PUD 201100132 - David B. Dykeman

Transcription

BEFORE THE CORPORATION COMMISSION OF OKLAHOMA
APPLICATION OF DAVID B. DYKEMAN,
DIRECTOR OF THE PUBLIC UTILITY
DIVISION, OKLAHOMA CORPORATION
COMMISSION, FOR A PUBLIC HEARING TO
REVIEW AND MONITOR APPLICATION OF
THE FUEL ADJUSTMENT CLAUSE OF
OKLAHOMA GAS AND ELECTRIC
COMPANY FOR THE CALENDAR YEAR 2010
AND,
FOR A PRUDENCE REVIEW OF THE
ELECTRIC GENERATION, PURCHASED
POWER AND FUEL PROCUREMENT
PROCESSES AND COSTS OF OKLAHOMA
GAS AND ELECTRIC COMPANY FOR THE
CALENDAR YEAR 2010
CAUSE NO. PUD 201100132
F I LE D
SEP 2 6 2012
COURT CLLrK'S OFFICE - OKC
CORPORATION COMMISSION
OF OKLAHOMA
HEARING:
July 17 - 18, 2012, in Courtroom B
2101 North Lincoln Boulevard, Oklahoma City, Oklahoma 73105
Before James L. Myles, Administrative Law Judge
APPEARANCES:
Stephanie G. Houle, Kimber L. Shoop, Patrick D. Shore, and William J.
Bullard, Attorneys representing Oklahoma Gas and Electric Company
Judith L. Johnson, Senior Attorney, representing the Public Utility
Division, Oklahoma Corporation Commission
Ronald B. Stakem and Jack G. Clark Jr., Attorneys representing OG&E
Shareholders Association
Thomas P. Schroedter, James D. Satrom, J. Fred Gist and Jennifer H.
Kirkpatrick, Attorneys representing Oklahoma Industrial Energy
Consumers
William L. Humes and Nicole King, Assistant Attorneys General
representing Office of the Attorney General, State of Oklahoma
REPORT OF THE ADMINISTRATIVE LAW JUDGE
Upon review of all the testimony and filings in this case, and after a thorough review of
all the evidence presented at the hearing on the merits in this Cause, the Administrative Law
Judge ("AU") submits this Report to the Corporation Commission of Oklahoma
("Commission"). Included in this Report are the AL's recommended findings of fact and
conclusions of law.
Cause No. PUD 201100132; OG&E - FAC/Prudence Review (2010)
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I. SUMMARY OF THE RECOMMENDATION
The ALI recommends the Commission find OG&E's FAC was calculated properly,
mathematically accurate and collected in accordance with OG&E's Fuel Cost Adjustment Tariff
for calendar year 2010 and that OG&E's FAC costs for calendar year 2010 recovered from
OG&E's Oklahoma jurisdictional customers should be approved by the Commission as having
been properly recovered. In addition, the AU recommends the Commission find OG&E's
generation, purchased power and fuel procurement processes and costs for calendar year 2010
were prudent.
II. PROCEDURAL HISTORY
On August 19, 2011, the Commission's Public Utility Division ("PUD Staff') filed the
Application in this Cause naming Oklahoma Gas and Electric Company ("OG&E" or the
"Company") as respondent, and seeking the following relief- a review of the Fuel Adjustment Clause ("FAC") of OG&E for calendar year 2010;
- a review of the prudence of OG&E's generation, purchased power and fuel
procurement processes and costs for calendar year 2010; and,
- an order consistent with PUD Staff 's findings and/or granting any relief it deems
appropriate and consistent with the applicable statutes and rules, whether specifically
prayed for or not.
On the following dates the parties shown below filed their respective entries of
appearance in the Cause:
- August 22, 2011, Oklahoma Industrial Energy Consumers ("OIEC")
- August 23, 2011, the Attorney General of the State of Oklahoma ("AG")
- October 19, 2011, OG&E Shareholders Association ("OG&E S/H")
On October 18, 2011, OG&E filed its Minimum Filing Requirements ("MFR") Package
as required by Commission rules at OAC 165:35-39-1, et seq.
On October 18, 2011, Donald Rowlett filed direct testimony on behalf of OG&E.
On October 21, 2011, the Commission issued Order No. 590300, granting OG&E's
motion for protective order.
On March 2, 2012, the Commission issued Order No. 594797, establishing the procedural
schedule for the Cause.
Each party filed its respective Remittal of Disqualification on the following dates:
- March 21, 2012— OIEC
- March 26, 2012 - OG&E and PUID Staff
- March 27, 2012 - Attorney General
- March 28, 2012 - OG&E S/H
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On March 27, 2012, the Commission issued Order No. 595736, amending the procedural
schedule in the Cause.
On April 4, 2012, the Commission issued Order No. 595969, determining the notice
requirements in this Cause.
On April 6, 2012, responsive testimony was filed by the following witnesses:
- Scott Norwood on behalf of OIEC (both redacted and unredacted)
- Edwin C. Farrar on behalf of the AG
- Kiran Pate! and David Garrett on behalf ofPUD Staff
On April 10, 2012, OG&E S/H filed its Statement of Position.
On May 8, 2012, Donald R. Rowlett, Kim A. Morphis, and Kenneth C. Johnson filed
rebuttal testimony on behalf of OG&E.
On May 14, 2012, OG&E filed Amended Exhibit KAIvI-1, providing the correct data
request response from OIEC to OG&E as an attachment to the rebuttal testimony of Kim A.
Morphis, OG&E's witness.
On May 30, 2012, OIEC, OG&E, PUD STAFF STAFF, and the Attorney General filed
Exhibit Lists.
Also on May 30, 2012, all witnesses filed summaries of their respective testimonies.
On June 7, 2012, the Pre-hearing Conference was held.
On June 8, 2012, PUD Staff filed a Notice of Hearing in accordance with Order No.
595969.
On July 17 and 18, 2012, the hearing on the merits was held before the AU. After
hearing all the evidence and at the conclusion of the hearing, the ALJ took the Cause under
advisement.
On August 3, 2012, the AG filed Proposed Findings of Fact and Conclusions of Law.
On August 10, 2012, OG&E, OIEC and PUD Staff filed Proposed Findings of Fact and
Conclusions of Law.
III. SUMMARY OF THE EVIDENCE
A summary of the prefiled testimony of the parties and the testimony given at the hearing
on the merits is in Attachment "A" hereto. Additional testimony and cross-examination is
available from the transcript of the hearing. All testimony and hearing exhibits were considered
by the ALJ in the determination of the AL's recommendation in this Cause.
Cause No. PUD 201100132; OG&E - FAC,Prudence Review (20 10)
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IV. ANALYSIS
A.
Introduction:
This Cause comes before the Commission by virtue of an application filed by the PUD
Staff on August 19, 2011. Pursuant to law (17 0. S. § 252) and Commission rules (OAC 165:505-3 and OAC 165:35-39), the Commission is required to annually audit OG&E's FAC and
determine whether the various charges or credits reflected in the FAC during the calendar year
were properly computed and based upon the actual prices paid for fuel.
In addition, Commission rules (OAC 165:35-35-1) require the Commission to
periodically conduct a prudence review on OG&E's generation, purchase power and fuel
procurement processes and costs.
PUD Staffs application in this Cause addressed both the above requirements for the
calendar year 2010 ("Review Period").
The record reflects that PUD Staff conducted the required audit and testified that the
various charges and credits reflected in OG&E's FAC during the Review Period were based on
the actual costs paid for fuel and were properly computed. No party disagreed with this
determination.
In responsive testimony, some parties challenged the prudence of OG&E's actions during
the Review Period in three areas.
OIEC challenged the prudence of OG&E's operations of its coal plants during the
Review Period.
OIEC also challenged the prudence of OG&E's participation in the purchase energy
marketplace during the Review Period.
Finally, both PUD Staff and OIEC alleged management imprudence caused an unplanned
outage at OG&E's Sooner Unit 2 (a coal-fired generation plant) and argued that the recovery of
the replacement power costs resulting from the outage should be disallowed.
In addition, OIEC in its responsive testimony, questioned OG&E's decision to de-rate its
Muskogee Unit 5. However, during the hearing on the merits OIEC witness Scott Norwood
stated that based on additional information provided by the Company he no longer believed
OG&E's management acted imprudently regarding this issue.
B.
Standard of Review (Prudence):
Part of this Cause is a review of the prudence of OG&E's generation, purchase power and
fuel procurement processes and costs for the Review Period.
The Commission's rules define the term prudence review as follows:
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"Prudence review" means a comprehensive review that examines as fair,
just, and reasonable, a utility's practices, policies, and decisions regarding
an investment or expense at the time the investment was made or expense
was incurred; including direct or indirect maximization of its positive
impacts and mitigation of adverse impact upon its ratepayers, without
consideration of its ultimate used and useful nature. (OAC 165:35-1-2)
The Commission has looked at the issue of prudence on numerous occasions. In one of
OG&E's past rate cases, the Commission stated:
It is well settled that prudence inquiries involve a determination whether
the utility management made a reasonable decision in light of the
circumstances existing at the time of the decision and the knowledge of
such circumstances that management had or should have had. (Cause No.
PUD 200500151 - Final Order No. 516261, Pg. 106)
Said another way, the appropriate standard of review to be applied in this Cause as to the
prudence of OG&E's generation, purchase power and fuel procurement processes and costs for
the Review Period is whether the actions of the Company's management, based on all that it
knew or should have known at the time, were reasonable in light of the circumstances which then
existed.
Additionally, a prudence determination may not properly be made on the basis of
hindsight judgments. The parties who addressed the appropriate standard noted that the test is
based on the decisions of a "reasonable utility manager", which compares the Company's actions
to the reasonable actions of a qualified and experienced utility manager (See Norwood
Responsive at p. 8; Garrett Responsive at p. 5 and Rowlett Rebuttal at p. 3).
I have applied this standard to the three areas where OG&E's prudence has been
questioned in this proceeding.
C.
Coal Plant Operations:
OIEC witness Scott Norwood recommends that the Commission require the Company to
credit $28 million in fuel cost recovery by OG&E during the Review Period. Mr. Norwood's
basis for recommending that OG&E management be found to have acted imprudently was his
calculation that the OG&E's coal plants operated at a lower capacity factor ("CF") than those of
Public Service Company of Oklahoma ("PSO") in 2010. The Company's witnesses testified that
OG&E's management approach is to operate its generation portfolio to provide electricity at the
lowest reasonable cost to its customers. The witnesses also addressed relevant differences
between the OG&E and PSO systems.
Mr. Norwood based his recommendation on the fact that the CF of OG&E's generation
units had steadily declined over the last five years. In addition, he compared the average CF
performance of OG&E's coal-fired generating units with that of PSO's and noted that it was
Report of the Administrative Law Judge
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lower. Based on this, it was Mr. Norwood's opinion that the drop in CF and the lower
comparison of OG&E's CF to that of PSO's were obvious evidence of imprudent operations.
The Company provided reasonable, credible and substantial evidence explaining the
lower CF's that they have experienced over the past few years.
Company witness Kim Morphis, who was primarily responsible for dispatching OG&E's
generation units during 2010, has over 30 years of experience with power plant operations. Mr.
Morphis testified that OG&E's consistent operational goal is to ensure that customers receive the
lowest reasonable cost energy. He testified that the Company participates in the SPP EIS market.
Mr. Morphis explained that when an EIS market price signal is less than the marginal cost of
OG&E's coal-fired generation, OG&E will "back down" or decrease the output of OG&E's coalfired generation and instead purchase lower cost energy from that market. This ensures that
OG&E's customers receive the lowest reasonable cost energy. (Morphis Rebuttal at p. 5, In. 710). He noted that the management decision to allow the SPP EIS Market to optimize OG&E
generating assets, including coal generation, may cause the CF of OG&E's individual units to
fluctuate, but this approach is in the best interest of OG&E's customers. (Morphis Rebuttal at p.
3, in. 4-7).
Mr. Morphis further explained how low load system demands contribute to reductions in
OG&E's coal unit CF. He testified that the ability of OG&E to maximize its coal-fired capacity
is influenced by a combination of factors, including: must take wind generation, contractually
committed cogeneration and minimum nighttime loads on other online generating units.
(Morphis Rebuttal at p. 5, In. 14-17).
Mr. Morphis also testified that Mr. Norwood's proposed penalty calculation as flawed.
He testified that when calculating potential damages, Mr. Norwood uses only OG&E's gas and
coal resources for replacement costs, ignoring the SPP EIS Market and the fact that replacement
costs are based upon marginal production costs of all assets in the SPP region. (Morphis
Rebuttal at p. 4, In. 21-19).
OG&E witness, Mr. Johnson, is the Company officer primarily responsible for the
operation of OG&E's generation facilities and has 32 years of experience operating electric
generation units. He testified that another factor impacting OG&E' s coal-fired units in 2010 was
the aging of the coal fleet, resulting in an increased incidence of forced outages caused by
damage from equipment fatigue, creep damage due to temperature exposure, and
erosion/corrosion from routine wear and tear. (Johnson Rebuttal at p. 4, In. 3-12). Mr. Johnson
testified that aging played a role in two of the more significant equipment issues OG&E
experienced in 2010, the Sooner Unit 2 economizer header failure and the Muskogee Unit 5
expansion joint failure. This has prompted OG&E to design and implement a more targeted
maintenance program, which started in 2010. The results of this program can be seen in the
improved equivalent availability performance of OG&E's coal units in all of 2011 and into the
first quarter of 2012. (Johnson Rebuttal at p. 4, in. 17-20).
Also, Company witness Donald Rowlett, who has worked in the utility industry for close
to 30 years, testified that management's goal is to obtain energy for its customers at the lowest
reasonable cost. (Rowlett Direct at p. 4, In. 22-27). He also noted that a comparison between the
PSO system and the OG&E system must consider much more than CF, including consideration
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of the differences between the two systems related to transmission availability and the difference
between the market price for energy produced by PSO's supercritical coal units and OG&E's
higher cost subcritical coal units. (7-18-12 Tr., p. 44, in. 6-15).
After consideration of the record in this Cause, it is my conclusion that OG&E's
management was prudent in the operation of the Company's generation units, including the coalfired units, during the Review Period. While the CF for OG&E's plants during the Review
Period merit some consideration, standing alone they are not demonstrative of management
imprudence. I am persuaded that OG&E's management acted reasonably by dispatching the
Company's coal-fired, gas-fired and wind power resources based on the SPP EIS Market. I also
am persuaded that there are a number of factors that can impact coal unit CF, including OG&E 's
participation in the SPP EIS Market, the age of OG&E's units and operational and maintenance
issues on those units.
Furthermore, I am not persuaded by OIEC's comparison of OG&E's coal unit CF to that
of PSO's. These are separate companies, with different generation fleets and needs. I do not
believe that just because OG&E's coal unit CF is less than PSO's that OG&E's operation of its
coal fleet is imprudent. Likewise, if the Commission were reviewing the prudence of PSO's
operation of its coal fleet, I would not automatically find that PSO was prudent because their
coal unit CF was higher than OG&E's. All facts have to be considered under the standard of
review noted above.
D.
Market Energy Purchases:
Mr. Norwood alleges that OG&E management acted imprudently by failing to make an
additional 1.8 million MWh of energy purchases during 2010 and recommends that the Company
be required to refund $16.2 million to ratepayers. Mr. Norwood's recommendation is based on a
general observation regarding the volume of PSO' s energy purchases in 2010 as compared to the
volume of purchases by OG&E during the same period and OG&E's failure to address the same
in its MFR package.
Mr. Norwood alleges that the Company had opportunities to increase its market
purchases during the Review Period, specifically by making an additional 1.8 million MWh of
energy purchases during 2010. I do not find Mr. Norwood's testimony regarding this issue
convincing, particularly because when asked on cross-examination for the basis for his
allegations of the existence of 1.8 million MWh of additional purchases he was unable to give
specifics. (See 7-18-12 Tr., p. 145, In. 8-25 and p. 146, in. 1-20).
OG&E has provided substantial evidence that demonstrates it took advantage of lower
cost market energy when available during the Review Period. In addition to the SPP EIS
Market, OG&E supplements SPP EIS Market purchases by utilizing traditional bilateral energy
markets where appropriate. Mr. Morphis testified that by offering its online units into the EIS
Market and purchasing energy from the bilateral market when it is available at a lower price,
OG&E is assuring that its customers receive the optimized value of the Company's generating
assets and both markets at all times. (Morphis Rebuttal at p. 9, in. 30-32). The evidence also
showed that the Company made economic bilateral purchases that purposely reduced scheduled
coal and gas generation output to the benefit of its customers.
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The evidence provided by the Company of its actions in the bilateral energy market is
persuasive. Mr. Morphis testified that in response to OIEC data request 2-4, OG&E provided a
daily list of specific opportunities for purchase during 2010 and information regarding when
those opportunities were captured or rejected as being uneconomic or undeliverable due to
transmission constraints. The information described in the response to OJEC data request 2-4
reflects the bilateral energy market that was potentially available to benefit OG&E customers
and shows market offers accepted or rejected in 2010. (Morphis Rebuttal at p. 10, in. 6-11).
Mr. Morphis also testified that regarding the FERC Form 1 data for PSO that a
comparison between PSO, absent their affiliate purchases, and OG&E shows that OG&E is
slightly higher in market purchases. (7-18-12 Tr., p. 98, In. 12-14).
As there was no persuasive evidence to support Mr. Norwood's position on OG&E's
market purchases and substantial evidence to support the Company's actions, it is my opinion
that the disallowance asserted by OIEC is not warranted and that OG&E's market energy
purchases for the Review Period were prudent.
Again, it is my opinion that comparisons between OG&E and PSO also do not apply here
as to this issue for the same reasons detailed in the previous section.
E.
Sooner Unit 2 Unplanned Outage:
OTEC witness Scott Norwood and PUD Staff witness David Garrett rely upon the
contents of the Health and Safety Form Incident Analysis Report produced by the Company
(Hearing Exhibit No. 1) to support their conclusions that OG&E's management acted
imprudently and should be penalized as a result of the Sooner Unit 2 unplanned outage. In his
responsive testimony filed on April 6, 2012, Mr. Garrett indicated he had concerns based on his
review of the contents of the report, but did not make a recommendation pending the Company
providing additional information. The Company subsequently filed the rebuttal testimony of
Kenneth Johnson addressing the incident and the accuracy of the report's conclusions and also
provided a Performance Correction Notice (Hearing Exhibit No. 2) given to the employee.
When testifying live, Mr. Garrett indicated that based on the contents of the Health and Safety
Form Incident Analysis Report, he recommended that OG&E's management be found to have
acted imprudently and the Company should be required to credit $3 million to ratepayers.
Mr. Garrett also indicated that he gave great weight to the legal doctrine of respondeat
superior in making his recommendation to require the Company to apply a 3 million dollar credit
to the Company's FAC. He stated that in Oklahoma, an employer is generally held liable for the
acts of an employee committed during the scope of his employment. Therefore, the switching
error that the OG&E employee made would make the Company responsible for the costs
associated with replacement power while the unit was out of commission.
It is my opinion that the liability of the Company is not the question here. Management
is responsible for the acts of its employees. The act was a mistake made by an employee of the
Company, and thus was a mistake made by the Company. However, the issue at hand is whether
this Company mistake was the result of imprudence. I do not believe that it was.
Cause No. PUD 201100132; OG&E - FAC,Prudence Review (2010)
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With respect to the November 17, 2010, outage at OG&E's Sooner Unit 2, I believe that
the appropriate analysis is to determine if OG&E's management has established reasonable
processes for hiring, training and supervising the employees responsible for operating the
Company's generation units.
Mr. Norwood and Mr. Garret both relied on the Hearing Exhibit No. 1 Incident Analysis
Report in their determination that the employee's switching error rose to the level of Company
imprudence. No other persuasive evidence was offered.
As with the other issues discussed above, the Company provided reasonable, credible and
substantial evidence explaining the background of the employee responsible for the switching
error, his training, and his instructions relating to the procedure performed that day.
Mr. Johnson testified that OG&E's hiring process is rigorous. He further explained that
candidates, before they are hired, are evaluated with skills and aptitude testing. (7-18-12 Tr., p.
60, In. 20-25).
Mr. Johnson also addressed the training program at OG&E. He testified that the
Company's training program has been in place for a number of years and only certifies a
switchman after he has been through a class that teaches the importance of doing the switching
correctly, how the Company procedures are to be executed and includes training time in the field
with an instructor. (7-18-12 Tr., p. 61, In. 5-14). Mr. Johnson also testified that OG&E's
training is consistent with that provided at the four utilities that previously employed him, but
OG&E is the only utility that he has had contact with that actually goes one step further and
requires a certification that the employee has had the appropriate training for switching. (7-1812 Tr., p. 61, In. 15-20).
Mr. Johnson also testified that Exhibit KCJ-2 to his rebuttal testimony details the training
for the switchman who was involved in the Sooner 2 incident and verifies that he was certified at
the time of the incident. (Johnson Rebuttal at p. 9, In. 14-18). He testified that Exhibit KCJ-2 is
a listing of OG&E's learning management system database for this employee and reflects all the
coursework the switchman had taken as well as two separate certifications of his switchman
capabilities. (7-18-12 Tr., p. 75, in. 14-17).
Mr. Johnson also testified that OG&E's supervision "left nothing to be desired in this
case" (7-18-12 Tr. Page 62, Ln 10-12). Mr. Johnson testified that the supervisor on duty the day
of the incident called both of the switchmen up to the control room and walked through the
switching order with them in preparation before he dispatched them out to the switchyard. Mr.
Johnson also testified that it is very rare for the supervisor to accompany the employees to the
substation to get the work done. (7-18-12 Tr., p. 62, In. 1-12). Mr. Johnson testified that OG&E
routinely switches on its generators 100 times per year without incident. (7-18-12 Tr., p. 76, in.
12-16).
Finally, Mr. Johnson testified that the references in the Incident Analysis Report which
could be read to say the employee was unqualified, inadequately trained and inadequately
supervised does not correctly present the facts of the switching error incident. (Johnson Rebuttal
at p. 10, In. 11-17). He testified that the recitation in the switchman's Performance Correction
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Notice has additional detail that points directly to the employee's performance during the
incident and correctly describes the employee's failure to follow the standard procedures. (7-1812 Tr., p. 54, In. 10-15).
It is my opinion that the weight of the evidence supports a finding that the switching
incident causing the Sooner Unit 2 outage resulted from an isolated incident of employee error.
Given the testimony regarding the Company's hiring process, training which meets or exceeds
industry standard and the evidence regarding supervisory oversight, in particular that of the
meeting in the control room between the supervisor and the two switchmen prior to their being
sent to the switchyard, it is my conclusion that at the time of this incident, based on what OG&E
knew or should have known, a reasonable utility manager would not expect an employee to
disregard his training and instructions under the circumstances occurring at that time. Therefore,
it is my opinion that the actions of the Company leading up to the employee's mistake were
prudent, and that the respective charges to the Company asserted by OIEC and PUD Staff as a
result of the error should be denied.
F.
MFR Requirements and Timing of Burden of Proof:
In the present Cause, some parties have given different interpretations to the Minimum
Filing Requirements and the specificity of information the Company is required to report and the
timeframe in which to report such information.
These are important issues relating to the efficient and proper processing of FAC and
prudence review cases, but the analysis and determination of the issues raised along these lines
were not necessary to determine the prudence of the Company in this case. As stated in
discussion above, it is my opinion that OG&E met its burden of proof as required by the
Commission's prudence rules.
However, there is still a bone of contention as to what should be filed, and when, as well as
when the proof of prudence should be set forth. Should the Company affirmatively prove prudence in
its initial testimony, the case in chief, or is prudence presumed with the filing of the completed MIFR
Package and it then be sufficient for the Company to provide additional proof of prudence in their
rebuttal testimony as to any asserted instances of imprudence that are raised by parties in responsive
testimony? It obviously is not clear in the Commission rules as reasonable arguments were made by
parties on both sides of the issue.
On cross-examination by OIEC, OG&E witness Donald Rowlett testified that the
Company was willing and eager to entertain rule changes to clarify these issues. Furthermore,
upon additional cross-examination by the AG, Mr. Rowlett testified that the Company would
agree to work with the parties to this Cause, either on an informal or formal basis, to address the
concerns raised in this Cause for future filings.
Therefore, I recommend that, in accordance with the agreement stated at the hearing on the
merits, that the Commission should require the parties to enter into a collaborative process to discuss
the MFR issues raised within this Cause with the aim to determine whether or not changes to the
Commission's MFR and/or FAC rules are needed. As a comment, it also would be wise to invite the
other Oklahoma electric utilities to participate in this process as any resulting rulemaking would affect
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them as well and it would be helpful to have their input from the beginning of the process rather than
waiting for the rulemaking stage.
V. FINDINGS OF FACT AND CONCLUSIONS OF LAW
The Administrative Law Judge recommends that the Commission make the following
Findings of Fact and Conclusions of Law:
THE COMMISSION FINDS that it is vested with jurisdiction in this Cause pursuant to
Article IX, § 18 of the Oklahoma Constitution, 17 O.S. § 152 and 17 O.S. §§ 251 and 252.
THE COMMISSION FURTHER FINDS that notice has been properly given in
accordance with the Commission's rules and Order No. 595969 establishing proper notice for
this Cause with notice to the Attorney General of the State of Oklahoma and affidavit of notice
having been filed with the Court Clerk at the Commission.
THE COMMISSION FURTHER FINDS that effective March 1, 2012, James L. Myles
was appointed to the office of AU. At that time, this Cause was transferred from AU
Jacqueline T. Miller to ALJ Myles. As ALJ Myles had previously served as Deputy General
Counsel within the Commission's Office of General Counsel and during his time there had
supervisory authority over Counsel representing PUD Staff in this Cause, he inquired of the
parties by e-mail dated March 20, 2012, as to whether or not they would waive any potential
disqualification that might reasonably be asserted pursuant to the Canons of Administrative
Judicial Conduct that have been adopted by the Commission, specifically Canon 3(C)(1)(c). All
parties agreed to waive the potential disqualification of ALJ Myles and agreed that he should not
be disqualified from the above-captioned matter by filing their respective Remittal of
Disqualification on the following dates: March 21, 2012 - OIEC; March 26, 2012 - OG&E and
PUD Staff; March 27, 2012 - Attorney General; and, March 28, 2012 - OG&E S/H.
THE COMMISSION FURTHER FINDS that for the calendar year 2010, PUD Staff
conducted a complete and thorough review of the FAC of OG&E and all charges and credits that
were passed through under this provision of OG&E's tariff.
THE COMMISSION FURTHER FINDS that the calculations of fuel costs passed
through OG&E' s FAC for the calendar year 2010 are arithmetically and mathematically correct
for the relevant billing periods and consistent with OG&E's tariff on file at the Commission, and
no material discrepancies were found.
THE COMMISSION FURTHER FINDS that the charges and credits passed through the
FAC for the calendar year 2010 were based on the actual prices paid by OG&E.
THE COMMISSION FURTHER FINDS that for the calendar year 2010 OG&E's
generation, purchase power and fuel procurement processes and costs, including the cost of
replacement power from the Sooner Unit 2 outage, were prudent and no disallowance for any of
these expenses is warranted.
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THE COMMISSION FURTHER FINDS that there is merit to the parties working in a
collaborative process to develop parameters for OG&E's next MFR package filing. The parties
to this Cause wishing to participate shall work together to refine the process under the current
Minimum Filing Requirements in an effort to obtain a resolution that is satisfactory to all parties.
In the event the parties are unable to reach an agreement, the PUD Staff is directed to initiate a
technical conference or rulemaking, as it deems necessary, to address the MFR issues raised in
this Cause.
VI.
RECOMMENDATION
The ALJ recommends the Commission adopt the Findings of Fact and Conclusions of
Law detailed above and find OG&E's FAC was calculated properly, mathematically accurate
and collected in accordance with OG&E's Fuel Cost Adjustment Tariff for calendar year 2010
and that OG&E's FAC costs for calendar year 2010 recovered from OG&E's Oklahoma
jurisdictional customers should be approved by the Commission as having been properly
recovered. In addition, the ALJ recommends the Commission find OG&E's generation,
purchased power and fuel procurement processes and costs for calendar year 2010 were prudent.
Finally, the ALJ recommends that the parties enter into a collaborative process to discuss the MFR
issues raised within this Cause with the aim to determine whether or not changes to the Commission's
MFR and/or FAC rules are needed.
Respectfully submitted this
2 (o'day of September, 2012.
Adithinisirative Law Judge
Cause No. PIJD 201100132; OG&E 2010 Fuel/Prudence Review
Attachinent "A" to the Report of the Administrative Law Judge
Page 1 of 20
Attachment A - Summary of Testimony
PUBLIC UTILITY DIVISION
Kiran Patel
Ms. Kiran Patel, public utility regulatory analyst for the Commission's PUD testified on
behalf ofPUD. Upon direct examination, Ms. Patel verified that on April 6, 2012, she had filed
testimony in this cause and that she did not have any changes to make to her pre-filed testimony.
Ms. Patel then briefly described the purpose of her testimony. She testified that her role
in this cause was to present findings and recommendations regarding calculations of the OG&E
FAC for the calendar year 2010. Ms. Patel then explained OG&E's FAC. She asserted that the
FAC is a tariff mechanism that allows a utility to automatically adjust each customer's monthly
bill based on changes in the costs of fuel used to generate electricity above or below the
Commission predetermined level of those fuel costs that are included in the base rates.
Moreover, Ms. Patel testified that there had been significant changes in OG&E's FAC,
and that OG&E had forecasted natural gas prices to be an average $6.10/MMBtu for 2010, but
the actual gas prices for the calendar year were approximately $4.72/MMBtu. She also said that
the forecasted natural gas burn was approximately 87.0 million MCF, but the actual 2010 burn
was 106.30 million MCF. She also stated that OG&E's forecasted coal costs for 2010 were
approximately $308 million, while the actual coal costs for the calendar year 2010 were $274
million.
Ms. Patel also described the procedures used in the OG&B's FAC audit. She testified
that she used the following procedures:
- Reviewed supporting documents such as contracts and invoices of natural gas, coal,
oil, transportation and purchased power;
- Reconciled the supporting invoices to the related contracts and monthly FAC filings
to ensure that the actual costs of fuel and purchased power had been accurately
included;
- Reviewed a sample of customers' bills by service level to ensure that such bills were
calculated accurately and that they properly reflect the FAC factor;
- Reviewed the Minimum Filing Requirements ("MFR") package and supplemental
materials; and
- Discussed and analyzed OG&E' s natural gas purchasing processes indicated in the
Fuel Supply Portfolio and Risk Management Plan.
Ms. Patel also asserted that OG&E spent $760 million to purchase fuel for the 2010 fuel
audit year. Finally, she recommended that the Commission approve the monthly filings of
OG&E's FAC for the calendar year 2010.
Cause No. PUD 201100132; OG&E 2010 Fuel/Prudence Review
Attachment "A" to the Report of the Administrative Law Judge
Page 2 of 20
Upon cross-examination, OIEC Counsel asked Ms. Patel whether the average cost of
coal-fired generation was much lower on OG&E's system in 2010 than the gas-fired generation.
Ms. Patel answered that the average cost of coal-fired generation was much lower. Moreover,
Counsel for the AG asked Ms. Patel whether OG&E's over-collected balance of $5,263,047 had
been credited to the customers, and Ms. Patel replied that it had been.
David Garrett
Mr. David Garrett, public utility regulatory analyst for the Commission's PUD also
testified on behalf of PUD. Upon direct examination, Mr. Garrett verified that on April 6, 2012,
he had filed testimony in this cause and that he did not have any changes to make to his pre-filed
testimony. Moreover, after PUD Counsel asked Mr. Garrett a series of questions concerning his
credentials, and after the ALJ noted the reservations of OG&B Counsel and OG&E S/H Counsel,
the ALJ accepted the credentials of Mr. Garrett as an expert witness to testify in this cause.
Upon direct examination, Mr. Garrett testified that the purpose of his testimony was to
present findings and recommendations regarding the prudence of OG&E's electric generation,
purchase power and fuel-related decisions and processes throughout the review period of 2010 as
part of PUD's comprehensive prudence review. He asserted that at the time he filed his pre-filed
testimony, he was unable to make a prudence determination regarding the Sooner 2 outage that
occurred in 2010; therefore, in that testimony he requested that OG&E provide him additional
information regarding the outage and the economic impact to ratepayers. Mr. Garrett testified
that subsequently, OG&E provided him the results of a GenTrader Cost Study, showing an
additional cost incurred by ratepayers in the approximate amount of $3.2 million.
Moreover, Mr. Garrett testified that Mr. Johnson, OG&E's witness, filed rebuttal
testimony and described the Sooner 2 outage. Mr. Garrett provided surrebuttal testimony and
said that Mr. Johnson's assertion that OG&E acted prudently because the switching incident was
not the result of management's failure but that of an OG&E employee is not supported by legal
authority and is fundamentally flawed because it creates an inappropriate distinction between the
employer and the employee. Mr. Garrett further explained that there is a fundamental legal
principle that provides that employers are responsible for the acts of their employees if those acts
are committed during the scope of employment. He also testified that if Mr. Johnson's assertions
were true, then there would be an inappropriate shifting of risk from the company to the
ratepayers and a situation where the ratepayers would be responsible for the negligent acts of a
company's employees. Moreover, Mr. Garrett said that it is not right for the company to reap the
rewards of risk taking on one hand, while avoiding the potential downside of risk on the other
hand if their employees commit a costly error, especially when those employees have been hired,
trained, and certified by the company and those employees have been acting under the direction
of company management.
Furthermore, Mr. Garrett testified that based on his review of OG&E's rebuttal
testimony, the GenTrader Cost Study, and other evidence presented in this cause, he has
Page 3 of 20
concluded that OG&E's managerial decisions regarding switching procedures, along with
OG&E's managerial decisions regarding the hiring, training, certification and/or supervision of
the employee who committed the error were inadequate. Therefore, he concluded that OG&E is
responsible for the additional fuel costs incurred by ratepayers resulting from the Sooner 2
outage, and he also recommended that the Commission enter an order applying a $3 million
credit to the company's fuel adjustment clause.
Attorneys for OG&E, OG&E S/H, OTEC, and the Office of Attorney General crossexamined Mr. Garrett. Counsel for PUD asked Mr. Garrett redirect questions.
ATTORNEY GENERAL
On April 6, 2012, the Responsive Testimony of Edwin C. Farrar was filed on behalf of
the Attorney General. However, at the hearing held on July 17, 2012, it was announced on
behalf of the Attorney General that Mr. Farrar would not testify at the hearing because in
negotiations the AG had resolved most of the issues discussed in his testimony, but that the
Attorney General would otherwise participate in the hearing.
OKLAHOMA GAS AND ELECTRIC COMPANY
Donald R. Rowlett
Direct Testimony - On October 18, 2011, Mr. Donald R. Rowlett filed direct testimony
on behalf of OG&E to provide an overview of OG&E's MFR package filed in this cause on
October 18, 2011, pursuant to Subchapter 39 of the Commission's Chapter 35 electric utility
rules. First, Mr. Rowlett described OG&E as an investor owned electric utility. Next, he
explained OG&E's FAC and the costs that flow through the FAC. He testified that the
components of the FAC are (1) the Total Annualized FAC Factor; and (2) Off-System Sales
Adjustment. Mr. Rowlett explained that those two components determine the FAC because the
FAC is the adjustment factor derived by taking the annualized FAC factor minus the off-system
sales adjustment and any Commission ordered refunds or charges, by service levels.
Mr. Rowlett also described the schedules and the information contained in the MFR
Package. He testified that OG&E plans for its fuel and purchased power needs with multiple
objectives in mind: ensure reliability; lowest reasonable cost; reduced fuel cost volatility;
compliance with all applicable laws and regulation; and safety. He also testified that Tab A-5
contains a narrative of any key factors or events which had a Material Impact on the Company's
actual fuel and purchase power expenses and their relative magnitude. Mr. Rowlett testified that
the material impacts for 2010 were related to the purchase of natural gas, coal and purchased
power.
Page 4 of 20
Rebuttal Testimony - Mr. Rowlett filed rebuttal testimony on May 8, 2012. He testified
that he has been extensively involved with OG&E fuel audits and prudence reviews since he
joined the Company in 1989. He testified that prior to joining OG&E, he reviewed the findings
of Commission fuel audits in conjunction with utility financial statement audits. In addition, he
testified that he has prepared or supervised the preparation of the Company's response to the fuel
audits and prudence reviews conducted by the Oklahoma, Arkansas and FERC staffs since he
started his employment at OG&E.
Mr. Rowlett also testified that he was involved in the rulemakings that produced the
current MFR requirements. He summarized how the rulemakings changed the process of how
information is provided by the Company for fuel audits and prudence reviews. He testified that
the Company's historic obligation to make its records available for audit has been expanded over
the years, but only to the extent described in the Commission's rules.
Mr. Rowlett testified how he interprets the standard for demonstrating the prudence of
OG&E's operations. He testified that the standard is based on the decisions of a "reasonable
utility manager" and this standard is a fundamental tenant of regulatory doctrine. Mr. Rowlett
testified that prudence reviews should be conducted based on the information produced in the
review period, without the benefit of hindsight or actions from past prudence reviews.
Mr. Rowlett briefly summarized the areas where the parties have questioned the prudence
of OG&E's fuel and generation costs. He then testified that his rebuttal testimony (i) explains
why the Company believes it has complied with Commission requirements and supplied all
relevant information in the MFR package in accordance with the Commission's rules; (ii)
provides a response to the arguments that the MFR package should have contained an
explanation and quantification of the Sooner 2 switching error; and (iii) discusses how it is
inappropriate to compare OG&E's operations to those of PSO for prudence review purposes. He
further testified that he also generally explains how the Company acted prudently regarding the
issues raised by the parties.
Mr. Rowlett testified that he does not agree with Mr. Garrett's assertion that the MFR
package did not include the information required by Commission rules. He testified that he
believes Mr. Garrett is basing his objection on requirements not included in the Commission
rules.
He testified that the MFR Package was established in 2007 as a mechanism for reducing
the need for extensive discovery and to allow the Staff and intervenors to arrive at their
respective conclusions in a shorter period of time. Mr. Rowlett further explained what happens
if, after the filing of the MFR package, a party challenges the prudency of one of OG&E's
actions. He testified that if the Staff or other parties question the prudency of an action based on
the information provided, the utility has the option of providing additional testimony or evidence
to demonstrate its prudence.
Mr. Rowlett testified that in addition to the information in OG&E's MFR Package and
information provided through discovery, Mr. Morphis and Mr. Johnson address specific prudent
operations of OG&E' s coal fired generation fleet from a managerial and dispatch perspective.
Page 5 of 20
He further testified that OG&E's coal unit capacity factor in 2010 is not indicative of imprudent
management by the Company.
Mr. Rowlett also testified to the information the Company provided regarding the
switching error at Sooner Unit 2 that was addressed by Mr. Norwood and Mr. Garrett. He further
testified that the Company does not agree with Mr. Norwood's conclusion that the switching
error at Sooner Unit 2 was the result of imprudent management. He also testified that the
Company does not agree with the suggestion that the information regarding the Sooner Unit 2
outage was insufficient. Mr. Rowlett testified that as demonstrated by Mr. Johnson in his
rebuttal testimony, the facts clearly show the Company was not imprudent in its actions related
to the switching error, therefore no penalty is warranted. He also testified that the Company has
reviewed Mr. Norwood's methodology for calculating the $9.6 million penalty and the Company
disagrees with Mr. Norwood's analysis for many reasons.
Mr. Rowlett testified that he disagrees with Mr. Garrett's statement that the economic
impact of the incident is a consideration in determining the prudence of the Company's actions.
He testified that Mr. Garrett testifies that he needs quantification of the economic impact to
OG&E's customers resulting from the switching error incident and damage to the Sooner Unit 2
generator before he can determine prudence. Mr. Rowlett explained that economic impact is not
a factor when determining the prudence of management actions. Mr. Rowlett also testified that
the Company generated an economic quantification as requested by Mr. Garrett, even though an
economic quantification is inappropriate. He testified that the analysis produced a range from
$3.0-$3.2 million and is likely overstated because the model only considers OG&E's portfolio
and does not consider lower cost replacement power available in the market.
Mr. Rowlett testified that OG&E provided evidence regarding the prudence of the
derating of its generating units, as questioned by Mr. Norwood in Schedule G of OG&E's MFR
Package. He also testified that a financial penalty related to OG&E' s bilateral market purchases
is not warranted as suggested by Mr. Norwood. Mr. Rowlett further testified that Mr. Garrett is
incorrect in asserting that the Company failed to meet the rule requirements related to the Sooner
Unit 2 outage. He testified that Mr. Garrett would like an expansive narrative explanation of the
Sooner 2 switching error in the MFR package; however, his request is not consistent with the
requirements of the rule. Mr. Rowlett testified that in this proceeding the Company has met its
obligation and a narrative explanation was not required because this event clearly did not come
close to the 3% materiality threshold. Mr. Rowlett also testified that Mr. Norwood did not
adequately recognize the differences between the OG&B system and the PSO system when
comparing the two. He testified that PSO is part of the AEP system and has vastly different
units. He further testified that Mr. Norwood's suggestion that the Commission should determine
the prudence of OG&E's management decisions by evaluating PSO's system is simply wrong.
Finally, Mr. Rowlett testified that he believed the Company complied with the rules and
was prudent in its actions in 2010. He testified that OG&E has complied with the rules and
provided the information necessary for the Commission to find the Company prudent during
2010. He further testified that the evidence presented by the Company, specifically to rebut the
allegations of Mr. Norwood, demonstrates that its actions in 2010 were prudent as related to fuel
and purchased power expenses.
Page 6 of 20
Kenneth C. Johnson
Mr. Kenneth C. Johnson filed rebuttal testimony on behalf of OG&E on May 8, 2012.
Mr. Johnson testified that he is the Vice President of Power Supply Operations for OG&E. He
testified in detail regarding his more than 32 years experience in the electric utility industry. He
testified that the vast majority of his experience relates directly to maintenance and reliability
practices and asset management of generating plant systems and equipment. This includes
numerous implementations of predictive maintenance programs, reliability centered maintenance
studies, root cause analyses on equipment failures, reliability analyses of rotating and stationary
equipment typically found in generating plants, and advanced maintenance/outage planning and
work management systems for four diverse utilities. He also testified that he received a
Bachelor's of Science degree in Zoology/Physiology in 1975 and a Bachelor's of Science degree
in Mechanical Engineering in 1980, both from Louisiana State University.
Mr. Johnson testified that his testimony rebutted the recommendations of OIEC's
witness, Scott Norwood related to the performance of OG&E's coal-fired generation fleet during
calendar year 2010 and addressed questions raised by Staff witness David Garrett regarding the
Sooner Unit 2 outage during the Fall of 2010, as well as rebutting Mr. Norwood's
recommendations concerning that incident.
First, Mr. Johnson explained why Mr. Norwood was mistaken in his conclusion that
OG&E's coal units were operated imprudently by the Company in 2010. Mr. Johnson testified
that OG&E's system was operated prudently given limitations and constraints that existed in
2010. He further testified regarding the maintenance issues which contributed to the coal unit
capacity factor in 2010. Mr. Johnson testified that the capacity factor of OG&E's coal-fired
units has trended downward since 2008 and is primarily due to the aging of the coal fleet. He
further testified that in recent years, OG&E has experienced an increased incidence in forced
outages due to the failure of various components related in part to the age of the units caused by
damage from equipment fatigue, creep damage due to temperature exposure, and
erosion/corrosion from routine wear and tear. He testified that this has prompted OG&E to
design and implement a more targeted maintenance program, which started in 2010. Mr.
Johnson stated that the results of this program can be seen in the improved equivalent availability
performance of OG&E's coal units in all of 2011 and into the first quarter of 2012. Mr. Johnson
also testified that two of the more significant equipment issues OG&E experienced in 2010 were:
Sooner Unit 2 economizer header failure, and the Muskogee Unit 5 expansion joint failure.
He further testified regarding the Sooner Unit 2 economizer header failure. He testified
that repairs, sufficient to operate in a de-rated condition until the header could be replaced, were
completed and Sooner Unit 2 was returned to service on February 15, 2010. He further testified
that a planned maintenance outage, as noted in the MFR package on Schedule G-4, had
previously been scheduled during September 2010 and this planned outage allowed the
replacement header to be installed at the same time as other routine outage work. Mr. Johnson
testified that in his experience this issue was prudently handled and by working with the State
Boiler Inspector to receive the waiver and reducing the operating pressure of the Unit to allow it
to remain online during the hot summer months, OG&E went above and beyond normal
Cause No. PIJD 201100132; OG&E 2010 Fuel/Prudence Review
Page 7 of 20
practices to ensure that as much low cost coal generation as possible remained online during
summer, benefitting our customers.
Next, Mr. Johnson testified regarding the Muskogee Unit 5 expansion joint failure. Mr.
Johnson further testified that Mr. Norwood was incorrect in his assumption that the Company
lost 94 MWs for the entire year because of this failure.
Finally, Mr. Johnson testified in detail regarding the causes of the Sooner Unit 2 outage
and rebutted Mr. Norwood's conclusion that the incident was caused by imprudent action on the
part of the Company. Mr. Johnson testified that Sooner Unit 2 had been out of service for a
repair to its coal delivery system and was in the process of being returned to service on
November 17, 2010. He testified that a Company employee performed a switching error, which
took Sooner Unit 2 off-line until December 28, 2010, approximately six weeks and which was
listed on MFR Schedule G-4. He further testified that following this incident an Incident
Analysis Report was drafted and the report was designated as Highly Sensitive Confidential and
made available at Company headquarters, as part of the response to OIEC 1-13, which was
answered on March 9, 2012. He testified that both OIEC witness Mr. Norwood and Staff
witness Mr. Garrett visited OG&E headquarters the week of April 2nd, to review the Highly
Sensitive Confidential documents.
Mr. Johnson also testified regarding how the switching error occurred. He testified that in
this instance, the Switchman did not follow procedure and instead made an error and closed the
final breaker, performing a step that he was not authorized or directed to perform. Mr. Johnson
further testified about the training and qualifications of the employees involved in the incident
and stated that both members had completed their switching training and the Switchman had his
OG&E issued Switchman Certification. Mr. Johnson testified that OG&E management acted
prudently prior to this incident.
Mr. Johnson further testified that the report reviewed by the parties which was completed
following this incident did not accurately present the facts and can be misread to suggest that the
Switchman was not certified or properly trained.
Mr. Johnson concluded that in his opinion, the Company acted prudently in the operation
of its generating units in 2010. He testified that he has 32 years of experience dealing with the
maintenance and operations of electric utility generating units and that during 2010, the
Company found creative ways to mitigate the effect of maintenance outages, to the benefit of
customers and avoid high costs during the summer months. He further testified that he is
confident that OG&E meets industry standards for training its Switchmen and that the Sooner
Unit 2 outage was the result of an individual Member not following his training.
Kim A. Morphis
Mr. Kim A. Morphis filed rebuttal testimony on May 8, 2012 on behalf of OG&E. He
testified that he is the Manager of Power Operations for OG&E. Mr. Morphis briefly testified
regarding his education and professional background and stated that he previously testified in
Cause Nos. PhD 200900230 and P1.JD 200900231. He further testified that his testimony will
Page 8 of 20
rebut the concerns of OJEC witness Scott Norwood in three areas: (1) the appropriateness of
OG&E's utilization of its coal fired generation fleet during calendar year 2010; (2) the changes
in reported capacity in 2010 for various generating assets; and (3) OG&E's practices regarding
bilateral market energy purchases.
First, Mr. Morphis testified regarding OG&E's participation in the SPP EIS Market. He
generally described the SPP EIS Market and how the Market is relevant to some of the concerns
raised in this proceeding. He testified that Mr. Norwood, and to some extent, Mr. Farrar, suggest
that coal unit capacity factors are the appropriate measures of determining if the Company has
operated those assets prudently, and that these suggestions are flawed and ignore the realities and
benefits of operating in the EIS Market. Mr. Morphis further testified that in the long run, the
participation in the market, while it may cause the capacity factors of OG&E's individual units to
fluctuate, is in the best interests of our customers since it results in the lowest reasonable cost.
Mr. Morphis also testified how SPP uses participants' hourly schedules and production cost
characteristics to optimize economic dispatch. He testified that assuming all the participant
companies follow the SPP dispatch instructions, this process is intended to result in the least cost
for all customers in the SPP region.
Next, Mr. Morphis provided a description of OG&E's coal-fired generating units and
how they are operated and participate in the SPP EIS Market. Mr. Morphis stated that OG&E
owns and operates five (5) coal-fired generating units, located at two plants, Sooner and
Muskogee. He further testified that in 2010, OG&E also had (and continues to receive energy
from) a long-term contract for 320 MWs of coal-fired generation from the ABS Shady Point
plant. He further testified that OG&E offers all operating units, including its gas generation and
wind generation, into the SPP EIS Market. Mr. Morphis testified that Mr. Norwood expressed
concerns regarding the reported capacity factors of OG&E's coal fired units. Mr. Morphis
testified that Mr. Norwood's conclusions regarding utilization of OG&E's coal generation are
not valid because Mr. Norwood's calculations are based upon the concept of a closed system in
which only OG&E resources serve its customers, which essentially ignores the existence of the
SPP EIS Market. He further testified that Mr. Norwood did not recognize the impact of low load
system demands on OG&E's generation fleet.
Mr. Morphis further testified regarding how SPP EIS Market prices affect the capacity
factors of OG&E's coal units. He also testified how low load system demands contribute to
reductions in OG&E's coal unit capacity factors. Mr. Morphis testified regarding the impact of
must take wind generation. He testified that in recent years, OG&E has steadily increased the
amount of wind in its generation portfolio which impacts coal capacity factors and coal
generation output during off-peak periods. Mr. Morphis also testified about the impact of
OG&E' s contractual cogeneration commitments. He testified that the availability of AES
impacts the capacity factor of OG&B's coal units in any given year. He also testified that low
load periods impact the coal capacity factor and other SPP utilities.
Mr. Morphis testified that in 2010, there were in excess of 20% of the hours when one or
more OG&E coal units were scheduled at less than its maximum capabilities due to these factors.
He testified that the appropriate way to consider the reasonableness of the Company's efforts to
optimize its coal generation factors in the hourly nature of the SPP EIS Market.
Page 9 of 20
Mr. Morphis further testified that Mr. Norwood's calculation of the $28 million
disallowance for low capacity factors is based on a faulty premise and should be disregarded. He
testified that the faulty premise is that OG&E's coal generation is always the least cost option for
OG&E' s customers and it is always desirable to maximize that resource.
Third, Mr. Morphis explained the changes in reported capacity in 2010 for various
OG&E generating assets. He testified that Mr. Norwood asserts that OG&E reduced the net
dependable capacity rating of Muskogee Unit 5 by 94 MWs and that OG&E also reduced the net
dependable capacity ratings on several other gas-fired units and that these reductions were not
prudent and were not in the best interest of OG&E' s customers. He testified that none of the
decisions regarding OG&E's plants were made in an arbitrary manner.
Finally, Mr. Morphis discussed OG&E's utilization of bilateral market energy purchases
which are made when third parties offer OG&E energy at costs that the Company believes will
be lower than the SPP EIS Market as a whole. He testified that Mr. Norwood asserts that OG&E
was not prudent in its market energy purchase practices and that the Company should be
penalized because customers would have benefitted from an increase in market purchases. He
further testified that Mr. Norwood's assertion is incorrect.
Mr. Morphis also testified that Mr. Norwood's claim that the Company could have
purchased an additional 1,800,000 MWhs of $33/MWh energy for OG&E customers from "the
market" is wrong. He further testified that Mr. Norwood did not produce evidence supporting
the existence of 1,800,000 MWh of purchase opportunities allegedly missed by OG&E in 2010.
He testified that Mr. Norwood's recommendations are in conflict with one another.
Mr. Morphis concluded that in his opinion he believes OG&E acted prudently and in its
customer's best interests in 2010. He testified that the Company believes that OG&E's
consistent participation in the SPP EIS Market provided the greatest opportunity to optimize the
use of available assets at any given time and reduce overall customer costs and that OG&E has
supplemented that practice by utilizing traditional bilateral energy markets where appropriate.
OKLAHOMA INDUSTRIAL ENERGY CONSUMERS
Scott Norwood
Mr. Scott Norwood, President of Norwood Energy Consulting, L.L.C., filed responsive
testimony on April 6, 2012, and testified on behalf of OTEC. Mr. Norwood has over 30 years of
experience in electric utility regulatory consulting, resource planning, and energy procurement
and his clients include government agencies, publicly-owned utilities, public service
commissions, municipalities and various electric consumer interests. He is a graduate of the
University of Texas College of Electrical Engineering. His qualifications and experience are set
forth in his résumé that is attached to his testimony as Exhibit SN-1. Mr. Norwood's
qualifications as an expert have previously been accepted by the Commission, including in
OG&E's 2007 and 2010 fuel prudence cases.
Page 10 of 20
Mr. Norwood testified that OIEC has a strong interest in ensuring the availability of
reliable and low cost electric power in Oklahoma, which is critical to the success of industry.
OG&E's fuel and purchased power costs are allocated to OJEC's members pursuant to tariffs
approved by the Commission. OG&E's total fuel and purchased power costs during 2010
exceeded $824 million. This case provides for the review of the prudence of OG&E's fuel and
purchased power costs during 2010, and will therefore determine the amount of such costs that
are recoverable from customers. Thus, OIEC's members have a vital interest in this case to
ensure that OG&E's fuel, generation and purchased power expenses during 2010 were prudently
incurred and represented the lowest reasonable cost energy available during this period.
Mr. Norwood testified that the purpose of his testimony is to present his findings and
recommendations regarding the prudence of OG&E's fuel and purchased power costs during
2010. OG&E incurred approximately $860 million in fuel and purchased power expense at an
average cost of $30.55/MWh to serve its customers during 2010. Mr. Norwood testified that, as
shown below, coal-fired generation and market energy purchases were the lowest cost energy
resources used by OG&E during 2010.
2010 OG&E Energy Supply Mix and Cost
Coal
Gas
Purchased Power
Total
MWh
14,689,777
11,130,216
2,313,607
28,133,600
Cost
$278,064,109
$/MWh
$18.93
$501,855,371
$45.09
$79,684,413
$859,603,893
$34.44
$30.55
Sources are OG&E MFR Schedules A-2, A-4 and H.
Mr. Norwood reviewed information provided by the Company in its application and
Minimum Filing Requirements ("MFR") and conducted discovery to examine issues which
appear to have influenced the level of fuel and purchased power expense incurred during 2010.
Based on his review he identified four primary concerns regarding the prudence of OG&E's
management of fuel and purchased power expenses during 2010. First, he is concerned that
OG&E has not provided evidence in its testimony or MFR Package to fully explain the decline in
coal plant capacity factor performance or to demonstrate the prudence of its management of coal
plant operations and outages during 2010. As shown in Mr. Norwood's schedule below, the
capacity factor ("CF") and equivalent availability factor ("EAF") performance of OG&E's
generating units has steadily declined (gotten worse) over the last five years and dropped to its
lowest level in 2010.
Page 11 of 20
OG&E Coal Unit Performance
2006
2007
2008
2009
2010
2006-2010
EAF
83.7%
76.5%
81.9%
76.0%
69.3%
77.5%
CF
73.0%
63.9%
75.7%
65.0%
61.3%
67.8%
DIFF
10.7%
12.5%
6.2%
10.9%
8.0%
9.7%
Moreover, as shown below, the average CF performance of OG&E's coal-fired
generating units has been consistently lower (i.e., worse) than PSO's coal-fired generating units
since 2006, and declined to its lowest (worse) level during 2010.
Oklahoma Administrative Code ("OAC") 165:35-39-11, specifies that OG&E is required
to provide "a narrative explanation of all significant unusual events with respect to generating
unit availability and the extent to which the events affected the utility's fuel and purchased
power expense" in Schedule G-3 of its MFR Package. However, OG&E did not address the
decline in coal plant performance in its MFR schedules or in its pre-filed direct testimony. Mr.
Norwood testified that in its rebuttal testimony, the Company asserts that the declining capacity
factor performance of its coal-fired units in 2010 can be explained by a number of factors,
including aging of its units, low load limits, the impacts of wind generation on coal unit dispatch,
and the availability of lower cost energy resources for purchase in the SPP energy market. Mr.
Norwood testified that most of the factors identified by OG&E also apply to PSO's coal-fired
generating units, and therefore do not explain why OG&E's coal units have consistently
performed at lower levels than PSO's units. In addition, it appears that the factors cited by
OG&E explain only a small portion (at most 5%) of the relatively low capacity factor
performance of OG&E's coal-fired generating units during 2010.
Page 12 of 20
In the absence of any further evidence explaining the decline in OG&E's coal plant
performance, Mr. Norwood recommended that OG&E's 2010 recoverable fuel and purchased
power expenses be reduced by $28 million to reflect the additional fuel and purchased power
costs savings that reasonably could have been achieved had OG&E's coal units operated at a
68% capacity factor during 2010. This performance level represents the approximate midpoint
between OG&E's average coal unit performance (61%) and PSO's average coal unit
performance (74%) during 2010.
Mr. Norwood's second concern regarding OG&E's fuel expenses during 2010 relates to a
generator forced outage at the Sooner Unit 2 coal-fired generating unit which occurred in
November of 2010. Again, OG&E is required to provide a narrative explanation of significant
unusual events related to generating unit performance that impact the Company's fuel expenses,
and the Sooner 2 forced outage was clearly a significant and unusual event. However, OG&E
did not provide a narrative explanation or any details regarding the effect of this outage on fuel
and purchased power expense in its testimony, in Schedule G-3, or in the MFR Package. Based
on Mr. Norwood's review of OG&E's report on the cause of the outage, it appears that this
outage was the result of OG&E's imprudent actions which allowed unqualified personnel to
attempt to place Sooner Unit 2 on line before it was operating at full speed and synchronized
with the grid. The report indicates that inadequate training, failure to follow procedures and
inadequate oversight contributed to this serious employee error and the resultant extended forced
outage of Sooner 2. In its rebuttal testimony, OG&E contends that its report describing the cause
of the Sooner 2 generator outage was inaccurate, and further argues that it should not be held
financially responsible for mistakes made by its employees.
Mr. Norwood disagreed with OG&E's position that ratepayers should be held responsible
for 100% of the replacement power costs arising from the employee error that resulted in the
Sooner 2 generator forced outage. He recommends that OG&E's 2010 recoverable fuel and
purchased power expenses be reduced by $9.6 million, which is Mr. Norwood's estimate of the
replacement energy cost impact of the Sooner 2 generator outage. See Exhibit SN-3.
Mr. Norwood's third concern regarding OG&E's fuel expenses during 2010 relates to the
unexplained 94 MW de-rating of the Muskogee 5 coal-fired generating unit during this period.
Mr. Norwood was concerned that OG&E had not explained the reasons for its decisions to retire
or de-rate certain gas-fired generating units on its system during 2010. Pursuant to OAC 165:3539-11, OG&E is required to provide a "description and explanation of any limitations on the
output of utility generating units" in Schedule G-5 of its MFR Package. The 94 MW reduction
to the original net dependable capacity rating of Muskogee 5 appears to reflect a significant
limitation on the output of this generating unit; however, OG&E did not mention this rating
change in its testimony, in Schedule G-5, or elsewhere in the MFR Package. In its rebuttal
testimony, the Company explained that the 94 MW de-rating of Muskogee 5 was related to a
condenser expansion joint failure that was not addressed in the Company's testimony. Based on
this new information, Mr. Norwood was satisfied that OG&E has adequately explained the cause
of the Muskogee Unit 5 de-rating and therefore Mr. Norwood withdrew his original
recommendation that the Company be required to file economic studies in its next fuel prudence
proceeding to quantify the impact of the de-rating of Muskogee 5 and to demonstrate the
prudence of the decision to de-rate the unit.
Page 13 of 20
Mr. Norwood's fourth and final major issue of concern regarding OG&E's fuel and
purchased power costs during 2010 relates to the relatively low volume of the Company's market
energy purchases during 2010. Mr. Norwood testified that, as shown below, during 2010,
OG&E's market energy purchases represented only approximately 8% of the Company's total
supply, while much higher cost gas-fired generation continued to represent approximately 40%
of total energy requirements.
2010 OG&E Market Energy Purchases
MWh
% of Total
Coal
14,689,777
52.2%
Gas
11,130,216
39.6%
Purchased Power
2,313,607
8.2%
28,133,600
Total
100.0%
$/MV
$18.93
$45.09
$34.44
$30.55
Sources are OG&E MFR Schedules A-2, A-4 and H.
Pursuant to OAC 165:35-39-5, OG&E is required to provide in Schedule A-i "a thorough
and detailed narrative of the fuel and purchased power expenses, procurement practices, and
procedures" during the 2010 review period. Mr. Norwood testified that despite this requirement,
OG&E did not address the reasons why its market energy purchases were relatively low during
2010, or why the Company was unable to purchase additional energy from the SPP market in
order to displace higher cost gas-fired generation on its system. For example, as shown below,
the volume of PSO's market energy purchases during 2010 was approximately four times the
level purchased by OG&E, while the volume of PSO's gas-fired generation was approximately
30% lower than OG&E's gas-fired generation during this same period. Moreover, the figures
presented below for PSO do not include additional PSO energy purchases from AEP affiliates
2010 OG&E vs PSO Market Energy Purchases (MWh)
OG&E
Bilateral Firm
Bilateral Non-Firm
Affiliate Non-Firm
SPS EIS
Total
Gas Generation
PSO
%Diff
110,105
238,659
0
1,520,967
1,869,731
884,295
1,755,040
1,336,067
3,420,721
7,396,123
803%
735%
11,130,216
7,789,195
70%
225%
396%
Due to OG&E's failure to address this issue in its MFR Package and direct testimony,
Mr. Norwood recommends that the Company's fuel and purchased power costs be reduced by
$16.2 million to reflect the estimated benefit which could have been achieved if OG&E had
purchased an additional 1.8 million MWh of energy during 2010. Even with this increased
volume of OG&E energy purchases, the level of market energy purchases by PSO during 2010
(excluding purchases from its AEP affiliates) would remain approximately two times the level of
Page 14 of 20
energy purchased by OG&E. Mr. Norwood testified that in its rebuttal testimony, OG&E argues
that it purchased energy from the SPP market whenever such energy was available at a lower
price than the cost of OG&E's generation. However, notwithstanding this assertion, the
Company has provided no additional evidence to demonstrate that it took advantage of all
opportunities to purchase energy and thereby to displace more expensive gas-fired generation on
its system during 2010. Given OG&E's failure to explain why it was not able to purchase
additional energy to displace more costly gas-fired generation on its system, Mr. Norwood stands
by his original recommended disallowance to address this apparent failure. Mr. Norwood's
recommended $16.2 million adjustment is based on the approximate $9/MWh differential
between the average cost of market energy purchases and OG&E' s average gas-fired generation
costs during 2010.
At the July 18, 2012, hearing on the merits Mr. Norwood provided surrebuttal testimony
and testified that he is an electric utility consultant and electrical engineer. Jr. 111). He has a
Bachelor of Science in Electrical Engineering from the University of Texas. (Tr. 111). He has
30 years of industry experience, about 10 to 12 of which dealt with either actual operations in
power plants or in operational monitoring of power plants, both natural gas and coal-fired power
plants. (Tr. 111). For the last 20 years he has been a consultant. (Tr. 111). He has dealt with a
variety of matters, including power supply consulting, purchasing and buying power, regulatory
consulting, and evaluating fuel and operational matters. (Tr. 111). Mr. Norwood' s credentials as
an expert witness were accepted. (Tr. 1112.).
Mr. Norwood made corrections to his Responsive Testimony and the summary of that
testimony filed in this cause in connection with OIEC's updated response to OG&E's Data
Request No. 1-11, revised Table 4, which was admitted as Hearing Exhibit 4. (Tr. 112-114).
This document corrects the table on page 29 of his testimony. Jr. 114).
Mr. Norwood testified that his initial concerns regarding the 94 megawatt derating of the
Muskogee 5 coal-fired generating unit during 2010 has been resolved by Mr. Johnson's rebuttal
testimony that explained that there had been a problem with a condenser outlet that limited that
unit's output for some period of time. (Tr. 114-115).
Mr. Norwood does not agree with Mr. Morphis' Rebuttal Testimony that the declining
performance of OG&E's coal units during 2010 is in part due to the availability of lower cost
energy for purchases from the energy imbalance system market. Jr. 115). The key point, which
is noted in Mr. Johnson's Rebuttal Testimony at p. 7, is the relatively minor effect of the EIS
market. Jr. 115). According to the Company's numbers, 550,000 megawatt hours were
purchased from that market by OG&E during 2010, which amounts to only 2.5 percent of the
maximum potential output of the unit, which was about 22.5 million megawatt hours in 2010.
(Tr. 115). Therefore, it would reduce the capacity factor by 2.5 percent. Jr. 115). That does
not explain why the average factor of OG&E' s coal units was approximately 14 percent lower
than PSO's coal units. (Tr. 116).
Mr. Morphis' testimony that low system demands, must-take wind generation and the
lack of contractual rights to decommit the AES-Shady Point facility served to reduce the output
of OG&E's coal units during 2010 does not explain the difference between the OG&E capacity
factors and the PSO capacity factor. (Tr. 116). The effect of this, according to the Company's
Page 15 of 20
calculations, is at most about 360,000 megawatt hours a year, which is about a 1.7 percent effect
on capacity factor, at most. (Tr. 116).
Mr. Norwood does not agree with Mr. Johnson's testimony that the declining
performance of OG&E's coal units during 2010 is the result of unit aging effects which have
been reversed in 2011 due to the Company's implementation of the new maintenance program in
2010. (Tr. 116-117). Over time, aging can affect the impact of coal-fired power plants, but you
would not expect to see a dramatic reduction as has occurred with OG&E's units over the last
five years. Jr. 117). Also, if that were the case, you would expect to see similar results in
PSO's coal units which were placed in service at about the same time as OG&B's units. They
burn the same type of coal and are very similar units. (Tr. 117). As shown by the Figures 2 and
1 on pages 15 and 16 of Mr. Norwood's Responsive Testimony, PSO's coal units are operating
in the 80 percent range on an average over the last five years, which is substantially better than
OG&E's. (Tr. 117). Mr. Norwood testified further that the information revealed during
discovery shows only a slight improvement in availability for OG&E's coal units in 2011. (Tr.
117-118).
Mr. Norwood disagreed with Mr. Rowlett's Rebuttal Testimony that it is not appropriate
to compare the performance of OG&E's coal units to the performance of PSO's coal units due to
differences in the generation portfolios and coal unit designs, which he claims impact the
dispatch of the coal units. OIBC asked for support for those assertions, and Mr. Rowlett testified
today that OG&E has not done any analysis to support that assertion. (Tr. 118). Mr. Norwood
testified that the bottom line is that coal units are the most economic source in the market for
manyhours. (Tr. 118-19).
Mr. Norwood disagreed with Mr. Morphis' assertion on page 7 of his Rebuttal Testimony
that Mr. Norwood's recommendation of $28 million disallowance for poor coal plant
performance during 2010 is based on a faulty premise that coal generation is always the least
cost option for OG&E's customers. (Tr. 119). Mr. Norwood's adjustment only adjusted for
about half, 7%, of the differential between OG&E's units and PSO's units. Therefore, Mr.
Norwood allowed for 7% of differential due to factors identified by OG&E, such as economics
and low loads and wind generation and contractual problems that may occasionally limit the
output of the coal units. Jr. 119). If you take everything the Company has identified as being
problems that might explain the difference or might limit the output of their units, it still does not
explain or make up the amount of difference that Mr. Norwood has allowed in his adjustment.
(Tr. 119).
Mr. Norwood disagreed with Mr. Rowlett's assertion on page 7 of his Rebuttal
Testimony that the facts show that the Company was not imprudent in its actions relating to the
switching error. (Tr. 120). The Incident Analysis Report is the Company's own analysis and
determination of the issues, such as inadequate oversight, which was attributed to a management
system deficiency; procedures not followed; employee performance; unclear knowledge of
procedures; inadequate training and evaluation for certification. All of these issues indicate
OG&E's management deficiency were a root cause of the outage. (Tr. 120). Mr. Norwood
testified that the concept that an electrician or a switchman out in a substation would have the
idea that he had the authority to put a generating unit on line is not indicative of simple error, but
is indicative of very poor communication and lack of oversight. (Tr. 120). At the very least, the
Page 16 of 20
employee should have been on the line with the shift supervisor, the control room operator, to be
getting instructions. (Tr. 120-121). If he had been there would have been no misunderstanding
that someone in the switch yard without the control room's understanding or knowledge would
be placing a generating unit in service. Jr. 121). Mr. Norwood testified that this is a big deal
and why OG&E had this comprehensive report. (Tr. 121). If you look at OG&E's determination
of the root causes, there is no doubt that there was a management deficiency in inadequate
oversight and training. Jr. 121).
Mr. Norwood testified that Hearing Exhibit 2 did not change his opinion. Hearing
Exhibit 2 is a communication with the employee telling the employee what he did wrong and it is
limited to personnel error, whereas the Incident Analysis Report is a broad review of what was
the root cause of the outage, which included both employee factors and management issues. Jr.
121-122). Mr. Norwood also testified that Mr. Johnson's Rebuttal Testimony relating to the
training of employees and Exhibit KCJ-2, also did not impact his recommendation. OIEC
attempted to obtain documentation in discovery that demonstrated the training done for the
certification of the employee at issue. (Tr. 122). In response, OG&E provided the two page
document, KCJ-2, which is a computer printout with very brief data. Jr. 122). It does not
describe or in any way demonstrate the adequacy or the knowledge of this employee. (Tr. 122).
Mr. Norwood testified that based on information provided by the Company in rebuttal in
another area, his $9.6 million recommended disallowance overstates the actual replacement
power costs resulting from the Sooner 2 forced outage. (Tr. 122-123). In estimating the
megawatt hours lost due to the outage, Mr. Norwood took information directly from the
Company's Schedule G-4. Jr. 123). The Company said, both in Rebuttal Testimony and
discovery, that those amounts were maximum megawatt hours that could have been produced if
the unit was on line producing at full rated output every hour. However, in reality, there would
likely have been certain hours that the output of the Sooner 2 unit would have been limited, even
if the forced outage had not occurred. Therefore, Mr. Norwood is willing to accept OG&E's
adjustment on the estimated replacement energy levels due to the outage. Jr. 123). However,
OG&E's documentation for its replacement power calculation was limited, so Mr. Norwood
discussed those calculations with the OG&E employee who made them. (Tr. 123). From those
discussions, Mr. Norwood learned that OG&E did not include purchased power as a resource in
its GenTrader calculation. The effect of that failure is that OG&E overstated the amount of
energy that would have been replaced with other coal-fired units and, therefore, OG&E's $3.2
million estimate of the replacement power cost due to the Sooner 2 forced outage is understated.
(Tr. 123). Factoring those two issues together, a more reasonable estimate of the Sooner 2
outage replacement energy cost is in the $4 to $5 million range.
Mr. Norwood disagreed with the Rebuttal Testimony of Mr. Morphis that OG&E
maximized the value that was available from the SPP energy market by participating in the SPP
EIS market and by taking full advantage of the bilateral market energy opportunities at all times
during 2010. (Tr. 124). Based on the data provided to Mr. Norwood by PSO and OG&E in
discovery, it appears that the bilateral market transactions made by PSO were far higher than the
level of purchases made by OG&E and also that the level of PSO's SPP EIS market transactions
were far higher. (Tr. 124). Mr. Norwood does not question the EIS market transactions, but
OG&E did not provide a good explanation for the bilateral market purchase differential. Jr.
124-125). The testimony by Mr. Morphis today referencing records of market purchase efforts
Cause No. P1313 201100132; OG&E 2010 Fuel/Prudence Review
Page 17 of 20
by OG&E in 2010 did not address his concerns about the level of OG&E's market energy
purchases in 2010. (Tr. 125). It was a log with one page per month, one entry per day for most
months as to what was available in the bilateral market. About 60 to 70 percent of the entries
were simply statements that no offers had been received for that day. (Tr. 125). It doesn't
demonstrate why two parties basically operating in the same market would have such a
divergence in purchase levels. (Tr. 125).
Mr. Norwood testified that Mr. Rowlett's testimony that the supercritical units of PSO
are a reason why they were dispatched at a greater level than the subcritical coal units of OG&E
is not correct. (Tr. 125-126). The differential between subcritical and supercritical heat rates is
approximately 1.5 percent which equate to a differential of approximately 20 cents per megawatt
hour, which is not a significant factor when looking at the $20 megawatt hour cost of energy of a
coal unit. jr. 126).
Mr. Norwood testified that Mr. Morphis did not include any discussion in his Rebuttal
Testimony about the level of market purchases made by OG&E versus the level made by PSO.
OG&E did not express any concern about this issue until today. (Tr. 126-127). OG&E provided
a hearing exhibit yesterday that indicated they may have some concerns on this issue and Mr.
Norwood did some research into that to try to resolve the differences. jr. 127).
Mr. Norwood testified that in his Exhibit SN-2, he identified the data responses from
which his numbers and data came. (Tr. 127). That data is OG&E's data. jr. 127). Mr.
Norwood did not remove cogen or add cogen purchases, since such amounts were not a
component of the market energy purchases provided in OG&E's discovery responses. Mr.
Norwood testified that he was talking about bilateral and EIS market, short term daily market
transactions, which is what OG&E provided Mr. Norwood and what Mr. Norwood presented in
his revised Table 4. jr. 127). Mr. Norwood also provided his work papers for that, as well as
the work papers from which the PSO purchase data came. (Tr. 128). They provide the identical
data that is provided in Mr. Norwood's Table 4 revised, which is the dame data Mr. Norwood
received from OG&E and PSO in response to identical data requests. (Tr. 128).
Mr. Norwood testified that the testimony by Mr. Morphis about the FERC Form 1 data is
incorrect. (Tr. 128). It is about a half a million higher than the amount reported in OG&E's own
FERC Form 1. (Tr. 128). Mr. Norwood testified that the data responses from PSO that Mr.
Norwood provided in his workpapers shows that the reported data for the SPP EIS market
purchases in PSO's FERC Form 1 are actually a net value of PSO's purchased energy less
energy sales. (Tr. 128). Thus, the difference between the 3.4 million roughly megawatt hour
purchase number by PSO in Mr. Norwood's Table 4 Revised and the Company's much lower
number in Mr. Morphis' new exhibit, which came from FERC Form 1, is only because it is a net
number. (Tr. 128). In other words, Mr. Morphis compared true purchases to a purchase minus
sale number. jr. 128). Mr. Norwood testified that Hearing Exhibit 3 did not change Mr.
Norwood' s recommendation because it addresses an amalgam of things, such as net purchases
and long-term contract purchases, that Mr. Norwood was not addressing in his recommendations.
(Tr. 129).
Mr. Norwood disagreed with Mr. Johnson's testimony that economizer header outlet
repairs to the Sooner 2 unit were above and beyond the call of duty. jr. 129-130). This issue
Page 18 of 20
came up for the first time in Mr. Johnson's Rebuttal Testimony. (Tr. 129). The only reason that
Mr. Norwood became aware of this issue was because there was a brief report on these repairs,
which was one of two reports on coal unit outages that the company had provided as highly
sensitive discovery responses at their offices. Jr. 13). Out of 17 forced outages of 100 hours or
more that were experienced during 2010, there were only two for which OG&E provided highly
confidential reports which addressed the cause of the outages. (Tr. 130). From the report
regarding the economizer header outlet repair issue, there was some stress cracking occurring
and the Company met with a vendor and had a consultant look at it and they made a
determination to continue to operate the unit for a period of time at a reduced rating. Jr. 130).
That is the type of judgment made about operating machines by power plant engineers and
operators as a part of their daily job. (Tr. 130). It does not represent an extraordinary action by
OG&E management.
With respect to evidence that OG&E could have purchased an additional 1.8 million
megawatt hours of economy energy during 2010, Mr. Norwood testified that he looked at
whether there was sufficient gas-powered generation operated during 2010 to justify an
additional amount of purchases in the market. (Tr. 130-131). He looked at the Seminole units,
which are conventional steam, and the Horseshoe Lake units, which had probably over 3 million
megawatt hours of generation spread throughout the year, both in peak months and off peak
months. (Tr. 131). That is one indication that in terms of economics there was significant
potential for additional energy purchases to create savings. Mr. Norwood testified that he has
not seen anything that indicated that transmission constraints or the market was not sufficient to
supply that additional amount of energy. The 1.8 million megawatt-hours is an amount that
certainly could have been purchased and it would have been beneficial to OG&E's customers.
(Tr. 131).
Cross-Examination of Scott Norwood at July 18, 2012, Hearing
Mr. Norwood provided comparisons of OG&E's units with the PSO units in his
testimony relating to the decline in coal capacity factor. (Tr. 138). He did not compare the
performance of the OG&E units to the SWEPCO coal units or the Westar coal units. (Tr. 138).
His comparison utilized readily available data on two systems that are adjacent, operating in the
same market, both have coal units, are a similar age, burning the same kind of coal, similar size
and which he has been reviewing on and off for the last three or four years. (Tr. 138-139). The
systems are very similar in terms of coal plant operations. (Tr. 139). It is very unlikely in this
case that transmission capability availability would have an impact on the capacity of the
respective coal units. Jr. 139). There is only around 4 percent of the time, according to
OG&E's studies, that OG&B's coal units are limited by low loads or by economics. The rest of
the time they are the cheapest source available and should be able to generate. (Tr. 139). Mr.
Norwood testified that transmission constraints that might limit exporting this power should not
be an issue for either utility. (Tr. 140). Mr. Norwood did not do a specific study of the potential
impact of transmission constraints on the coal capacity factors of OG&E or PSO because they
would normally not be exporting this power, but would be using it for their customers as the
lowest cost source in the vast majority of hours. (Tr. 140).
Mr. Norwood testified that his 7 percent disallowance recommendation is generous and
includes the issues raised by OG&E, like the EIS market, low loads, wind generation, and the
Page 19 of 20
differences between the systems. (Tr. 141-142). It is a reasoned judgment. Jr. 142). The
Company did not provide any other explanation that would explain the gap. Jr. 142).
Mr. Norwood testified that 1.8 million megawatt hours of additional market energy
purchase would be a drop in the bucket in the SPP market. Jr. 146). He has not seen any study
indicating that OG&E physically could not get that amount of energy into its system. (Tr. 146147). Mr. Norwood has seen testimony that suggested that OG&E's import capability was fairly
high. (Tr. 146-147). On Exhibit 4, the reference to Sooner 2 outage adjustment should have
been to market energy adjustment. Jr. 145-148).
With respect to his recommendation relating to the 1.8 million megawatt hour
adjustment, the only evidence OG&E provided as to what it did in the bilateral market were the
logs, which don't prove much. OG&E has no testimony as to why its purchases were at the level
they were. (Tr. 148). Therefore, Mr. Norwood looked at other evidence, such as whether OG&E
had financial incentive and a prospect for benefiting where it was operating off of old gas-fired
generation. (Tr. 148). Mr. Norwood also looked at whether the market is sufficient to supply
that. (Tr. 148-149). He also looked at transmission issues. (Tr. 149). Mr. Norwood testified
that he also looked at whether neighboring utilities were able to achieve this level, and PSO is
able to. (Tr. 149). The information provided by OG&E indicated that it has transmission import
capability of 500 to 600 megawatts. (Tr. 150).
Mr. Norwood explained that although OG&E's average cost of fuel and energy was less
than PSO's cost in 2010, his testimony relates to the reasonable utilization of OG&E's resources.
OG&E has three times the amount of coal-fired generating capacity that PSO has; probably
1,000 megawatts more combined cycle generating capacity than PSO has, OG&E has long term
purchased power agreements that are at attractive energy rates. Therefore OG&E's energy costs
clearly ought to be lower. Jr. 162). His testimony is that in these few limited areas, OIEC
would like to see improvement or an explanation as to why things cannot be improved. (Tr.
162). Mr. Norwood testified that OG&E has 11 million megawatt hours of gas, much of which
is inefficient gas-fired generation that could be displaced. (Tr. 163).
Mr. Norwood testified that he relied on the Incident Analysis Report for the Sooner 2
forced outage because it was prepared contemporaneously with the incident by an investigative
team of OG&E employees that had a number of disciplines with operations and plant people.
(Tr. 163-164). The conclusions in that Report are very clear and they include management
failures. (Tr. 64). The report was reviewed, finalized, and signed in February, 2012, and has not
been amended. (Tr. 164). The report has been endorsed, finalized by management fairly
recently after an extensive review that was done contemporaneously with the event. (Tr. 164).
That is strong evidence, without any information that says that the five members of the
investigative team did not interpret this correctly. (Tr. 164).
Mr. Norwood agreed that the Report was initiated contemporaneous but that he did not
know when the conclusions were reached. Jr. 164-165). Mr. Norwood testified that he did not
discount the testimony of description in Exhibit 3 that there was personnel error. (Tr. 165).
However, if someone in the switch yard thought he had the authority to put a coal unit on line
without contacting operations, that is the kind of event that is indicative of issues relating to
Page 20 of 20
communications, training, and management oversight. (Tr. 165). That is just common sense.
(Tr. 165).
Mr. Norwood testified that as far as management's responsibility, there are a number of
deficiencies shown by the report that go to management in terms of inadequate procedure,
inadequate training, inadequate management oversight, that should have been addressed. (Tr.
167). Mr. Norwood further testified that you should not have a situation where an employee out
at the substation is putting a coal unit on line. (Tr. 167). There was testimony today that these
employees talk to the operations personnel before going out to the line to get instructions. If that
had occurred, it would not be consistent with what happened because no operator would tell a
switchman to go out there and put the unit on line, close the breaker, whenever you want. There
was some kind of miscommunication. (Tr. at 167). It is apparent that the certification was not as
rigorous as it needed to be because there was a misunderstanding by the employee. (Tr. 167168). Mr. Norwood testified that the training must have been deficient because OG&E has
suggested some changes to make it clear that the control room operator had the authority and not
the system operator. (Tr. 168). There is no question that the report explicitly says that training
and certification were inadequate and that management, in terms of supervisory oversight, was
inadequate. (Tr. 168). Also, by just reading what happened it is clear that this outage resulted
from a management and personnel problem. (Tr. 168). The training program obviously wasn't
clear because there were revisions to the training. (Tr. 169).
Sur-Surrebuttal Testimony of Scott Norwood at July 18, 2012, Hearing
Mr. Norwood testified that the purpose of the personnel report that was given by the
supervisor to the employee was to communicate to the employee what he did wrong, whereas the
Incident Analysis Report is a much broader report that looks at the root causes of the outage,
which included both personnel error and, as noted explicitly, management deficiencies. (Tr.
170). The Incident Report is a broader analysis that looks at the overall failure. The personnel
report is the discussion with the employee to make him understand what he did wrong and what
he needed to do going forward; it has a narrower focus. Jr. 170). This was a serious event that
the Company took very seriously and it would not have published something that was going to
be widely distributed and used for making future changes and policies without taking it very
seriously. Jr. 171).

PUD 201100132 - David B. Dykeman

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