q. DO YOU BELIEVE THE COMPANY SHOULD SEEK TO MEET ITS ENTIRE DG REQUIREMENT THROUGH THESE PRGRAMS? A. No. These programs are the most expensive renewable programs to EPE's customers

21 and EPE currently has other resources that are more economical and can used to satisfy some portion of EPE's DG renewable requirement. In addition, EPE is often 3 in discussions with parties interested in constructing QFs that would be connected to 4 5 EPE's distribution system and could enable the Company to meet its DG requirements at a more reasonable cost to its customers. 7 Q. 9 A. PLEASE DISCUSS EPE'S PROPOSAL TO REDUCE THE CONTRACT TERM TO EIGHT YEARS. Currently, the Renewable Portfolio Standard is defined through the year 00, which 0 coincides with the proposed eight year contract term. In addition, New Mexico PV contractors have indicated that the payback period for PV systems is approximately eight years. EPE does not believe it would be reasonable to require its customers to 3 continue to pay for incentives on systems after the initial investment has been paid 4 5 back. Furthermore, program participants will continue to receive significant economic benefits from their system due to net metering and due to the fact that these systems should increase their property values. Q. HOW MANY YEARS DOES EPE BELIEVE IT WILL TAKE FOR PV SYSTEMS IN EACH OF THE TIERS IN THE SMALL SYSTEM PROGRAM 0 TO ACHIEVE 00% PAYBACK? A. EPE's analysis indicates that systems in the first tier should achieve 00% payback of their original investment at approximately.7 years, which would cause the systems

22 to have.3 years of remaining service life. The systems in the second tier should achieve 00% payback of their original investment at approximately 4.4 years, 3 which would cause the systems to have 5. years of remaining service life. Finally, 4 the systems in the third tier should achieve 00% payback of their original investment 5 at approximately. years, which would cause the systems to have 3.9 years of remaining service life. 7 Q. UNDER THE CURRENT INCENTIVE STRUCTURE, DID PARTICIPANTS 9 0 A. ACHIEVE 00% PAYBACK DURING THE YEAR CONTRACT TERM? Yes. As stated previously, PV contractors in EPEts New Mexico service area have stated that they project the payback period for residential PV systems to be approximately eight years. Therefore, under the current pricing structure, participants 3 will continue to receive incentive payments for four years after they have achieved % payback of their original investment and will continue to receive significant economic benefits from net metering for the remaining service lives of their facilities. Q. 0 A. WHY DID EPE DEVELOP ITS PROPOSED INCENTIVE PRICE FOR SOLAR GENERATION TO NOT PROVIDE 00% PAYBACK OF THE SYSTEM COSTS OVER THE PROPOSED CONTRACT TERM? The Company does not believe it is appropriate to require non-participating customers who either cannot afford to purchase or lease a system or elect to not do so to guarantee that participants will receive 00% payback of the system costs over the 0

23 3 4 contract term, particularly when the expected average service life of these systems are significantly longer than the term under which the price is guaranteed. Therefore, it is reasonable for those who can afford to purchase or lease solar generating systems to be required to recover some portion of their investment from economic benefits 5 received after the guaranteed incentives have ended. Nevertheless, as noted on 7 Exhibit EDE-5, customers should fully recover their investment in only 4.7 years after the end of their contract term, but with more than.3 years of average remaining service life for their systems. Consequently, although the participants 9 0 should have fully recovered their investment, they will continue to receive economic benefits on their investment for several more years after recovering their investment. Q. 3 4 P~EASE EPLAIN YOUR PROPOSED UPDATE TO THE INCENTIVE PRICE FOR WIND GENERATION FACILITIES PARTICIPATING IN THE PROGRAM. 5 A. The incentive price calculation is provided on Exhibit EDE-. The Company 0 calculated the incentive price to reflect the payback calculation for the average size wind turbine currently connected to EPE's system, the estimated current costs for small wind generation facilities, current federal and state tax incentives, and the fact that most currently connected facilities are owned by and connected to Residential Service customers. The cost for small wind generation facilities was based upon the package price for a.0 kw wind turbine, which is approximately equal to the size of the average

24 3 4 5 customer-owned wind turbine currently connected to EPE s system in New Mexico. In addition, the calculation reflects the 30% federal tax credit available to wind turbines pursuant to the Energy Improvement and Extension Act of 00 and that there is no state income tax credit offered to small wind generation facilities. The calculation resulted in a proposed guaranteed incentive price for small wind I generation facilities of $0.0 per kwh fixed for a period of years. 7 Q. 9 0 A. PLEASE DISCUSS THE PROPOSED INCENTIVE PRICE BY TIER FOR SMALL WIND GENERATION SYSTEMS? The proposed incentive price for small wind generation facilities participating in the Tier is $0.0 per kwh. The proposed incentive price for small solar generation 3 4 facilities participating in the Tier and Tier 3 are $0.04 per kwh and $0.0 per kwh, respectively. Consistent with the proposed contract term for small solar facilities, the proposed contract term for all tiers is eight years. 5 Q. HOW MANY YEARS DOES EPE BELIEVE IT WILL TAKE FOR WIND A. 0 GENERATION SYSTEMS IN EACH OF THE TIERS IN THE SMALL SYSTEM PROGRAM TO ACHIEVE 00% PAYBACK? EPE s analysis indicates that systems in the first tier should achieve 00% payback of their original investment at approximately.7 years, which would cause the systems to have.3 years of remaining service life. The systems in the second tier should achieve 00% payback of their original investment at approximately.5 years,

25 which would cause the systems to have.5 years of remaining service life. Finally, the systems in the third tier should achieve 00% payback of their original investment 3 at approximately 3.3 years, which would cause the systems to have.7 years of 4 remaining service life. 5 Q. 7 9 A. IS EPE REQUESTING THE RIGHT TO LIMIT THE NUMBER OF CUSTOMERS ALLOWED TO PARTICIPATE IN THE SMALL SYSTEM REC PURCHASE PROGRAM AT THIS TIME? Not at this time. However, as mentioned previously, the Company is proposing to 0 establish a tiered incentive pricing structure that would limit participation and second incentive price tiers. in the first 3 Q. 4 5 A. WHAT ARE SOME OF THE BENEFITS OF EPE'S SMALL SYSTEM REC PURCHASE PROGRAM? A primary benefit of the Purchase Program is that it has increased the total amount of renewable energy produced on or delivered to EPE's system by encouraging retail customers to install renewable energy systems and to maintain existing systems. Another benefit of this program is that through encouraging the installation of small DG systems, it can reduce EPE's forecasted annual system peak load requirements. 0 Q. HOW WILL THE PURCHASE PROGRAM ENCOURAGE CUSTOMERS TO INSTALL AND MAINTAIN RENEWABLE ENERGY SYSTEMS? 3

26 A. Participating customers will be able to sell to EPE the RECs created when their small system produces energy. This will help the customers defray some of the costs of installing and maintaining the system and will reduce the expected payback period for customers' investment in systems. The combination of the Purchase Program and the benefits derived from net metering should provide customers with incentives to ensure their systems are properly maintained and producing the maximum energy possible. 9 Q. WHAT IS THE ESTIMATED ANNUAL PAYMENT A CUSTOMER WOULD 0 RECEIVE FOR PARTICIPATING IN THE REC PROGRAM? A. Based upon the average size of the systems currently connected to EPE and the expected capacity factors for the applications, it is estimated that EPE will pay the 3 typical small PV participant in Tier approximately $ per year and will pay the 4 5 typical small wind generation participant in Tier approximately $3 per year. Q. WHAT ARE THE FINANCIAL BENEFITS CUSTOMERS WILL RECEIVE FOR PARTICIPATING IN THE SMALL SYSTEM REC PURCHASE PROGRAM? A. The value obtained by a participating customer under net metering is based on EPE's 0 retail rate tariff. For 0, it is estimated that for the average Residential and Small Commercial Service customer, the value of net metering will be $0.337 per kwh of a customer's generation. In addition, these customers receive an incentive price per 4

27 kwh that EPE pays the customer for RECs purchased from the customer. 3 Q. 4 5 A. 7 9 HOW DOES EPE COMPENSATE PROGRAM PARTICIPANTS FOR THEIR RECS? RECs are purchased by EPE from each participant as part of the regular monthly billing process. Participants receive a monthly statement documenting the number of kwh produced by the system, the number of RECs purchased by EPE, the purchase price per REC and the total price of RECs purchased from the participant by EPE during that billing period. 0 REC purchase payments are applied as a credit to the participant's electric bill on a monthly basis. If the amount paid for the RECs is greater than the total of the customer's monthly electric service plus kwh charges, but less than $30, the balance Q. of the REC payment is carried forward as a credit for the following month's bill. the balance exceeds $30, EPE sends the customer a check for the entire balance. WHAT FEES AND CHARGES DOES EPE IMPOSE TO PARTICIPATE THE PROGRAM? If IN A. 0 Participants are charged in accordance with EPE's interconnection agreements. The only other fee or charge to participants in the program is the $50 application fee included in the program Application. This fee is intended to cover the cost of processing the application and the cost of installing the second meter required for the program. Currently interconnected customers only pay the one-time fee to join the 5

28 Purchase Program. 3 Q. DOES EPE REQUIRE THAT A SECOND METER BE INSTALLED? 4 A. Yes. A second meter is required because the total number of RECs created by the S customer-owned renewable system is counted by measuring the total kwh output of the customer's system. To measure the total output of the system an additional meter 7 must be installed at the output of the customer-owned system. 9 Q. 0 A. WHO IS RESPONSIBLE FOR PROVIDING THE METER SOCKET AND WIRING FOR THE SECOND METER? The Small PV Program participant is responsible for installing the meter socket and 3 all wiring for the second meter. EPE provides and installs the second meter. 4 VI. MEDIUM SYSTEM REC PURCHASE PROGRAM 5 Q. A. 0 PLEASE DESCRIBE THE COMPANY'S MEDIUM SYSTEM REC PURCHASE PROGRAM. The Medium System REC Purchase Program is similar to the Small System REC Purchase program, except that it is available for systems with a maximum rated output from 0 kw to 00 kw. In addition, the proposed incentive prices for Medium System RECPurchase Program systems differ from the prices for small systems because these prices were developed based upon the costs for solar and wind facilities of that size.

29 EPE offers the program through the Commission-approved Medium System Renewable Energy Certificate Purchase tariff. The updated tariff, which is attached as Exhibit EDE-7, is modified from the tariff approved in NMPRC Case No UT only to reflect updated prices. EPE offers the tariff in conjunction with the use of the approved Application to Participate in Purchase Program for Medium System RECs (,Medium System Application") between EPE and individual 7 customers, which EPE is not proposing to modify. The Medium System Application 9 0 sets forth the terms of program participation. Customers are also required to interconnect their facilities in accordance with the QF interconnection rules and agreements established by the Commission. Q. 3 4 A. WHAT INCENTIVE PRICE PER KWH IS EPE PROPOSING TO PAY PARTICIPANTS UNDER THE MEDIUM SYSTEM REC PROGRAM? The Company proposes to pay solar generation participants in Tier $0.0 per kwh, 5 participants in Tier $0.0 per kwh and participants in Tier 3 $0.0 per kwh. are the same prices proposed for the Small System PV participants. These 0 EPE is proposing to pay wind generation participants in Tier $0.04 per kwh, which is the same as the currently approved incentive price. EPE is also proposing to pay wind generation participants in Tier $0.0 per kwh and participants in Tier 3 $0.00 per kwh. 7

30 Q. 3 A PLEASE EPLAIN HOW THE PROPOSED INCENTIVE PRICE FOR SOLAR GENERATION WAS DEVELOPED. The incentive price for solar generation for the Medium System REC Purchase Program was developed similar to the calculation for solar generation in the Small System REC Purchase Program. The calculation is provided on Exhibit EDE-. The Company calculated the incentive price to reflect the payback calculation based upon the estimated current costs for a 50 kw AC PV facility, expected operating characteristics for a PV system, current federal tax incentives, and the expectation that these facilities will typically be owned by and connected to corporate customers served under EPE's General Service rate. Q. 3 4 A. 5 0 PLEASE EPLAIN HOW THE PROPOSED INCENTIVE PRICE FOR WIND GENERATION WAS DEVELOPED. The incentive price for solar generation for the Medium System REC Purchase Program was developed similar to the calculation for solar generation in the Small System REC Purchase Program. The calculation is provided on Exhibit EDE-9. The Company calculated the incentive price to reflect the payback calculation based upon the quoted turn-key price for a 0 kw AC wind turbine, expected performance characteristics for the wind turbine, current federal tax incentives, and the expectation that these facilities will typically be owned by and connected to corporate customers served under EPE's General Service rate.

31 Q. WHY IS THE PROPOSED INCENTIVE PRICE FOR WIND GENERATION SIGNIFICANTLY LOWER THAN THE PRICE FOR SOLAR 3 GENERATION? 4 A. The primary factors that lead to the lower proposed incentive price for wind 5 generation are due to a higher assumed net capacity factor for wind generation; and no expected degradation in system efficiency over the -year term. 7 Q. WHAT RENEWABLE SYSTEMS ARE ELIGIBLE TO PARTICIPATE IN 9 THE PURCHASE PROGRAM? 0 A. New and existing renewable energy systems utilizing solar or wind generation, rated at 0 kw AC to 00 kw AC qualify to participate. To be eligible, these systems must have an interconnection agreement with EPE in compliance with NMPRC Rule 5, 3 be interconnected with EPE, and have completed the Application to Participate in 4 Purchase Program for Medium System RECs. 5 Q. ARE CUSTOMERS REQUIRED TO PARTICIPATE IN THE PURCHASE PROGRAM IN ORDER TO INTERCONNECT WITH EPE'S SYSTEM? A. No. 0 Q. WHAT ARE THE BENEFITS TO A MEDIUM SYSTEM PROGRAM PARTICIPANT, INCLUDING NET METERING OF THEIR ELECTRICITY USAGE? 9

32 A The value obtained by a customer under net metering is based on EPE's retail rate tariff. It is expected that participating customers will be served under the Company's Small Commercial, General Service, Large Power Service or City & County Service rates. For an average General Service customer, the value of net metering for 0 is projected to be approximately $0.005 per kwh of a customer's generation that offsets the customer's consumption during a given month. This benefit is in addition to the proposed incentive prices for participating customer-installed solar generation systems and wind generation systems, identified previously. Consequently, the 9 0 projected 0 total value to a net metered customer of the RECs and energy produced by a medium solar generation facility participating in Tier will be approximately $0.005 per kwh and the total value to a participating wind generation facility is $ Q. 5 A. 0 HOW DOES EPE COMPENSATE PROGRAM PARTICIPANTS FOR THEIR RECS? RECs are purchased by EPE from each participant as part of the regular monthly billing process. Participants receive a monthly invoice documenting the number of kwh produced by the system, the number of RECs purchased by EPE, the purchase price per REC and the total price of RECs purchased from the participant by EPE that billing period. REC purchase payments are applied as credits to the participants' electric bills on a monthly basis. If the amount paid for the RECs is greater than the total of the 30

33 3 customer's monthly electric service plus kwh charges, but less than $30, the balance of the REC payment will be carried forward as a credit for the following month's bill. If the balance exceeds $30, EPE will send the customer a check for the entire balance. 4 5 Q. WHAT FEES AND CHARGES DO EPE IMPOSE TO PARTICIPATE PROGRAM? IN THE 7 A. 9 0 Participants are charged in accordance with EPE's interconnection agreements. The only other fee or charge to participants in the program will be the $50 application fee included in the program Application. This fee is intended to cover the cost of processing the application and the cost of installing the second meter required for the program. Currently interconnected customers will pay the one-time fee to join the Purchase Program. 3 4 Q. DOES EPE REQUIRE THAT A SECOND METER BE INSTALLED? 5 A. Yes. A second meter is required because the total number of RECs created by the customer-owned renewable system is counted by measuring the total kwh output of the customer's system. To measure the total output of the system an additional meter must be installed at the output of the customer-owned system. 0 Q. WHO IS RESPONSIBLE FOR PROVIDING THE METER SOCKET AND WIRING FOR THE SECOND METER? A. The Medium System REC Program participant is responsible for installing the meter 3

34 socket and all wiring for the second meter. EPE will provide and install the second 3 meter. The cost of the meter is included in EPE's total program costs. 4 Q. WHAT IS EPE'S CURRENT PROJECTED PARTICIPATION IN THE 5 MEDIUM SYSTEM REC PROGRAM AND THE PROJECTED RECS PROVIDED BY THE PROGRAM? NUMBER OF 7 A. EPE currently has 0 facilities in New Mexico with a rated capacity of kw-ac that are participating in the Medium System REC program. However, EPE has 9 received a number of inquiries by potential participants in the Medium System REC 0 Purchase Program. EPE projects it will add participants in the Medium System REC Purchase Program per year during 0 and Q. 4 5 A. WHAT ARE THE PROPOSED ANNUAL COSTS FOR THE SMALL SYSTEM REC PURCHASE PROGRAM AND THE MEDIUM SYSTEM REC PURCHASE PROGRAM? EPE estimates the total cost for these programs in 0 to be approximately $,5 and the cost for the programs in 03 is estimated to be $3,3. VII. CONCLUSION 0 Q. A. PLEASE SUMMARIZE THE IMPACTS OF ESTIMATED COSTS ASSOCIATED WITH EPE'S 0 PLAN ON CUSTOMERS. EPE's estimated costs of meeting the Act's renewable energy requirements for 0 3

35 and 03 through the purchase of RECs with and without related energy will not cause EPE to reduce kwh purchases for large, nongovernmental customers or to exceed the reasonable cost threshold standard set by the Commission for those years. EPE will recover the costs of renewable purchases that include energy and associated RECs through its FPPCAC on a monthly basis; all other costs of EPE's 0 Plan, including RECs purchased without associated energy, will be deferred with carrying costs for later recovery in a general rate proceeding. 9 Q. 0 ARE EPE'S PROPOSED CHANGES TO THE SMALL SYSTEM REC PURCHASE PROGRAM AND THE MEDIUM SYSTEM REC PURCHASE PROGRAM REASONABLE AS TO THEIR TERMS AND COSTS, BASED ON THE ACT AND RULE? 3 A. Yes. EPE's Small System REC Purchase Program and its Medium System REC 4 5 Purchase Program have already shown that they encourage the development of distributed generation on EPE's system and are expected to continue to encourage that development. In addition, these programs will provide EPE with reasonably-priced RECs that will help EPE to meet minimum percentage targets established by the Commission. The proposed changes reflect current installed cost of facilities, the 0 significant expansion in participation in these programs, the need to balance the incentives with the cost impact on EPE's customers and the directive from the Final Order in EPE's 00 Plan, NMPRC IO-0000-UT, to consider establishing a tiered incentive price structure. 33

36 Q. DOES TillS CONCLUDE YOUR TESTIMONY? 3 A. Yes. 34

37 EHIBIT EDE- PAGE OF EL PASO ELECTRIC COMPANY Calculated Incremental Cost and Factors for Renewable Resource Procurement for the 0 and 03 Procurement Years Line No. DescriEtion Reference 0 03 REC Purchases without Energll PNM Wind REC Purchase Exhibit RA-4 $ $ SPS REC Purchase Exhibit RA-4 70,000 70,000 Total REC Purchases without Energy (Net of No Avoided 3 Costs) Sum ( + ) $ 70,000 $ 70,000 CRLEF Project Biomass REC Purchase 4 CRLEF Project REC Purchase Exhibit RA-4 $ 4,45 $ 3,7 5 0 Levelized Fixed Cost per MWh of Combined Cycle () Workpaper $ $ MWh Purchased from CRLEF Exhibit RA-4,43,579 7 Total Avoided Fixed Cost of Combined Cycle Line 5 * Line $ $ Net Incremental CRLEF Costs above Avoided Costs Line 4 - Line 7 $ 4,45 $ 3,7 Solar Energll Purchases 9 SWEC Solar Energy Purchases Exhibit RA-4 $,474 $,5 0 Hatch Solar Energy Purchases Exhibit RA-4,3,799,3,73 NRG SunTower Solar Energy Purchases Exhibit RA-4,770,7,70,05 SunEdison Solar Energy Purchases Exhibit RA-4 4,37,33 5,9, 3 Small & Medium System REC Purchase Programs - Solar Workpaper 43,075 50, 4 Total Solar Energy Purchases Sum (9 thru 3) $ 3,59,40 $ 4,73,7 5 0 Levelized Avoided Cost per MWh of Combustion Turbine () Workpaper $ 5.4 $ 5.4 MWH Solar Energy Purchases Exhibit RA-4,354 5,3 Total Avoided Cost of Combustion Turbine Line 5 * Line $,39,403 $ 0,79,40 Net Incremental Solar Energy Costs above Avoided Costs Line 4 - Line $ (5,3,943) $ (,059,7) Wind Energll Purchases Small & Medium System REC Purchase Programs - Wind Workpaper $,35 $,35 0 Applicable Avoided Costs Net Incremental Wind Energy Costs above Avoided Costs Line - Line 0 $,35 $,35 Total Annual Incremental Cost of Renewable Procurement Plan Sum(3,, & ) $ (4,4,974) $ (5,4,7) () Levelized Fixed Cost per MWh assumed to be $0 per MWh because this is a purchase from a OF cogeneration facility. () Levelized Cost per MWh of GE LMS00 Combustion Turbine based on EPRI TAG calculation and fuel cost projection from March 0 EIA Annual Energy Outlook forecast of natural gas prices for delivery to electric generation.

38 EHIBIT EDE- PAGE0F EL PASO ELECTRIC COMPANY Calculated Incremental Cost and Factors for Renewable Resource Procurement for the 0 and 03 Procurement Years Line No. DescriQtion 0 03 Forecasted New Mexico Jurisdictional MWH Sales at Meter (),757,55,50,3 New Mexico System Loss Factor () Forecasted New Mexico Jurisdictional MWH Sales at Supply,97,37,99,90 4 Total Annual Incremental Cost of Renewable Resource Purchases $ (4,4,974) $ (5,4,7) New Mexico System Incremental Cost Factor for Renewable Resource 5 Procurement Applicable to all kwh sales, $/kwh $ (0.004) $ (0.005) Loss adjusted for secondary voltage delivery $ (0.005) $ (0.005) 7 Loss adjusted for primary voltage delivery $ (0.00) $ (0.0053) Loss adjusted for transmission voltage delivery $ (0.00) $ (0.004) Notes: () EPE's 0 Forecast of New Mexico Jurisdiction kwh Sales () EPE's Filed Eighteenth Revised Rate No., NMPRC Case No UT