May 28, 2003 Dr. Burl W. Haar Executive Secretary Minnesota Public Utilities Commission 121 Seventh Place East, Suite 350 St. Paul, MN 55101 RE: Minnesota Pollution Control Agency’s Review of Xcel Energy’s Metropolitan Emission Reduction Proposal, Docket No. E002/M-02-633 Dear Dr. Haar: The Minnesota Pollution Control Agency (MPCA) is pleased to submit its reply comments on the Xcel Energy Metropolitan Emission Reduction Proposal (MERP). The MPCA believes that the Legislature’s purpose in passing the emissions reduction rider statute is best achieved by full approval of the Xcel Energy MERP Proposal. In these reply comments, the MPCA clarifies several points that have been made in the record to date, and offers perspectives on the comments filed by other parties on April 28, 2003. MPCA looks forward to working with the Commission and other interested parties as this matter moves toward decision. Please contact me at (651) 296-7302 or Assistant Commissioner Ann Seha at (651) 284-0382 if you or the Commission have any questions. Sincerely, Sheryl A. Corrigan Commissioner SAC/ds

Office of the Commissioner

Minnesota Pollution Control Agency

Xcel Energy Metropolitan Emission Reduction Project

Minnesota Pollution Control Agency Reply Comments

May 28, 2003

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MPCA Reply Comments

Metropolitan Emission Reduction Proposal

May 28, 2003

1.0 Introduction When the Federal Clean Air Act was passed in 1970, it exempted electric generation facilities that were already in place from the application of stringent air pollution control standards established under the act. At that time, the expectation was that as electric generation facilities matured, aged, and were retired they would be replaced with new, state of the art facilities that had excellent air pollution control. The Clean Air Act, however, had some unintended consequences. Power plants without air pollution control equipment cost less to operate than plants with air pollution control equipment. As a result, utility companies had an incentive to extend for as long as possible the operating lives of older power plants. In Minnesota’s case, 33 years after the Clean Air Act was passed, approximately 55% (over 3,000 megawatts) of base load and intermediate generating units are exempt from air pollution control performance standards for new sources. The continued operation of very old power plants has caused a growing concern about the need to dramatically reduce emissions from some of the oldest power plants in the nation’s electric generation system. States such as Colorado and North Carolina have taken action to reduce emissions within their borders. Other states, particularly in the northeastern United States, have been reducing emissions as part regional strategies to control smog and fine particle pollution in their region. At the same time, there are several national regulations in progress under the 1990 Amendments to the Clean Air Act, that will, in the next decade, reduce emissions from existing power plants in order to address such impacts as smog, fine particulate pollution, acid rain, and visibility impairment across the United States. There are also several proposals in Congress to substantiality reduce total emissions of key pollutants from the power generation sector by 70% (lowest number) or more (competing bills). All of these efforts recognize the need for very large reductions of multiple pollutants that are emitted by the nation’s fleet of old electric power plants. In Minnesota, this recognition prompted the Minnesota Legislature to enact an innovative approach for creating an incentive to dramatically reduce emissions from major existing power plants. The emission reduction rider statute, Minn. Stat. 216B.1692, has three main emphases. First, the statute provides utilities with incentives to design and voluntarily propose emission reduction projects for their existing power plants. Second, the statute requires the MPCA, using its expertise in the field of environmental science and regulation, to determine whether a proposed project qualifies under the statute and assess the benefits expected from and the appropriateness of the project. Finally, the statute asks the Public Utilities Commission (PUC) to determine whether the company’s

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proposal “appropriately achieves environmental benefits without unreasonable consumer costs.” The MPCA believes that the Legislature’s purpose in passing the emissions reduction rider statute is best achieved by full approval of the Xcel Energy MERP Proposal. In these reply comments, the MPCA clarifies several points that have been made in the record to date, and offers perspectives on the comments filed by other parties on April 28. In this reply comment, “Alternative” refers to the set of alternative projects Xcel included in its filing, the subject of the MPCA’s April 28, 2003 Report. “Proposal” refers to Xcel’s preferred project, the subject of the MPCA’s December 30, 2002 report. Analyses, definition of terms and concepts remains the same as previously described in the MPCA’s reports.

2.0 Summary

The MPCA has thoroughly evaluated Xcel’s Metropolitan Emission Reduction Project (MERP) Proposal and Alternative projects. The MPCA has demonstrated that the Proposal achieves the most cost effective emissions reductions of the two projects on a dollars per ton of pollution reduced basis. Available quantitative methods of assessing costs and benefits, with reasonable adjustments, demonstrate that the Proposal achieves benefits that approximate and most likely exceed, its costs. In addition, the MPCA has pointed out multiple issues in the emerging science of pollution impacts on human health and the environment that show on a qualitative basis that the MERP Proposal has many more benefits than any offered quantitative analysis can capture. The MPCA recommends that the Public Utilities Commission (PUC) approve the Proposal. The Alternative would apply emission controls at three old power plants, with significant health and environmental benefits. However, the MPCA has some concerns about the Alternative. First, the control technology proposed at High Bridge and Riverside does not represent the best technology. It would seem appropriate, if new controls are to be applied, to use the best technology available. Second, the Alternative does not include the costs of plant rehabilitation at High Bridge and Riverside. The MPCA completed its analysis of whether the Alternative qualifies under the statutory requirement to reduce emissions to the lowest cost-effective level, given the age and condition of the plant. The MPCA concludes at this time that the Alternative qualifies under this state statute. The MPCA also concludes that Xcel should consider whether it would be willing to install additional NOx controls on Riverside unit 8 because these would be considered cost-effective under federal law. When comparing the Alternative to the Proposal, the MPCA concludes that the Proposal is the superior project. The Proposal has greater reductions of more pollutants, installs the best control technology at all three plants, provides more local benefits, more new generating capacity, and more refurbished existing generating capacity. In addition, the

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Proposal appears to be more cost-effective than the Alternative. The Proposal’s quantified benefits approximate and most likely exceed its cost, and it provides numerous unquantified benefits as well. Finally, the MPCA has provided an analysis that shows that implementation of the primary Proposal should achieve full compliance by Xcel Energy with anticipated federal regulations likely to be in place in the next decade, as well as with the different proposals that are being considered by Congress to reduce power plant emissions. As the MPCA will discuss later in these reply comments, it is likely that some of the controls proposed in the Alternative may require additional work, and thus added costs, in future years to allow Xcel Energy to meet anticipated future requirements. The MPCA will not summarize further the results of its December 2002 analysis of the Proposal or its April 2003 analysis of the Alternative, and refers the PUC to the summaries provided in these two documents, and the detailed analysis they both provide. The remainder of this summary will highlight the key findings and analysis contained in these reply comments. The MPCA’s analysis of emission reductions is corrected to reflect that, under the Proposal, the coal-fired boilers High Bridge 3 and 4 are eliminated, but remain in operation, untouched, in the Alternative. MPCA has calculated the greater emission reductions achieved in the Proposal in these Reply Comments. The emission changes as a result of the Proposal are now larger than first described, that is, reductions are greater. High Bridge 3 and 4 are old boilers with very poor particulate matter controls, hence large reductions in particulate matter (PM10) and lead occur when eliminating these boilers. Xcel’s plans to rehabilitate the King boiler and turbine would reduce the amount of CO2 generated when producing electricity. While Xcel describes the improvements as lowering CO2 emissions per unit of fuel consumed, there are corresponding reductions in all pollutants because fuel is used more efficiently in generating electricity. Less particulate matter, sulfur dioxide, and mercury is released because less coal is being burned, meaning there is less of this material that needs to be collected in downstream control equipment. The MPCA staff concurs that the rehabilitation work at King would have an emission related benefit. The MPCA staff has reviewed the filing submitted by the Department of Commerce (DOC) to the PUC on April 28, 2003. MPCA commends the DOC for their work and agrees with their recommendations to the PUC regarding approval of Xcel’s Proposal. The MPCA staff appreciate DOC deferring to the MPCA’s findings on the seriousness of the health and environmental consequences of power plant emissions. While the MPCA analyses of Xcel’s Proposal and Alternative projects shows both quantifiable and qualitative benefits, the MPCA has concern that DOCs analysis greatly underestimates quantifiable benefits of the Proposal.

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• Eliminating the emissions from High Bridge Units 3 and 4 and continuing DOC’s treatment of benefits (e.g., to the year 2034 at Xcel’s interest rate) increases the benefits of the Proposal by about $25 million.

• In its July 2002 filing, Xcel projects a reduction in CO2 emissions; the MPCA

calculates an increase. Accounting for this change in CO2 emissions increases the benefits analysis of the Proposal by a few million dollars.

• In the analysis of mercury impacts, DOC assumes a unit rate that is off by four

orders of magnitude. The externality values were in dollars per pound of mercury released, not dollar per ton, as used by DOC. Also, MPCA’s proposed value for the upper end of the range is $9,781, not $4,359. These adjustments would increase the estimated benefits of eliminating mercury emissions in the Proposal from a low estimate of $4 million to a high estimate of $11 million.

• Regarding SO2 emissions the current allowance price is based on emissions at the

current national emission cap of 8.9 million tons per year. The law of supply and demand will most certainly result in a significant increase in the value of future allowances, because the cap is expected to be no more than 3 million tons in the near future. Also, as discussed in the MPCA December 30, 2002 filing, SO2 emissions are linked to the formation of fine particulate, the most health damaging environmental effect of power plant emissions. The SO2 allowance price does not internalize these costs, which are discussed in the MPCA’s December 2002 filing.

• The MPCA uses a lower discount rate for MERP’s environmental benefits than

Xcel or DOC. MERP’s financial components should be discounted at a rate that reflects Xcel’s financial condition. MERP’s environmental components however require a different treatment. The basis for evaluating community health impacts cannot and should not be made equivalent to the basis for making financial investment decisions. Risks differ significantly in the two different contexts. Financial markets evaluate individual firms’ business risk. For example, Xcel’s business risks have changed quite a lot in the past year, according to financial market evaluations. There is no market that evaluates community health. On the other hand, there is also no risk that reduced emissions will fail to improve community health. The risk premium included in financial discount rates should not influence community health evaluations.

The MPCA has used the 3% discount rate to value environmental and health benefits as approved by the Environmental Protection Agency’s (EPA) Science Advisory Board for EPA’s environmental benefit assessments. Applying such a rate to the treatment of environmental externalities by DOC would increase the DOC’s calculated benefits of the Proposal by $216 to $450 million.

• The cost of rehabilitation of High Bridge and Riverside is not included in Xcel’s

budget of the Alternative project for these plants, thus the costs were excluded

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from DOC’s analysis. The MPCA staff estimate that the capital cost of rehabilitation might be at least $200 million dollars in addition to the cost of the Alternative project.

• The DOC analysis does not account for the value of the addition of new capacity

provided for in the Proposal. Xcel has estimated that this avoided cost from adding new generating capacity has a value of approximately $700 million.

It is not likely that controlling air pollution from coal-burning power plants will become unnecessary, as scientific evidence continues to show health impacts from ever-smaller particles, acid deposition continues to impair lakes, and mercury deposition from the air into lakes continues to contaminate fish. Implementing a control project in the very near term will aid in keeping these projects’ cost reasonable. Further, while there has been discussion on how to quantify the value of health benefits from reducing power plant emissions, there is no disagreement that reducing power plant emissions results in health and environmental benefits of considerable consequence. Some of these benefits accrue immediately, like the reduced number of asthma attacks, some of them later, like lower mercury concentration in fish. Delaying the implementation of either the Proposal or Alternative project delays realizing these health benefits.

3.0 How the MPCA determines if a Project Qualifies The MPCA has interpreted the provisions of Minn. Stat. § 216B.1692, subd. 1 (3) to create three, progressively less stringent tiers, for approval of a proposal under the statute. The first requirement would qualify a project at an existing plant if it achieves compliance with applicable new source review standards under the federal Clean Air Act. MPCA has interpreted this provision to mean the application of the best available control technology (BACT) for new power plants under the Clean Air Act. Second, a project may quality if it would emit air pollutants at levels substantially lower than what would be allowed for new facilities by new source performance standards under the Clean Air Act. This requires a straight forward comparison of the expected emission rate from the project with the latest new source performance standard under the Clean Air Act. Upon a determination that the expected emission rate is “substantially lower”, the project would qualify. The MPCA interprets the third requirement in this section of the statute to be a requirement that the project could meet if the project is found to not be in compliance with the first two requirements. The corner stone of a finding under the third criterion is that it “would not be cost effective to reduce emissions to the levels in items one or two.” Once the project is found not to meet the first two criteria, a reduced level of pollution

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control could qualify a project under the statute if it is determined to be the lowest cost effective level given the age or condition of the generating unit. There has been some discussion about the application of new source review to existing sources, which would also consider the age and condition of the unit, as a way of qualifying a project under the third criterion. This is because, when an existing source triggers new source review requirements, the age and condition of the unit is considered when evaluating the cost per ton of pollutant removed during retrofitting. Similar to the type of analysis that would occur for existing sources under new source review, the MPCA believes the best interpretation of the third criterion is that it is a state air pollution control test established by the emission reduction rider statute, and does not require adherence to federal requirements of analysis in either the new source review program or the new source performance standards program.

4.0 Qualifying the Alternative project As described in MPCA’s December 2002 report in pages 7 and 8, emission standards set under new source review (NSR) are a result of a best available control technology (BACT) analysis by the project proposer, and a determination by the permitting authority that the proposal is BACT. BACT is necessary whenever a major source of air pollution emissions is constructed, or whenever an existing major source of air pollution emissions is modified that causes pollutant emissions to rise significantly.1 A BACT analysis is a case-by-case analysis conducted under specific federal guidance. For a proposal, all available means of controlling air pollution are identified, including changing the means of production, fuel cleaning or switching, and/or using add-on control equipment. EPA even directs project proposers and permitting authorities to consider control equipment available outside of the United States if it has practical potential application to the emission unit. After the control options are identified and the infeasible technologies eliminated, the energy, environmental and economic impacts of each control option is determined. The technology that reduces emissions by the greatest amount while meeting cost-effective values set the BACT limit. EPA has defined “cost-effectiveness” as the dollars per ton of pollutant emissions reduced. Average and incremental cost-effectiveness are the two economic criteria considered in the BACT analysis. The analysis is conducted on an annual basis, so both construction and operating costs must be estimated, as well as annual reductions in the pollutant being controlled.

1 The definition of “significant increase” is found in 40 CFR 60 52.21(b)(23)

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States log the results of BACT analyses so that future proposals are able to determine what technologies are feasible and what emission limit ranges have preceded any specific proposal. The MPCA did not undertake a site-specific BACT analysis that determines applicable emission limits. Rather, the MPCA described the likely outcome of a BACT analysis by describing what the BACT/LAER Clearinghouse contains for coal-fired and gas-fired units. The MPCA provided likely ranges of emission limits, and compared Xcel’s MERP projects to the median value of the range (that is, the middle value reported, not the average). The MPCA determined that the Proposal would result in all three generating stations meeting BACT—King meets BACT for a new coal-fired boiler, while the combined cycle (CC) stations at High Bridge and Riverside would meet BACT for new gas-fired CC turbines. The BACT analysis results in emission limits for the project. Analyses conducted prior to construction of a new facility can result in emission limits that are more stringent than an analyses conducted for modifying or reconstructing existing facilities. Technology and efficiency improvements that result in lower air emissions can be incorporated into the construction of new emission facilities. Because existing equipment can limit the choice and ability to incorporate new technology developments, BACT limits for retrofits at times may be less stringent. One thing a BACT analyses is not is an assessment of the economic situation of the individual source. Control alternatives cannot be eliminated from consideration based on affordability by the facility owner. The cost of control alternatives identified as BACT that have been successfully employed within an emissions source group means that the industry has incorporated that level of control into the cost of doing business. Xcel therefore cannot claim that selective catalytic reduction (SCR) as a retrofit technology for NOx control can be eliminated as BACT based on the likelihood that SCR would render it uneconomical to operate, as stated in its reply to DOC IR 38. Rather, Xcel must demonstrate that the cost-effectiveness of SCR, in terms of dollars per ton of NOx removed, exceeds U.S. EPA guidelines of cost-effectiveness for this pollutant. This continues with the next-higher technology identified for reducing NOx: comparing its cost-effectiveness to EPA guidelines. It is also at this time that the incremental cost of reducing NOx can be assessed; how much more does it cost to achieve greater reductions by using a better technology?

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Xcel provided some additional information about the use of SCR in follow-up information provided to the MPCA on May 23, 20032. Xcel believes that based on its estimate of NOx controls at Riverside and High Bridge, the cost of additional NOx reductions is as follows:

High Bridge 5 and 6 Riverside 7

Riverside 8

$/ton/yr $/ton/yr LNB/OFA3 $300 to 600 $50 OFA/LNB/NN $350 to 600 $50 OFA/LNB/NN/SCR $11,000-$15,000 $4000

The boiler at Riverside Unit 8 is a cyclone boiler, a type of boiler that due to its method for burning coal creates a very large amount of NOx. The boiler units at Riverside 6/7 and High Bridge are wall-fired pulverized coal units, and generate considerably less NOx during combustion. SCR can control NOx from a cyclone boiler results at a relatively lower cost per ton of NOx removed because the amount of NOx removed is very high—the MPCA estimates NOx reductions at Riverside 8 with SCR to be about 6000 tons per year, about a 90% reduction in the amount of NOx released each year from this unit. The Alternative proposes a cheaper method of NOx control, achieving about a 50% reduction in NOx emissions from this unit. It is appropriate to consider using SCR at Riverside 8. Of the three plants involved in this emissions reduction project, Riverside is described as being in the best shape4. While Xcel reports that after rehabilitation the book value of Riverside 8 is 15 years5, technical assessments of the generating unit describe the remaining useful life of the boiler, turbine and generator is well beyond this book life, and potentially extends a couple decades. SCR retrofitting is becoming a common activity at power plants throughout the United States to meet various environmental requirements. EPA’s guidance for evaluating current BACT analyses describes cost-effective NOx control at $6,000 per ton of NOx removed. Xcel’s calculated incremental cost of NOx removal at Riverside 8 is well below this value at $4,000/ton of NOx removed. NOx control when using SCR on the other boilers is well beyond $6,000/ton, and further analysis would not likely lower this estimate. SCR would clearly be required under a BACT analysis for Riverside 8. However, there is considerable difference in the cost per ton of NOx removed between what has been proposed in the Alternative and the use of SCR in Riverside 8.

2 Ronald W. Elsner, Xcel, in letter to David Thornton, MPCA. May 23, 2003. 3 LNB=low NOx burners; OFA=overfire air; NN=neural networks; SCR=selective catalytic reduction. 4 The plant is fully depreciated by Xcel in 2014. Xcel Supplemental Filing, April 28, 2003. 5 Xcel MPCA IR Response No. 24, April 30, 2002.

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The MPCA is not bound by federal BACT analysis requirements in determining whether a project would qualify. The MPCA therefore concludes that the Alternative project qualifies under Minn. Stat. § 216B.1692, subd. 1. The MPCA also concludes that Xcel should consider whether it would be willing to install additional NOx controls at Riverside 8 because these would be considered cost-effective under federal law.

5.0 Emission Estimate Corrections and Emission Impact of King Boiler Refurbishment 5.1 Emission reductions of the Proposal are greater than previously presented by Xcel or the MPCA. In preparing its review of the Alternative, the MPCA staff realized that under the Proposal, the coal-fired boilers High Bridge 3 and 4 are eliminated, but remain in operation, untouched, with no added controls, in the Alternative. Emissions reductions from eliminating units 3 and 4 were not accounted for in the Proposal. In reviewing the Proposal, MPCA staff did not catch this omission. Xcel subsequently provided a recalculation of emission reductions when High Bridge 3 and 4 emissions are properly accounted for (reply MPCA 22-Attachment A). Emission reductions as a result of the Proposal and Alternative project are shown below.

SO2 NOX PM10 CO2 CO Lead6 Mercury1

Emissions, 3+4, tpy 580 810 60 291,000 50 1007 138

Proposal Emissions change (in tons per year)

-32,460 -22,870 -670 -1,104,603 0 160 -191

Percentage change -95 -94.5 -70.3 -9.2 0 -60 -81

Alternative Emissions change (in tons per year)

-29,963 -16,146 -322 443,628 531 42 -14

Percentage Change -87.7 -66.7 -33.8 6.8 61.8 15.8 -7

The emission changes as a result of the Proposal are now slightly larger than first described, that is, reductions are greater. High Bridge 3 and 4 are old boilers with very

6 Emissions of lead and mercury are reported in pounds per year. 7 Lead emissions from High Bridge 3 and 4 are taken from MPCA’s annual criteria emissions inventory. 8 The MPCA estimated mercury emissions from High Bridge 3 and 4 as 13 pounds in its public notice of the Minnesota mercury emissions inventory in September 2002. The total reduction of mercury at High Bridge under the Proposal is 79 pounds (66 pounds from High Bridge 5 and 6, 13 pounds from High Bridge 3 and 4). The mercury emissions inventory can be found at www.pca.state.mn.us/news/publicnotice/pn092302-attachment.pdf

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poor particulate matter controls, hence large reductions in particulate matter (PM10) and lead occur when eliminating these boilers. Xcel also recalculated the environmental cost of emissions from High Bridge (reply MPCA 23- Attachments A and B, 5/2/03). When emissions from High Bridge are properly accounted for, using the PUC’s low and high externality values, Xcel calculates environmental benefits of the Proposal in the range of $62 to $142 million using the PUC’s low and high externalities values, compared to the previous Proposal calculation of $58 to $127 million. After accounting for benefits that extend to the year 2040 and a more appropriate discount rate (see MPCA December 30, 2002 filing pages 38-41) the new estimated benefits using only the PUC’s low and high externality values become $310 to $680 million, an increase of about $180 million from the previous high externality estimate.

5.2 The rehabilitation of the A.S. King boilers reduces air emissions. Xcel describes how it views the rehabilitation work undertaken at the King plant contributing to reduced air emissions in its April 28, 2003 Supplemental filing (recap of proposal-5). Xcel states that a series of efficiency improvements—burning coal more thoroughly, improving the conversion of heat to steam, converting more thermal energy to mechanical energy in a turbine—result in releasing less CO2 for each kilowatt-hour of electricity produced. Reductions in releases of CO2 might be accomplished in many ways, but improving the efficiency of the use of coal, that is, using less electricity overall, and using less coal to generate electricity, is an important step in slowing the growth of CO2 releases from the electricity-generating sector of the US economy. Xcel’s plans to rehabilitate the boiler and turbine would indeed reduce the amount of CO2 generated when producing electricity. Xcel reported the CO2 release rates in its August 2002 reply to MPCA 1: 205 lbs of CO2 is released for every million Btu’s of fuel burned (lb/mmBtu), and after rehabilitation, 199 lb/mmBtu of CO2 is released. The total amount of CO2 released from King under the Proposal increases, due to the increased generating capacity and utilization. While Xcel describes the improvements as lowering CO2 emissions per unit of fuel burned, there are corresponding reductions in all pollutants because fuel is used more efficiently in generating electricity. Less particulate matter, sulfur dioxide, and mercury is released because less coal is being burned, meaning there is less of this material that needs to be collected in downstream control equipment. The MPCA staff concurs that the rehabilitation work at King would have an emission related benefit.

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6.0 Comments on Department of Commerce’s Cost/Benefit Analysis The MPCA has reviewed the filing submitted by the Department of Commerce (DOC) to the PUC on April 28, 2003. MPCA commends the DOC for their work and agrees with their recommendations to the PUC regarding approval of Xcel’s Proposal. The MPCA appreciates DOC’s deferral to the MPCA’s findings of the seriousness of the health and environmental consequences of power plant emissions, both those that are quantifiable and those that are qualitative. While the MPCA analyses of Xcel’s Proposal and Alternative projects shows both quantifiable and qualitative benefits, the MPCA believes that in several respects, DOCs analysis substantially underestimates the quantifiable benefits of the Proposal.9

6.1 Emission reductions from High Bridge 3 and 4 were not accounted for in Xcel’s proposal.

As discussed above, Xcel did not account for the reduction in emissions that would result from shutting down High Bridge 3 and 4 under their Proposal. All parties failed to catch that omission. Eliminating the emissions and continuing DOC’s treatment of benefits (e.g., to the year 2034 at Xcel’s interest rate) increases the benefits of the Proposal by about $25 million.

6.2 CO2 Emissions of the Alternative are higher than Xcel’s or DOC’s estimate. The MPCA differs from Xcel in the assessment of CO2 emissions under the Alternative. In its July 2002 filing, Xcel projects a reduction in CO2 emissions; the MPCA calculates an increase. This is because while there is a small decrease in CO2 emissions at Riverside and High Bridge due to increased efficiency, there is a larger increase in emissions at King due to an increased plant capacity. The MPCA calculated CO2 emissions by using plant utilization and CO2 emission rates for baseline conditions and the Alternative. The rates for the baseline condition, the Proposal and the Alternative were provided by Xcel in reply to the MPCA information request number 1. (Reply MPCA 1, August 26, 2002). MPCA calculations show that if future plant utilization rates were to be at or near the projected annual averages, total CO2 emissions increase. CO2 emissions decrease slightly when burning coal at High Bridge and at Riverside, but because there is a substantial increase in the utilization rate at King from baseline conditions to projected future use at King (from 70 percent to 82 percent utilization), the overall emissions of CO2 increases. 9 If Xcel were to decide to install SCR controls for NOx at Riverside 8, the cost of this change will increase the cost of the Alternative project by about $70 million.

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Accounting for this change in CO2 emissions increases the benefits analysis for the Proposal by a few million dollars.

6.3 The environmental cost of mercury is considerably higher than calculated. A number of elements in the DOC estimate for the benefits from reducing mercury emissions are incorrect. They are presented here in order of their likely significance in the total benefits estimate:

• In the analysis of mercury impacts, DOC assumes a unit rate that is off by four orders of magnitude. In the analysis, DOC used an environmental externality value from the original externalities proceeding, however, an error was made in the units. The values discussed during the proceedings were in terms of dollars per pound of mercury released, not dollar per ton, as used by DOC. (p. 19) (see MPCA Initial Brief, p. 25).

• A second error has occurred in using this value. MPCA’s proposed value for the

upper end of the range was $9,781, not $4,359. (Op. cit.) It may be that DOC confused the MPCA proposal with a proposal made by the Residential Utilities Division of the Office of the Attorney General. That group proposed a mercury cost range of $1,429 per pound to $4,359 per pound. (See Findings of Fact and Conclusions, Klein, par. 142.)

• Emission reduction estimates should be corrected. DOC assumes total mercury

emission reductions will be just over 250 pounds per year. MPCA estimates current mercury reductions under the Proposal will be just over 191 pounds, recognizing that High Bridge Units 3 and 4 mercury emissions are also eliminated under the Proposal. The reductions are as follows: King 14 pounds High Bridge 76 pounds Riverside 98 pounds Adjusting the emission reduction estimate will lower the total cost estimate, but the change will be small. .

These adjustments would increase the estimated benefits of the Proposal in eliminating mercury emissions from the Riverside and High Bridge plants from a low estimate of $4 million to a high estimate of $11 million.

6.4 The value of SO2 allowances is likely underestimated. The DOC has recognized that the PUC externality values do not properly account for the benefits of reducing sulfur dioxide emissions. To adjust for that, DOC has used a dollar

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per ton value representative of the current cost of national SO2 allowances. This dollar value significantly underestimates the future value of SO2 reductions in two ways. First, the current allowance value is based on emissions under the current national emission cap of 8.9 million tons per year. Because of pending federal legislation and/or regulations anticipated under the 1990 Clean Air Act Amendments such as the Bush Administration’s Clear Skies bill, the cap for SO2 emission is expected to be reduced by at least 70% (a nationwide SO2 cap of 3 million tons). The law of supply and demand will most certainly result in a significant increase in the value of future allowances. It is difficult to speculate how big the increase may be. Second, as discussed in the MPCA December 30, 2002 filing, SO2 emissions are linked to the formation of fine particulate, the most health damaging environmental effect of power plant emissions. Allowance prices do not relate to environmental harm, but to the market conditions for the allowance. If the environmental benefits related to SO2 reductions were quantified in an externality value or tied in some fashion to the allowance price, the value would be much higher.10

6.5 Public health benefits should not be equated with financial market risk. A discount rate of 3% is the more appropriate rate at which to value the public health benefits of the Proposal. Xcel Energy, MPCA and the Department of Commerce all recognize the need to discount cost and benefit estimates. Xcel and DOC believe costs and benefits should be discounted at the same rate. The MPCA uses a lower discount rate for MERP’s environmental benefits. The reasons for this are outlined in the MPCA’s December 30, 2002 filing and are not repeated here (MPCA December 2002 at 39-40). In its comments, DOC suggests that private discount rates should apply to social benefits because this practice will cause Xcel to “internalize” social cost. The MPCA disagrees. Pollutant emissions harm people, and reducing emissions leads to real improvement in community health. A benefit-cost analysis has nothing to do with the question of whether polluting firms internalize environmental cost. Benefit-cost analyses simply look to see whether total benefits exceed total costs. The question of how costs should be distributed is normally set aside until after analysts have figured out whether a project is worth undertaking. MERP’s financial components should be discounted at a rate that reflects Xcel’s financial condition. MERP’s environmental components require a different treatment. The basis 10 SO2 allowance prices nearly tripled between 1996 and 1999, not due to changes in environmental costs, but because market conditions changed. Allowance prices are influenced by: a) the prices of fuels, b) the cost of emission control equipment, c) demand for electricity, d) capacity of the generation-transmission-distribution network, and e) interest rates - among other things. Even under the current 8.9 million ton cap, the price has been well over $200 at different times in the past.

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for evaluating community health impacts cannot and should not be made equivalent to the basis for making financial investment decisions. Risks differ significantly in the two different contexts. Financial markets evaluate individual firms’ business risk. For example, Xcel’s business risks have changed quite a lot in the past year, according to financial market evaluations. There is no market that evaluates community health. On the other hand, there is also no risk that reduced emissions will fail to improve community health. The risk premium included in financial discount rates should not influence community health evaluations. The MPCA continues to believe that it is more appropriate to evaluate environmental benefits using the same methods as used by the EPA in evaluating national emission control programs for power plants or other industrial sectors. The MPCA has used the 3% discount rate to value environmental and health benefits as approved by the Environmental Protection Agency’s (EPA) Science Advisory Board for EPA’s environmental benefit assessments. Applying such a rate to the treatment of environmental externalities by DOC would increase the DOC’s calculated benefits of the Proposal by $216 to $450 million.

6.6 Cost/benefit analyses should take into account avoided costs. DOC’s cost/benefit analysis does not take into account avoided costs of the Proposal or Alternative. First, the rehabilitation costs of High Bridge and Riverside have not been included in the DOC analysis. This is a real cost but has so far been neglected, either as a cost of the Alternative project, or as an avoided cost of the Proposal. This cost should be estimated and added to the cost of the Alternative. In contrast, all costs are included in the Proposal. DOC has assumed that Xcel’s Alternative project would essentially represent a “do nothing” scenario. This is because DOC assumes that without MERP, Xcel would ultimately undergo these changes at some point in order to keep these plants running, as it would be less expensive than total replacement at a different location or to purchase replacement power. DOC then used the costs of the Alternative described in the July 2002 filing as a “baseline case” to which the Proposal was compared. Part of the basis for this assumption by DOC is based on the expectation that Xcel would choose to rehabilitate and retrofit these plants instead of replacing them with new facilities or purchased power. Unfortunately, the cost of rehabilitation of High Bridge and Riverside is not included in Xcel’s budget of the Alternative project for these plants, thus the costs were excluded from DOC’s analysis. The MPCA staff estimate that the capital cost of rehabilitation might be at least $200 million dollars in addition to the cost

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of the Alternative project. 11In order to present this scenario as DOC envisions it, DOC’s assumed baseline case capital cost should be increased. Second, the DOC analysis does not account for the value of the addition of new capacity provided for in the Proposal. Xcel plans through the Proposal to increase its capacity to generate electricity by 385 megawatts. The value of this added capacity should be subtracted from the cost of the Proposal. Xcel has estimated that this avoided cost from adding new generating capacity has a value of approximately $700 million. Since Xcel will need to add this capacity one way or the other, including its cost in the Proposal but not the Alternative does not result in an appropriate comparison of the worth of the respective projects.

6.7 Summary of Comments on DOC Cost/Benefit Analysis Two of the items described above have a relatively small effect on the cost/benefit analysis conducted by the DOC. DOC currently calculates the present net value of environmental benefits to be $278 million. Properly accounting for the change in emissions from High Bridge and the externalities related to mercury would increase DOC’s estimate of the Proposal’s benefits to be $314 million. The other issues that MPCA have raised about DOC’s analysis have a much larger effect on the cost/benefit accounting process. These three--the capital cost of rehabilitation at High Bridge and Riverside (at least $200 million) under the Alternative, the value of the new generating capacity ($700 million) in the Proposal, and adjusting the discount rate applied to the benefits ($450 million)—increases the quantified benefits of the Proposal by well over one billion dollars.

7.0 The cost of waiting. It is not likely that controlling air pollution from coal-burning power plants will become unnecessary, as scientific evidence continues to show health impacts from ever-smaller particles, acid deposition continues to impair lakes, and mercury deposition from the air into lakes continues to contaminate fish. Given the growing links of human exposure to ozone and fine particulates with specific widespread and preventable health effects, more stringent emission limits for SO2 and NOx are under discussion at the national level. The Bush Administration has proposed the Clear Skies Initiative (CSI) to address power plant emissions. The Administration’s proposal would set national caps for SO2, NOx and mercury releases, and then requires affected facilities to control emissions, or buy credits from better-controlled facilities. The caps are proposed to first come into effect in 2010, with a downward ratcheting in 2018.

11 This number is an estimate scaled from the King Plant refurbishment costs, and is not an adequate substitute for a calculation of expected costs to refurbish High Bridge and Riverside boilers.

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EPA modeled the nation’s electricity generating system to determine what reductions occur under the proposed cap. The modeling shows that the Proposal achieves the greatest reductions in air emissions, but the Alternative project does not achieve the same level of reductions that would occur under CSI.12 Xcel’s claim of the MERP Proposal providing regulatory certainty thus appears to have merit. Implementing the Proposal would mean little or no future changes under federal regulatory changes. The notion that early action might lead to a reasonably-priced project also has weight. Because the entire country will be involved in the planning and installation of air pollution control devices, there will be capacity demands for engineering, financial, equipment and construction services, making retrofit projects that much more difficult and expensive. Xcel in its April 28, 2003 Supplemental Filing made reference to EPA’s assessment of such capacities in the United States. EPA completed an analysis of the engineering and economic factors of installing air pollution control technologies to meet the requirement of CSI.13 Besides finding a shortage in the availability of boilermaker labor to meet demand, EPA also learned that the time allowed for installation of control equipment is an important factor, especially for the near term (up to year 2010). This is because the market’s response to the increased demand for materials and services will not be instantaneous. As the amount of time provided to install control technologies decreases, the accelerated installation of the equipment increases its cost of compliance. While this was a caution to EPA and Congress to consider the market’s ability to respond to a compliance deadline, it also points out that careful planning well ahead of time allows for better control of costs. Implementing a control project in the very near term, while demand is not driven by federal regulation, will aid in keeping these projects’ cost reasonable. Further, while there has been discussion on how to quantify the value of health benefits from reducing power plant emissions, there is no disagreement that reducing power plant emissions results in health and environmental benefits of considerable consequence. Some of these benefits accrue immediately, like the reduced number of asthma attacks, some of them later, like lower mercury concentration in fish. Delaying the implementation of either the Proposal or Alternative project delays realizing the health benefits, which are real. These two factors, acting to ensure regulatory certainty and to control costs, are also important when considering whether to simply wait until a plant demands rehabilitation. Generating electricity creates a great deal of pollutants; a key method of lowering pollution is to change the way combustion occurs. Simply reviewing the Alternative project shows that changes can be slight to achieve reductions (neural networks on a boiler for better fuel/air use), or can be massive (rehabilitating a boiler, adding SCR for 12 Emissions information extracted from modeling conducted by EPA. Modeling results are available from EPA’s website: http://www.epa.gov/airmarkets/epa-ipm/results.html 13 U.S. EPA, 2002. Engineering and Economic Factors Affecting the Installation of Control Technologies for Multipollutant Strategies. Office of Research and Development, October 2002. EPA-600/R-02/073

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NOx control). A central element in a plant rehabilitation project is understanding the degree of rehabilitation necessary—literally, how much of this plant is salvageable, how much of it must be replaced because of existing or pending environmental regulations. If regulations are uncertain, a project’s scope and related costs are uncertain. It seems that in general, if a project is reasonable in scope and cost, provides the expected benefits and is affordable, then waiting only delays the decision, delays benefits, and potentially increases the cost of the project.

8.0 Procedural Comments The PUC specifically asked for comments related to the issue of public hearings, and procedures that would lead to a final decision. The MPCA recommends that the PUC, if it decides to conduct public hearings on the project, conduct four public hearings. First, the MPCA believes that the Commission should conduct a hearing to receive public comment at a place near the location of each affected power plant. This would give the PUC a feel for the community concerns about these plants and how involved the community has been in designing the legislation and in Xcel’s development of the Proposal before this matter came before the PUC. In addition, because the PUC wants to hear from ratepayers who are not in the neighborhood of each of the power plants, the MPCA recommends that the PUC conduct one additional public hearing at an area in Xcel Energy’s service territory that is not deemed near any of the three power plants that are the subject of the Proposal. The MPCA believes that Xcel Energy’s MERP Proposal, as well as the Alternative, have been the subject of thorough evaluation since the time Xcel held community meetings while evaluating potential options and then announced its Proposal in May of 2002. In the year since the Proposal was presented to the public, it has been subject of detailed analysis at the MPCA, the Department of Commerce and by other interested parties in this proceeding. The MPCA believes that, therefore, the record is complete in this matter, and the Commission should proceed to hear the arguments of the parties and make its decision on Xcel’s petition. The MPCA believes that the Department of Commerce has suggested reasonable modifications to the Proposal to assure cost discipline as Xcel proceeds to implement these projects, and that the MPCA’s analysis demonstrates the superior environmental performance and benefits of the MERP Proposal. To the extent that the PUC wishes to have the opportunity for further questions and information, the MPCA suggests that be handled with meetings directly in front of the Commission, so that information can be freely exchanged and provided directly to the PUC. The MPCA does not believe that either a series of task forces or a contested case hearing is necessary.

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The MPCA understands that this proceeding has been different than a typical proceeding before this Commission, because the mechanism for cost recovery for those projects has been worked out by the parties in front of the Minnesota Legislature in 2001, and in the discussions and analysis of Xcel’s Proposal since it was first announced over a year ago, well before the rate rider proposal was formally heard before the PUC. This discussion has been thorough, and a wide variety of interested parties have evaluated Xcel’s proposal, the MPCA’s analysis, and the Department of Commerce’s analysis of natural gas supply and cost issues. The MPCA encourages the Commission to expeditiously consider this filing.

9.0 Conclusion Xcel Energy’s MERP Proposal would achieve enormous reductions in key air pollutant emissions in the State of Minnesota. This project would implement some of the most significant reductions seen in Minnesota since the Clean Air Act was passed, and MPCA started implementing air pollution control regulations. The MPCA evaluated this proposal like it would evaluate any other pollution control project put forward by other industrial sectors. The MPCA performed both a quantitative and a qualitative analysis of the Proposal’s benefits, and demonstrated that the proposed costs for these projects where with in the range being experienced today in the United States for other utilities that are performing this sort of work, and discussed emerging issues in environmental science and pollution control that indicate that while quantitative benefits of the Proposal likely exceed or at least equal its costs, there are several important qualitative benefits that leave no doubt that the MERP Proposal is appropriate and should be approved. In the emission rider statute, the Legislature recognized that the MPCA should apply its expertise on the latest developments in environmental and human health effects of air pollution, the cost and effectiveness of air pollution control equipment and the benefits of proposed projects. The MERP Proposal is more the cost effective than the Alternative and addresses issues that the alternative proposal would not touch. As one example, while the primary proposal would result in significant reductions in mercury emissions in the State, the Alternative does not reduce mercury emissions at all. The Proposal, in addition to its air pollution reduction benefits, would create cost effective new power for Xcel Energy’s system at existing sites near load centers, with no additional electric transmission costs. The MPCA also notes the comments made by both Xcel Energy and the Department of Commerce that the addition of increased natural gas capacity to the Xcel system could increase the ability of Xcel Energy to take on and properly manage additional wind power in the future. Pollution control equipment is sufficiently expensive that many companies found it in their interest to continue to operate older, grandfathered power plants way past the expectation of any of the authors of the 1970 Clean Air Act. The important and historic change that the MERP Proposal represents has been brought about in part by increased community awareness and concern about power plant emissions, and the continuing

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development of environmental science and knowledge of effects of air pollution on human health and the environment. In addition, companies like Xcel Energy are realizing that proactive, well planned efforts to control pollution from older plants will avoid more costly, piece-meal, and uncertain impacts from future regulatory requirements, and secure important environmental and public health improvements.

This voluntary, forward-looking proposal is exactly what the Legislature envisioned when it passed the emission reduction rider statute. The MERP Proposal represents an historic opportunity for the Public Utilities Commission to approve implementation of huge air pollution emissions reductions, modernization of three of Xcel Energy’s Metropolitan electric utility plants, and reaffirm Minnesota’s leadership position in the protection of health and the environment.