BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO DOCKET NO. 13A ______E ______________________________________________________________________________ IN THE MATTER OF THE APPLICATION OF BLACK HILLS/COLORADO ELECTRIC UTILITY COMPANY, LP, FOR A CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY TO CONSTRUCT A POWER PLANT CONSISTING OF A 40 MW SIMPLE CYCLE COMBUSTION TURBINE AND ASSOCIATED BALANCE OF PLANT PURSUANT TO COMMISSION DECISION NO. C12-1434. ______________________________________________________________________________

DIRECT TESTIMONY OF

MARK L. LUX

ON BEHALF OF

BLACK HILLS/COLORADO ELECTRIC UTILITY COMPANY, LP

April 30, 2013

NOTICE OF CONFIDENTIALITY:

A PORTION OF THIS DOCUMENT HAS BEEN FILED UNDER SEAL:

EXHIBITS ML-1, ML-4 AND ML-5

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Table of Contents

SECTION PAGE I. INTRODUCTION AND QUALIFICATIONS ..................................................... 1

II. PURPOSE OF TESTIMONY ................................................................................ 1

III. DESCRIPTION OF LM6000 TURBINE .............................................................. 2

IV. GENERAL DESCRIPTION OF THE PLANT ..................................................... 7

V. INFRASTRUCTURE ............................................................................................ 9

VI. ENVIRONMENTAL COMPLIANCE ................................................................ 10

VII. CONSTRUCTION TIMELINE ........................................................................... 11

VIII. PROJECT SCOPE ............................................................................................... 12

IX. PROJECT PLAN ................................................................................................. 13

X. CAPITAL COSTS ............................................................................................... 14

XI. POINT COST CAP .............................................................................................. 15

XII. CONCLUSION .................................................................................................... 17

List of Exhibits

Exhibit ML-1:

Highly Confidential: Capital Cost Comparison, Air- vs. Wet-Chilled

Exhibit ML-2: Standard Large Generator Interconnection Agreement (LGIA)

Exhibit ML-3: Construction Timeline

Exhibit ML-4: Highly Confidential: EPC and Owners Costs

Exhibit ML-5: Exhibit ML-6:

Highly Confidential: SAIC R.W. Beck Fairness Opinions Incentive-Sharing Mechanism Calculation Methodology

1

DIRECT TESTIMONY OF MARK LUX 1

I. INTRODUCTION AND QUALIFICATIONS 2

Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 3

A. My name is Mark L. Lux. My business address is 1515 Wynkoop Street, Suite 4

500, Denver, Colorado 80202. 5

Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? 6

A. I am employed by Black Hills Service Company, a wholly-owned subsidiary of 7

Black Hills Corporation. I am Vice President and General Manager, Power 8

Delivery, Regulated and Non-Regulated Generation. 9

Q. ON WHOSE BEHALF ARE YOU TESTIFYING? 10

A. I am testifying on behalf of Black Hills/Colorado Electric Utility Company, LP 11

(the Company or Black Hills). 12

Q. WHAT ARE YOUR DUTIES AND RESPONSIBILITIES AS VICE 13

PRESENT AND GENERAL MANAGER, POWER DELIVERY? 14

A. I am responsible for the construction and operation of the electric power 15

generation and coal mining assets, owned by Black Hills Corporation subsidiaries, 16

including those owned by Black Hills/Colorado Electric Utility Company, LP. My 17

employment history and experience is provided in Appendix A. 18

Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THIS COMMISSION? 19

A. Yes. 20

II. PURPOSE OF TESTIMONY 21

Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? 22

2

A. The purpose of my testimony is to describe the LM60001 turbine, including 1

location, ownership, employee additions, existing infrastructure, environmental 2

compliance, construction timeline, project plan, capital costs, the Point Cost Cap, 3

and the proposed incentive-sharing mechanism. 4

Q. WHAT IS YOUR RECOMMENDATION? 5

A. I support the Companys application to build a LM6000 natural gas-fired turbine 6

at the Pueblo Airport Generating Station (PAGS). It complies with Commission 7

Decision No. C12-1434 because it replaces 42 MW2 of generating capacity retired 8

at the Clark Station with a resource of similar size and has been justified through 9

the Electric Resource Planning (ERP) process. Building an LM6000 natural gas-10

fired turbine plant will control cost by efficiently utilizing infrastructure at PAGS. 11

Importantly, a firm cost Point Cost Cap will limit cost risk to customers, 12

absent extraordinary circumstances.3 13

III. DESCRIPTION OF LM6000 TURBINE 14

Q. PLEASE DESCRIBE THE LM6000 TURBINE. 15

A. The Company is proposing to build and own a power plant consisting of an 16

LM6000 aeroderivative natural gas fired turbine and associated balance of plant 17

equipment to be located at PAGS (The Plant). The Plant will consist of a turbine, 18

generator and transformer interconnected to an existing substation and fuel supply 19

1 All references herein to LM6000 or General Electric LM6000 or GE LM6000 do not represent a commitment to purchase; but instead, represent a proposal for a 40 MW simple-cycle, aeroderivative gas-fired turbine that will be defined by the Companys vendor selection process. 2 The replacement capacity of Clark Station is 42 MW as referenced in Black Hills Clean Air-Clean Jobs Act Plan (Docket No. 10M-254E). The actual capacity is now 40 MW because one set of cables was removed from each phase of Clark Station Unit 1 in 2011, reducing the units capability from 18 MW to 16 MW. 3 I define extraordinary circumstances as circumstances that are unforeseen and beyond our control.

3

piping system. The Plant will be electrically interconnected to an existing 115 kV 1

substation located adjacent to PAGS. The 115 kV interconnected substation is 2

designed for reliability, having five outgoing transmission lines feeding customer 3

loads. To ensure reliability and to address geographic risk, two of the five power 4

lines can be out of service and the facility can still provide 100% capacity output 5

from PAGS delivered to customer loads. Additionally, the fuel will be supplied 6

through two existing 100% redundant interconnected natural gas piping systems 7

that are installed at the plant location, are connected to Colorado Interstate Gas 8

Company, and have sufficient capacity to support all of PAGS including the 9

Plant. The redundancy of interconnecting electric and gas facilities ensures 10

reliability. No other known independent power plants available to serve the 11

Company loads within the State of Colorado would provide interconnection 12

facilities with such high probability for reliability as those designed at PAGS. 13

Geography risk is greatly reduced as a result of this redundancy. 14

The preliminary design of the Plant uses a General Electric model 15

LM6000PF combustion turbine generator (CTG). At summer ambient 16

temperatures, the CTG will provide 38.5 MW of net generating capacity. To 17

meet air emission requirements the Plant will be equipped with dry low emission 18

(DLE) combustors and selective catalytic reduction (SCR) to control nitrogen 19

oxide (NOx) emissions, as well as catalyst to control carbon monoxide (CO) 20

emissions. The CTG is able to ramp to 100% of net generating capacity output in 21

10 minutes at a rate of 10 MW per minute. These features enable the flexible 22

regulation services for intermittency of load on the Black Hills system. 23

4

Q. WHAT IS BLACK HILLS PREVIOUS EXPERIENCE WITH LM6000 1

TURBINES? 2

A. Black Hills Corporation (BHC) has constructed, owned and operated LM6000 3

turbines for the past 12 years. BHCs subsidiaries currently own and operate 4

seven LM6000 turbines and are constructing three new LM6000s to be completed 5

in 2014. In previous years, BHC operated fifteen LM6000 turbines at its 6

generating plant in Nevada (Las Vegas) and in Colorado (Boulder, Denver, and 7

Fountain). These plants were sold in 2008 after the corporations acquisition of 8

the Aquila regulated utility assets. In summary, we have operated twenty-two 9

LM6000 units in total. 10

Q. WHAT IS THE AVAILABILITY FACTOR AS A MEASURE OF A UNITS 11

OPERATING PERFORMANCE? 12

A. Commission Rule 3602(a) defines availability factor as the ratio of the time a 13

generating facility is available to produce energy at its rated capacity, to the total 14

amount of time in the period being measured. 15

Q. WHAT IS THE TYPICAL AVAILABILITY FACTOR FOR THE LM6000 16

TURBINE? 17

A. The four existing LM6000 turbines at PAGS in 2012, the first year of commercial 18

operation, achieved a 98% contract availability factor. The North American 19

Reliability Corporation (NERC) collects data nationally, and the average 20

availability of similar units from 2007-2011 as reported by NERC was 91%. 21

This availability factor of 98% at PAGS is remarkable for the first year of 22

operation as compared to national industry averages. 23

5

Q. IS THE LM6000 CAPABLE OF PROVIDING REGULATION SERVICE 1

FOR INTERMITTENT WIND GENERATING RESOURCES IN 2

COLORADO? 3

A. Yes. The LM6000 is designed to provide load-following regulation services. 4

Maintenance cycles are not impacted by starting and stopping these turbines. The 5

LM6000 can start from zero and ramp to 100% full net capacity output in 10 6

minutes. These CTGs can maintain a ramping rate of 10 MW per minute 7

operating from 50% output (20 MW) to 100% output (40 MW) while at the same 8

time maintaining emission compliance. These features enable the LM6000 to 9

respond quickly, providing load-following capability to regulate sudden losses or 10

increases of wind generation. 11

Q. DOES THE LM6000 HAVE HIGHER MAINTENANCE EXPENSE THAN 12

OTHER NATURAL GAS-FIRED RESOURCES THAT WERE 13

MODELLED IN THE ERP? 14

A. No. As shown in the busbar study of the 2013 ERP, entitled The Generation 15

Technology Characterization and Busbar Cost Analysis, the LM6000 has 16

relatively low maintenance costs as compared to similarly-sized units with similar 17

dispatch profiles. 18

Q. WHAT IS THE HEAT RATE OF THE LM6000? PLEASE EXPLAIN 19

HOW THE HEAT RATE CAN BE CONVERTED TO A THERMAL 20

EFFICIENCY METRIC. 21

6

A. The LM6000 maintains a typical heat rate of 10,000 Btu/kWh for the PAGS 1

altitude (approx. 5,000 ft. elevation). This figure converts to a thermal efficiency 2

factor of 34 percent. 3

Q. DO EXTREME AMBIENT (OUTDOOR) TEMPERATURES AFFECT 4

THE THERMAL PERFORMANCE OF THE LM6000? 5

A. Yes. At ambient temperatures of 50 degrees Fahrenheit, the LM6000 performs 6

optimally. However, for temperatures higher than 50 degrees, we must deploy 7

chillers to cool the combustion air inlet to the CTG. For temperatures lower than 8

50 degrees, we must warm the combustion air inlet. This inlet air tempering is 9

typical of the LM6000s BHC operates to ensure optimum fuel efficiency at 10

varying ambient temperatures. 11

Q. WILL THE LM6000 TURBINE ADDITION AT PAGS MEET THE 12

STATES AIR EMISSIONS NEW SOURCE PERFORMANCE 13

STANDARDS (NSPS)? 14

A. Yes. We will install Selective Catalytic Reduction (SCR) in the exhaust system to 15

control NOx and CO greenhouse gas emissions as described in the testimony of 16

Mr. Fred Carl. Recently installed units operated by BHC subsidiaries have an 17

SCR catalyst. Older LM6000 turbines installed in Colorado do not have an SCR 18

catalyst and therefore those units would release more greenhouse gas emissions as 19

compared to a new LM6000 unit designed to meet todays NSPS air emission 20

requirements. 21

Q. ARE OPERATORS OF THE LM6000 REQUIRED TO BE CERTIFIED? 22

7

A. No. However, Black Hills requires its plant operator candidates to pass an 1

Edison Electric Institute (EEI) approved pre-qualification test Plant Operator 2

Selection System (POSS) at a skill level suitable for nuclear plant operations. 3

This test is required prior to employment at the Company as a plant operator. 4

Q. WILL THE LM6000 TURBINE BE DESIGNED AS A WATER- OR DRY -5

COOLED SYSTEM? 6

A. Water-cooled, for two reasons. First, PAGS has existing water supplies to 7

support water-cooling for the LM6000 turbine addition. Second, water-cooled 8

systems are more economical for peaking dispatch. The direct capital cost of the 9

Plant designed with a dry cooled unit is approximately 4% more expensive than 10

wet cooling, on a per kilowatt basis, because of the capacity reduction (or de-11

rate) for the dry cooling system on a hot day (105 degrees Fahrenheit), as shown 12

in Highly Confidential Exhibit ML-1. 13

Q. DOES BLACK HILLS HAVE ADEQUATE WATER SUPPLIES UNDER 14

CONTRACT? 15

A. Yes. The agreement executed with the Board of Water Works, Pueblo, Colorado 16

provides adequate water supply for up to 20 years with two 10-year extension 17

options. This agreement contracts up to 2,530 acre-feet of water annually for up to 18

40 years, which supports the water demand of all the existing units at PAGS and 19

additional capacity of approximately 90 MWs. The LM6000 addition is 40 MWs. 20

Additionally, the PAGS site has two 100% redundant water feed systems to the 21

Plant, providing reliable water supply per the Board of Water Works agreement. 22

IV. GENERAL DESCRIPTION OF THE PLANT 23

8

Q. WHERE WILL THE LM6000 TURBINE BE LOCATED? 1

A. The LM6000 turbine addition will be located at Black Hills existing plant, 2

PAGS. The plant is located at 4000 North 27th Lane in Pueblo, Colorado, 81001. 3

This is Section 11, T20S R54W in Pueblo County. 4

Q. ARE THERE BENEFITS TO LOCATING THE LM6000 AT AN 5

EXISTING POWER PLANT SITE? 6

A. Yes. An existing location, as available at PAGS, means there are shared facilities 7

installed to accommodate the turbine addition: a natural gas pipeline 8

interconnection, an electrical transmission interconnection, water storage and 9

supply including fire protection, wastewater systems and on-site civil 10

infrastructure such as access roads, control rooms, and security fencing. On the 11

other hand, a new undeveloped location requires infrastructure facilities to be 12

constructed. An existing location such as PAGS saves construction time and 13

labor costs. Generally speaking the overall project costs of an existing developed 14

site are 3% to 10% lower than the overall project costs of an undeveloped site. 15

Q. WHO WILL OWN THE LM6000 TURBINE? 16

A. It will be owned by Black Hills/Colorado Electric Utility Company, LP. 17

Q. WHO WILL OPERATE THE LM6000 TURBINE? 18

A. It will be operated by Black Hills Service Company, a wholly-owned subsidiary 19

of Black Hills Corporation. 20

Q. HOW MANY CONSTRUCTION WORKERS WILL BE REQUIRED FOR 21

THE LM6000 TURBINE? 22

9

A. As provided in Dr. Mary Jo Kealys testimony, at peak, 55 full-time construction 1

workers will be required. On average, across a 12 month construction period, 2

there will be 35 full-time equivalent (FTE) construction workers. 3

Q. HOW MANY PERMANENT EMPLOYEES WILL BE REQUIRED FOR 4

THE LM6000 TURBINE UPON INSTALLATION? 5

A. We expect one additional full-time employee. 6

V. INFRASTRUCTURE 7

Q. PLEASE DESCRIBE THE EXISTING NATURAL GAS 8

INFRASTRUCTURE AT PAGS TO ACCOMMODATE THE LM6000 9

TURBINE. 10

A. A 100% redundant natural gas pipeline exists, consisting of two user-owned 11

delivery lines. Each line is 50% owned by Black Hills/Colorado Electric Utility 12

Company, LP and 50% owned by Black Hills/Colorado IPP, LLC, and each is 13

used exclusively for the PAGS. The fuel supply consists of two pipelines, each 14

2.5 miles long, 12 in diameter, and providing 100,000 dekatherms/day of natural 15

gas supply at 960 psi delivery pressure from the upstream, interstate pipeline 16

Colorado Interstate Gas Company. The capacity of this pipeline is 10% more 17

than the expected fuel requirements of all PAGS combustion turbines operating at 18

100% capacity output, including the LM6000 turbine addition. 19

Q. PLEASE DESCRIBE THE EXISTING ELECTRICAL TRANSMISSION 20

INTERCONNECTION. 21

A. For transmission interconnection of additional generation at PAGS, a Standard 22

Large Generator Interconnection Agreement (LGIA) was executed on February 9, 23

10

2012 for 100 MW. The LGIA is provided as Exhibit ML-2 and allows the 1

Company to interconnect the LM6000 to the electric transmission system at the 2

local 115 kV substation. This is described in the testimony of Mr. Eric Egge. 3

Q. WHAT IS THE WATER SUPPLY INFRASTRUCTURE AT PAGS FOR 4

THE LM6000 TURBINE ADDITION? 5

A. PAGS is located within the city limits of Pueblo and has a potable water supply. 6

PAGS processes its own waste water and is permitted with an existing waste 7

water discharge pond. It has ample capacity to accommodate additional 8

wastewater discharge from an LM6000 addition. The site re-uses all wastewater 9

and processes this water through a wastewater facility located at PAGS. 10

Q. HOW MUCH WATER WILL BE CONSUMED BY THE LM6000 11

TURBINE ADDITION? 12

A. Water use varies based on time of year and other factors. However, based on our 13

experience at PAGS with LM6000 units, an appropriate indicative value for water 14

use is 840,000 gallons per year assuming a10% annual capacity factor. 15

VI. ENVIRONMENTAL COMPLIANCE 16

Q. WILL A GREENHOUSE GAS EMISSIONS PERMIT BE REQUIRED FOR 17

THE ADDITION OF AN LM6000 TURBINE? 18

A. Yes. As described in the testimony of Mr. Fred Carl, the Company will seek a 19

permit. 20

Q. WILL A CONTINUOUS EMISSIONS MONITORING (CEM) SYSTEM BE 21

INSTALLED FOR THE LM6000 TURBINE ADDITION? WHAT DOES IT 22

MONITOR AND REPORT? 23

11

A. Yes, a CEM system will be installed. The CEM system reports NOx and CO 1

emissions as required by state and federal regulatory requirements. 2

Q. WILL SELECTIVE CATALYTIC REDUCTION (SCR) BE INSTALLED? 3

WHAT EMISSIONS DOES IT MITIGATE? 4

A. Yes. SCR will be installed in the exhaust system of the CTG. SCR introduces 5

ammonia with a catalyst to chemically convert NOx emissions into nitrogen and 6

water vapor. Another catalyst converts carbon monoxide (CO) emissions to 7

carbon dioxide (CO2), reducing CO emissions to below permit limits. This new 8

LM6000 plant would have more stringent emission limits for the NOx and CO 9

than any other existing plant in Colorado. 10

Q. HOW WILL THE PROPOSED LM6000 AT PAGS COMPARE TO OLDER 11

LM6000 TURBINES? 12

A. The NOx and CO emissions for the new LM6000 at PAGS will be significantly 13

lower than older units. For NOx , the PAGS LM6000 operating at full load will 14

emit 0.05 lb/MWhr. This is approximately 17 times less NOx per MW over older 15

LM6000 units. For CO, the PAGS LM6000 will emit 0.012 lb/MWhr. This is an 16

emission rate 7 or 8 times less CO per MW compared to older LM6000s. 17

VII. CONSTRUCTION TIMELINE 18

Q. PLEASE DESCRIBE THE TIMELINE FOR CONSTRUCTION 19

ACTIVITIES. 20

A. The commercial operation date for the Plant is January 15, 2017. Several 21

activities would precede this in-service date. The construction activities would 22

12

start January 2016. A timeline showing construction milestones is provided as 1

Exhibit ML-3. 2

Q. WHEN WILL THE LM6000 BE DELIVERED TO THE SITE AFTER IT IS 3

ORDERED? 4

A. Generally, a turbine of this type would be delivered 12-16 months after the order 5

is executed. Based on a current budgetary manufacturer estimate, we believe lead 6

times to be around 12 months at this time and under current market conditions. 7

VIII. PROJECT SCOPE 8

Q. WHAT IS THE GENERAL SCOPE OF THE PROJECT? 9

A. The Project consists of constructing an LM6000 combustion turbine generator at 10

PAGS on land owned by the Utility, including the balance of plant equipment, 11

foundations/piles, site grading and storm water control in accordance with permit 12

requirements. Water, natural gas supply and electrical interconnections are also 13

included in the scope. These three interconnections will be constructed to connect 14

to infrastructure already installed at the PAGS location. 15

Q. WHAT ARE THE BATTERY LIMITS OF THE SCOPE OF THE 16

PROJECT? 17

A. The battery limits are defined as follows: 18

High Voltage Side of Generator Step Up Transformer as per the 19

large generator interconnect agreement (LGIA), excluding 20

Network Upgrades. 21

Water connection within the boundary of the PAGS facility. 22

Natural Gas connection within the boundary of PAGS facility. 23

13

Process wastewater connection to existing system. 1

Q. DOES THIS SCOPE INCLUDE ALL COSTS OF THE PROJECT? 2

A. The total project cost includes the construction scope of supply within the battery 3

limits defined above and Owners Costs, which are further described in the Capital 4

Cost section. 5

IX. PROJECT PLAN 6

Q. HOW DOES THE COMPANY PLAN TO CONSTRUCT THE PROJECT? 7

A. The Company considered two options to construct the project. The first was to 8

retain a firm to take the schedule and cost risk, referred to in the Industry as the 9

Engineering, Procurement, and Construction (EPC) construction approach. This is 10

a turnkey approach, and the EPC contractor takes the responsibility for schedule 11

and cost performance risk. This approach typically adds 10% or more to the cost 12

of the project because of the performance risk (risk premium). The second 13

approach is the Owners Self Build (OSB). With the OSB approach, the owner 14

assumes the schedule and cost risks. In turn, that potentially saves the risk 15

premium over the EPC approach. The Company plans to construct the project 16

under the OSB approach. 17

Q. DOES THE COMPANYS CONSTRUCTION PLAN BENEFIT 18

CUSTOMERS, AND IF SO, HOW? 19

A. Yes. The Company proposes a Point Cost Cap and an incentive-sharing 20

mechanism. The Point Cost Cap is based in part on the EPC approach. The 21

Point Cost Cap protects the customer from project cost over-runs while the 22

14

incentive-sharing mechanism creates an incentive for the Company to actively 1

manage costs while giving a majority of the savings to the customer. 2

Q. WAS THIS APPROACH USED IN PAST PROJECTS AND, IF SO, WHAT 3

WERE THE RESULTS? 4

A. Yes. The Company used this same approach on the PAGS project to construct the 5

two LMS100 turbines in 2011, Docket No. 09A-415E. The results were notable 6

for providing customer and company benefits. The cost cap was $260 million, 7

with the first $10 million of savings going to the customers. All cost savings 8

below $250 million were split 85% to customers and 15% to the company. Based 9

on the 85/15 split, the customer benefit was approximately 10% of the Point Cost 10

Cap, or $26 million. The Company benefit was $3 million. 11

X. CAPITAL COSTS 12

Q. HOW WAS THE CAPITAL COST FOR THE PROJECT ESTIMATED? 13

A. Two capital cost estimates were independently prepared for Black Hills by Black 14

& Veatch (B&V) on April 4, 2013. B&V prepared the estimates in 2013 dollars 15

and escalated to 2017 dollars to match the in-service date. The estimates are 16

based on two construction approaches for an LM6000 turbine addition at PAGS. 17

The first construction approach is an EPC approach and the second construction 18

approach an OSB. Both EPC and OSB include direct and indirect capital costs, 19

but exclude Owners Costs. 20

Q. HOW WERE THE OWNERS COSTS FOR THE LM6000 TURBINE 21

ADDITION ESTIMATED? 22

15

A. Black Hills estimated its Owners Costs for the LM6000 turbine addition at PAGS 1

in 2017 dollars. Owners Costs include the following: insurance; corporate 2

internal administration and construction management costs; the costs for water 3

rights, easements, and a socioeconomic analysis; consultant fees (technical); ERP-4

related expenses; internal labor and expense for the expansion slot; legal expenses 5

for the expansion slot; consulting and modeling fees for the expansion slot; permit 6

application fees; air permitting application costs; legal expenses; interconnection 7

costs (gas and electrical); spare operating parts; mobilization costs; plant operator 8

training; sales tax; and Allowance for Funds Used During Construction 9

(AFUDC). The capital costs using the EPC approach plus the Owners Costs 10

together provide the total capitalized costs for the project in 2017 dollars. The 11

Owners Costs are set out in Highly Confidential Exhibit ML-4. 12

Q. HAVE THE COST ESTIMATES BEEN VERIFIED BY AN 13

INDEPENDENT THIRD-PARTY INDUSTRY EXPERT? 14

A. Yes. On April 22, 2013, Black Hills retained SAIC (formerly, R.W. Beck) to 15

analyze both the B&V EPC and Black Hills Owners Costs and provide a written 16

opinion of each. SAIC conducted a site visit to review the planned Project. The 17

fairness opinions conclude that the estimates are reasonable. The fairness opinions 18

from SAIC are provided in Highly Confidential Exhibit ML-5. 19

XI. POINT COST CAP 20

Q. IS BLACK HILLS REQUESTING A POINT COST CAP IN THIS CPCN 21

APPLICATION? 22

16

A. Yes. Black Hills is requesting both a Point Cost Cap and an incentive-sharing 1

mechanism. Our Point Cost Cap will be all-in, that is, equal to the EPC 2

estimate plus Owners Costs described above, in 2017 dollars, amounting to 3

$70,842,458. It will be the maximum amount of dollars requested for recovery 4

when the LM6000 turbine enters commercial operation on January 15, 2017, 5

absent extraordinary circumstances.4 Black Hills is requesting a presumption of 6

prudence on the Point Cost Cap. The Commission approved a Point Cost Cap and 7

related incentive-sharing mechanism in Docket 09A-415E, for construction of the 8

two LMS100 turbines at PAGS. 9

Q. PLEASE DESCRIBE THE INCENTIVE-SHARING MECHANISM. 10

A. The incentive-sharing mechanism will be implemented to the extent that the 11

actual recorded dollars are less than the Point Cost Cap of $71 million in 2017. 12

The first 3.85% in savings (or $2.7 million) will go to the customers. This 13

represents a deadband. Any savings below this deadband will be split 85% 14

customers and 15% Company. Exhibit ML-6 illustrates the methodology of this 15

incentive-sharing mechanism. 16

Q. HAS THE COMMISSION PREVIOUSLY AUTHORIZED A POINT COST 17

CAP AND INCENTIVE-SHARING MECHANISM FOR BLACK HILLS? 18

A. Yes. The Commission authorized Black Hills to implement a Point Cost Cap and 19

incentive-sharing mechanism in Docket 09A-415E, for construction of the two 20

LMS100 turbines at PAGS. The incentive-sharing mechanism modeled in this 21

docket uses the same principles that the Commission previously approved. 22

4 See prior footnote.

17

Q. WHAT ARE THE BENEFITS OF THE POINT COST CAP AND 1

INCENTIVE-SHARING MECHANISM? 2

A. First, the Point Cost Cap is valid. It was independently determined by B&V and 3

independently verified by SAIC. Second, the Point Cost Cap provides cost 4

certainty for customers. Finally, the Point Cost Cap coupled with the incentive-5

sharing mechanism (including the deadband) provides a strong incentive for the 6

Company to manage the LM6000 project. A similar incentive-sharing 7

mechanism resulted in customer savings when used for the PAGS LMS100 8

project. 9

XII. CONCLUSION 10

Q. WHAT IS YOUR RECOMMENDATION? 11

A. I support the Companys CPCN application to build an LM6000 gas-fired turbine 12

at PAGS with a Point Cost Cap of $71 million and incentive-sharing mechanism. 13

This CPCN approval complies with Commission Decision No. C12-1434 and 14

fulfills Black Hills rights under the Clean Air-Clean Jobs Act. 15

Q. DOES THIS CONCLUDE YOUR TESTIMONY? 16

A. Yes.17

1

Appendix A

Statement of Qualifications

Mark Lux

Mr. Lux graduated from South Dakota School of Mines and Technology with a

Bachelor of Science degree with honors in Mechanical Engineering in 1987. In 2004, he

completed the Utility Executive Course at the University of Idaho.

Mr. Lux has more than 25 years of experience working in the mining and

electrical power industry, in both nuclear and fossil fuel power generation, including

operating experience and power plant construction experience.

Mr. Lux joined Black Hills Corporation in August 1988. For Black Hills, he has

been involved in the development, engineering, construction, and commissioning of coal-

fired, natural gas-fired and wind-powered generating plants.

The coal-fired generating plants designed and built during his tenure are all air-

cooled power plants with minimal water consumption and were constructed for Black

Hills Power, Cheyenne Light Fuel and Power, and Black Hills Wyoming all affiliates of

Black Hills Corporation. Most recently, the Busch Ranch Wind Project (29 MW) south of

Pueblo began commercial operation in October 2012.

The most recent natural gas-fired generating plants completed and being

developed by Mr. Lux are: (1) the Pueblo Airport Generating Station (PAGS) in Pueblo,

Colorado; and, (2) the Cheyenne Prairie (Cheyenne Prairie) Generating Station in

Cheyenne, Wyoming.

PAGS began commercial operations on January 1, 2012 and contains two GE,

LMS100 turbines (simple cycle) and four GE, LM6000 turbines (configured for 2X1

combined-cycle operation). The plant generating capacity is 380 MW.

2

Cheyenne Prairie is under construction. It will contain three GE, LM6000

turbines, one of which will be configured for simple cycle, and the other two in a 2X1

combined-cycle configuration. The plant generating capacity will be 132 MW.

Cheyenne Prairie will begin commercial operations in the fourth quarter 2014.

I. INTRODUCTION AND QUALIFICATIONSII. PURPOSE OF TESTIMONYIII. DESCRIPTION OF LM6000 TURBINEIV. GENERAL DESCRIPTION OF THE PLANTV. INFRASTRUCTUREVI. ENVIRONMENTAL COMPLIANCEA. The NOx and CO emissions for the new LM6000 at PAGS will be significantly lower than older units. For NOx , the PAGS LM6000 operating at full load will emit 0.05 lb/MWhr. This is approximately 17 times less NOx per MW over older LM6000 units. Fo...VII. CONSTRUCTION TIMELINEVIII. PROJECT SCOPEIX. PROJECT PLANX. CAPITAL COSTSXI. POINT COST CAPXII. CONCLUSION