Promoting Joint Demonstration Projects as a Benefit for Utilities and Ratepayers

1. Promoting Joint Demonstration Projects as a Benefit for Utilities and Ratepayers Kevin C. Fitzgerald, Managing Partner, Troutman Sanders Washington DC Office

2. The Joint Demonstration Project Model • Multiple Utilities Share in Development of Technologies That Each Considers Valuable to Itself and Its Ratepayers • Share the Costs/Avoid Duplication • Share the Rewards

3. Advantages of Joint Demonstration Projects • Reduced Costs for Each Participant • Lower Per Project Cost Allows Involvement in Multiple Demonstration Projects, Instead of a Small Number of Solo Projects—a Diversified Portfolio • Especially for Small Utilities, Enables Entry into Larger Scale Projects

4. Who Might Participate in Joint Demonstration Projects with Utilities? • Anyone Who Believes that the Project is a Good Investment, Including: • Other Utilities • Independent Power Producers • Cooperatives • Fuel Producers • Government

5. Potential Contexts for Future Joint Demonstration Projects • Public Policy Trends Suggest Real Potential for Joint Demonstration Projects on: • Environmental Controls • Advanced Coal Technologies • Plant Efficiency Measures

6. Energy Policy Act of 2005 Promotes Joint Demonstration Projects • Federal Government Supports Joint Demonstration Project Model • Energy Research Consortium tax credit available to participants in joint demonstration projects coordinated by non‑profit entities • 26 U.S.C. § 41(a)(3) (tax credit for "20 percent of the amounts paid or incurred by the taxpayer in carrying on any trade or business of the taxpayer during the taxable year (including as contributions) to an energy research consortium")

7. What Do Joint Demonstration Projects Offer Regulators? • Low Cost Way to Bring Latest Technologies to Local Ratepayers • Reduced Risk from a Diversified Portfolio of Projects • Diversification Reduces Risk Exposure for Company and Ratepayers • Net Effect is Low Cost Access for Ratepayers to Wide Array of New Technologies and Those Technologies’ Benefits

8. Regulators Still Have a Role in Protecting the Public Interest • Regulators Have Same Role in Assessing Prudency of Regulated Utilities’ Investments in a Joint Demonstration Project as the Project were Pursued Independently • A Utility Still Has an Obligation Only to Pursue Projects That Appear to Have a Real Chance at Being Useful to Its Ratepayers

9. Applying Used & Useful to Joint Demonstration Projects • Joint Demonstration Projects Offer Benefits to All Participants—Not Just Host Site • Some Statutory Limitations May Exist: • At Least One State Defines Used & Useful to Require the Production of Electricity for the Utility’s Ratepayers • Local Evaluation of Laws is Important But the Real Usefulness of New Technology from Joint Projects Remains

10. Many States Have Started Down the Path to Joint Projects • Nevada Commission—Where a reasonable analysis of known information suggests that the benefits of the demonstration project will exceed its costs, the project should go forward (NV PSC Docket No. 03-12002 (2004)) • Louisiana Commission—It is appropriate to allocate costs in joint demonstration projects to each utility. (La PSC Docket No. R-29712 (May 18, 2007) (allocating a fraction of the costs of Nustart to Entergy for rate recovery))

11. Many States Have Started Down the Path to Joint Projects • Takeaways • The Nevada Commission Decision Highlights the Fact That a Complete Running Plant is Not Always Needed for a Project to Yield Benefits • The Louisiana Commission Decision Shows that Allocations to the Local Utility Can Be Done by State Regulators

12. Joint Demonstration Projects Fit & Complement Reasonable Rates Requirements • "It is the obligation of all regulated public utilities to operate with all reasonable economies." El Paso Natural Gas Co. v. FPC, 281 F.2d 567, 573 (5th Cir.) (1960), cert. denied, 366 U.S. 912 (1960). • The "Commission [...] may review the operating expenses of a utility and thereby prevent unreasonable costs for materials and services from being passed on to rate payers." General Telephone Co. of Upstate New York, Inc. v. Lundy, 218 N.E.2d 274, 277 (1966).

13. Joint Demonstration Projects Fit & Complement Reasonable Rates Requirements • Compare Joint Demonstration Projects to Reasonable Rate Obligation: • Adding Value to Customers with New Technology and • Doing so at a Lower Cost • In Many Cases, Joint Projects Will Be the Most Cost Effective Way to Reach Important Goals

14. Hypothetical • 4 Utilities and 1 IPP are Interested in Developing Carbon Capture Technology for Their Coal Plants. • Each Takes a 20% Stake in the Joint Demonstration Project • Estimated Total Project Cost: $10 Million

15. Hypothetical • Each Participant Contributes $2 Million • Each Participant Has Rights to Employ the Technological Gains from the Project • $8 Million ($10 Million - $2 Million) Savings for Each Participant Relative to Going Solo • Good for the IPP in a Competitive Market—More Profits • Good for the Ratepayers under Cost of Service Regulation—Lower Costs • Each Partner Benefits from the Addition of More Partners

16. Questions?