BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION DIRECT TESTIMONY OF JENNIFER VOSBURG ON BEHALF OF LOUISIANA GENERATING LLC AND NRG POWER MARKETING LLC

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1 APSC FILED Time: //0 ::0 PM: Recvd //0 :: PM: Docket -0-u-Doc. BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION IN THE MATTER OF A SHOW CAUSE ORDER DIRECTED TO ENTERGY ARKANSAS, INC. REGARDING ITS CONTINUED MEMBERSHIP IN THE CURRENT ENERGY SYSTEM AGREEMENT, OR ANY SUCCESSOR AGREEMENT THERETO, AND REGARDING THE FUTURE OPERATION AND CONTROL OF ITS TRANSMISSIONS ASSETS DIRECT TESTIMONY OF JENNIFER VOSBURG ON BEHALF OF LOUISIANA GENERATING LLC AND NRG POWER MARKETING LLC March, 0

2 March, 0 APSC FILED Time: //0 ::0 PM: Recvd Louisiana //0 Generating :: PM: LLC Docket and -0-u-Doc. NRG Power Marketing LLC TESTIMONY OF JENNIFER VOSBURG ON BEHALF OF LOUISIANA GENERATING LLC AND NRG POWER MARKETING LLC 0 Q: PLEASE STATE YOUR NAME AND AFFILIATION. A: My name is Jennifer Vosburg. I am President of Louisiana Generating LLC ("LaGen") and Senior Vice-President of NRG Energy, Inc. My business address is Telly Street, New Roads, LA 00. I am testifying in this docket on behalf of LaGen and its affiliate, NRG Power Marketing LLC ("PML"), which I collectively refer to as "NRG." Q: PLEASE STATE YOUR EDUCATION AND PROFESSIONAL EXPERIENCE. A: Currently, I serve as the President of LaGen, which is a subsidiary of NRG Energy, Inc. I have worked within the LaGen organization for the past five years in a variety of roles, all w ith a special focus on transmission related issues. Prior to my employment with LaGen, I was a partner at Long Law Firm in Baton Rouge where my practice included the public utility and regulatory area. I graduated summa cum laude from Louisiana State University and hold a juris doctorate from the LSU Law School. Q: PLEASE DESCRIBE NRG's BUSINESS. A: Through a series of long-term full requirements service contracts, LaGen serves ten electrical cooperatives in Louisiana. The cooperatives served by LaGen are: Beauregard Electric Cooperative, Inc., Claiborne Electric Cooperative, Inc., Concordia Electric Cooperative, Inc., Dixie Electric Membership Corporation, Jefferson Davis Electric Cooperative, Inc., Northeast Louisiana Power Cooperative, Inc., Pointe Coupee Electric Membership Corporation, South Louisiana Electric Cooperative Association, Southwest Louisiana Electric Membership Corporation, and Washington-St. Tammany Electric Corp., Inc. LaGen owns two generating stations (Big Cajun I and Big Cajun II), which are used to serve our cooperative load, while the excess is used to make DIRECT TESTIMONY OF JENNIFER VOSBURG Page

3 March, 0 APSC FILED Time: //0 ::0 PM: Recvd Louisiana //0 Generating :: PM: LLC Docket and -0-u-Doc. NRG Power Marketing LLC 0 both on- and off-system economic power sales. LaGen's affiliates own three other generating stations in the Entergy footprint (Bayou Cove, Cottonwood and Sterlington), which make firm and non-firm sales on both a long-term and short-term basis. This generation and the cooperative load is encompassed in the LAGN Balancing Authority that is embedded in the Entergy system and operated by LaGen. In addition, LaGen operates three Balancing Authorities in Arkansas as part of its full requirements contracts with three Arkansas municipalities. NRG also has wholesale customers in Texas and Mississippi. As a result of its unique business model, NRG looks partially like a transmission-dependent utility and partially like an independent power producer. This dichotomy gives NRG a unique perspective into aspects of the Entergy system, as well as the comparative merits of the Midwest Independent System Operator ("MISO") and the Southwest Power Pool ("SPP"). Q: PLEASE DESCRIBE NRG'S INTEREST IN THIS PROCEEDING. A: NRG owns approximately 00 MW of generation interconnected to the Entergy transmission system, 00 MW of that generation is located in Louisiana. NRG is the largest user of transmission service on the Entergy system, after Entergy itself, with NRG contributing roughly $0 million a year in firm transmission costs towards the costs of operating the Entergy transmission system. NRG has been an active participant in the Entergy stakeholder process for many years, including strong participation in the ICT process as well as the Entergy Regional State Committee ("ERSC") process since its inception in 00. I have held leadership positions on various stakeholder committees and task force and continue to be heavily involved at the ERSC. NRG has continued to push for improvements in the Entergy transmission system for the benefit of its customers and market participants. NRG makes significant contributions to the fixed costs of operating the Entergy transmission system, but has not always seen the benefits of this investment. As this DIRECT TESTIMONY OF JENNIFER VOSBURG Page

4 March, 0 APSC FILED Time: //0 ::0 PM: Recvd Louisiana //0 Generating :: PM: LLC Docket and -0-u-Doc. NRG Power Marketing LLC 0 Commission well knows, the Entergy transmission system continues to be heavily constrained and these constraints pose serious challenges to companies like NRG that depend on the availability of transmission service to both serve full requirements customers and to make firm and non-firm sales on both a long-term and short-term basis. As a result, the proposal that Entergy might join MISO will directly impact NRG's business operations. Q: WHAT IS THE PURPOSE OF YOUR TESTIMONY? A: The purpose of my testimony is to state NRG's support for Entergy's proposal to join MISO, subject to certain conditions that NRG believes are necessary for Entergy's move to MISO to be in the public interest. As discussed in more detail in my testimony, the Commission should condition its approval of the MISO transition on: () NRG and other load serving entities being provided feasible Auction Revenue Rights ("ARRs") and Financial Transmission Rights ("FTRs") at a comparable rate as historic allocations of ARRs and FTRs to existing MISO load serving entities; () Requiring Entergy to bid its generating facilities into the MISO energy markets at a price that is equal to the marginal cost of production of each generating unit, as determined by an independent market monitor; and () Clarify that if Entergy does not follow the least-cost dispatch solution developed by MISO then the LPSC may determine any resulting increase in fuel costs was not prudently incurred. These conditions will ensure that all customers in Louisiana will enjoy the benefits of centralized least-cost dispatch of generation associated with the transition to an organized market. Q: WITH THE ADOPTION OF THOSE CONDITIONS, DO YOU RECOMMEND THAT THIS COMMISSION APPROVE ENTERGY'S REQUEST TO JOIN THE MISO? DIRECT TESTIMONY OF JENNIFER VOSBURG Page

5 March, 0 APSC FILED Time: //0 ::0 PM: Recvd Louisiana //0 Generating :: PM: LLC Docket and -0-u-Doc. NRG Power Marketing LLC 0 A: Yes I do. From a wholesale customer perspective, the key benefits that MISO provides are transparency into three critical areas: transmission planning; allocation of congestion costs; and energy pricing. Transmission Planning: With regards to transmission planning, MISO stakeholders engage in a multi-year transmission planning process that considers input from a variety of stakeholders and then renders unbiased decisions on what transmission upgrades are needed to operate the system in a reliable manner. While the current Base Plan and Construction Plan processes provide for some stakeholder input, it remains difficult for independent entities, such as NRG, to influence the process. There remain lingering doubts as to the adequacy of the current Entergy transmission planning process, while congestion continues to be a growing problem on the transmission system. Congestion Costs: Transparency into the allocation of congestion costs is another place where MISO membership could provide benefits to Louisiana customers. Currently, if a particular path is congested in Entergy, the only means of relieving that congestion is to fund upgrades to the transmission system that can often run hundreds of millions of dollars for even modest transmission service requests: MISO's Locational Marginal Price ("LMP") markets provide customers the choice between paying for transmission upgrades or paying more in the congestion component of LMP. Allowing this type of customer choice is a key benefit of organized markets. Moreover, going to MISO would represent a substantial improvement over the existing method of allocating congestion cost responsibility under the current ICT arrangement. Currently, Entergy has the sole discretion on what transmission projects and associated costs are assigned to a transmission service request that is impacted by congestion. The ICT arrangement provides only limited oversight of Entergy's proposed solution and provides no analysis as to whether Entergy's proposed solution is the most economic solution. DIRECT TESTIMONY OF JENNIFER VOSBURG Page

6 March, 0 APSC FILED Time: //0 ::0 PM: Recvd Louisiana //0 Generating :: PM: LLC Docket and -0-u-Doc. NRG Power Marketing LLC 0 However, I have some concerns about how MISO intends to provide congestion hedging to longterm firm customers on the Entergy system, which is the subject of the conditions NRG is suggesting be adopted by the Commission. Energy Pricing: MISO operates a mature Day " market that has been proven to be effective. With proper procedures in place, NRG also expects to see major improvements resulting from MISO's least-cost security constrained dispatch (i.e., least cost set of generation resources that satisfy the system's reliability need) of generation resources throughout the Entergy region. Currently, the Entergy market is perhaps the most illiquid market in the country; illiquid," meaning that it is difficult to shop for the cheapest source of electricity to satisfy NRG's energy needs. Entities such as NRG should theoretically be able to purchase energy more economically by its ability to purchase power from the lowest cost sources on the system, including taking into account locational constraints. The lack of transparency into generator pricing and transmission system needs makes it difficult for a less expensive resource to displace more expensive competing units. MISO's centralized dispatch will eliminate many of these disparities and improve competition and lower prices. However, the benefits of a centralized least-cost dispatch will only be realized if the underlying offers to generate into the market reflect a unit's expected cost to generate. I address my concerns with Entergy's ability to affect MISO's energy markets below. Q: YOU CITED CONCERNS ABOUT MISO'S CONGESTION HEDGING PROGRAM. PLEASE DISCUSS THOSE CONCERNS. A: The ability of NRG to hedge its exposure to congestion pricing is another large area of concern. In theory, MISO's system of allocating ARRs and FTRs to long-term users of t he transmission system seems like it would provide reasonable protection against spikes in congestion. DIRECT TESTIMONY OF JENNIFER VOSBURG Page

7 March, 0 APSC FILED Time: //0 ::0 PM: Recvd louisiana //0 Generating :: PM: llc Docket and NRG -0-u-Doc. Power Marketing llc 0 However, nothing is ever that simple in the Entergy transmission footprint, and I have significant concerns over how this allocation of ARRs and FTRs will be implemented. In particular, I am concerned that the combination of an under-built transmission system, combined with Entergy's tendency to over-subscribe the capacity of the transmission system (very often to its affiliates) will lead to insufficient ARRs and FTRs to cover the needs of longterm users of the transmission, such as NRG and its wholesale customers. Historically, Entergy would grant its affiliates transmission service conditioned on the redispatch of certain generating facilities in a manner that alleviates certain overloads on the transmission system. These "base-case overloads" on the transmission system make it difficult (if not impossible) for other entities to reserve transmission service. For example, a network customer would be required to pay for addressing not only its own effect on the transmission system, but also any base-case overloads that exist. These historical practices will have a major effect on louisiana if the Commission approves Entergy's request. MISO Market Participants have been awarded, on average, % of ARRs that they nominate in Stage A of the ARR allocation process, and approximately 0% in Stage (Schnitzer Testimony at p. ). I am extremely concerned that these historically high rates of ARR allocation will not translate into the Entergy region. In fact, Entergy and MISO both acknowledge that the expectation is that ARR entitlements in the Entergy region may not be sufficient-- which could expose NRG's cooperative customers to congestion costs beyond those currently experienced by other MISO load serving entities ("lses"). For example, in response to NRG Data Request -b, MISO states that "additional rules may be appropriate to ensure that load-serving entities within the Entergy region receive a reasonable hedge consistent with the Order No. -A guidelines." Similarly, Entergy concedes in response to NRG - that "the Operating Companies would be short, at least relative to receiving long-term ARRs DIRECT TESTIMONY OF JENNIFER VOSBURG Page

8 March, 0 APSC FILED Time: //0 ::0 PM: Recvd Louisiana //0 Generating :: PM: LLC Docket and -0-u-Doc. NRG Power Marketing LLC 0 comparable to other MISO members and consistent with the standards articulated in FERC Orders /-A." MISO also states in testimony that "there are initial indications that the Second Planning Area's level of transmission infrastructure to address congestion is less than that of the First Planning Area." Moeller Testimony at p.. Q: HOW DO YOU THINK THE COMMISSION SHOULD ADDRESS THESE ISSUES? For the purposes of MISO integration, the over-sold and under-built nature of the Entergy transmission system may make it impossible for MISO to grant hedges sufficient to protect NRG and our customers against excess congestion costs. None of these issues exist to the degree that they do in the Entergy region. In order for this transfer of control to be in the public interest, it is critical that any allocation of FTRs and ARRs by MISO take into account these historical practices and ensure that entities, such as NRG, are not disadvantaged by Entergy's over-selling of transmission capacity. Again, this is not an issue that MISO's existing rules contemplate. My recommendation is that this Commission conditions its acceptance of the change in control filing on MISO satisfactorily addressing this legacy issue. Specifically, I recommend that the Commission direct MISO to demonstrate that its ARR and FTR allocation practices will:. Hold NRG and similarly situated LSEs harmless from unhedged congestion costs resulting from Entergy's integration into MISO, in a manner comparable to existing MISO LSEs;. Demonstrate that Entergy's historic practice of allowing base-case overloads to exist will not disadvantage NRG and other similarly situated LSEs by accounting for base-case overloads and redispatch conditions in the assignment of ARRs and FTRs;. Require Entergy and MISO to outline specific steps they will take to reduce LSEs' exposure to congestion costs upon integration; and DIRECT TESTIMONY OF JENNIFER VOSBURG Page

9 March, 0 APSC FILED Time: //0 ::0 PM: Recvd Louisiana //0 Generating :: PM: LLC Docket and -0-u-Doc. NRG Power Marketing LLC 0. Ensure that sha reholders, which have benefited from the historical under-building of the Entergy system, should be called upon to partially fund any shortfall. Q: YOU ALSO CITED CONCERNS ABOUT THE DISPATCH OF GENERATION. HOW DO YOU THINK THE COMMISSION SHOULD ADDRESS THESE ISSUES? A: As previously noted, MISO's centralized dispatch system has the potential to eliminate many of the disparities in generator dispatch currently resulting from the lack of transparency into generator pricing and transmission system needs in the Entergy region. As in any nodal or nonnodal market, one company who holds a dominate position in generation can exert tremendous influence over the results of the market. The Commission should nonetheless ensure the centralized least-cost dispatch of generation throughout the Entergy region so that Entergy does not use the power it holds being the dominant generator on the system to offer its resources in such a way (via bidding practices, self-scheduling etc.) to control LMPs which could result in higher costs to Louisiana ratepayers. Otherwise, Entergy could bid its units into the market in an anti-competitive manner, or voluntarily dispatch its units out of economic merit, but then seek to recover the increased fuel costs from its captive customers. Entergy ultimately earns a return to its shareholders based on how it received rate recovery treatment from its individual state commissions. Currently that rate recovery is predicated on the dispatch of its generation- not on how efficient that dispatch has been. A nodal market such as MISO allows state commissions the opportunity to base Entergy's rate recovery on clear, transparent market signals, not on metrics such as se lf-owned generated megawatt-hours. I recommend that the Commission clarify that any increased fuel costs incurred by Entergy as a result of voluntarily operating its units out of merit will not be recoverable in rates. I note that this still allows Entergy to operate its generating units out of merit when directed by MISO or the Reliability Coordinator in order to preserve reliability, but would still ensure that prices are DIRECT TESTIMONY OF JENNIFER VOSBURG Page

10 March, 0 APSC FILED Time: //0 ::0 PM: Recvd //0 :: PM: Docket -0-u-Doc. Louisiana Generating LLC and NRG Power Marketing LLC properly set. I am not saying that Entergy would engage in any improper behavior, but that establishing upfront rules would ensure that Entergy adopts the recommended MISO least-cost dispatch and eliminate one possible concern associated with the transition to the MISO Two-Day market. Q: WOULD THE SAME ISSUES ALSO ARISE IF ENTERGY WERE TO JOIN SPP? ARE THERE ANY ADDITIONAL ISSUES THAT JOINING SPP WOULD CAUSE? A: Yes. These issues will arise regardless of which organized market Entergy joins. The SPP market rules are far less developed than those in MISO, {and most importantly have never been implemented in the real world) so while my prior answers focus on MISO, a transition to SPP would require similar and perhaps additional conditions. Additionally, unlike MISO, SPP has no historic data for comparison as its Day market is not operational and is not expected to be until 0. It is far more difficult to know exactly what Louisiana would be getting if Entergy were to join SPP than if it joins the relatively mature MISO market. The history of comparable market structures coming in on time and on budget is not good, with ERCOT and CAISO both coming in significantly above budget and behind schedule. Further, MISO has an extensive history of energy and FTR/ARR precedent to look at, while these allocation mechanisms are far less developed in SPP. Q: DOES THIS CONCLUDE YOUR TESTIMONY? A: Yes. DIRECT TESTIMONY OF JENNIFER VOSBURG Page

11 APSC FILED Time: //0 ::0 PM: Recvd //0 :: PM: Docket -0-u-Doc. BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION IN THE MATIER OF A SHOW CAUSE ORDER DIRECTED TO ENTERGY ARKANSAS, INC. REGARDING ITS CONTINUED MEMBERSHIP IN THE CURRENT ENERGY SYSTEM AGREEMENT, OR ANY SUCCESSOR AGREEMENT THERETO, AND REGARDING THE FUTURE OPERATION AND CONTROL OF ITS TRANSMISSIONS ASSETS AFFIDAVIT OF WITNESS I, Jennifer Vosburg, being duly sworn, depose that the Direct Testimony in the abovereferenced matter on behalf of Louisiana Generating LLC and NRG Power Marketing LLC is true and correct to the best of my knowledge, information and belief. Gordon D. Polozola Notary Public State of Louisiana La Bar Roll No. 00 My Commission is for life.