BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * *

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1 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * IN THE MATTER OF THE APPLICATION OF ) PUBLIC SERVICE COMPANY OF COLORADO ) FOR APPROVAL OF REVISIONS TO ITS ) WINDSOURCE PROGRAM ) DOCKET NO. A- DIRECT TESTIMONY AND EXHIBITS OF STEVE MUDD ON BEHALF OF PUBLIC SERVICE COMPANY OF COLORADO October 1, 0

2 LIST OF EXHIBITS Exhibit No. SM-1 Revised Windsource Tariff

3 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * IN THE MATTER OF THE APPLICATION OF ) PUBLIC SERVICE COMPANY OF COLORADO ) FOR APPROVAL OF REVISIONS TO ITS ) WINDSOURCE PROGRAM ) DOCKET NO. A- DIRECT TESTIMONY AND EXHIBITS OF STEVE MUDD INDEX SECTION PAGE I. INTRODUCTION AND STATEMENT OF PURPOSE...1 II. BACKGROUND OF WINDSOURCE... III. WINDSOURCE STANDARD PROGRAM... IV. WINDSOURCE LONG-TERM CONTRACT...1 V. GENERAL PROVISIONS...

4 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO * * * * * IN THE MATTER OF THE APPLICATION OF ) PUBLIC SERVICE COMPANY OF COLORADO ) FOR APPROVAL OF REVISIONS TO ITS ) WINDSOURCE PROGRAM ) DOCKET NO. A- DIRECT TESTIMONY AND EXHIBITS OF STEVE MUDD I. INTRODUCTION AND STATEMENT OF PURPOSE Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Steve Mudd. My business address is 0 Larimer Street, Suite 0, Denver, Colorado 00. Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT POSITION? A. I am employed by Xcel Energy Services, Inc., a wholly-owned subsidiary of Xcel Energy Inc., the parent company of Public Service Company of Colorado. My job title is Product Portfolio Manager. Q. ON WHOSE BEHALF ARE YOU TESTIFYING IN THE PROCEEDING? A. I am testifying on behalf of Public Service Company of Colorado ( Public Service or the Company ). Q. HAVE YOU INCLUDED A DESCRIPTION OF YOUR QUALIFICATIONS, DUTIES, AND RESPONSIBILITIES? A. Yes. A description of my qualifications, duties, and responsibilities is included as Attachment A.

5 Q. WHAT IS THE PURPOSE OF YOUR DIRECT TESTIMONY? A. First, I will provide a brief history of the program and describe goals for the Company s Windsource program. I will describe recent and significant changes to the market for voluntary renewable energy programs. I will describe challenges to these goals given the existing Windsource program structure. I will then summarize proposed changes to the Windsource structure, and the new Windsource Long-Term Contract that will facilitate achievement of program goals. Finally, I will introduce additional expert witnesses II. BACKGROUND OF WINDSOURCE Q. CAN YOU PROVIDE A BRIEF HISTORY OF THE WINDSOURCE PROGRAM? A. Yes. The Windsource program was originally established in 1 to gain experience with the economics and operations of a nascent renewable energy technology at an agreed-upon value-based price. The Company also hoped to gain experience with market demand for a premium-priced, voluntary product with environmental benefits. The Windsource program quickly grew to be one of the largest voluntary green power programs in the country. Q. HAVE THERE BEEN SIGNIFICANT CHANGES TO THE PROGRAM IN THE PAST? A. Yes. In a 00 Settlement Agreement (Docket No. 0S-1E) the program pricing determinant was modified to be cost-based instead of

6 market-based. The agreed-upon pricing methodology incorporated relief from ECA and AQIR riders to the extent of participants Windsource program purchases. As part of that Settlement Agreement the Company also agreed to pursue Green-e Certification for Windsource. The Company was subsequently awarded, currently maintains and expects to continue to maintain Green-e Certification for its Windsource program. In a 00 Settlement Agreement (Docket No. 0S-EG), the Windsource pricing methodology was modified to charge non-participants for benefits inuring to them from the Windsource program, thereby reducing the costs that were to be recovered from Windsource customers. Through the period from 1 through 00, Windsource sales were made from specific, dedicated wind facilities. In 00, the Commission approved the Final Stipulation and Settlement Agreement (Docket No. 0A-0E) among Public Service, the Commission Staff, the Colorado Office of Consumer Counsel, the Governor's Energy Office, Western Resource Advocates, and the City of Boulder (the "00 Windsource Agreement"). This 00 Windsource Agreement made two major changes to the program. First, rather than supplying the program from specific generation assets, Windsource energy and RECs would now come from Public Service s overall RES portfolio. This made available to Public Service customers Renewable Energy Credits ( RECs ) from Public Service system generation that were not needed to meet the Renewable Energy Standard ( RES ). RECs

7 associated with Windsource energy would be retired on behalf of Windsource customers and could not be used to meet the RES. Second, pricing for the program was changed to be based upon the incremental cost of adding additional renewable resources to the Public Service system. Q. WHAT ARE THE GOALS OF THE WINDSOURCE PROGRAM? A. We have designed the Windsource changes to accomplish the following goals: 1) Continue to meet the demand of many of our customers for renewable energy in excess of Renewable Energy Standards; ) Offer renewable energy at competitive rates; ) Continue to ensure that nonparticipants in Windsource are not adversely impacted by the Windsource program and that they share in the benefits provided by the Limon II PPA; ) Minimize year-to-year Windsource price volatility; ) Ensure renewable energy supplies are readily available to meet program demand; and ) Provide the flexibility for further Increases in system renewable generation should the Commission find the resource additions to be in the public interest. Q. WHAT WAS THE DIRECTION PROVIDED TO PUBLIC SERVICE BY THE COMMISSION AS PART OF THE 00 WINDSOURCE AGREEMENT? A. In approving the 00 Windsource Agreement, the Commission encouraged Public Service to find ways to grow our Windsource program.

8 The Commission's Administrative Law Judge stated as follows, in Decision No. R0-0 (February, 00) at page 1: The undersigned ALJ finds that the successful continuation of the Windsource program is just as important to the State of Colorado today as it was in 1, if not more so. Windsource in 1 provided a means to participate in renewable energy acquisition not easily available by other means. Windsource today provides an additional means for Public Service customers to voluntarily participate in renewable energy acquisition above and beyond the mandated percent retail rate impact cap. While the Staff's concerns regarding the program and its continued viability and contribution to adding additional renewable resources are well taken, it is nonetheless important to maintain Windsource as a successful, voluntary renewable program. Mr. Stoffel offered in testimony that Windsource was one of the most successful programs of its kind offered by a utility in the country. To end the program at this point would send the wrong signal. Certainly, encouraging Public Service to continually improve its renewable energy program is an important purpose to ensure the continued viability and growth of the program. The Final Stipulation provides the means to keep the program moving along that path Q. SINCE THE 00 WINDSOURCE AGREEMENT WAS APPROVED, WHAT HAS HAPPENED WITH WINDSOURCE? A. Windsource remains the most popular option for purchasing renewable energy in Colorado. In 0, over thousand residential customers and businesses purchased some portion of their energy through Windsource. In 0, we expect to sell 1, MWh of renewable energy in Colorado. Overall Windsource sales, however, will have declined by percent from 00 to 0. This modest overall decline masks the fact that residential sales have dropped by 1 percent while commercial sales have increased by percent during the same time

9 period. As a percentage of total Windsource sales, commercial sales now make up percent of total sales, compared to percent in 00. Q. WHAT HAS DRIVEN THE DECLINE IN SALES IN RESIDENTIAL SUBSCRIPTIONS? A. The drop in residential participation is driven primarily by economic conditions. The program has also experienced some attrition as customers turn to solar to meet their renewable needs. We have also heard concerns in PUC proceedings that the formula for determining the Windsource premium is too complicated. Q. WHAT HAS DRIVEN THE INCREASE IN SALES IN COMMERCIAL SUBSCRIPTIONS? A. The increase in commercial sales has been driven primarily by three major factors: the need of federal agencies to purchase a percentage of their load from renewable sources (Presidential Executive Order ); the ability to obtain LEED certification points by purchasing Windsource; and the desire by companies to demonstrate their renewable leadership by purchasing renewable energy. The increase mirrors national trends in green power purchasing. According to NREL: Sales to nonresidential customers continued to outpace those to residential customers, with more than % of all sales by volume to the nonresidential sector in 00, an increase from % in

10 Q. WHAT IS THE COMPETITIVE LANDSCAPE FOR VOLUNTARY RENEWABLE ENERGY IN COLORADO? A. According to the EPA Green Power Partnership, there are companies that offer retail residential and small business unbundled REC products that are available to Colorado consumers. For large commercial and wholesale unbundled REC purchases, there are different REC marketers whose unbundled REC products are available to Colorado customers. Q. HAS WINDSOURCE BEEN IMPACTED BY THE COMPETITIVE RENEWABLE ENERGY OPTIONS AVAILABLE TO CONSUMERS? A. Yes. Over time, several large customers have left the Windsource program. Others have made large purchases of unbundled RECs. For example, all major Colorado universities in our service territory purchase RECs from companies other than Public Service. Many companies, including some Federal agencies and national retailers, have centralized renewable energy purchasing, sourcing their purchases from the lowestcost providers nationwide. In general, REC marketers have targeted large companies, but we have also seen erosion in the small business sector 1 related to local REC-marketer campaigns. Companies have also 0 1 significantly increased investments in distributed generation as a means to meet their environmental goals while mitigating potential future increases in utility rates for electricity.

11 Q. HOW DOES WINDSOURCE COMPARE TO THESE COMPETITIVE OFFERINGS? A. Generally speaking, the price of RECs from REC marketers is less expensive than the current Windsource premium. REC marketers are also able to offer more flexible contract terms than Windsource, giving customers the option for longer terms or one-time purchases. Retail REC sales in Colorado from entities other than Public Service are not regulated, enabling REC marketers to be more adaptive to changing market conditions and customer contract demands. Most often, these companies provide RECs that are generated outside of Colorado from states with higher supplies of RECs and less demand from utilities for compliance. Compared to the growing market for distributed generation, Windsource does not currently provide the same financial upside potential as installing generation on the customer site. Q. DOES THE CURRENT WINDSOURCE STRUCTURE MEET THE NEEDS OF ALL CUSTOMERS FOR RENEWABLE ENERGY? A. No. The current structure and pricing of the Windsource program does not meet the needs of all customers. Q. WHAT STEPS HAS PUBLIC SERVICE TAKEN TO IMPROVE THE WINDSOURCE PROGRAM? A. As part of the 00 Windsource Agreement, Public Service met with environmental and community-based organizations and government agencies in discussions to obtain ideas for product development. In a

12 series of meetings in 00, summarized in the Company s Renewable Energy Advisory Group Report (Docket 0A-0E), the group looked at the viability of several ideas for renewable energy products that Public Service might offer. Among the most popular concepts was the idea of a voluntary product offering that would enable commercial customers to participate in the long-term financial benefits of renewable energy contracts, either in the form of a long-term fixed-price contract or as a hedge against potential natural gas costs increases. Q. WHAT OTHER EVENTS HAVE INFLUENCED THE COMPANY S THINKING AROUND VOLUNTARY RENEWABLE ENERGY? A. In Consolidated Dockets No. A-E and A-0E, Public Service sought and obtained approval from the Commission to acquire more wind energy. That docket resulted in the execution of a power purchase agreement with the low wind bidder, a subsidiary of NextEra Energy Resources, for the development of a 00 MW wind farm, known as Limon I. Certain parties to those dockets expressed concern about Public Service acquiring more wind energy at this time, because Public Service already has sufficient RECs to meet the Renewable Energy Standard through 0. This opposition to Limon I suggested to Public Service that we should continue to look for ways to provide more renewable energy to Windsource customers who wanted more than the renewable energy mandated by the Renewable Energy Standard. These customers are

13 willing to pay for these extra RECs, even if the parties appearing in Dockets No. A-E and A-0E did not want to do so. We had also committed in the 00 Windsource Agreement to consider the development of additional new financially viable renewable energy products, including products that provide for stable rates. Q. WHAT ELSE OCCURRED WITHIN THIS TIME FRAME? A. Public Service had developed a proposal to the City of Boulder that called for the development by NextEra of an additional 00 MW of wind, to be called Limon II. Negotiations on that transaction did not result in agreement among the parties. Public Service then asked NextEra if it would be willing to still construct Limon II under a power purchase agreement with Public Service due to its low cost. The Limon II PPA was submitted to the Commission for review and approval on August 1, 0 and is pending before the Commission in Docket No. A-E. The Commission will decide in Docket No. A-E whether it is in the public interest for Public Service to acquire the Limon II resource as a system resource. Then, in this Docket, the Commission will decide whether the Limon II project can be used for new Windsource product offerings. Q. WHAT WAS THE RESULT OF ALL OF THESE DEVELOPMENTS? A. The Limon II PPA presents Public Service with a good opportunity to reshape these Windsource programs. The Limon II PPA has very low wind prices and provides us with approximately,000 MWH of wind energy annually.

14 1 1 1 Based on the feedback of the Windsource Advisory Group, our regulatory experience with the Limon I PPA, the low prices in the Limon II contract, and our analysis of market conditions, the Company determined that the Limon II PPA presented an excellent opportunity to revisit the Windsource program in a way that more cost-competitively meets the needs of our customers for renewable energy, both by reducing the premium charged under the Windsource Standard offering and also by offering a new Windsource Long-Term Contract product. Q. HOW IS THE COMPANY PROPOSING TO CHANGE THE WINDSOURCE PROGRAM? A. Public Service proposes four changes to enhance the existing Windsource program ( Windsource Standard ). We are also proposing the creation of a new, long-term Windsource participation option for large commercial customers ( Windsource Long-Term Contract ) III. WINDSOURCE STANDARD PROGRAM Q. WHAT IS THE WINDSOURCE CUSTOMER VALUE PROPOSITION OF THE WINDSOURCE STANDARD PROGRAM BEING PROPOSED? A. Customers wanting to participate in the Windsource Standard program can purchase flexible quantities of renewable energy at one of the lowest rates in the country with no lengthy commitments or contract terms. Q. PLEASE DESCRIBE THE FOUR CHANGES YOU ARE PROPOSING TO THE EXISTING WINDSOURCE PROGRAM.

15 A. First, the mechanism for pricing Windsource would shift from its current incremental cost-based portfolio approach to a market-based approach. Second, accordingly the Windsource Standard premium would be lowered to $1 per 0 kilowatt-hour block, a percent reduction from the current Windsource premium of $.1 per block. Third, contract terms would be eliminated for all customers, replaced by a 0 day notice to leave the program. Fourth, RECs for the program would no longer be supplied from all resources in the Company s renewable resource portfolio; instead, all RECs serving the Windsource Standard program would be wind RECs. Q. WHAT ASPECTS OF THE WINDSOURCE PROGRAM WOULD REMAIN UNCHANGED IN THE NEW WINDSOURCE STANDARD PLAN? A. Windsource RECs will still be provided from wind resources in Public Service s renewable energy portfolio, and not from specific dedicated facilities. Wind RECs will be retired to match Windsource subscriptions and will not be available to Public Service for RES compliance. Customers would still be able to purchase Windsource Standard in 0 kilowatt-hour blocks up to 0 percent of their usage. For customers purchasing 0 percent of their energy through the Windsource Standard program, the total RECs retired would be the net of the current RES requirement. The Company would still reserve the right to limit program subscriptions if those purchases put the Company s ability to meet the RES standard at risk. The event-specific option for Windsource 1

16 purchases would still be available. The program will maintain its Green-e Energy certification. Q. HOW DID PUBLIC SERVICE DETERMINE THE NEW PREMIUM FOR THE WINDSOURCE STANDARD PLAN? A. Public Service first analyzed pricing data on the national market for utilityoffered green pricing programs. According to the most recent NREL report on the voluntary green power market, Green Power Marketing in the United States: A Status Report (00 Data) : In 00, the price of green power for residential customers in utility programs ranged from -0.1 /kwh (a savings compared to standard service) to.00 /kwh above standard electricity rates, with an average premium of 1. /kwh and a median premium of 1.0 /kwh. The Company also looked at the pricing of REC-based products. According to NREL: Retail prices charged for REC products typically range from about 1 /kwh to. /kwh for residential and small commercial customers, although some are priced as high as 0 /kwh for some products, such as solar RECs. 0 1 The $1 per block (1 /kwh) rate represents a cost-competitive option that is expected to improve the competitive position of Windsource, stimulate growth in the program and help increase residential customer retention. Q. WHY SHOULD THE WINDSOURCE STANDARD PREMIUM BE BASED ON MARKET RATES? 1

17 A. In recent answer testimony regarding Public Service s 01 RES Plan (Docket A-1E), PUC Staff witness William Dalton states in Answer Testimony as follows at page 0: Staff concurs with the Company, in part, that the continual decline in Windsource subscriptions is attributable to multiple reasons: continued weak economic conditions coupled with customers reducing the discretionary spending, the Company s aggressive renewable energy portfolio being developed without Windsource premiums, and REC alternatives available in the market place. Customers have the option to purchase RECs and other environmentally friendly products from numerous sources outside the Company. Given these factors, Mr. Dalton goes on to recommend (at page ) that Public Service: change the Windsource premium to a more transparent pricing mechanism. One alternative would be to base the premium on an annual average of voluntary REC prices as published by national or regional REC trading organizations, brokerages or government agencies. This would greatly simplify premium determination, increase pricing transparency and reflect more accurately the market price for voluntary RECs. Mr. Dalton recommends that Public Service should return Windsource to a stable rate program as it was initially envisioned. (page ). Public Service agrees with Mr. Dalton that market-based pricing provides significant advantages compared to the current incremental cost model. The 00 Windsource Agreement employed a model model that relies on a series of forward-looking assumptions around the renewable energy market in Colorado, each with its own level of complexity. Small changes in assumptions can have significant impacts on the rate 1

18 calculation. The market-based pricing model is more transparent and simple. Q. DOES THE MARKET-BASED PRICING CHANGE THE SUPPLY FOR THE PROGRAM? A. Yes. Because the current portfolio-based pricing mechanism estimated costs related to all renewable generation sources, the RECs retired on behalf of Windsource customers currently include a percentage of wind and solar RECs. With the new lower market-based price, the retired RECs for Windsource would be wind RECs in Public Service s inventory, because it would no longer be appropriate to retire the more expensive non-wind RECs for Windsource sales. Q. HOW WOULD RECS FOR THE WINDSOURCE STANDARD PROGRAM BE RETIRED? A. Wind RECs will be retired on a first-in, first-out methodology within the vintage and facility guidelines outlined in the Green-e Energy National 1 Standard. The amount of RECs retired for a 0 percent Windsource Standard customer would be based on their kwh usage minus the RES requirement. For example, for 01 the RES is 1 percent; in 01 a 0% Windsource Standard customer would have percent of the RECs retired under Windsource while the remaining 1 percent were retired under the RES. This is consistent with Green-e Energy requirements. 1

19 Q. WHEN WOULD THE NEW WINDSOURCE STANDARD PREMIUM GO INTO EFFECT? A. The new rate would go into effect as soon as possible following Commission approval of this application. An illustrative tariff is attached as Exhibit SM-1. Q. HOW WOULD THE PREMIUM CHANGE IN THE FUTURE? A. Public Service will propose to change the Windsource Standard premium by filing an Advice Letter to request a tariff change. We propose that there will be no requirement to change the Windsource Standard premium pursuant to any fixed schedule. We will propose changes to the premium when market conditions dictate. Of course the Commission will have the jurisdiction to review all Public Service tariff filings. Q. WHY IS IT IN THE PUBLIC INTEREST TO CHARGE A MARKET PREMIUM FOR WINDSOURCE INSTEAD OF AN INCREMENTAL COST-BASED PREMIUM? A. In the 00 Windsource Agreement, the underlying rationale for the incremental cost pricing was that Public Service would use the Windsource premiums to buy additional renewable resources and, therefore, the premiums paid by Windsource customers needed to reflect that cost. As Mr. Dalton discusses in his testimony in Docket No. A- 1E, with the large renewables program that the Company currently has underway, it is difficult to show the importance of the small additions made 1

20 to the Company s renewable portfolio as a result of the Windsource premiums. Public Service suggests that there is now a more important policy objective that is served by repricing Windsource at lower market rates. As I discussed earlier, we have customers who wish to green up their electricity consumption through the purchase of RECs. They have many non-regulated opportunities to make REC purchases and will continue to opt to buy their RECs elsewhere if Public Service s RECs are priced out of the market. At the same time, Public Service has a large non-dg and wholesale DG REC inventory that is beyond the levels we need for RES Compliance and we also have a negative balance in the RESA deferred account. Given these facts, we believe that the public interest is better served by changing the Windsource Standard program back to a marketdriven program, a program that enables Public Service to compete with non-regulated companies in selling our surplus RECs to our customers. The premiums from these sales would continue to be credited to the RESA deferred account, initially reducing the RESA negative balance (and the interest accruing on that negative balance) and ultimately providing funds for either the acquisition of more renewable energy, or alternatively, for reduction in the two percent RESA rate rider in the future. We believe that given the current state of the REC market and Public Service s REC position, it is now in the public interest to price Windsource so that it can compete in our retail market and have these monies reduce the negative 1

21 1 REC balance. The negative RESA balance continues to limit what the Company can reasonably accommodate in all of our other renewable programs, from Solar*Rewards, community solar gardens, and larger utility scale resources. We believe that Staff is correct we need a simpler, more competitive Windsource pricing scheme to monetize our current RECs, rather than continuing to charge higher priced incremental costs. Right now, Public Service is monetizing surplus RECs by selling them at market prices off-system. We would like to offer our own customers the opportunity to buy these surplus RECs at a market-based premium. All premiums paid by our retail customers would be credited to the RESA deferred account IV. WINDSOURCE LONG-TERM CONTRACT Q. WHAT IS THE CUSTOMER VALUE PROPOSITION OF THE NEW WINDSOURCE LONG-TERM CONTRACT PROPOSED BY THE COMPANY? A. Large customers can purchase a long-term, fixed quantity of renewable energy at a fixed price tied to the Limon II wind project with potential financial benefits if the costs of Limon II are lower than the costs of energy from other sources. Q. HOW WILL THE WINDSOURCE LONG-TERM OPTION BE STRUCTURED? 1

22 A. Large commercial customers would be offered a time-sensitive opportunity to participate in the financial and environmental benefits of the Limon II wind farm via a long-term contract. Customers would pay (or receive) the difference between the costs of the Limon II PPA and Public Service s avoided costs (net of the costs of wind curtailment and integration), plus a premium to the RESA deferred account, and marketing and administration costs. If the combined wind costs and premium are less than Public Service s net avoided costs, customers would receive the financial benefits in the form of a monthly bill credit. This modified contract for differences would provide our customers the opportunity to obtain a hedge against fossil fuel prices. For voluntarily agreeing to pay for the costs of Limon II, these customers would pay more for Windsource than system energy when gas prices are low but could pay less for Windsource than for system energy if gas prices are high. These customers would voluntarily assume some of the risk of how the Limon II PPA costs play out compared with Public Service s system supply. Q. WHAT IS THE PREMIUM THAT WOULD BE CHARGED CUSTOMERS PARTICIPATING IN THE WINDSOURCE LONG-TERM PLAN? A. We plan to set a fixed premium for participation in the Long-Term Plan of $1 per MWh. The $1 per MWh premium will be compared each month to the Company s avoided costs and the other costs of the program that are assumed by the Windsource customer. The net of the premium over the assigned costs will be held in a Reward Fund for each participating 1

23 customer. When the customer s Reward Fund is large enough to cover the security retained by the Company to limit the financial risk to nonparticipants, any excess dollars in the Reward Fund annually will be credited against the Windsource customer s electric bill or a check will be sent to the customer Q. WHAT IS THE PURPOSE OF THE REWARD FUND? A. The Reward Fund is the mechanism for calculating each customer s balance in the modified contract for differences. The Reward Fund mechanism is also designed to provide security for contract performance by the Windsource subscriber. Q. HOW DOES THE REWARD FUND CALCULATION WORK? A. The $1 per MWh price is fixed for the length of the customer contract. Annually, the Company will determine for each customer under this program whether the Customer is entitled to a reward (bill credit or check) based upon each customer s Reward Fund. The Reward Fund will be 1 calculated based upon the following factors: 1) For the Windsource RECs, the Windsource subscriber must pay the difference between the price under the Limon II PPA and Public Service s net avoided costs. Mr. Detmer and Mr. Haeger explain how the net avoided cost is determined for each month of Limon II PPA production. This difference could be either positive or negative. If negative, money may be paid back to the subscriber, subject to the other charges discussed next. ) The Windsource customer must also pay a charge for the marketing and 0

24 administration costs of the Windsource Long-Term Contract program. That charge is $1 per MWh. ) The Windsource customer must also contribute an additional amount to the RESA account so that all customers share in the savings created by the Limon II PPA. The RESA contribution would be $ for the first two years of the contract and would then vary by gas prices in all subsequent years. Mr. Haeger explains how the RESA contribution will work. Finally, each subscriber must provide security for performance under the Windsource Long-Term Contract. That security can take the form of either a letter of credit or the establishment of a cash reserve in the customer s Reward Fund. The cash reserve required is $ per MWH of the Windsource subscription and can be built up overtime through the monthly payments of $1 per REC. When the monies in the Windsource customer s Reward Fund exceed $ per MWh of contract subscription, the customer will be entitled to an annual reward in the form of either a bill credit or check. An illustrative example of these calculations is provided below: Premium Long-term price per MWh $1.00 Expenses Marketing and administration $1.00 RESA Contribution $.00 Contract differences Limon wind farm cost $.0 Avoided cost - Base case (1.) Total contract differences $. 1

25 Total Expenses $. (contract diff. + marketing + RESA Contribution) Added to Reward Fund $ In this example, the customer paid $1 per MWh premium for the Windsource RECs. The three cost components are then subtracted. Marketing and administrative costs for the year were $1. The RESA Benefit was $. And the difference between the costs of Limon II and the net avoided costs was $.. The total costs applied against the $1 REC payment would be $.. Remaining in this customer s fund would be the difference between the Windsource premium paid and these costs -- $.0 per MWh -- which (in the absence of a letter of credit) would be retained as security for contract performance in the customer s Reward Fund. Once the accumulated retention exceeds $ per MWh, the customer will receive an annual credit against electric bills or a check. In this example, the Company retired one Limon II REC on behalf of this Windsource customer. Assuming no breach of the Long-Term contract, the Reward Fund balance would be returned to the customer at the end of the contract term. Q. WHAT IF A CUSTOMER S REWARD FUND BECOMES A NEGATIVE AMOUNT? A. There is a possibility that the Reward Fund could reach a negative balance if the costs of Limon II were significantly higher than avoided costs. This scenario would only occur if natural gas prices were to drop

26 significantly beyond current levels. The Company set the Long-Term Contract premium at $1 to reduce the risk of the Reward Fund reaching a negative balance. The Company modeled the Reward Fund using the low-gas scenario presented by Mr. Haeger. Under this scenario, we do not project that the Reward Fund balance would drop below zero. In the unlikely event that the Reward Fund does go negative, this would mean that natural gas prices are so low that the $1 REC price was insufficient to cover the incremental cost of the Limon II PPA, plus the program administrative costs, plus the RESA contribution. While this situation is very unlikely, it does support the public policy of requiring the RESA contribution from the Windsource subscribers that we have proposed. Further, should it appear that natural gas prices are likely to remain lower than the amounts assumed in Mr. Haeger s low gas scenario, the Company can raise the Windsource Long-Term Contract price for all new contracts entered into after the date of the REC price increase. Q. HOW LONG OF A CONTRACT TERM IS REQUIRED? A. Customers would enjoy a minimum contract term of five years with options for renewals up to years. Customers could contract for longer terms up to years. Renewals would be subject to a reevaluation of the Windsource premium, the RESA contribution included in the cost calculation, and the rebuilding of the customer Reward Fund.

27 Q. WHAT HAPPENS IF A CUSTOMER MOVES, GOES OUT OF BUSINESS, OR DECIDES HE NO LONGER WANTS TO BE A PART OF THE PROGRAM? A. The benefits of the Windsource Long-Term Contract are non-transferable. Businesses that move to a new location within Public Service s service territory can retain their participation in the program. If a customer moves outside of Public Service territory, decides to exit the program, or goes out of business, the customer forfeits the accumulated value in their Reward Fund and the right to future benefits. Customers who fail to perform their contractual obligations will also be excluded from re-enrolling in any Windsource option available at the time for a period of one year. Q. WHAT ARE THE MINIMUM REQUIREMENTS FOR PARTICIPATION AND PURCHASE QUANTITY? A. Customers must purchase a minimum of 10,000 kwh per year. Customers may aggregate purchases across multiple premises onto a single contract. For customers who wish to purchase 0 percent of their energy through the Long-Term Contract, their total purchase would be limited by the amount of renewable energy already provided as part of the RES. For example, the average RES requirement for the five-year period between 01 and 01 is 1 percent, so a customer wishing to purchase 0 percent of their usage on a five-year contract would be limited to a purchase level of percent.

28 Q. WOULD THE NEW LONG-TERM PROGRAM BE CERTIFIED BY GREEN-E ENERGY? A. Yes. The Company intends to maintain Green-e Energy certification for both Windsource program options. Q. WHERE WILL THE RECS FOR THIS PROGRAM ORIGINATE AND HOW MUCH WILL BE AVAILABLE AS PART OF THIS PROGRAM? A. RECs for this program will be supplied by the Limon II project. Total subscriptions in the Windsource Long-Term Contract program will be limited to 0,000 MWh annually. Q. HOW WILL THE PROGRAM MANAGE FLUCTUATIONS IN PRODUCTION FROM LIMON II? A. The Company has limited the size of the program to help manage periodic fluctuations in annual production. In the event of a major disruption of generation caused by force majeure, Public Service would reserve the right to suspend customer contracts or purchase RECs from the system portfolio at market prices at the time. Q. HOW WOULD RECS FOR THIS PROGRAM BE RETIRED? A. RECs will be retired within the calendar year from the Limon II wind project within the vintage guidelines outlined in the Green-e Energy National Standard. Excess RECs that cannot be retired toward for the Long-Term program would be added to the Company s bank of RECs for RES compliance and would also be available to the Windsource Standard program.

29 Q. WILL THIS PROGRAM BE MADE AVAILABLE ON AN ONGOING BASIS AND WHAT HAPPENS IF SIGNIFICANT CUSTOMER ATTRITION OCCURS? A. In future years, if additional capacity from Limon II becomes available, Public Service may offer this Long-Term Contract to customers on its wait list or to new customers wishing to participate in the program. New contract pricing would be subject to the same rules around contract renewals as outlined above. Q. WHEN WOULD THE NEW PROGRAM GO INTO EFFECT? A. The start of the new program would follow commercial operation of the Limon II wind farm, anticipated to be no later than December 1, 01. Public Service would begin marketing of this program prior to this date. Q. HOW WILL THE PROCESS FOR RESERVATIONS WORK? A. As soon as possible, Public Service will begin taking customer reservations. All Company commitments will be dependent upon Commission approval of this product offering. Reservation forms will indicate the customer s desired purchase quantity. Reservation quantities cannot exceed a customer s annual estimated usage. As of March 1, 01, if reservations exceed available capacity in the project, then Public Service would allocate participation based on the method described below. If reservations are less than available capacity, the Company will continue to accept reservations on a first-come, first-served basis until the end of 01 and the start of the program. Reservation requests arriving

30 after capacity has been fully subscribed after March 1, 01 will be placed on a wait list. Q. WHAT IS THE METHOD OF ALLOCATION FOR RESERVATIONS RECEIVED PRIOR TO MARCH 1, 01? A. If reservations prior to March 1, 01 exceed the program s available capacity, then the following process will be utilized to help ensure broad participation. A customer s rank in the reservation process will be based on the date the reservation request is received. Capacity will be allocated by round. In each round, customers will be allocated 1,00 MWh per round until their request is met or until total program capacity is used up. Remaining requests will have the option to go onto the wait list. Q. HOW WILL THE WAIT LIST WORK? A. Customers who do not receive their desired reservation quantity will be placed on a wait list. In the event excess capacity is available, that capacity will be distributed on a first-come, first-served basis based on the date of the customer s original reservation. Q. CAN CUSTOMERS PARTICIPATE IN BOTH THE WINDSOURCE STANDARD PROGRAM AND THE LONG-TERM OPTION? A. Yes. Customers can participate in both programs up to 0 percent of their annual usage. Q. IF LIMON II HAS SUCH POSITIVE POTENTIAL FINANCIAL UPSIDE, WHY IS THE COMPANY LOOKING AT USING THE ASSET FOR WINDSOURCE AND NOT AS A SYSTEM RESOURCE?

31 A. Regardless of the outcome of this Windsource docket, Public Service believes that the contract terms of the Limon II PPA are beneficial and should be approved, at the very least as a system resource. However, the extent of the savings is highly dependent upon natural gas prices a future that no one can accurately predict. We have some customers who are more optimistic than others that wind will be cheaper than natural gas in the future and who would be willing to pay a premium now to take advantage of their assumption of future savings. We would like to tap that customer segment to assume some of the risk (and corresponding reap for themselves some of the reward) associated with the Limon II PPA V. GENERAL PROVISIONS Q. WHAT WOULD BE THE IMPACT OF A FULLY SUBSCRIBED LONG- TERM CONTRACT ON THE SIZE OF THE WINDSOURCE PROGRAM? A. In 0, the Company expects Windsource sales of 1, MWh. Assuming some attrition from the Standard program to the Long-Term program, in 01 the combined programs would be in the range of 0,000 MWh, a nearly four-fold increase in the size of the program. Q. WHAT WOULD BE THE IMPACT OF ADDING LIMON II RECS TO THE WINDSOURCE PROGRAMS ON PUBLIC SERVICE REC RETIREMENTS? A. RECs are retired annually on behalf of our Windsource customers in addition to the RECs retired from our portfolio for the Renewable Energy Standard. With the addition of Limon II to the Windsource portfolio, the

32 quantity of RECs retired by Public Service would increase significantly. In the 01 Colorado RES Plan, the Company forecast that we would retire. million RECs to meet RES goals between 01 and 01. If the new Windsource program were fully subscribed, it would add approximately six million RECs to this total, an increase of almost %. Q. HOW DO THESE CHANGES ADDRESS THE PROGRAM GOAL OF MEETING THE DEMANDS OF CUSTOMERS FOR RENEWABLE ENERGY IN EXCESS OF RENEWABLE ENERGY STANDARDS? A. The Long-Term Contract option is expected to bring new, larger customers to the Windsource program in an innovative way that provides a strong competitive alternative to non-regulated REC sales that currently send dollars outside of Colorado. Q. HOW DO THESE CHANGES ADDRESS THE PROGRAM GOAL OF OFFERING RENEWABLE ENERGY AT COMPETITIVE RATES? A. The new premium for the Windsource Standard plan will lead to increased participation and growth in the program by improving our competitive position. The new pricing mechanism for the Standard program enhances rate transparency and simplicity. The Long-Term Contract option provides a potential enhanced financial benefit to our customers which significantly improves our competitive position. The Long-Term Contract enables our customers to more directly participate in the comparative economics of wind energy vs. other fuels an option that REC marketers cannot match.

33 Q. HOW DO THESE CHANGES ADDRESS THE PROGRAM GOAL OF CONTINUING TO ENSURE THAT NON-PARTICIPANTS IN WINDSOURCE ARE NOT ADVERSELY IMPACTED BY THE WINDSOURCE PROGRAM AND THAT THEY SHARE IN THE BENEFITS OF LIMON II? A. The Windsource Standard option continues to ensure that non-participants are not harmed by monetizing excess RECs from the Company portfolio and providing additional dollars to the RESA Deferred Account. The Long- Term Contract includes two primary safeguards for non-participant protection. First, the Windsource customer pays all costs of the Limon II PPA over system avoided costs and then makes an additional contribution to the RESA. Through this program structure, the non-participants are better off than they would have been if the Company had not acquired the Limon II resource. Second, the Reward Fund mechanism provides security against contract default by Windsource customers. Q. HOW DO THESE CHANGES ADDRESS THE PROGRAM GOAL OF MINIMIZING YEAR-TO-YEAR WINDSOURCE PRICE VOLATILITY? A. At the low-end of current market rates, the $1 per block rate for the Standard plan is expected to remain stable for the foreseeable future. The Long-Term Contract creates a stable, fixed price option for customers willing to commit to longer terms. 0

34 Q. HOW DO THESE CHANGES ADDRESS THE PROGRAM GOAL OF ENSURING RENEWABLE ENERGY SUPPLIES ARE READILY AVAILABLE TO MEET RAPID CHANGES IN PROGRAM DEMAND? A. The Windsource Standard plan creates an effective option to respond to fluctuations in demand. Participation in the Long-Term Contract has been limited to help ensure that the program will not be over-subscribed. Q. HOW DO THESE CHANGES ADDRESS THE PROGRAM GOAL OF PROVIDE THE FLEXIBILITY FOR FURTHER INCREASES IN SYSTEM RENEWABLE GENERATION SHOULD THE COMMISSION FIND THE RESOURCES TO BE IN THE PUBLIC INTEREST? A. With the new changes, additional dollars will be directed into the RESA Deferred Account, either creating additional headroom for additional renewable energy acquisitions or for the potential future reduction of the two percent RESA charge on customer bills. In addition, the structure of the Long-Term Plan could be replicated with new renewable energy projects in the future to bring more renewable energy to Colorado. Q. HOW DO WE EXPECT THESE CHANGES TO BE RECEIVED BY CUSTOMERS? A. The Limon II project will represent one of the single largest additions of generation for a voluntary renewable energy program in the country and one of the most innovative structures for a long-term renewable program. Our customers have indicated a strong desire to participate in this program and help us to bring this resource to Colorado. The Company 1

35 held two Windsource Advisory Group meetings in preparation for this filing and has had numerous discussions with several customers around this offering. Reaction to the concept has been extremely positive and participation is expected to be high. Q. HAS THE COMPANY MET THE COMMISSION S REQUEST TO FIND WAYS TO GROW THE WINDSOURCE PROGRAM? A. Yes. We request that the Commission approve of our efforts, and the desire of our customers, to bring more renewable energy to Colorado. Q. WILL THE COMPANY PRESENT OTHER WITNESSES TO SUPPORT THIS APPLICATION? A. Yes. Mr. Kurtis Haeger, Managing Director of Resource Planning, will testify regarding the determination of the costs that will be borne by Windsource customers. Mr. Nicholas Detmer will testify as to the software program that the Company will use to determine actual avoided system costs. Q. DOES THIS CONCLUDE YOUR TESTIMONY? A. Yes it does.

36 Attachment A Statement of Qualifications Steve Mudd I currently manage the Windsource program for Xcel Energy in Colorado, Minnesota, Wisconsin, New Mexico and Michigan. I have managed this program since October, 00. In this time, I ve been instrumental in the design and redesign of Windsource in each state. I ve written or contributed to testimony in Colorado, Minnesota, Wisconsin and New Mexico and I previously testified before the Colorado PUC in the 00 Windsource docket (Docket No. 0A-0E). I ve presented at numerous industry conferences on the topic of voluntary green power programs including the E Source Forum and the Center for Resource Solution s Renewable Energy Markets conference. Prior to Windsource, from 00 through 00 I worked as Manager of Marketing Strategy and Planning for Xcel Energy and as Product Portfolio Manager from 001 through 00. In these positions, I managed a broad range of product offerings and worked on strategic issues for the marketing organization. Prior to Xcel Energy, I was employed at Level Communications from 1 through 001 in a variety of financial positions. I earned my Bachelor of Arts degree in English from the University of Wyoming in 1.