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1 (The afternoon session resumed at 1:05 p.m.,

2 reported by Colette E. Ross, Certified Reporter.)

3

4 CALJ FARMER: Let's go back on the record.

5 Is APS ready to call your next witness?

6 MS. GRABEL: We are, Your Honor. Call Mr. Mark

7 Schiavoni to the stand.

8

9 MARK SCHIAVONI,

10 called as a witness on behalf of the Applicant, having

11 been first duly sworn by the Certified Reporter to speak

12 the truth and nothing but the truth, was examined and

13 testified as follows:

14

15 DIRECT EXAMINATION

16 BY MS. GRABEL:

17 Q. Mr. Schiavoni, would you please state your full

18 name and business address for the record.

19 A. Mark A. Schiavoni, Senior Vice President Fossil

20 Fuel Generation for Arizona Public Service; address, 400

21 North 4th Street -- no, 5th Street, excuse me -- Arizona

22 85004.

23 Q. You have already noted that you are employed by

24 Arizona Public Service and your capacity. What do you do

25 in that capacity?
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1 A. I have responsibility for all the fossil

2 generation within Arizona Public Service as well as the

3 renewable generation that we are bringing on line

4 currently.

5 Q. I believe, sir, you have in front of you two

6 documents that have previously been marked as -- I am

7 going to need help -- I believe it is APS Exhibits 9 and

8 10, is that correct?

9 A. 11 and 12.

10 Q. 11 and 12. Thank you. Do you recognize

11 Exhibit No. 11, sir?

12 A. Yes, I do.

13 Q. Can you please describe it for the record.

14 A. It is direct testimony of Mark A. Schiavoni on

15 behalf of Arizona Public Service, Docket

16 E-01345alpha-10.

17 Q. Was that testimony prepared by you or under your

18 supervision and control?

19 A. Yes, it was.

20 Q. Do you have any corrections or updates to that

21 exhibit at this time?

22 A. No, I do not.

23 Q. If I were to ask you the questions contained in

24 APS Exhibit No. 11 would your answers today be the same as

25 they were then?
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1 A. Yes, they would.

2 Q. And if you will take a look, please, at APS

3 Exhibit No. 12, would you please identify that document

4 for the record.

5 A. Yes. It is rebuttal testimony of Mark A.

6 Schiavoni on behalf of Arizona Public Service Company,

7 Docket E-01345alpha-10-0474.

8 Q. Was that testimony also prepared by you or under

9 your supervision or control?

10 A. Yes, it was.

11 Q. Do you have any corrections or updates to APS

12 Exhibit 12 at this time?

13 A. No, I do not.

14 Q. And if I were to ask you the questions contained

15 in APS Exhibit 12, would your answers today be the same as

16 those contained within that document?

17 A. Yes.

18 Q. Do you have any corrections or updates to APS

19 Exhibit 12 at this time?

20 A. No, I do not.

21 MS. GRABEL: At this time, Your Honor, I would

22 like to move APS Exhibits 11 and 12 into the record.

23 CALJ FARMER: Are there any objections to APS

24 Exhibits 11 or 12?

25 (No response.)
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1 CALJ FARMER: Hearing none, those exhibits are

2 admitted.

3 (Exhibits APS-11 and APS-12 were admitted into

4 evidence.)

5 BY MS. GRABEL:

6 Q. Quickly, Mr. Schiavoni, Judge Farmer yesterday

7 asked Mr. Schlissel to provide her with an update of the

8 status of pending environmental regulation at the Four

9 Corners. Would you like to update your testimony in that

10 regard?

11 A. Yes, I do. First off, what was brought up

12 yesterday talked through CO2, which the Federal Clean Air

13 Act, it is under new source review and new source

14 performance standards. That is anticipated. It will

15 not have one.

16 CCR, which was referred to yesterday in a

17 couple different ways, what that is is the RCRA, for

18 those who are familiar with it, the Resource

19 Conservation Recovery Act, and that is combustion, or

20 coal combustion residuals. And that rule has been in

21 various draft forms and proposed rules.

22 Mercury, the Clean Air Act, again, MACT is the

23 short term, but Maximum Achievable Control Technology,

24 and that is a proposed rule.

25 BART, which is from the Clean Air Act again,
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1 with that is regional haze, Best Available Controllable

2 Technology -- Retrofit Technology. Excuse me.

3 And lastly, 316(b), which is the Clean Water

4 Act, which is for cooling water intakes, that rule has

5 been put out in draft form. Comments, I believe, are

6 due this week in fact.

7 Q. And, Mr. Schiavoni, do you know whether APS

8 considered the cost required by those regulations in the

9 present value revenue requirement analysis that it

10 conducted with respect to this proposed transaction?

11 A. Yes. For all of these proposed rules or these

12 things that are on EPA's agenda, we submitted and looked

13 at all these as part of our analysis of this acquisition

14 with the exception of the 316(b) Clean Water Act rule,

15 which was de minimus, very little cost for us to

16 implement at Four Corners 4 and 5.

17 MS. GRABEL: I have no further questions. He is

18 open for cross.

19 CALJ FARMER: Thank you.

20 Mr. Hogan, do you have questions?

21 MR. HOGAN: No.

22 CALJ FARMER: Mr. Ritchie?

23 MR. RITCHIE: Yes, Your Honor.

24

25
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1 CROSS-EXAMINATION

2 BY MR. RITCHIE:

3 Q. Good afternoon, Mr. Schiavoni. My name is Travis

4 Ritchie for Sierra Club.

5 A. Good afternoon.

6 Q. And, Mr. Schiavoni, did you review the testimony

7 of David Schlissel submitted on behalf of Sierra Club in

8 this proceeding?

9 A. Yes, I did.

10 Q. And did you review both the confidential and

11 nonconfidential versions?

12 A. I believe I only reviewed the redacted form.

13 Q. And do you have a copy of that testimony in front

14 of you?

15 A. No, I do not.

16 Q. If I may provide you one. And, Mr. Schiavoni,

17 could you please identify the document I just handed to

18 you.

19 A. Yes, intervenor testimony of David A. Schlissel

20 on behalf of Sierra Club, Docket E-01345alpha-10-0474.

21 Q. And I believe that has been entered as

22 Exhibit SC-1. And that is the confidential version of the

23 testimony.

24 Now, Mr. Schiavoni, we discussed this a little

25 bit before. Just to get us back there, how old are Four
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1 Corners Units 4 and 5 right now?

2 A. 4 and 5 went into commission in 1969 and 1970

3 respectively.

4 Q. So 41 years old?

5 A. Correct.

6 Q. And is it correct that APS stated in its

7 application that it intends to operate Units 4 and 5 until

8 2038?

9 A. That is correct.

10 Q. And do you know how old those units will be then?

11 A. From -- it will be --

12 Q. 68?

13 A. I will be challenged by the math also. 70 plus.

14 Q. And so is it your testimony that you believe that

15 there is -- let me back up.

16 If you refer to page 4 of your rebuttal

17 testimony, sir --

18 A. Yes.

19 Q. -- line 7 and 8, if you could, please read the

20 sentence that starts there is no reason.

21 A. There is no reason to believe that, if the units

22 are properly maintained, this trend will discontinue in

23 decades to come. In fact, the current end of life

24 assumption associated with these units, 2038 --

25 Q. And the trend you were talking about is the
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1 consistent trend of the capacity factor, the historical

2 capacity factor, is that correct?

3 A. The historical performance of the units, that's

4 correct.

5 Q. And that assumption is the same assumption that

6 the levelized cost analysis made in the, in the

7 application submitted by APS, is that correct?

8 A. That is correct.

9 Q. Now, isn't it true, Mr. Schiavoni, that APS'

10 PROMOD analysis shows different trends for that?

11 A. I am not sure. I don't have that information in

12 front of me.

13 MR. RITCHIE: Your Honor, I would like to

14 discuss a confidential exhibit that was provided by APS,

15 but I am sensitive to discussing that openly and I was

16 wondering what the procedures were for that.

17 CALJ FARMER: Let's go off the record for a

18 moment.

19 (An off-the-record discussion ensued.)

20 CALJ FARMER: Okay. Let's go back on the

21 record.

22 BY MR. RITCHIE:

23 Q. Thank you, Mr. Schiavoni. I just handed to you

24 a confidential exhibit that was provided to us by APS. It

25 was also included in Sierra Club confidential
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1 Exhibit SC-1, which is Mr. Schlissel's confidential

2 version of the testimony, and was included as an

3 attachment to that exhibit.

4 So, Mr. Schiavoni, going back to your statement

5 where you say there is no reason to believe that the

6 units, that the trend, the historical trend wouldn't

7 continue, if I could direct you, sir, to the column for

8 Four Corners Units 4 and 5 on the second graph of the

9 attachment that I handed to you.

10 A. Yes.

11 Q. Can you state what that column is, sir.

12 A. The second column or third column?

13 Q. It is the third column.

14 A. 4 and 5?

15 Q. Yes, Four Corners 4 and 5, correct.

16 A. Okay. It is indication of capacity factors from

17 2015 to 2030.

18 Q. And could you describe the trend of those

19 capacity factors.

20 A. Capacity factors vary from 81 percent to

21 75 percent over that time span.

22 Q. And I believe they actually go as low as

23 64 percent for at least one year in there, is that

24 correct?

25 A. That is correct.
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1 Q. So this actually does, wouldn't this show a

2 decreasing trend over that over the future time period of

3 Units 4 and 5 as far as the capacity factor?

4 A. Strictly as a number, yes. But there are

5 variables that would cause that to decrease.

6 Q. That would cause the decrease to decrease, or --

7 sorry.

8 A. Yes, the number to change. Your outage plan

9 schedules, you take defined outage periods. Those

10 outage periods, depending on what is being done during

11 those periods, they take the length of time the unit is

12 out, which contributes to the capacity factor. You have

13 other variables such as fuel prices and future fuel

14 contracts and what they look like and how the unit is

15 dispatched.

16 So all this number is is a reflection of the

17 capacity that it is expected to produce in any given

18 year, how much of the total megawatts available are

19 being generated. So there are a lot of things that are

20 getting put in here that from a planning perspective

21 looks at those variables.

22 Q. But this is a modeling analysis that APS used and

23 APS did plan that, if this transaction goes through, that

24 this is what it expects the capacity factors to look like

25 going forward?
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1 A. That is correct.

2 Q. But that's not using a, the same historical

3 figures that you testified to in your testimony, that we

4 wouldn't expect to see any change, correct?

5 A. That's correct.

6 Q. So, Mr. Schiavoni, you said there were various

7 reasons for why those capacity factors would change. But

8 at the end of the day that would mean that the Four

9 Corners Units 4 and 5 would be generating less power, is

10 that correct?

11 A. Yes, they would be generating less based on

12 market conditions at that particular point in time,

13 correct.

14 Q. And how is it that APS would make up that type of

15 power loss in their portfolio?

16 A. Well, normally through the resource planning,

17 you plan. And Mr. Dinkel would testify later and would

18 be better suited to answer that question. But from my

19 perspective, your resource planning dictates as load

20 growth changes, as in our case, we have energy

21 efficiency. We have other initiatives that look at

22 load. So it is much more a picture what happens to load

23 in the future. What the asset mix is in the future will

24 dictate how these units are dispatched.

25 Q. Let's assume for -- let's take demand out for one
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1 second and just talk about power generation. Seeing these

2 numbers and seeing them decreasing actually means that

3 over time, if this modeling is true, you would have to

4 find power to replace what would otherwise be produced at

5 the capacity factors that we are currently seeing at

6 Arizona, or at Four Corners Units 4 and 5, correct?

7 A. If you made the assumption that the units are

8 not dispatching because of material condition, that

9 would be true. But that is not assumptions that are

10 being made here, as you see in the last year, 2030,

11 75 percent capacity factor.

12 So it varies year to year based on what is going

13 on, one, with the market; secondly, what is going on

14 with generation accessibility; and, third, what is going

15 on from an outage plant perspective. As I mentioned,

16 there are a lot of variables that go into making up

17 these numbers. But the basis of your question, from a

18 maintenance perspective, that isn't what this is telling

19 you.

20 Q. So is it your testimony then that APS could

21 choose to continue to operate it at the current capacity

22 factor if they desire?

23 A. Yes.

24 Q. But, so then, if you follow this modeling

25 analysis, is it your testimony that APS is requesting to
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1 purchase an asset today that it then won't use as much in

2 the future?

3 A. No, that's not what I am saying at all. Again,

4 the resource planning and what is looked at, it looks at

5 everything as a portfolio, what is in there, what is the

6 best resource for the best application.

7 Again, I don't have the background in what went

8 into the resource planning for these particular numbers,

9 especially towards the end of life or the end of 2030,

10 but the maintenance and what you do dictates how well

11 those plants can run. My suspicion would be those

12 assets will perform, they will be close to 80 percent as

13 they have historically been.

14 Q. And as those plants age, there are operational

15 problems that could hypothetically reduce the capacity

16 factors and the ability to run that plant?

17 A. Absolutely.

18 Q. And what would APS do in that scenario? Would

19 you purchase power from somewhere else or would you find

20 something in your portfolio to replace that lost

21 generation?

22 A. Well, the immediacy of the need would dictate

23 what you would do. If you have a need today, for

24 example, then yes, then you would go into the market to

25 procure, if necessary, generation replacements lost
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1 today. If it is a long-term need, then we -- you make a

2 decision, we do this every day, you make a decision what

3 type of repairs you do, how quickly you do the repair,

4 do you work around the clock, do you back it off, only

5 work day shift. So you are making a lot of decisions

6 real-time on how you handle material condition issues

7 that come up in power plants because you look at doing

8 it in the most cost effective manner.

9 Q. And those costs, even if they are cost effective,

10 those would be something that APS would expect to request

11 from the Commission recovery through rates, is that

12 correct?

13 A. Through our normal budgeting cycles.

14 Q. So would APS in this be willing to guarantee the

15 capacity factors that you think are likely to continue for

16 the Arizona Four Corners units?

17 A. I am sorry. Could you rephrase or say that

18 question again.

19 Q. I shouldn't have said Arizona in there. You

20 stated before that you believe there is no reason that the

21 units can't continue to operate at their current capacity

22 factors. If there was some operational reason for them to

23 drop below those capacity factors, would APS be willing to

24 essentially make up the difference and cover whatever

25 costs are necessary to make, to cover that gap
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1 essentially?

2 A. It depends what the issue is. Again, I can't

3 see into the future what could be a scenario that would

4 play out that would dictate saying that we are not going

5 to go forward and make the repairs. We have had to do

6 that over the last 40 years of operation and we will

7 continue to do it in the future. So it would be too

8 hard for me to sit here and say if this condition

9 happened then we will take, we will absorb it, that if

10 something else happens, someone else will absorb it. It

11 is dictated by the condition that exists.

12 Q. All right. Thank you.

13 Moving on, we discussed quite a bit about natural

14 gas as a different type of generating source. Can natural

15 gas combined cycle units serve as baseload power?

16 A. Any generating resource can serve as baseload if

17 you so choose. So if all we have is renewal and you

18 have no other source of generation, de facto it becomes

19 baseload. So it is really predicated on what your

20 generation portfolio is.

21 Baseload is normally the lowest cost in your

22 dispatch stack. And that's how it is determined. So

23 baseload, which is -- coal, nuclear, hydro normally fall

24 in the category of baseload because that is the lowest

25 cost generation for megawatts that have to be covered
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1 off peak, normal, around the clock, minus peak. Beyond,

2 then, you have intermediate, normally your gas falls in

3 intermediate type of dispatch, and then finally your

4 peaking assets. So it is really predicated on what you

5 have for resources to determine what the baseload has,

6 is. Excuse me.

7 Q. Under APS' current resource plan, they rely, or

8 you rely on natural gas as an intermediate source, as you

9 characterize it, is that correct?

10 A. That is correct.

11 Q. And does that mean that you, as opposed to a

12 peaker -- it is somewhere between a peaker and baseload.

13 And my understanding, and please correct me if I am wrong

14 on this, is that you essentially turn them on during

15 expected high demand times so there are not necessarily

16 spikes and peaks, but when you know it is going to be, you

17 know, hot during the summer, that's when you plan to use

18 those resources, is that correct?

19 A. The load dictates when those resources are made

20 available and dispatched, that's correct. An example is

21 you have a peak in the morning when businesses are

22 turning on and starting up. You may need that for that

23 particular peak period of time because the load is above

24 what the baseload resource it. So you would start the

25 combined cycle or the next lowest generating asset in
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1 the dispatch stack that would come on line to serve that

2 load, and et cetera, all the way through until you get

3 to your CTs, which are the highest cost.

4 Q. And so operating natural gas plants as

5 intermediate loads, that means that they are actually idle

6 for quite a bit of time, doesn't it?

7 A. Their capacity factor, our capacity factor is

8 roughly about 30 percent.

9 Q. And that actually brings up, if you would, turn

10 to page 21 of Mr. Schlissel's testimony.

11 A. Yes.

12 Q. So this is an excerpt from the historical

13 capacity factors in the two west Phoenix combined cycle

14 units, is that correct?

15 A. That is correct, Table 3.

16 Q. Yes, Table 3. Thank you.

17 And so, as you said, it does appear that natural

18 gas, that APS operates its existing natural gas plants at

19 about a range between a 30 percent and a 47 percent

20 capacity factor, is that correct?

21 A. Yes, on average, between west Phoenix 11 percent

22 to the 39 percent, that would be correct, about

23 30 percent total.

24 Q. But those natural gas plants are capable of

25 operating at much higher capacity factors, isn't that
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1 correct?

2 A. That is correct.

3 Q. So it is the way that APS chooses to use those to

4 meet the load that results in this very low capacity

5 factor?

6 A. It is the way the market dictates how they are

7 used which dictates when these are used. You are not

8 going to intentionally start them if they cost more to

9 put them on line if you have a cheaper resource

10 available. So a cheaper resource won't be displaced by

11 this.

12 Q. But from a technical standpoint, if, say, Four

13 Corners was not available, you would be able to operate

14 these existing combined cycle units that APS owns at a

15 higher capacity factor?

16 A. That is correct.

17 Q. And thereby generating more electricity to meet

18 the load?

19 A. That's correct.

20 Q. Now, Mr. Schiavoni, I would like to reference the

21 Commission Decision No. 67744, which I believe established

22 the self-bid moratorium. And I believe that was

23 referenced in the application.

24 A. Okay.

25 Q. Are you aware of that decision?
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1 A. I am aware. I am not an expert in it by any

2 means.

3 Q. And isn't it correct that that decision, as part

4 of that decision, Pinnacle West, which I believe is APS'

5 parent company, was seeking permission to put, to transfer

6 to APS five natural gas plants to put into rate base, is

7 that correct?

8 A. I believe so. I am not familiar with the

9 details of what took place back then. I wasn't part of

10 the company back at that point in time.

11 Q. But to your understanding, the natural gas plants

12 that are currently in APS' portfolio are in rate base?

13 A. Yes, they are.

14 Q. And came from Pinnacle West?

15 A. Yes.

16 Q. Now, do you know if the self-build moratorium in

17 that decision was linked to that allowance for APS to

18 allow those five generating units into rate base?

19 A. I do not know.

20 Q. And, Mr. Schiavoni, we talked about intermediate

21 load generation. Can purchased power meet that need?

22 A. Any power resource can meet that need.

23 Q. And APS would then use that as an intermediate,

24 so it is depending on the economics of it?

25 A. Price-wise, if it meets price for that
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1 intermediate, absolutely.

2 Q. So if you were to use a natural gas plant as a

3 baseload plant and continue to operate it, then in order

4 to smooth your load, your load needs -- you could purchase

5 from the open market or could enter into power purchase

6 agreements that could meet intermediate needs?

7 A. If there is a need for it, yes, you could.

8 Q. And, Mr. Schiavoni, does APS have existing

9 long-term purchase agreements right now?

10 A. Yes, we do.

11 Q. And those include natural gas or generation,

12 correct?

13 A. Yes, it does.

14 Q. When APS negotiates those contracts, do you

15 consider natural gas fuel price volatility?

16 A. When those contracts were negotiated, I am not

17 sure how they were negotiated or contracted, again,

18 Mr. Dinkel would be able to explain a little bit more

19 how those were set up or established, when they were

20 negotiated.

21 Q. Could you speak to, generally speaking, when a

22 utility negotiates a power purchase agreement, do they

23 consider things like fuel price volatility in those

24 contracts?

25 A. Yes. It is normally taken into account as part
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1 of the contract requirements. And normally the provider

2 makes it a pass-through directly to the entity entering

3 in the contract. So if I needed to pass all the fuel

4 volatility to me and I accept the responsibility, fuel

5 volatility is normally the way it is structured in my

6 experience.

7 Q. In your experience the utility is still subject

8 to the risk of fuel price volatility?

9 A. That is correct.

10 Q. But you are not aware of whether or not the

11 existing power purchase agreements have a term that passes

12 through that?

13 A. Again, I am not certain how those are structured

14 for us.

15 Q. And Mr. Dinkel is perhaps a better person to

16 answer that?

17 A. Yes.

18 Q. All right. Now, Mr. Schiavoni, going to your

19 rebuttal testimony on page 5 --

20 A. Yes.

21 Q. -- at lines 11 and 12, could you please state or

22 read the sentence beginning with no one but.

23 A. No one but APS has yet stepped forward to

24 purchase SCE's interest, and it is highly unlikely that

25 anyone else will do so on the timeline required.
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1 Q. And that interest is referring to Four Corners

2 Units 4 and 5, correct?

3 A. That is correct.

4 Q. So, as far as you are aware, APS is the only

5 interested buyer in Four Corners Units 4 and 5?

6 A. Within -- yes. Southern Cal Edison offered the

7 current, existing owners an opportunity. Beyond that I

8 am not sure what Southern Cal Edison did to market their

9 share of the asset.

10 Q. But you are not aware of anybody else expressing

11 an interest?

12 A. No, I am not.

13 Q. And, now, you are aware, though, that all of the

14 other owners who have a right of first refusal did not

15 exercise that right, is that correct?

16 A. That is correct.

17 Q. And if I could refer you, sir, to that same

18 page 5, line 23 --

19 A. Yes.

20 Q. -- the sentence starting in addition, if you

21 could, please read that.

22 A. In addition, several of the co-owners of Units 4

23 and 5 are also joint participants in multiple coal

24 facilities that face similar environmental issues as

25 those now facing Four Corners.
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1 Q. And the next sentence as well, please, sir.

2 A. As I see it, uncertainty about the future of

3 those other resources makes even more dubious the

4 co-owners' interest in investing further in Four

5 Corners.

6 Q. What are the similar environmental issues that

7 are referred to in that statement?

8 A. Multiple owners -- and just to refresh, the

9 ownership makeup for Four Corners includes Salt River

10 Project, Tucson Electric, El Paso Electric, and Public

11 Service of New Mexico are other co-owners besides

12 Southern Cal Edison and ourselves.

13 Multiple owners are involved in different

14 projects from San Juan Generating Station located very

15 close to where this plant is located, as well as Navajo

16 Generating Station, so multiple owners including

17 ourselves. We are also part owner in Navajo Generating

18 Station.

19 Navajo Generating Station is facing much the

20 same set of circumstances that was, that we are facing

21 with Four Corners. They have an owner that must leave

22 the project by a date certain, 2019 in this case. So

23 with that project, Navajo Generating Station, it is

24 ourselves, Salt River Project, and Tucson Electric.

25 They are also co-owners in that project.
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1 So you have an ownership change that has to

2 occur. You have the uncertainty around what the BART

3 rule is going to be like for Navajo Generating Station.

4 We have federal draft implementation plans that have

5 already been put forth by the EPA for our facilities.

6 Navajo Generating Station does not have that yet. So

7 there is still uncertainty what the rules will look like

8 for BART for Navajo Generating Station.

9 And San Juan Generating Station is going through

10 the same exercise with the State of New Mexico around

11 their BART process. That ownership share includes

12 Public Service of New Mexico and Tucson Electric.

13 So you have multiple owners that have multiple

14 power plants that are facing similar type issues,

15 whether it is one party has to leave the project or

16 there is environmental regulations that are coming forth

17 and there is uncertainty around those regulations.

18 Four Corners 4 and 5, we have a clear picture of

19 regulation now that we have the draft federal

20 implementation plan. So we have more certainty on what

21 that future looks like for that power plant that the

22 other owners do not have the luxury of at the other

23 facilities currently.

24 Q. But that certainty is with respect to regional

25 haze rule and the BART requirements, correct?
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1 A. Regional haze as well as the other rules

2 pending, which we are all facing the same, as well as

3 with any coal plant in the country.

4 Q. But the other rules pending, you mentioned, I

5 believe, MACT earlier as well as ozone and coal ash, you

6 don't have the certainty what those regulatory costs would

7 be with respect to Four Corners?

8 A. We have what we believe are worst case

9 scenarios, yes. Certainly you don't know, until you see

10 the final rule, you are not going to know what it is

11 going to look like. But we have modeled various

12 scenarios of what the rule could look like and put in

13 place what we think are the right things.

14 Q. And do those create financial risks for investing

15 in this type of asset?

16 A. No, because, again, we looked at those with

17 costs as part our model.

18 Q. Well, let me rephrase. I didn't say unknown

19 risks. I just said financial risks. And in this case the

20 company may be willing to accept those risks, is that

21 accurate?

22 A. I guess I am not sure what you are asking.

23 Would you repeat the question or rephrase it so I can

24 understand and try and --

25 Q. Sure. Let me try that again. These other, these
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1 additional regulations we talked about that have not been

2 finalized, there is a range of possibilities of what they

3 could require, correct?

4 A. Correct.

5 Q. And that range of possibilities also includes a

6 range of costs that could be imposed on the Four Corners

7 units, correct?

8 A. Correct.

9 Q. And so to the extent that those -- that there is

10 uncertainty of what that range might be, I would

11 characterize that as a financial risk. Is that accurate?

12 A. It is a financial risk if you can't bound it.

13 We think we have bound low and high, just like you do

14 with any investment. You are going to say this is my

15 risk both on the downside and the upside. We have done

16 that, if that's your question.

17 Q. So the risk is there but you believe you have

18 identified it?

19 A. That's correct.

20 Q. But, now, you didn't quantify that in the

21 application currently before this proceeding, is that

22 correct, other than the SCR?

23 A. We quantified -- well, within the, I would have

24 to relook at the application, but within that we have

25 modeled what we expected our costs to be with the
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1 exception of 316(b) as I mentioned earlier.

2 So for mercury we had something what we think is

3 going to be a mercury cost, which is not very much

4 because, again, as was discussed earlier today, we

5 already had the baghouse and scrubbers. So those costs

6 were looked as part of our final analysis of what the

7 value proposition is for this asset.

8 Q. And you use the worst case scenarios in those

9 analyses?

10 A. Just we looked at most probable and have

11 evaluated all various scenarios.

12 Q. Now, moving on in your testimony on page 6, line

13 7 and 9, could you please read the sentence starting with

14 there simply.

15 A. There simply is a limited market for coal at

16 present given the environmental uncertainties and

17 related costs.

18 Q. And did you mean that statement to apply

19 specifically to the southwest or is that nationwide in

20 your understanding?

21 A. Ours was in relationship to, in general, what is

22 going on with coal across the country right now with the

23 number of plant closures, et cetera, as a result of

24 environmental uncertainties.

25 Q. And as you said, so contributing to those
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1 environmental uncertainties are like the BART standard, I

2 believe in the east there is the transport rule that

3 recently came out, MACT standards, these various things we

4 have spoken about, those are the environmental

5 uncertainties that you are referring to?

6 A. No. Those are more certain. It is the one like

7 what just came out yesterday. We were waiting for

8 something to come out. You knew it was in the works.

9 And it came out. So now you can start evaluating what

10 the impact is going to be.

11 And that's one thing. We are getting more

12 clarity on what the rules are going to look like in a

13 lot of these areas that have been uncertainties for

14 years, not just recently, but most of these issues have

15 been longstanding issues 10 years or more that have been

16 ongoing and they are starting to be cleared up as far as

17 what these rules are going to look like.

18 Q. But is it fair to say that your testimony at the

19 time you provided this, your rebuttal, is that those

20 uncertainties did create a limited market for coal,

21 correct?

22 A. Yes. Uncertainty creates a limited market for

23 anything. It can any type of resource. PSD can create

24 an issue for gas plants, for example. It is an

25 uncertainty until you understand it. So any asset, any
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1 uncertainty you have can create a problem. In this case

2 environmental has been something that has created an

3 uncertainty. So the answer to your question is yes.

4 Q. Now, Mr. Rose testified earlier today, he said

5 buying a coal plant right now is a great deal. Doesn't

6 this contradict the statement that you had in your

7 testimony that there is a limited market for coal right

8 now?

9 A. There may be a limited market. It doesn't

10 change the fact that the deals we are being offered and

11 we are looking at going after is a great deal.

12 Q. Well, putting aside this specific deal, I believe

13 Mr. Rose testified to just the markets in general are

14 fantastic for coal at the moment.

15 A. They are very low price. So if you are willing

16 to understand the outcomes potentially around

17 environmental, I would suspect it would be a good deal.

18 It is not a market that I am familiar with or involved

19 in.

20 Q. But despite Mr. Rose's characterization -- I will

21 withdraw that.

22 So, Mr. Schiavoni, you mentioned that APS looked

23 at the risks of or the potentials for future environmental

24 regulations and calculated those probabilities, correct?

25 And you included what I think you stated was the most
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1 probable analysis in what you submitted before for this

2 application, correct?

3 A. For where we had unknowns we put in what we

4 believe would be the outcomes in most of the cases.

5 And, again, I think Mr. Dinkel can better lay out the

6 variables that were involved, but we took worst case

7 where we thought it was appropriate.

8 Q. And as far as quantifying those, the only ones

9 you quantified were for the SCR pollution controls,

10 correct?

11 A. No. Again, we quantified around mercury. We

12 quantified around SCRs, or BART, which goes beyond just

13 SCR, but BART. We quantified coal ash regulation,

14 potential around coal ash regulation. So we did do more

15 than just SCRs.

16 Q. Did I hear this morning you thought they were de

17 minimus?

18 A. No. What I said, 316(b), Clean Water Act, would

19 be de minimus so it was not included in the analysis.

20 And just to provide clarity, mercury looks the

21 same way for us because of the scrubbers and baghouses,

22 at worst absorbing an injection system, which is again a

23 low cost item.

24 Q. So in my review of your testimony and the

25 information that APS provided, it looked to me like APS
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1 predicted 239.6 million of pollution control costs, is

2 that correct?

3 A. 239, no, that would not be correct. I am not

4 sure where you are getting that number from.

5 Q. One moment.

6 Mr. Schiavoni, can you please identify the

7 document that I just handed to you.

8 A. This is APS' response to Sierra Club data

9 request SC 1.13, capital cost comparison table.

10 MR. RITCHIE: Your Honor, I would like to mark

11 this exhibit as Sierra Club Exhibit 6 and move it into

12 the record.

13 CALJ FARMER: Are there any objections to the

14 admission of Exhibit SC-6?

15 (No response.)

16 CALJ FARMER: Hearing none, it is admitted.

17 (Exhibit SC-6 was admitted into evidence.)

18 BY MR. RITCHIE:

19 Q. And, Your Honor, I do want to clarify for

20 purposes of this, the text response of this data request

21 does reference a confidential exhibit that was also

22 provided in the latter part of the question. That

23 confidential exhibit is not included here.

24 CALJ FARMER: Okay.

25 BY MR. RITCHIE:
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1 Q. So, Mr. Schiavoni, if I could refer you to the

2 last page, which is a table titled capital cost

3 comparison, and as you will see there the top number on

4 the left, sir, is the 239.6 million. Does that represent

5 the expected cost for installing an SCR on 4 and 5?

6 A. For Southern California Edison's share, as I am,

7 as I look at this, I believe that's what we are talking

8 about here. So it is not inclusive of our share.

9 Q. Fair enough. For the share that you are

10 proposing to purchase?

11 A. Correct.

12 Q. Now, do you know the quantification of any other

13 additional pollution control cost in addition to the

14 239.6 million for, we will stick with, Edison's share?

15 A. For Edison's share? No, not -- I don't have it

16 in front of me what their cap -- what their overall

17 capital cost was for Edison's share of additional

18 emissions.

19 Q. I guess, sir, what I am getting at, and I will

20 just go ahead, APS has presented that it believes that the

21 upcoming costs for installing pollution controls to Four

22 Corners Units 4 and 5 is this amount of 239.6 million.

23 But you are not asking for recovery of that in this

24 proceeding, correct? That would be a later proceeding?

25 A. That would be, that's correct.
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1 Q. Would you be willing during this proceeding to

2 stipulate to a cost cap at that amount for pollution

3 control retrofits for the lifetime of the Four Corners

4 units?

5 A. No, I would not be willing to do that because,

6 as you know, until you get into the actual rules, we

7 haven't settled on a BART, so I don't know what the

8 finding will look like. I am not sure what the final

9 rule is going to look like. So there is no way I can

10 provide any certainty today that says this is what the

11 costs will be until I see the final proposal from the

12 EPA, the approval proposal from the EPA.

13 Q. So as part of your transaction in this

14 application, you have requested an accounting mechanism to

15 recover, eventually, the purchase price of the Four

16 Corners Units 4 and 5, correct?

17 A. That is correct.

18 Q. And so that will be separated out from what these

19 pollution control costs would be and you seek to recover

20 those at a later date, correct?

21 A. Pollution controls, like existing generation,

22 would be part of our normal doing business in the

23 future.

24 Q. So would you agree at least that the purchase

25 price that you are requesting accounting treatment for is
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1 not the total price, the total capital costs that APS

2 would be committing itself to in this plant, is that

3 correct?

4 A. No, I would not say that. The costs of what we

5 are paying for the power plant is for the power plant.

6 Costs beyond that time, once we have ownership, just

7 like we have today, we are the current owner of that

8 power plant and current owner within 4 and 5, that cost

9 gets dealt with when it comes through and we have a

10 process that it gets dealt with.

11 So will the cost be more? Yes, it is going to

12 be more for environmental controls if we so choose to do

13 those things. That is always going to be the case for

14 any plant modification that has to be done in the

15 future.

16 MR. RITCHIE: Your Honor, I have no further

17 questions.

18 CALJ FARMER: Mr. Robertson, do you have

19 questions for this witness?

20 MR. ROBERTSON: Yes, I do. Thank you, Your

21 Honor.

22 Your Honor, I have requested that there be

23 marked as Alliance Exhibits 2 and 3 for identification

24 copies of two sets of responses provided by APS to data

25 requests that were submitted earlier in this proceeding.
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1 Alliance Exhibit 2 is a copy of APS' July 5th,

2 2011 responses to data requests submitted by the Arizona

3 Competitive Power Alliance. And Alliance Exhibit 3 is a

4 copy of APS' responses to data requests previously

5 submitted by Southwest Western Power Group when it was a

6 party in this proceeding. And those responses were

7 dated May 19, 2011.

8 Prior to or right at the beginning of our noon

9 recess today, I provided copies of these two sets of

10 data requests and responses to Ms. Grabel. I don't know

11 if the witness has a set with him at this time and I

12 wanted to be sure he did before I began my

13 cross-examination.

14

15 CROSS-EXAMINATION

16 BY MR. ROBERTSON:

17 Q. Mr. Schiavoni, do you have those? And if not, I

18 have got extra copies here for you.

19 A. Mr. Robertson, I do have, I believe, what you

20 just referred to.

21 Q. Okay. Very good.

22 Let me begin my cross-examination then by

23 starting with Alliance Exhibit 2. And let me have you

24 turn to the first data request and response. That's

25 ACPA 1.1.
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1 But by way of background and perhaps somewhat by

2 way of foundation, would you describe for me the process

3 that APS uses when it is responding to data requests

4 submitted by various parties and, specifically in this

5 instance, the data requests submitted by the Arizona

6 Competitive Power Alliance. What was your involvement in

7 that process and what was the process that was used?

8 A. My involvement in the process is questions that

9 are directed towards me would come into my office. And

10 then, from there, we would develop our response or data

11 that's needed. And then, from there, it would go to our

12 regulatory staff for appropriate filing.

13 Q. Do I understand you correctly then that you were

14 directly involved in the development of the responses to

15 these data requests where you were identified as the

16 witness for the data request in question?

17 A. Directly involved in review of the material that

18 was going forward, that is correct. I didn't write out

19 the responses.

20 Q. Correct. I understand that. And you did see the

21 response in its final form before it was sent back to the

22 party submitting the data request?

23 A. That is correct.

24 Q. Okay. Let's start then with the response to

25 ACPA 1.1. That response had inquired when Arizona Public
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1 Service Company first became aware that the State of

2 California had enacted and/or enrolled SB 1368. And the

3 response indicates APS became aware that the State of

4 California had enacted SB 1368 shortly after the

5 legislation was enacted in 2006.

6 Let me ask you. At that point in time, what was

7 APS' understanding of the nature and potential impact of

8 that legislation on Southern California Edison and its

9 participation in the Four Corners plant?

10 A. At that point in time -- let me back up.

11 When this was done in 2006 and when it came in

12 the company, how we looked at it or how APS reviewed

13 this was done internal to APS. I wasn't at APS at the

14 time. So the actual mechanics that they went through in

15 2006 I am not certain of, but I have been informed by my

16 folks, my organization, just as you saw here, they found

17 out about it through normal media and legal reviews that

18 were done with this.

19 Q. At what point in time did you begin your

20 employment with APS?

21 A. 2009.

22 Q. 2009.

23 A. That's correct.

24 Q. With reference to the enactment of SB 1368 in

25 2006, based on your discussions with your people, have
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1 they shared with you whether APS had any discussions or

2 did any analysis as to how that legislation might impact

3 the ability of Southern California Edison to continue to

4 be a participant in Units 4 and 5?

5 A. Not going back to 2006. When I came in 2009 and

6 was brought into this position, it was one of the

7 reviews that we did, was to better understand what the

8 implications and what types of things were going to

9 happen as a result of not only SB 1368 but, more

10 specifically, the interpretation of how this, how this

11 was being characterized by people in usage.

12 We have a co-owners committee that come

13 together. So the six co-owners come together. Southern

14 Cal is part of that. And most of it has been through

15 briefings with Southern Cal Edison as to status as well

16 as our own legal staff and their reviews of this

17 particular bill.

18 Q. Do you know whether in 2006 following the

19 enactment of SB 1368 the Four Corners co-owners committee

20 members had occasion to discuss or consider what the

21 impact of that legislation might be on Edison's ability to

22 continue to participate as a co-owner?

23 A. No, I do not. And there are, there are not

24 minutes that are taken as part of those minutes, so I

25 have no records to go back and look what was discussed
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1 during that time frame.

2 Q. All right. Let's turn to the next data request

3 response, which is 1.2. And in this data response,

4 inquiry was made as to when APS first became aware of the

5 rules adopted by the California Public Utilities

6 Commission to implement SB 1368. And the response

7 indicates that APS became aware that those emission

8 performance standard rules had been enacted in 2007.

9 So against the background of you telling me when

10 you joined the company, let me ask you: Do you know

11 whether in 2007 the members of the operating committee for

12 Four Corners had occasion to discuss or consider the

13 impact of those rules on the ability of Edison to be able

14 to continue to participate as a co-owner?

15 A. No, I do not.

16 Q. Let's turn now to the response to data request

17 ACPA 1.3. And here the inquiry was made as to when APS

18 first became aware of southern California Edison's

19 application for an exemption from the rules of the

20 California Public Utilities Commission. And in the

21 response it states:

22 SCE indicated to APS that it intended to seek an

23 exemption from the aforesaid rules before SCE filed its

24 petition for modification. APS became aware of SCE's

25 application for an exemption shortly after SCE filed its
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1 application.

2 Do you know whether as of that point in time

3 either internally within APS or among the membership of

4 the co-owners operating committee on the Four Corners

5 Units 4 and 5 discussions were had with regard to the

6 likelihood of Southern California Edison being able to

7 prevail with its petition?

8 A. No, I do not.

9 Q. Okay. And when you say no, you do not, I am

10 assuming that you are also including your state of

11 knowledge that you have acquired since you joined the

12 company in 2009, is that correct?

13 A. That is correct.

14 Q. Okay. Let me go back to the response to data

15 request ACPA 1.3 for just a moment. Since joining the

16 company, have you by any chance learned the year and month

17 in which Southern California Edison filed its petition for

18 modification, and, similarly, the year and month in which

19 Southern California Edison indicated it was going to be

20 filing such a petition? The response does not indicate a

21 year or a date.

22 A. No, I do not when -- excuse me. I do not know

23 when they made that decision or when they decided. My

24 belief is it was filed sometime in 2007, I am not quite

25 certain of the time frame in 2007, with a subsequent
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1 response in 2008 and again in 2010.

2 Q. Okay. Let's proceed now then to the response to

3 ACPA 1.4. And in that response, it states APS became

4 aware of the CPUC's denial of SCE's request for an

5 exemption shortly after the CPUC denied SCE's request for

6 an exemption. And further on in that response, there is

7 an indication in September of 2008 the CPUC denied SCE's

8 petition for modification.

9 Do you know as of that point in time whether

10 there were any discussions internally within APS or within

11 the co-owners operating committee of Units 4 and 5 as to

12 the impact or the likely effect of the California

13 Commission's denial of that petition on the future ability

14 of SCE to continue to participate in Units 4 and 5?

15 A. Not from, not for the original decision

16 September 2008, I do not, no.

17 Q. Okay. Now, in his same response there is a final

18 sentence that says in May 2010 the CPUC granted in part

19 SCE's petition for modification.

20 Do you know the difference between the original

21 denial in 2008 and then the subsequent granting in part in

22 2010?

23 A. My understanding, the differences were around

24 what type of capital investment and the obligation to

25 prove whether life extension or not was the difference
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1 between the two. I am obviously much more familiar with

2 the 2010 decision and what came out of the 2010, but it

3 was revolving around how Southern Cal Edison could

4 recover their capital investments or their costs.

5 Q. Did the partial granting of the petition for

6 modification in 2010 address the problems that were

7 presented by SCE's original petition in any significant

8 manner?

9 A. Well, it solved the problem of the existing

10 investments they were making and recovering those

11 investments and what type of latitude. And my

12 understanding from the co-owners when I stepped in, what

13 we were trying to do was understand and get clarity

14 around what life extension meant. There was a lot of

15 debate and dialogue around life extension capital. And

16 that was the crux of this issue for us, as the other

17 owners, trying to understand better what can Southern

18 Cal Edison do and what can they not do.

19 Q. And what was the understanding as of May of 2010

20 when that partial granting of the petition for

21 modification occurred?

22 A. Well, all that did was provide clarity to

23 Southern Cal Edison in their minds from the Commission

24 on what costs they can incur, what costs they couldn't

25 incur, and what they have to do for future cost recovery
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1 on a year-by-year basis. So that just provided clarity

2 for them in how to deal with this.

3 As you are well aware in this, in our responses,

4 and we talk about it was in December of 2009, we had

5 already received, the owners had already received

6 written notification from Southern Cal Edison about

7 their intent with regards to the project.

8 Q. Were there -- strike that.

9 When you joined the company in 2009, were you

10 advised as to this circumstance involving Southern

11 California Edison, the California legislation, and the

12 rules of the California Public Utilities Commission?

13 A. Yes. I was advised that this was out there and

14 this had been an issue for Southern Cal Edison as far as

15 trying to understand what it meant to them as far as

16 their facilities that they were partial owners in

17 already. So my, my knowledge and understanding was much

18 more around the fact of what can Southern Cal Edison do

19 and how long can they stay in the project and what is

20 the implications of the owners with that.

21 Q. And first of all, who advised you of the

22 situation upon your commencement of employment with APS?

23 A. It would have been my predecessor as well as the

24 co-owners in one of our first meetings.

25 Q. And who was that individual?
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1 A. My predecessor was John Denman.

2 Q. And, secondly, what were you informed of with

3 regard to the situation you just described in terms of the

4 impact of the legislation and these rules and the action

5 of the California commission upon the anticipated ability

6 or inability of SCE to continue to be a project owner?

7 A. What I was informed of was that there was still

8 a lack of clarity of how the rule was going to be

9 applied and what the implications of the rule were going

10 to be for Four Corners specifically. With that, there

11 was much discussion and conversation around what we, the

12 other owners, felt that rule meant versus what Southern

13 Cal Edison may be interpreting that rule to mean. So

14 for us it was much more time spent trying to understand

15 the implication of the rule more than anything at this

16 point in time.

17 Q. And what was the conclusion reached by the other

18 co-owners?

19 A. That there wasn't a conclusion. We continued

20 to, to this day we continue to struggle with some of the

21 implications of that rule. And, as with this

22 transaction, if this transaction doesn't, does not go

23 forward, we have the next three to four years, until

24 2016, to deal with still what we consider some ambiguity

25 in what Southern Cal Edison may be able to invest in or
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1 not invest in.

2 Q. Would it be correct to say as of the point in

3 time that you joined APS in 2009, APS and the other

4 non-SCE owners of Units 4 and 5 were of the view that

5 there was a very real possibility that SCE might not be

6 able to continue its ownership interest in Units 4 and 5?

7 A. There was a point in time that the

8 discussions -- all of our discussions have taken place

9 back and forth. As we do with all ownership interest,

10 we have one owner that went out and looked at what else

11 they could do with themselves as part of this, as their

12 own cost structure, what the outcomes could be from

13 their own cost perspective.

14 We never reached a consensus of what the

15 potential outcome could be beyond the fact that

16 December of 2009 we formally got told what the outcome

17 from Southern Cal Edison's perspective was. So up until

18 that point in time, there was just much more in the way

19 of debate and discussions about the rule versus the

20 mechanics of what do you do if this rule in fact is

21 interpreted or used the way it appeared that it was

22 being used.

23 Q. Would it be correct to say that prior to

24 December of 2009, the non-SCE owners of Units 4 and 5 had

25 identified that there was the very real possibility that
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1 Edison might not be able to continue as an owner in

2 Units 4 and 5?

3 A. I couldn't tell you what the other owners

4 thought at that point in time as far as what Southern

5 Cal Edison was or was not going to do. As far as the

6 ownership question, again, when I got here in

7 December 2009, it was very clear what their intention

8 was going to be. We were in the middle of the lease

9 negotiation with the Navajo Nation. And they informed

10 us they could not be party, based on the California

11 ruling, to any lease or contractual extensions beyond

12 2016. So that's when we all got formally told that

13 Southern Cal Edison will no longer be part of that

14 project going forward. Up to that point, yes, I mean

15 there were many discussions about that potential.

16 Q. Okay. And that included discussions within APS,

17 is that correct?

18 A. With NAP?

19 Q. Yes, within APS as to the part that Edison might

20 not be able to continue.

21 A. Within my team, yes.

22 Q. Okay. Now, I think you just covered it but I

23 want to be sure. Specifically what did Edison advise the

24 company -- strike that.

25 Let's go to the company's response to data
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1 request ACPA 1.5. And that data request had inquired as

2 to on what date and by what means did SCE inform the other

3 owners in Units 4 and 5 that SCE, one, would not pay its

4 share of any costs for Units 4 and 5 that could be deemed

5 life extending of Units 4 and 5, and, two, would pull out

6 of the plant entirely by 2016. And the response indicates

7 on December 15, 2009, SCE sent the co-owners a

8 confidential letter notifying them of its intentions with

9 respect to Four Corners.

10 Could you be more specific as to what SCE

11 notified the other owners of at that point in time.

12 A. They notified us that, formally, that they no

13 longer could participate in any contractual arrangements

14 that would go beyond the existing contractual

15 arrangements which all expired in 2016. They informed

16 us that capital investments could not be made that could

17 be interpreted as extending plant life by five years, or

18 beyond five years, excuse me. That was two key

19 components of the notification and their intention to

20 leave the project.

21 And if there wasn't -- they also as part of the

22 letter notified us that they did not intend to market in

23 the open market their share of Four Corners 4 and 5 and

24 that they would offer the owners an opportunity to

25 acquire their share in an expeditious manner, and if it
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1 could not be done in an expeditious manner, we should be

2 looking at making arrangements for a logical shutdown of

3 Units 4 and 5 starting in 2014 --

4 Q. Did --

5 A. -- from their perspective.

6 Q. Sorry. I didn't mean to speak before you

7 concluded.

8 Did Edison indicate why they would not offer

9 their share to a third party?

10 A. No, not specifically. I believe, as was

11 testified earlier by Mr. Rose, our arrangement at Four

12 Corners with the multiple owners allows for right of

13 first refusal on any owner. And I think for a third

14 party to come in and bid on a unit or an asset such as

15 this that any owner can match would be something that's

16 not normally seen or done. Why would I negotiate so

17 that one of those owners can take it away from me and I

18 don't have any recourse for that?

19 So they were in a position, and as we would

20 probably think the same way, why market this, and,

21 again, I don't know the facts, but I would surmise why

22 market something that at the end of the day the owners

23 can step in and take out from underneath someone. It

24 just doesn't make a lot of sense. And they didn't feel

25 probably there was going to be a willing participant in
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1 there to look at this asset.

2 Q. In their December 2009 notification to the other

3 co-owners, did Edison indicate that if none of the other

4 co-owners were interested in acquiring its ownership

5 interest, then the only course of action that it would

6 consider would be to recommend shutting down the units?

7 A. No. It wasn't as formal as a recommendation.

8 It was what they felt was going to be a logical sequence

9 because of timing and coming up against the expiration

10 of our lease with the Navajo Nation, our fuel contract,

11 as well as the co-tenancy agreement. So their feeling,

12 or stated, was if this is done expeditiously, we will

13 probably be left with no other recourse than to shut

14 down the power plant.

15 Q. That was perhaps more in the nature of conjecture

16 upon their part as opposed to intent?

17 A. That's correct. This was not factual. We

18 hadn't discussed that as an owners group as a scenario

19 yet.

20 Q. As of that point in time, and we are now in

21 December of 2009, had any of the other owners indicated

22 that they might be interested in acquiring Edison's

23 ownership interest?

24 A. We, APS, being the operator, we had a discussion

25 as the co-owners. And it was decided as part of that
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1 discussion that we individually would not go off and

2 negotiate, as I just indicated, as the ROFR. It would

3 not make a lot of sense to five of us to negotiate

4 separately with Southern Cal Edison.

5 So with that, you know, we, APS, said, well, we

6 are the owner, or the operator, we will take the lead on

7 the negotiation to see what can be had.

8 Individually, myself and another member of my

9 staff, we met with each owner and we had conversations

10 with each owner about their potential interests. There

11 was two schools of thought. Some had expressed

12 potential interest and others had no interest at that

13 particular point in time. But both, all of them said

14 emphatically that they would wait until they see the

15 final numbers, and, secondly, they would wait, that they

16 have an interest in continuing operation of those two

17 units, 4 and 5. So that was part of the conversation

18 that took place during that time frame when we were

19 trying to decide how to move forward with Southern Cal

20 Edison.

21 Q. When you said they indicated they would wait

22 until they saw the final numbers, was there an implication

23 by those who made that statement that if APS were to

24 arrive at terms with Southern California Edison that, if

25 implemented, would enable continuation of the plant, those
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1 others then implicitly would decline to exercise their

2 right of first refusal?

3 A. No, quite the contrary. In fact, the ROFRs went

4 to the last day in a couple circumstances. And, again,

5 you know, we, we are all owners of various facilities,

6 including this facility. So we are all together in

7 certain circumstances asset by asset. So I wouldn't say

8 that. I think people look very hard at this and were

9 trying to make a decision considering they had decisions

10 to make at two other power plants potentially, or

11 another power plant. So it was multiple. I would view

12 that as multiples were trying to figure out what is the

13 right thing for them strategically to do, not just at

14 Four Corners or the other assets they have in the Four

15 Corners like we do.

16 Q. So as of that point in time is it your testimony,

17 and I just want to be sure I understand it, that there

18 were some other co-owners who, by saying they would wait

19 and see what the numbers look like, might possibly have

20 been parties who would potentially be interested in

21 stepping in and acquiring the ownership interest?

22 A. It is possible. You know, I don't know what

23 happened in their offices with their staffs and with

24 their board or whatever. It is always possible.

25 Q. But as of that point in time they had not taken
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1 that possibility off the table, is that correct?

2 A. Well, they did when they submitted their ROFRs,

3 their right of first refusals.

4 Q. That was subsequent, though, correct?

5 A. That is correct.

6 Q. When did these one-on-one discussions occur

7 between you and a member of your Staff and the other

8 co-owners of the plant other than Edison?

9 A. It took place just prior to us getting final

10 parameters of a deal done basically. So it was as we

11 were completing this deal last year. It took place

12 during that time frame. So I would imagine somewhere

13 between -- I can't recollect the exact time, but it was

14 just prior to us consummating this deal we had with

15 Southern Cal Edison.

16 Q. Now, the application in this proceeding was filed

17 on November 22nd, 2010. Moving back from that, can you

18 estimate approximately when in 2010?

19 A. It would have been in the fall of 2010.

20 Q. It would have been in the fall of 2010.

21 Mr. Rose earlier today expressed his opinion that

22 this was a transaction where the value, as he perceived

23 it, was on the order of $1 billion and yet the assets were

24 available to be acquired for 294 million. Do you know

25 whether the other co-owners of Units 4 and 5, other than
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1 SCE and APS, viewed the transaction the same way Mr. Rose

2 does?

3 A. I don't know. I would not have any knowledge

4 what the other owners believe of the transaction.

5 Q. Do you know why those other owners decided not to

6 exercise their right of first refusal?

7 A. No, I do not.

8 Q. Okay. Let's go now to data request ACPA 1.6.

9 And I am going to read that into the record and the

10 response just so that we have it all together in one

11 place.

12 The data request reads as follows: With

13 reference to Article 1.1.68 and/or Article 8.4 of the

14 November 8, 2010 purchase and sale agreement between SCE

15 and APS, would APS exercise its right to terminate and/or

16 withdraw from the agreement if the Arizona Corporation

17 Commission issued a decision, one, deferring final action

18 on APS' request for authorization to acquire SCE's

19 ownership interest in Units 4 and 5, and, two, directing

20 APS to conduct an RFP for proposals to provide APS with an

21 approximately equivalent amount of generation capacity

22 from other sources?

23 And the response indicates the addition of any

24 new process that would delay a resolution of this matter

25 and add new uncertainty to the conditions surrounding
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1 Units 4 and 5 increases the risk that the transaction will

2 not be consummated.

3 Against that background, let me ask you: From

4 APS' perspective, what factors would influence a final

5 decision by APS as to whether or not to terminate and/or

6 withdraw from the agreement with Edison?

7 A. The structure we have set up with this

8 transaction with California Edison is there are two

9 off-ramps for APS, one in March of 2011, or, excuse me,

10 2012, and one in December of 2012. California, Southern

11 Cal Edison also has the ability to terminate the

12 agreement in December of 2012.

13 As to your question, I will come to the answer

14 in a way that tries to set the stage for why we are here

15 from an expediency standpoint and why it is important

16 for us to have this resolved sooner rather than later.

17 We are in the process of looking at an

18 acquisition of this 4 and 5 and closure of 1, 2 and 3 as

19 part of this transaction. With that said, in order to

20 meet the requirements that the draft BART has imposed or

21 is going to impose on us, that federal implementation

22 plan can go one of two ways.

23 It can require us to make the Units 1 through 5

24 compliant by 2016 environmentally, which then includes

25 controls that would have to be placed on 1, 2 and 3 as
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1 well as 4 and 5.

2 The second piece is that compliance then would,

3 if you back it up, for just compliance in that space

4 would require us to start making capital investments in

5 2012. So us as an owners group, we have to start

6 deciding are we going to make capital investments on 4

7 and 5 in 2012 without certainty that there is a

8 transaction that can be supported by APS or APS is not

9 going to walk or Southern Cal Edison is not going to

10 walk from this deal. No one is going to make that type

11 of investment without some sort of certainty of this.

12 The second piece of the capital is, if I close

13 1, 2 and 3, in turn, we take auxiliary steam from 1, 2

14 and 3 to start up 4 and 5, I have put an auxiliary

15 boiler in place of those three remaining units. That

16 auxiliary boiler has to be permitted. And in order to

17 get permitted, our permits go through the federal

18 government. We don't have -- because it is on the

19 reservation, so the federal government controls the air

20 permits or permits at that site in conjunction or

21 consultation with the Navajo Nation.

22 In order to do that, to meet a 2013 or '14 or

23 '15 closure of 1, 2 or 3, again, permits take

24 approximately 12 to 18 months to put in place, which

25 then pushes out to 2000 -- mid 2013 if this isn't done
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1 by the beginning of next year, for example, and just

2 continues to move it out, which then delays closure of

3 1, 2 and 3 and then delays closure of 1, 2 and 3.

4 What ends up happening is we may have no wiggle

5 room or no room -- excuse me, wiggle room is an

6 incorrect term -- no room in dealing with the EPA as far

7 as compliance space goes with new regulation with

8 regards to BART. So that's first off.

9 Second is the EPA, as I mentioned. The EPA has

10 issued our draft federal implementation plans. There

11 are two plans out there right now. One plan says

12 retrofit and make all five units meet BART and do that

13 by 2016. The second plan was part of a proposal that we

14 had made which was in conjunction with this that says we

15 will put SCRs or do the compliance for Units 4 and 5 in

16 2018 and close 1, 2 and 3 by 2014. With that closure,

17 again, it gets muddied up or makes it more difficult if

18 I don't have an auxiliary boiler and I don't have the

19 things in place to be able to meet those compliance

20 dates or that offer we are asking for to move out SCRs

21 on 4 and 5 as well as closing 1, 2 and 3 earlier. So

22 EPA is the second part of it.

23 Which FIP will we want to use? This deal isn't

24 done. Then we will use the FIP that says keep all of

25 them open until 2016 and then go from there, because
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1 then we would be talking about the owners. Do we close

2 4 and 5? Do we retrofit 1, 2 and 3? We will have

3 different decisions we have to make.

4 Lastly is fuel contracts. We are in the middle

5 of negotiation of fuel contracts. Fuel contracts are

6 based on take. Well, if I am closing three units and I

7 have 4 and 5, my take on fuel is going to be different

8 than all five units available. If the power plant is

9 going to close in 2016, there is no need to negotiate a

10 new fuel agreement. So that agreement has to take place

11 or is in place right now and being negotiated, which

12 will have some finality to this by February of next year

13 potentially, 2012.

14 So it is important with all these moving pieces

15 that we sat back and we said how quickly do we have to

16 move, what do we have to do in order to make this

17 transaction work. There are a lot of moving pieces to

18 this. So that is why we say that the uncertainty that

19 can be caused by a decision by the Commission that would

20 not allow us potentially to have the deferral, as well

21 as looking at the RFP process, which, again, would take

22 time as it was explained by Mr. Rose this morning,

23 really would make this a much more difficult transaction

24 to consummate and it pretty much sets in motion

25 something that may ultimately cause a closure of Four
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1 Corners altogether.

2 Long-winded answer to your question.

3 Q. You have imparted a lot of information and a lot

4 of moving pieces in that answer. And I am not sure I am

5 dealing with moving pieces or a maze, but let me see if I

6 can work my way through it a little bit.

7 Have the owners of Units 4 and 5 other than

8 Edison discussed what they would do if the Commission

9 denied APS' request for authorization to acquire Units 4

10 and 5?

11 A. We are in process of contingency planning for

12 that eventuality now.

13 Q. Now, do the current EPA proposals or the

14 alternatives as you outlined it, I believe there were

15 three, do they dictate which way the owners, other than

16 SCE and Units 4 and 5, would go over or what their options

17 are if the Commission did not approve APS' request in this

18 proceeding?

19 A. No, not necessarily. And I would just make a

20 minor correction. There are only two proposals, two

21 federal implementation plans that have been proposed.

22 One is retrofit all five. The other one is close 1, 2

23 and 3, retrofit just 4 and 5. So that's the two

24 proposals.

25 That in itself has not dictated our course of
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1 action. That is just another economic decision that

2 gets made by each individual owner on what they want to

3 invest.

4 The circumstances are somewhat different because

5 of Southern Cal Edison's position or Southern California

6 Edison's need to leave the asset because they cannot be

7 engaged in a contractual engagement beyond 2016. Any

8 owner, including APS, at any point can say I want to

9 sell my share of the asset and do that. They have the

10 right to do that.

11 So each owner is individually making up their

12 own mind or looking at this from their own perspective

13 on what they are going to do, things or factors they are

14 going to take into account to continue to stay in this

15 process as they would in any generating project.

16 Q. If I understood a portion of your response

17 correctly a few moments ago, at the present time the

18 non-SCE co-owners of Units 4 and 5 are having contingency

19 plan discussions on what to do if the Commission did not

20 approve APS' request as to Units 4 and 5 in this

21 proceeding, is that correct?

22 A. We are starting that. We have not -- in fact,

23 we have a meeting the 2nd of August, and that's one of

24 the agenda items, to start looking at our contingencies

25 just on 4 and 5. Remember, the owners have no -- they
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1 are not owners in 1, 2 and 3. That's wholly owned by

2 APS. So that's our decision to make, not theirs.

3 Q. Right. That was my understanding. Would those

4 contingency plans impact APS' decision with regard to

5 Units 1, 2 and 3?

6 A. They may. We would have to look at it

7 economically again like we do with any decision we make

8 and what is the right thing for our customers. And

9 that's what drives our decisions.

10 Q. Okay. Now, this date of 2016, how does that come

11 about as a significant date? Is that a result of the

12 California legislation and the regulations of the

13 California commission or is that a date which arises from

14 a contract or an expiration of a contract or what?

15 A. Yes, it is interesting. July of 2016 was used

16 for a lot of different things as part of this co-tenancy

17 and co-ownership agreement. The operating agreement

18 which designates us as operating agent expires in 2016.

19 The co-tenancy agreement, how we do business

20 collectively, expires in 2016. Our fuel agreement

21 expires in 2016. Our lease with the Navajo Nation was

22 set to expire in 2016. We agreed to the extension to

23 2041. That now needs to be approved by the Department

24 of Interior, but that also was set to expire in 2016.

25 So there were a lot of moving pieces that all were set
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1 to expire at the same time.

2 What brought this then to a challenge or an

3 issue that we had is, again, Southern Cal Edison sending

4 us the letter that basically says they can't enter into

5 contracts that would extend beyond 2016. So all of

6 those agreements in place, including our lease with the

7 Navajo Nation, Southern Cal Edison is only a party to

8 that lease until 2016 or the consummation of this

9 transaction, nothing beyond that. So we have a separate

10 agreement signed by the remaining owners for 2016 and

11 beyond with the Nation.

12 Q. With regard to the operating agreement and the

13 co-tenancy agreement, you indicated that they expire in

14 2016. Do they contain provisions that are frequently

15 found in agreements that provide for a year-to-year

16 extension in the absence of agreement upon termination or

17 a new agreement by the parties?

18 A. Not that I am aware. The agreement ends in

19 July of '16.

20 Q. Okay. Is APS the likely entity to continue to be

21 the operator of Units 4 and 5 beyond 2016, regardless of

22 the transaction that's before the Commission in this

23 proceeding?

24 A. Yes.

25 Q. Okay. Let's go to data request ACPA 1.7. And
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1 here the inquiry is a little bit different. The data

2 request references the same provisions of the purchase and

3 sale agreement with Edison referred to in ACPA 1.6. But

4 the question posed is: Would APS exercise its right to

5 terminate and/or withdraw from the agreement if the ACC

6 issued a decision denying APS the type of accounting order

7 APS has requested in its application with respect to

8 Units 1, 2 and 3 at Four Corners?

9 And the response indicates the denial of any of

10 the requests made in the company's application increases

11 the risk that the transaction will not be consummated.

12 Now, when that response refers to transaction, we

13 are talking about the transaction with respect to Units 4

14 and 5, correct?

15 A. I believe so. This was Mr. Guldner's response.

16 Q. Oh, I am sorry. I should have looked at the

17 bottom of the page. I will withdraw this line of inquiry

18 and save that for Mr. Guldner.

19 A. Thank you.

20 Q. Thank you. I got so wrapped up in the moving

21 parts.

22 Let's move to Alliance Exhibit 3, which is the

23 company's responses to data requests which have been

24 submitted by Southwestern Power Group when it was a party

25 in this proceeding. And let me ask you by way of
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1 background and foundation, to your knowledge was the

2 process used in preparing the company's responses to this

3 data request the same that you have described was used in

4 responding to the data requests submitted by the Arizona

5 Competitive Power Alliance?

6 A. I am sorry. I do not have that, Mr. Robertson.

7 The Southwest, I do not have it.

8 Q. You don't have Alliance-3?

9 A. I do now.

10 Q. You do now.

11 A. I believe I do now.

12 Q. Because I have got an extra copy here.

13 A. No, I have it now. I am sorry. Could you

14 repeat your question.

15 Q. Yes. My question at this point was by way of

16 background and foundation. Was the process that was used

17 in the company for preparing responses to these data

18 requests that you previously described the same as the

19 process that was used in connection with the data requests

20 submitted by the Alliance?

21 A. Yes.

22 Q. Okay. I do have a few questions with regard to

23 those data requests where you are indicated as the

24 responsive witness. Let's start with the response to

25 SWPG 1.1. And the data request had inquired whether any
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1 of the owners of Units 4 and 5 other than APS and SCE had

2 expressed any interest in acquiring all or a portion of

3 SCE's ownership interest in Units 4 and 5. And you

4 previously addressed that in your testimony.

5 And the response indicates:

6 No. The other owners at Four Corners had a right

7 of first refusal that expired March 8, 2011. None of the

8 owners exercised their rights of first refusal.

9 Against that background let me ask you this

10 question. Do you know whether any of the owners of

11 Units 4 and 5, other than Edison, have discussed the

12 possibility of shutting either Unit 4 or 5 and using the

13 remaining unit to satisfy their collective needs?

14 A. There had been, well, discussions around a

15 scenario that may allow, that may -- I am sorry, a

16 scenario that would provide for partitioning. Our

17 co-tenancy agreement does not allow for partitioning.

18 Q. You say it does or does not?

19 A. Does not.

20 Q. But that is something that could be addressed

21 through an amendment of the co-tenancy agreement?

22 A. It is something we would have to look at from a

23 legal standpoint what could be done there.

24 Q. Is that one of the topics that's going to be

25 addressed in these forthcoming contingency planning
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1 discussions?

2 A. It very well may be.

3 Q. Okay. Let's take a look at the response to data

4 request SWPG 1.2. And the data request had inquired

5 whether the owners of Units 4 and 5 other than SCE had

6 reached a decision as to whether to continue the operation

7 of those units beyond 2016 in the event the Commission

8 does not approve APS' application in this proceeding. And

9 the response states the owners of Units 4 and 5 have not

10 reached a decision as to whether to continue to operate

11 those units beyond 2016 in the event the Commission does

12 not approve APS' application.

13 Now, you have indicated in your testimony this

14 afternoon there are some contingency discussions that are

15 planned with the first meeting beginning in August. That

16 would embrace the inquiry posed here, is that correct --

17 A. That is correct.

18 Q. -- whether or not to continue?

19 Let's go to the response to data request

20 SWPG 1.3. And that data request inquired: In terms of

21 additional years, what would be the extended life of

22 Units 1, 2 and 3 at the Four Corners Generating Station if

23 they were retrofitted to comply with anticipated

24 environmental regulations applicable to such units?

25 And the response says the life of the units would
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1 be constrained by the term of the lease, 2041. And a

2 subset to the response goes on to state the cost is shown

3 on page 10, lines 9 to 14 of the application, the total

4 cost for units 1 through 3 would be approximately

5 $586 million.

6 Let me ask you this question. Given the

7 considerations indicated in this response, why would APS

8 make such an investment regardless of the Commission's

9 decision on APS' request as to Units 4 and 5?

10 A. Not implying that we would, it is something we

11 would evaluate. We would have to look at it from

12 economic decisions based on our resource plan that we

13 have and then make decisions from there.

14 Q. Let's turn to data request SWPG 1.6. And this

15 data request makes inquiry as to the assumptions

16 underlying APS' conclusion that new transmission

17 infrastructure would be needed in connection with the use

18 of combined cycle generation to replace the generating

19 capacity of Units 4 and 5.

20 And in the response it states as follows:

21 Most existing gas generation locations, as well

22 as the assumed location of new gas generation, is west of

23 Phoenix outside of the Phoenix load pocket. This region

24 is typically identified as the Palo Verde area. Assuming

25 all transmission infrastructure is built as identified in
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1 the APS 10-year transmission plan, APS would need

2 additional Palo Verde-East transmission capacity beginning

3 in 2018 if the Four Corners transaction is not

4 consummated.

5 It goes on to say the upgrades necessary would

6 involve the permitting and construction of additional

7 lines to increase the scheduling capability.

8 Let me ask you, first of all: Why is it assumed

9 that new gas generation would be located west of Phoenix?

10 A. I think the assumption is not necessarily that

11 that's the only place. We have looked and we do

12 continue to look at all available sites and resources

13 potentially for the generation.

14 I would defer to Mr. Dinkel when he is

15 testifying to give you more specificity around

16 locational, but it is part of just the resource planning

17 to look at it.

18 Q. Are you familiar with the Bowie project which has

19 received a certificate of environmental capacity for a

20 location near Bowie in southeastern Arizona?

21 A. No, I am not.

22 Q. How much additional Palo Verde-East transmission

23 capacity would be needed in 2018?

24 A. I do not know.

25 Q. Do you know whether or not there are any non-APS
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1 transmission projects currently proposed or in the works

2 that might provide the needed capacity east of Palo Verde?

3 A. I do not know that.

4 Q. Do you know whether the additional lines to which

5 reference is made in the response to the data request mean

6 new structures or, rather, reconductoring on existing

7 structures?

8 A. I do not know that. I just took it off the

9 transmission plan.

10 Q. I will move away from the data requests now,

11 Mr. Schiavoni, and see what I have got on my other list.

12 Let me take just a minute to review my notes.

13 When APS and the other non-SCE co-owners of

14 Units 4 and 5 were advised in December of 2009 by Edison

15 that Edison in essence would be pulling out of the

16 project, did APS as of that point in time or any time

17 thereafter give consideration to options or alternatives

18 to the capacity represented by Edison's ownership interest

19 in Units 4 and 5 that might be available to APS?

20 A. Without specificity to 4 and 5, I would say that

21 our -- we continually look at the resource plan to

22 understand what we can and can't do. So from that

23 perspective, yes, it is always looked at and understood.

24 The uniqueness of this circumstance, because of

25 the timing on it, predicated us to move very quickly if
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1 this was the right deal or not. And this very well

2 could have been the wrong deal. The pricing could have

3 been something that would have been exorbitant and made

4 this not an issue for us at all. But because of the

5 attractiveness and how this pricing was and how quickly

6 we could close on something like this, you get it done

7 in order to support what needed to done for long-term

8 certainty at the Four Corners area, this made the right

9 sense from my perspective.

10 Now, again, Mr. Dinkel will be testifying later.

11 He is the resource planning person. So he would have

12 that direct responsibility to look at that resource

13 adequacy and what we would potentially do to fill those

14 resource needs.

15 Q. Now, you have testified that Edison notified the

16 other co-owners of Units 4 and 5 in December of 2009 that

17 basically Edison was not going to be able to continue

18 beyond 2016, correct?

19 A. That is correct.

20 Q. And I believe the response in one or more of the

21 data requests that APS provided indicated a date of

22 November 8th, 2010 for the agreement that was agreed to

23 between Edison and APS, correct?

24 A. Yes.

25 Q. Within that time frame between December of 2009
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1 and November of 2010, at what point did APS have a good

2 idea of what the purchase price was going to be, setting

3 aside the other transactional details?

4 A. That's an interesting question. I think from a

5 pricing standpoint, the 294 I think we were pretty much

6 in agreement, because the structure of this deal was to

7 keep, keep people whole. I mean that's what this was

8 looked at, not one penny more, not one penny less.

9 So when this deal got done with 2012 as a goal,

10 October 2012, the thought process was Southern Cal

11 Edison, they got kept whole for their customers from

12 that period to the 2016 date. From our perspective, we

13 looked at it from a value proposition, saying our

14 customers reap the benefit from that same point in time

15 now, '12 to '16.

16 So for us, if we can work to that kind of

17 guideline, which is what Southern California Edison

18 proposed to us, all we want out of this is to make sure

19 our customers are kept whole until 2016, as long as

20 that's done, then we can complete this transaction,

21 which made it a very beneficial transaction for both

22 parties and for us with our customers. So we knew from

23 basically that point in time that December '11, because

24 they put that in the letter kind of as a guidepost to

25 what they wanted to achieve, so we knew that that was
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1 kind of the model this was going to be developed around,

2 was keep their customers whole, and if you can do that

3 and provide value for ours, we can get a deal done.

4 And, quite frankly, that's how it happened.

5 So to put a target to say the 294 was X date,

6 that actual number probably late summer, maybe mid

7 summer of last year, 2010, but we had the framework

8 always in place from their letter in 2009 that that's

9 what was being asked of from them. So we felt, as all

10 the owners did, that was going to be a pretty good deal

11 for anybody that can step up and buy that share.

12 Q. And then, if I understand you correctly, as to

13 the actual number for the deal, you had that as mid to

14 late summer of 2010, correct?

15 A. Yes, plus or minus. I am not -- I don't

16 recollect the exact time that we came to that number and

17 said this is it. But I do know the last month or two,

18 or the last month was the legal documentation to get

19 everything straightened out, so backing up from October,

20 somewhere prior to October. But as I recall, it was

21 sometime in mid summer sometime that we came up with

22 that pricing and said this will work and now let's go

23 fix all the little things that had to be addressed as

24 part of that agreement.

25 Q. Okay. Very good.
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1 What is the level of confidence you have that

2 federal and/or state regulations will allow continued

3 operation of Units 4 and 5 beyond three different points

4 in time? I am going to include in my question and I would

5 like you to respond to each, 2020, 2030, and 2040.

6 A. As with any regulation, there has not been

7 forced closures. The closures of power plants are based

8 on business decisions, the economics. So regulation

9 itself is not going to force the closure. It is going

10 to be, it is going to be up to individual owners to make

11 a decision economically is it right to continue.

12 With your mileposts for what we know today, you

13 know, if I was to sit back 25 years ago and say what was

14 I going to know in 2011, I couldn't predict, wouldn't

15 know, but back then we all felt very strongly there were

16 a lot of environmental regulations coming forward that,

17 you know, challenge the industry. That has held true

18 but economically continues to survive because you can

19 always do the material condition things to configure a

20 power plant the way you want it to meet the compliance

21 of the regulations. No regulation traditionally has

22 ever been established that says you can never meet this

23 requirement.

24 So I think it is much more of what is the

25 magnitude of a regulation in the future than whether you
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1 can get compliance. Now, of course, you set a zero

2 emission of carbon, yeah, no one will ever meet that.

3 But I don't see that as a reality. So I think we can

4 meet compliance 2020, 2030, 2040.

5 Q. Assuming it makes business sense, correct?

6 A. Correct.

7 Q. And would you agree as you move into the future

8 what does and does not make business sense would include

9 consideration not only of cost of compliance with the

10 regulations then in effect or to be in effect but also

11 what the cost is for alternative power, sources of power?

12 A. Absolutely.

13 Q. Okay. I think your last answer or your last two

14 answers may have addressed this question but I want to be

15 sure I don't overlook it. What is your level of

16 confidence that the owners of Units 4 and 5 will be

17 willing to continue to pay for the cost of operating Units

18 4 and 5 up to and beyond 2020, 2030, and 2040?

19 A. I cannot, I can't predict what the other owners

20 may be thinking or what they will be thinking in those

21 time frames. So, again, they always have the option, as

22 we do, to leave the project at some point in time if it

23 is not financially the right project to be in, just like

24 we do in any other assets. It would be unfair of me to

25 guess what they may be thinking.
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1 Q. Okay. One last area. What weighting would you

2 give -- let me rephrase that.

3 What weighting would you recommend that the

4 Commission give in connection with its deliberations in

5 this proceeding to the following considerations. And

6 there are five. And I will mention them and then you can

7 take them in sequence as you like: Cost, environmental,

8 Navajo community interest, the Commission's policy to

9 foster and maintain a viable competitive wholesale

10 electric market in Arizona, and any other you care to

11 mention.

12 A. I don't know that I will mention any more.

13 That's interesting you pick the first three that you

14 did, because that was the basis for this transaction.

15 This transaction, because of the set of circumstances

16 that presented itself, was unique inasmuch as we have

17 people in the Navajo Nation that are so dependent on the

18 operation of this facility. So for them it is a

19 livelihood. It is things that provide for education and

20 other things for the Nation. And with the high

21 unemployment rate, it is one of the things that is

22 stable up in the Nation. They rely on both the coal as

23 well as these power plants for an economic engine for

24 the Nation.

25 The environment, as has been mentioned
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1 repeatedly, was extremely important to us. And that's

2 why we proffered to the EPA the structure of a different

3 alternative to the FIP that they proposed. Their

4 original proposal was all five plants by 2016, make them

5 compliant. We came back and said we will close 1, 2 and

6 3 early and we will go ahead and do the retrofit on 4

7 and 5. As was testified earlier today, it is better

8 than the EPA laid out to us. So the environment is

9 important to us. And we felt this makes a move and puts

10 us in the right direction of improving the visibility of

11 the parks up in that area.

12 And lastly, cost, last only because from my

13 perspective as part of this earlier discussion, cost

14 comes back to the customer, how much is the customer

15 willing to pay for the power they receive. And the

16 customer ultimately decides what is the right cost. Our

17 job is to pick resources and give them choices. Once

18 you start taking away choices, then I think it makes it

19 harder for the customer to understand why their electric

20 bills are what they are. And going to a sole fuel

21 supply takes away choice. We look at how do we provide

22 full diversity. And that's important to us that we do

23 that.

24 But ultimately, and to your last point, policy,

25 which is established by Commission, they make the
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1 ultimate decision what the resource looks like. So that

2 is their, their right, and that is what they are here

3 for. So that is the number one issue obviously from a

4 Commission standpoint with all the other three being

5 influencers in a lot of ways.

6 So this transaction was so important to us from

7 that perspective as we balance those first three things,

8 because ultimately everybody -- does everybody get what

9 they want in this transaction? Absolutely not. But it

10 is the best thing for the customers, best thing for the

11 Navajo Nation, and best thing for the environment given

12 the set of circumstances that were presented.

13 Q. It sounds as though in your response you are

14 identifying the various considerations and expanding far

15 beyond the labels that I assigned, but you are not

16 actually presuming to suggest specific weightings for each

17 of those to the Commission. Is that correct?

18 A. I wouldn't presume to tell the Commission how to

19 weigh their decisions. I think these are all factors

20 they take into account in their decision making.

21 MR. ROBERTSON: Mr. Schiavoni, today in this

22 hearing room is the first time you and I have had

23 occasion to meet one another, so to speak. We chatted

24 informally previously. I would just like to say for

25 myself it has been most enjoyable, and I appreciate your
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1 directness in responding to questions. That concludes

2 my cross and thank you.

3 THE WITNESS: Thank you. I am not sure that

4 having a lawyer saying they appreciate me siting here is

5 a good thing either.

6 CALJ FARMER: Let's take a break here and return

7 at 3:15.

8 (A recess ensued from 2:54 p.m. to 3:13 p.m.)

9 CALJ FARMER: Okay. Let's go back on the

10 record.

11 Mr. Robertson.

12 MR. ROBERTSON: Yes, Your Honor. I had a very

13 brief procedural matter. Specifically I would like to

14 move the admission into evidence of Alliance Exhibits 2

15 and 3.

16 CALJ FARMER: Any objection to the admission of

17 Alliance Exhibits 2 or 3?

18 (No response.)

19 CALJ FARMER: Hearing none, they are admitted.

20 (Exhibits Alliance-2 and Alliance-3 were

21 admitted into evidence.)

22 MR. ROBERTSON: Thank you, Your Honor.

23 CALJ FARMER: RUCO.

24 MR. POZEFSKY: Thank you, Your Honor.

25
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1

2 CROSS-EXAMINATION

3 BY MR. POZEFSKY:

4 Q. Good morning, or good afternoon, Mr. Schiavoni.

5 Let me start by going, covering some ground that you have

6 already covered, ask some additional questions on some

7 ground that you already covered.

8 One of the exhibits that was handed out was a

9 Sierra Club exhibit. And it was SC 1.13. On the back of

10 it there was a capital cost comparison that you talked

11 about.

12 A. Thank you. Okay.

13 Q. I just wanted to clarify a few points you made so

14 I understand. You had talked about that 239.6 million in

15 the first column next to SCRs. Is it my understanding

16 that that was the total cost of regulatory compliance that

17 APS anticipates as we go forward with this?

18 A. No. This is just the SCRs and it was just

19 Southern Cal Edison's share.

20 Q. Okay. Is there an additional amount beyond the

21 SCRs that that was, I know you were asked quite a bit

22 about the quantitative, but is there an additional amount

23 that APS anticipates beyond the SCRs that you can quantify

24 for us?

25 A. For Units 4 and 5?
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1 Q. Yes.

2 A. Yes, there is. But it is part of a normal

3 capital spend program that you have for the project.

4 And I think Mr. Dinkel, when he is doing his testimony,

5 has the basis for the numbers that were used. I can

6 give you environmental costs and those type of things if

7 needed.

8 Q. I am just trying to get an idea of the total

9 anticipated costs. So if you have them handy, if you

10 could. And if I have any questions further on it, I will

11 ask Mr. Dinkel.

12 A. For, just for the additional things I would put

13 in is 316(b), as I mentioned, which was not part of the

14 analysis. That's $3 million. Mercury, MACT, which was

15 part of it, is $4 million. And we talked about SCRs.

16 That's the other cost components that I had as part of

17 it.

18 Q. Okay. I am sorry. What was the first one, the

19 one before the mercury, MACT?

20 A. 316(b), which is the water.

21 Q. And how much was that, sir?

22 A. That was 3 million, 3.1 million.

23 Q. Okay. You also talked earlier about APS, like

24 any business, would look at the risk from the low end to

25 the high end. Are these figures that you are talking
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1 about here, are they the low end? The high end? What are

2 they?

3 A. No, these figures that we provided for the SCR

4 that I talked about for mercury, there are some

5 certainty around those because those rules are further

6 along. And so there is better clarity around what those

7 would look like. So those are just like any

8 construction cost. There is going to be a little

9 variance but not that much of a variance.

10 So for rules that are promulgated we can get

11 more certainty of the costs until final rules -- like

12 BART, I can't tell you total BART costs, for example. I

13 can tell you what an SCR cost but I can't tell you the

14 total BART cost until I see the final rule.

15 Q. Okay. I am going to ask you some questions,

16 Mr. Schiavoni. I don't know if you are really the right

17 person to answer them as we go through this. It is going

18 to probably either be you or Mr. Dinkel. But if it isn't

19 you, please let me know.

20 You are the senior vice president of fossil

21 generation, correct?

22 A. That's correct.

23 Q. I want to talk to you a little bit about

24 long-term gas contracts as an alternative option. The gas

25 that would be purchased pursuant to any such contract
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1 would be purchased and not produced by assets that the

2 company owns, correct?

3 A. Correct.

4 Q. So APS would therefore have no ownership interest

5 or control on that gas generation, correct?

6 A. In the gas, the generation itself, that's

7 correct.

8 Q. And, of course, and again I know you are not an

9 attorney, but if there is a purchased power agreement,

10 there is always a possibility that a party could breach

11 the contract, is that correct?

12 A. I would assume so.

13 Q. And if so, a breach of contract could place at

14 risk APS' obligation to serve at least temporarily, is

15 that correct?

16 A. That's correct.

17 Q. Are gas PPAs structured in a way that limits the

18 risks associated with gas price volatility?

19 A. If you are -- if the question is for gas

20 generation, I want to make sure we are not confusing gas

21 hedge for pipeline capacity versus the actual generating

22 asset and the gas that's used to burn the generation.

23 So I am talking about the actual generation itself.

24 Q. Right.

25 A. Under normal circumstances my experience has
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1 been that gas is a pass-through. So basically the owner

2 of the asset does not pay for the gas. It is paid by

3 the customer.

4 Q. Are there other risks associated with long-term

5 gas contracts?

6 A. Again, from a PPA standpoint, on an off-take for

7 generation, yes. It is the volatility of the gas price,

8 because you retain that exposure. That exposure is not

9 held by the owner of the generation.

10 Q. The plant that's in question here, APS' proposal

11 of Units 4 and 5, that plant is substantially depreciated,

12 is that correct?

13 A. That's correct.

14 Q. What is the depreciable life?

15 A. The depreciable life, I believe, and I am not

16 certain, so it is 2035, I believe, or 2030 or 2031. I

17 am guessing but I think it is 2031.

18 Q. So how many years before it would be fully

19 depreciated?

20 A. 20 more years.

21 Q. 20 more years? Let's move on to the Navajo

22 Nation. Four Corners plant is a big employer of the

23 Navajo Nation, correct?

24 A. Yes, it is.

25 Q. You would agree that if the plant were closed in
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1 its entirety it would have a substantial impact on the

2 Nation's economy, correct?

3 A. Yes, it would.

4 Q. Can you shed some more light on just how much of

5 an impact it would have on the economy?

6 A. During the time frame we were negotiating with

7 the Nation the lease, the Nation, one, was very clear on

8 presenting the significance of this facility and the

9 attendant coal contracts to the economics of the Nation.

10 President Shirley, the previous president, called it

11 cataclysmic. If this transaction or this lease was not

12 renewed and continued to operate, it would be

13 cataclysmic to the economy of the Navajo Nation, which

14 then President Shirley had stated.

15 I don't want to speak for the Nation but I just

16 do know that in my interactions over the last two and a

17 half years in negotiating the lease, we have seen the

18 impact to the Nation from unemployment. We have seen it

19 in the chapter houses. I visited the chapter houses.

20 We speak to the people in chapters, their needs. There

21 is a significant need. And we take something that

22 contributes as much as it does to their economy,

23 65 million directly to their annual coffers, it will

24 escalate with CPI over time, you take into account the

25 amount of employee, employees that are working there and
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1 the impact to that, all said and done, it is about

2 $225 million on the conservative side of impact to that

3 area. And there is not another significant economic

4 driver for the Nation at this point in time.

5 They are working very hard to develop an

6 economic plan for the future. And I know the new

7 council, it is a priority of theirs. But suffice it is

8 not in place today and it is something that they are

9 challenged by and they would be challenged from the loss

10 of revenue coming from this facility.

11 Q. Is it the largest in the Nation?

12 A. Between BHP and the facility, yes. So between

13 the mine and the power plant it is the largest Navajo

14 employer on the reservation.

15 Q. And what percentage of the employees are Navajo?

16 A. Between the mine and ourselves, anywhere between

17 75 to 80 percent of the employees are Navajo.

18 Q. And how many people in all in Navajo?

19 A. A thousand -- excuse me. I don't know the exact

20 number of the population, if that's what you are asking.

21 Q. Let's talk a little bit about the lease. The

22 land at the Four Corners sits on is owned by the Nation,

23 correct?

24 A. That is correct.

25 Q. And it is the subject of the lease between the
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1 Nation and the utilities, correct?

2 A. That's correct.

3 Q. And that lease, as I understand it, at least when

4 I went to view the plant, it was up for negotiation, is

5 that correct?

6 A. Yes, it was.

7 Q. What is the status of the negotiation?

8 A. That negotiation with the Navajo Nation has been

9 completed. It has been signed and was forwarded from

10 the council. The speaker had signed it, forwarded it to

11 the president. The president signed it. So now it is

12 waiting to go back from the Navajo Nation to the

13 Department of Interior.

14 The Department of Interior has final signatory

15 authority on the lease. They will undergo a NEPA

16 process, which can take anywhere from three to five

17 years potentially -- could be longer, it could be

18 shorter, hopefully shorter -- prior to the Department of

19 Interior doing a final approval of the lease. But we

20 are treating the lease and we are taking action on the

21 lease as if it has already been approved. We made our

22 first annual payment just this past last week with the

23 new terms and conditions that were in the lease.

24 Q. Can you shed some light on some of the more

25 important terms, like the length of the lease?
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1 A. The lease runs through 2041. We pay the Nation

2 $7 million a year. That is adjusted for inflation on an

3 annual basis. With that, we have provided for the

4 standing committees to address both Nation as well as

5 our plant concerns with the administration of the lease,

6 and not only today but going forward in the future.

7 With the lease, the Nation has retained certain

8 rights with respect, with respect to how the final

9 condition of the facility is left when we eventually

10 leave the facility. There are certain conditions we

11 have to meet. Those are probably the most significant

12 features of the lease. There are many other conditions

13 within the lease but those are probably the most

14 significant.

15 Q. And how would the lease be affected if in fact

16 this transaction as proposed was not approved?

17 A. The lease does not -- the lease will continue if

18 those plants were closed. So we will continue to pay

19 the Nation $7 million a year for the lease all the way

20 through 2041, but they lose all the other revenue

21 stream. Obviously the more significant revenue that

22 comes from royalties, taxes, employees, et cetera, that

23 goes away.

24 Q. Do you anticipate that APS would attempt to

25 recover the terms of the lease in that situation from
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1 ratepayers?

2 A. I haven't contemplated it.

3 Q. Okay. Let me ask you, Mr. -- sir, even if it

4 could be sure that replacing the capacity with gas

5 generation capacity could be done at the same or even a

6 lower cost, there still are considerable reasons why APS'

7 proposal would still be better for ratepayers, is that

8 true?

9 A. Well, first off, I would say that I don't know

10 of any scenario that we are going to find or anybody

11 would find a lower cost gas generating plant to supplant

12 Four Corners.

13 With that said, I think that it is good for the

14 ratepayers. Again, the customers get the value of

15 long-term stability for baseload resources, which is

16 important to the mix of generation that you need in

17 order to operate in this environment. So as gas prices

18 surge or decrease, you have the ability to move in and

19 out from a resource perspective what resources are being

20 used as we build a renewable portfolio to meet our

21 requirements for renewables. You need baseload to back

22 things up.

23 It is, it is a resource. Again, as I earlier

24 testified, you can establish baseload wherever you want.

25 You can say $50, whatever comes in at $50 to cover this
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1 megawatts is part of baseload. But the customer has got

2 to pay for that then. So it always comes back to the

3 same issue, what is the cost to the customer. And this

4 is a lower cost provider even if everything else was

5 equal.

6 Q. Isn't it true that EPA's rule which would require

7 the filing of SCRs in Unit 4 and 5 has not become final

8 yet?

9 A. That's correct, it has not been finalized,

10 finalized inasmuch as it is, it is put out in a final

11 rule. They have issued draft federal implementation

12 plans, which have been out for now, I believe, since

13 January.

14 Q. When is it expected to be final?

15 A. I would expect, we have no timeline, but I would

16 expect it to finalize sometime this fall.

17 Q. On page 12 of your rebuttal testimony, line 16

18 through 23, you state that the engineering procurement

19 construction work would take slightly more than three

20 years to complete.

21 Given that you will have five years from the

22 publication of the rule to implement the changes, wouldn't

23 you agree that this new EPA rule does not make it

24 mandatory that APS finalize this purchase in October 2012?

25 A. Well, the EPA itself is not a factor in this.
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1 It is our decision on what has to be done in order to

2 support what we have to do to continue to operate the

3 facility. SCR is one part of it.

4 As I mentioned earlier, one plan that's out

5 there is compliance by 2016. You back that up three

6 years to do the construction, it puts you in 2013. You

7 have got to work it around major outages. And so you

8 would have to start implementation earlier in order to

9 support the major outage schedules you have. That's one

10 component.

11 The second component comes in, if I am going to

12 close 1, 2 and 3, I have got to provide another source

13 of auxiliary steam which is used for start-up of 4 and

14 5. In order to do that, I need to get a new air permit

15 for an aux boiler. A new air permit typically takes a

16 year to 18 months to receive. Hoping to fast track it,

17 but with that timing, if I started my air permit when

18 this is approved October of next year, that's '13. Then

19 I got to build it, which takes a year, puts me in '14,

20 which is closure time I am supposed to have for 1, 2 and

21 3.

22 So all these things start compounding as far as

23 investing capital. And this isn't, I am not even

24 discussing the certainty that owners need in order to

25 make those investments. My co-owners, I would not speak
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1 for them, but I would think they would find it difficult

2 to make investments, major investments in capital next

3 year with no certainty around this transaction being

4 completed.

5 Q. What I think I hear you saying is the rule

6 doesn't require it but the implementation of the rule

7 would require it --

8 A. That's correct.

9 Q. -- from APS' standpoint?

10 A. That's correct.

11 Q. APS has not shown or even alleged an extreme need

12 for the additional 170 million megawatts of baseload the

13 transaction will provide, isn't that true?

14 A. I think that would be a better question for

15 Mr. Dinkel.

16 Q. Under the terms of the agreement, Mr. Schiavoni,

17 delay would result in a 7.5 million reduction in the

18 purchase price for each month after October 2012, is that

19 correct?

20 A. That's correct.

21 Q. If the deal does not close in October 2012, SCE

22 will still be able to use the power generated from Units 4

23 and 5, is that correct?

24 A. That is correct.

25 Q. But is it also true that SCE is no longer
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1 entitled to the generation at the time of the closing?

2 A. That is correct.

3 Q. So let's take the hypothetical that the deal

4 closes in October 2012, APS pays the 294 million. In

5 January 2013, SCE would not have a right to the generation

6 that is being generated at Four Corners, is that correct?

7 A. That's correct.

8 Q. That would be used to provide service to APS,

9 correct?

10 A. To our customers, that's correct.

11 Q. When would SCE be required to leave Four Corners

12 in that situation?

13 A. Upon close of the transaction.

14 Q. Do you know, Mr. Schiavoni, has SCE made

15 arrangements to replace the generation it will lose at

16 Four Corners?

17 A. I do not know.

18 Q. So you wouldn't know when its replacement

19 generation, if it even had any, would come on line?

20 A. Yeah. I don't know the reserve margins that

21 they have. So they may have generation available to

22 them today that, when this asset closes in October or

23 this deal closes in October, that they can take it right

24 off the reserve. I am not sure how they are set up

25 currently. Their market structure, as you know, is very
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1 different than others. They are managed through the

2 ISO. So they may go to real-time markets to fulfill

3 needs also.

4 Q. At what point does APS retire Units 1, 2 and 3?

5 A. Under what we have laid out here, we would

6 propose that no later than '14. But, again, it is

7 driven on a couple different things here.

8 One, it is driven by me being able to get an aux

9 boiler in place in order to run 4 and 5, as I already

10 talked about.

11 The second thing is EPA rulemaking, as we talked

12 about, for mercury compliance or for BART would require

13 baghouse and scrubbers which don't exist on 1, 2 and 3.

14 Mercury, MACT, may, may be effective as early as three

15 years from final rulemaking, which potentially could be

16 2014 they would have to come into compliance. So we

17 have to make that decision on 1, 2 and 3 now to say we

18 are going to go spend, because in order to get compliant

19 on three units and put baghouses and SCR, we are already

20 late, we would need to be moving quickly to invest the

21 capital to put on those units.

22 So 2014, the EPA rule may in fact -- we won't be

23 able to be compliant and then we would force ourselves

24 into a shutdown. So there are a couple variables that

25 drive the timing.
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1 Timing earlier than that is really much more

2 driven by, one, Commission desire as well as what we are

3 looking at from a perspective of investment. You know,

4 so anywhere before 2014 is feasible.

5 Q. Well, the judge asked a question. It is getting

6 late in the afternoon so I don't even remember who she

7 asked it of. She asked a question that I think one of the

8 Commissioners wanted to know. And that was why retire,

9 why not sell. And I think the answer I heard from the

10 witness was the reason we do that is because of the right

11 of first refusal. But if you are telling me that you are

12 not looking to retire it until 2014 but you are looking to

13 close by October 2012, why not sell them?

14 A. Potentially whether there is a market for 1, 2

15 or 3 I don't know, but, again, keeping in what we were

16 trying to do from an economic standpoint, if it doesn't

17 make economic sense for us to make the investment, why

18 would it make economic sense for someone else to make

19 that investment considering what we are putting on the

20 table as the alternative?

21 It may very well make economic sense to somebody

22 else, but we are trying to deal with the EPA as well, as

23 was mentioned, which the second federal implementation

24 program put on the table is you don't have SCRs on until

25 2018 for 4 and 5, which is good for all of us, because
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1 that gives us more time, because we are concerned --

2 concern is probably too strong a word. We are not

3 operating under a final approved lease by Department of

4 Interior. Until that gets done, you know, we are still

5 operating under a lease that we have signed with the

6 Nation but Interior still hasn't approved which is still

7 three to five years away. So if I can push out the

8 investments on 4 and 5 that I have to make at a later

9 point in time, that's probably better for us overall.

10 1, 2 and 3, though, is what gets sacrificed in

11 there because that is part of what EPA is proposing,

12 close 1, 2 and 3 as part of the deal to reduce the

13 overall emissions footprint and, as has been talked

14 about by others, the impact to the national parks, et

15 cetera.

16 Q. What makes economic sense to one utility can be

17 different to another utility. You would agree with me,

18 right?

19 A. I would agree with you, but what is on the table

20 with the EPA today, we could not sell 1, 2 and 3 with

21 the structure of the 2014 and 2018 dates that I alluded

22 to. So the only scenario that we could go forward under

23 the EPA structure would be the federal implementation

24 plan draft that says you have to retrofit all five units

25 and 1, 2 and 3 have to be compliant by '14 for mercury.
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1 So you have two hurdles on 1, 2 and 3 that someone would

2 have to pick up. That is putting a baghouse and

3 scrubber on the unit by 2014 on all three, as well as

4 getting an SCR onto 1, 2 and 3 by 2016. That just

5 feasibly, I think that would be almost impossible for a

6 third party to complete a transaction, get it approved,

7 and get that done. The approval process alone would be

8 a couple years in making.

9 Q. But you could throw the proposal out there,

10 couldn't you?

11 A. I will defer to Mr. Dinkel. He would be the one

12 making those decisions. I just don't see it as

13 something you would do. I really don't.

14 Q. And if you were able to sell it, the money that

15 you could get out of it could be used to offset the

16 purchase price and eventually lead to lower rates to the

17 ratepayers, couldn't it?

18 A. If you could obtain a deal like that,

19 absolutely. I just don't think that's a very likely

20 scenario.

21 Q. If the transfer is authorized but the transfer

22 date is postponed, is there any reason why APS could not

23 proceed with engineering and retrofitting Units 4 and 5?

24 A. Well, again, in order to be able to exercise our

25 rights, we would have to be the owner. And if we are
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1 saying we will say yes on the self-build moratorium,

2 which is what we are asking for, but we are not going to

3 allow you to go forward until 2016 or some other date,

4 there is not much we are going to be able to do in order

5 to put the capital structure together. The owners are

6 not going to participate. I would not think they would

7 participate unless this thing was done and SCE was out

8 of the transaction altogether.

9 Q. Has APS retrofitted any other units with the

10 proposed SCRs?

11 A. No, no. We have done baghouse and scrubbers on

12 these units at 4 and 5 historically as well as Cholla 1

13 and 3 have been done, and Cholla 2 is scheduled next

14 year as starting, so upgrades.

15 Q. Is it your belief that if the transaction is not

16 approved pursuant to APS' proposal that SCE will pull out

17 of Units 4 and 5 prior to the current lease expiring in

18 2016?

19 A. Well, one, I can't, I can't speak for Southern

20 Cal Edison, but they can't pull out of the ownership

21 agreement prior to 2016, if that's your question. So if

22 this transaction does not go through, they are still an

23 owner through at least 2016 when the co-tenancy expires.

24 Q. So if they did pull out, it would be a breach, or

25 wouldn't be?
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1 A. I would believe so. I am not a lawyer but I

2 would think so.

3 Q. Section 10.1 G of the contract does give both the

4 seller and the purchaser the right to terminate the

5 contract if not finalized by December 31st, 2012.

6 I am sorry. I will slow down.

7 Is there any provision that would mandate they do

8 so if the transfer is delayed beyond that date?

9 A. No. It is strictly the option of either party.

10 There is conditions for termination that is not a listed

11 condition, but the structure, and, again, I don't have

12 the contract in front of me, but the structure was such

13 as in normal contracts, that you close as soon as

14 practical after approval of the transaction.

15 Q. Has SCE told APS that it would terminate the

16 contract if the closing was delayed beyond December 2012?

17 A. No, they have not.

18 Q. Has APS asked SCE whether it would terminate the

19 contract if the closing was delayed?

20 A. No, we have not, or I haven't. Excuse me.

21 Q. So what is the hurry to close by 2012 if APS does

22 not need the generation and by simply following a purchase

23 agreement APS could reduce its capital investment?

24 A. Again, the sense of urgency around 2012, I would

25 like to have it closed in 2011 quite frankly, but the
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1 sense of urgency comes from the capital investments that

2 have to be made in the facility to become compliant with

3 the environmental regulation in front of us.

4 So for the owners, it is unanimous vote of all

5 owners in order to spend or change operations or do

6 anything. The owners -- quite frankly, we would not

7 vote if another owner was in the same situation. And in

8 this case Southern Cal Edison would have the right to

9 vote no and they are not going to invest, which is kind

10 of where we are at or where we think we are going to be

11 this coming year.

12 Edison is going to say we are not going to

13 approve any more capital that could be considered life

14 extension as determined by the CPUC. And we are getting

15 in a position where no capital will be invested in the

16 power plant. Power plants would then start to

17 potentially degrade over time and you would not be able

18 to be compliant and still be operational at the time

19 EPA's rules went into effect. And that's, that is very

20 important.

21 I mean we could, you could theoretically say,

22 okay, you can do this and shut down in 2016 when

23 Southern Cal Edison is out of the project and then spend

24 two years or two and a half, or how many ever years,

25 retrofitting. But that's a time period not producing
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1 any generation, so you are wasting, wasting basically

2 our customers' money, I believe, at that point in time.

3 Q. The $7.5 million monthly reduction occurs if the

4 company contract or if the transaction isn't closed by

5 October 2012. How did that figure come about?

6 A. You are never certain on a date when something

7 is going to happen. So what we looked at is what is

8 probable, what is realistic. Can you get to an

9 October close, and, if it goes on either side, what is

10 the compensation to either party both ways, if it closes

11 early or if it closes late.

12 It was based on what potential gas prices could

13 be, quite frankly, because that's going to be the

14 replacement power of choice. So it is looking at what

15 would it cost to replace that power in that time frame.

16 If gas prices are at that price, seven and a

17 half million works and let's run the scenario. We are

18 not going to close until November. So seven and a

19 half million comes off our purchase price from that

20 perspective. If gas prices are high, elevated, that's a

21 good deal for Southern Cal Edison. They are getting

22 cheap for you for seven and a half million. If gas

23 prices are real low, it is not necessarily a good deal.

24 That's all you are trying to do, put a number to

25 what gas prices could potentially be for replacement
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1 generation in that time period, and then for every

2 month, and we did it by months, not days or years, but

3 every month what is the impact. And this is how you

4 make the adjustment to price. That's all that was

5 looked at. So it was nothing rocket science or

6 something very scientific in looking at this. It was

7 looking at gas strips.

8 Q. You might have answered this but I just have a

9 few more questions. I am going to ask this anyway. Given

10 that the other owners have already waived their right of

11 first refusal, do you have any idea what the other owners

12 would do with their shares if the deal was delayed or not

13 approved?

14 A. No, I do not.

15 Q. More questions on SCE. On page 14, lines 12

16 through 7 of your rebuttal, lines 12 through 17 of your

17 rebuttal testimony, you state that SCE may not be able to

18 contribute to do any capital improvements due to the CPUC

19 filing.

20 Could you please state what capital improvements

21 have had to be delayed due to the CPUC ruling?

22 A. No capital projects to this point in time have

23 been delayed as a result of this. The impact will start

24 in 2012 as stated by their commission.

25 Q. Are there any capital improvements that you
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1 already -- are there any capital improvements that you can

2 identify that would have to be implemented in 2012 through

3 '13 and could not be postponed until a later date?

4 A. Well, the most significant capital would be for

5 SCRs and starting the work on SCRs, as well as, again,

6 the aux boiler would have to be done. And then you

7 would have your normal maintenance items that you would

8 be deferring as a result of that, such as, you know,

9 working on the turbine or pump change-out or something

10 like that.

11 Q. Does the use of the term may in your rebuttal

12 testimony on page 14, line 15 indicate there are capital

13 improvements SCE could still participate in?

14 A. Yes. Again, what SCE has, what Southern Cal

15 Edison has to do, they have to provide to the Commission

16 all of their budget. So anything that they are

17 proposing to be spent on Four Corners they have to

18 present prior to being allowed to spend.

19 Q. Wouldn't their contribution lower the expenditure

20 to APS and ultimately to their customers?

21 A. From what perspective? A reliability

22 perspective? Maybe I am missing the question here.

23 MR. POZEFSKY: Yeah, I don't think I articulated

24 it right. And actually I am not -- I can't remember how

25 I -- what I was thinking when I wrote it. So I think
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1 that's it.

2 All right. Thank you, sir. Thank you.

3 CALJ FARMER: Okay. Staff.

4 MR. HESLA: Thank you, Your Honor.

5

6 CROSS-EXAMINATION

7 BY MR. HESLA:

8 Q. Good afternoon, Mr. Schiavoni.

9 A. Good afternoon.

10 Q. I would like to begin by walking through the

11 timeline between when APS first learned that SCE was going

12 to sell its share of Units 4 and 5. And you testified

13 earlier that was on December 15th, 2009, is that correct?

14 A. It was the date of --

15 Q. The letter?

16 A. It is in my testimony, the letter we received

17 from Southern Cal Edison which formally informed us that

18 they were exiting the project.

19 Q. And when did APS decide internally that it would

20 consider pursuing that interest in 4 and 5?

21 A. At that time we, not necessarily Cal Edison, but

22 we were looking at the environmental pieces and starting

23 to formulate a plan of what do we do with BART as BART

24 was coming forward.

25 When Southern Cal Edison sent us the letter,
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1 that prompted more detailed discussions in-house as far

2 as alternatives and what type of scenario can we see

3 ourselves acquiring, because we didn't need the

4 resource. Our baseload resource was fine. So it wasn't

5 a resource that we said we need this today, so let's go

6 look at it.

7 Again, it was kind of stepping back and saying

8 we have a lot of moving parts with a lease expiring,

9 with all these other agreements expiring, this may be an

10 opportunity to do something, as I iterated earlier, that

11 is good for a lot of different constituents and meets

12 the overall goal which we are trying to achieve, which

13 is a low cost resource.

14 So I won't say it was any one day. It started

15 with that letter formalizing Southern Cal Edison's

16 position and formalizing that we did not intend to

17 market the asset, that they would offer the opportunity

18 to owners, that we internally started looking at this

19 saying how could we look at this and should we be

20 involved, quite frankly.

21 Q. And would you agree with me it was a complex

22 process then to --

23 A. Extremely. It still is.

24 Q. Mr. Schiavoni, do you have a date certain when

25 you made that determination, if you are aware?
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1 A. No. I mean I think you said the 15th. I

2 thought the letter was like the 9th of December or

3 whatever. But it was sometime after the first year

4 after I got the letter. And we had talked to Southern

5 Cal Edison. We had an owners meeting for them to have

6 more clarity around it.

7 They told us prior to the letter they were going

8 to let us know what their intentions were. So we knew

9 that they were going to tell us something. What it was

10 going to look like or shape it was going to look like we

11 weren't sure. So I couldn't tell you an exact date, on

12 this date let's go forward, but that started the wheels.

13 Q. And you testified earlier that you arrived at the

14 prospective purchase price in the summer of 2010?

15 A. Late summer, early fall, as I said, all the --

16 we completed the deal on paper in November. It took a

17 month plus for legal to look at the contract and

18 rewriting, so on, so prior to that point in time, end of

19 summer, beginning of fall.

20 Q. And when did you begin your negotiations with

21 SCE?

22 A. We began actual negotiations, as I recall,

23 sometime in January of '10. February of '10 we actually

24 started to have a discussion with them of what a deal

25 would look like.
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1 Q. And when was that agreement to purchase SCE's

2 interest in 4 and 5, when was that consummated and

3 executed?

4 A. November of 2010.

5 Q. Okay. And when was this application filed?

6 A. Shortly thereafter. I don't know the exact date

7 off the top of my head.

8 Q. Do you believe APS moved expeditiously in

9 pursuing SCE's share in 4 and 5?

10 A. Yes, we did.

11 Q. I would like to switch gears, Mr. Schiavoni, if I

12 can. Is it your understanding that RUCO is suggesting

13 that APS delay the transaction?

14 A. Through their testimony, that's what I

15 understand. I don't know what it looks like today, but

16 through the testimony, yes.

17 Q. Do you foresee any problems with delaying the

18 transactions?

19 A. Absolutely.

20 Q. What are those problems?

21 A. As I stated, capital decisions, investments in

22 power plant have to be made starting next year. And we

23 have targets for compliance with the EPA regardless of

24 which plan we go with for the EPA. And if this

25 transaction is delayed it will potentially impact
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1 meeting compliance dates which then would lead to

2 shutting down the facility. So it is critical that this

3 is done sooner rather than later in order to support the

4 investments that need to be made to continue operations

5 of Four Corners 4 and 5.

6 Q. In light of those problems, do you believe that

7 RUCO's suggesting to delay the transaction is realistic?

8 A. No, I do not.

9 Q. Do you believe the purchase sale agreement

10 permits APS to delay the transaction at their discretion?

11 A. I am not a lawyer. I think the contractual

12 terms of the settlement or the contract between us and

13 APS, or, excuse me, Southern Cal Edison, gives each

14 owner the right in December of 2012 to terminate the

15 agreement if certain conditions aren't met. And one of

16 the conditions that are set forth is that we have

17 reached, we have gained the approval of the Corporation

18 Commission for that to happen. Beyond that, that's the

19 extent of my knowledge of what you can and can't do as

20 far as that contract, but they have that right if we

21 don't have terms satisfactory to APS through the

22 Commission findings.

23 Q. And you mentioned under the purchase and sale

24 contract that either party has the option to terminate

25 after -- is it December 31st, 2012?
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1 A. That is correct.

2 Q. Do you believe there is a risk that SCE would

3 terminate the contract if APS delayed past

4 December 31st, 2012?

5 A. I think there is a risk, absolutely, not spoken

6 to me. But, again, much like RUCO, for our consumers,

7 you know, their equivalent is going to continually look

8 at this deal. I think the longer this gets delayed, and

9 who knows where gas prices are going to be a year and a

10 half from now, if they are 3 to $4 more than what they

11 are today, they may have a very different perspective of

12 this transaction than what they have today. That's a

13 risk. Conversely, not that gas can go $3 lower, but if

14 it can, I am with you, but it can't today, we would look

15 at it differently. So it is really where you are at

16 that point in time that's going to predicate what your

17 thoughts are.

18 MR. HESLA: Thank you, Mr. Schiavoni. That

19 concludes our examination.

20 CALJ FARMER: Thank you.

21

22 EXAMINATION

23 BY CALJ FARMER:

24 Q. I have some questions for you from Commissioner

25 Newman.
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1 The eastern United States has many older coal

2 plants. Has the capacity factor of those plants between

3 the ages of 45, 50 and 60 years old declined?

4 A. As I understand the question, eastern United

5 States age of power plants and capacity factors, I do

6 not know what that population would look like and what

7 has happened with their capacity factors.

8 What I could say in response to that, my prior

9 employment was with an eastern US facility or company

10 that had coal facilities and similar in age and vintage.

11 And those capacity factors were going up. Those were

12 merchant plants. And when gas prices went up, they were

13 extremely competitive, more competitive into the market.

14 So I saw the opposite in my own personal experience, so,

15 when I was employed out that way. But beyond that, I

16 don't have any direct knowledge.

17 Q. Okay. Could you turn to your rebuttal testimony

18 at page 10, please. Specifically looking at lines 18 to

19 21, Commissioner Newman asks: Doesn't Xcel have a

20 coal/CSP hybrid in service since July 2010?

21 A. My understanding, there is a small facility that

22 is in commission, that's correct.

23 Q. The 44 megawatt cameo plant has 4 megawatts of

24 CSP attached, thereby increasing the plant's efficiency an

25 estimated 5 percent. Are you familiar with that?
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1 A. I am not familiar with the 5 percent on the

2 efficiency, but the rest of it, yes.

3 Q. Okay. This is continuing with his question. He

4 asks: Why not try a hybrid as a pilot? Has APS looked at

5 the cost?

6 A. To look at something, first, I think most

7 producers take a perspective that no one wants to be the

8 first in any technology. You would rather have

9 technology be developed and have all of the bugs worked

10 out, if you will, before you make any type of investment

11 in technology.

12 But in this case, we have been looking at doing

13 a hybrid or doing a pilot. I think that's a separate

14 discussion. It is not necessarily tied to an

15 acquisition we are trying to make because we are not

16 supplanting the megawatts that are being procured here

17 with either of these types of projects that are being

18 talked about.

19 Whether we want to look at them in the future, I

20 think we are always open to look at new projects and we

21 have looked at new projects in the future. But beyond

22 that, we haven't really spent a lot of time in this

23 technology just because it is small scale and isn't

24 proven yet.

25 Q. Okay. Could you please turn to page 14,
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1 specifically lines 4 through 8. Could you please explain

2 what would happen if the California Public Utility

3 Commission decides to retire Units 4 and 5 as per Mohave.

4 A. Yeah. I don't think they would formally say

5 that -- you know, it is probably not the best use of

6 words here that I used here, but retirement is not their

7 option. Their option is not to approve the transaction

8 to sell. And if they fail to approve that transaction

9 to sell, it in effect causes the same thing. Then we

10 run up to the end of the co-tenancy agreement in 2016.

11 We have one of our owners or 48 percent share of

12 one of the plants that no longer is party to the plant's

13 operation or to the plant itself. I think that at that

14 point in time it is much more a legal discussion that

15 would take place of what recourse, if any, we have and

16 what can we as owners do as a result of that. So this

17 question we have looked at.

18 We have looked at Mohave and some of the

19 circumstances surrounding Mohave. There are a lot of

20 similarities. But one thing that was evident with

21 Mohave was that time got to them. And the continual

22 time it took to get to solutions for their problems

23 environmentally created this perfect storm, if you will,

24 that it came to a point where they could not meet the

25 commitments and were closing a power plant as a result
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1 of that.

2 A lot of this plays to that same type of set of

3 circumstances. And, again, that's why the sense of

4 urgency to complete this transaction, so we don't put

5 ourselves in the same position of uncertainty and

6 ambiguity with all the owners that no decisions are made

7 and just, as a result of that, you naturally go to a

8 point where you can't be compliant with environmental

9 rules and you end up with a forced shutdown and then it

10 becomes economically not feasible to restore these

11 units.

12 Q. Can you tell me what the status of that

13 proceeding is at the CPUC?

14 A. My understanding at this point in time is they

15 have had their hearing similar to this. And that's

16 about the extent of where I know where they are at right

17 now. It has -- no ruling has been made. They had the

18 public, not the public hearing, but this hearing and

19 they are waiting now.

20 Q. Did APS participate in that hearing?

21 A. Not directly, no, we did not.

22 Q. That concludes Commissioner Newman's questions.

23 I do have a few of my own for you.

24 A. Okay.

25 Q. Could you explain for me what steps APS needs to
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1 do to retire Units 1, 2 and 3.

2 A. In order to retire 1, 2 and 3, basically what we

3 do and we would look at, we would put the units into

4 what we call a harvest mode. So basically we would stop

5 spending capital, major capital or really any capital,

6 on Units 1, 2 and 3. We will use as an example we are

7 going to close it January 1st, 2014, just for picking a

8 date. We would stop making any type of major

9 investments in it. That would be the first thing to do,

10 so put it into a harvest mode.

11 Q. I am sorry?

12 A. We call it a harvest mode.

13 Q. Harvest, okay.

14 A. The second thing we would do is we look at all

15 of our required liability that we may have, asbestos,

16 oils, fluids, how you -- those types of things that for

17 a long term you are not going to leave in that power

18 plant. So the second thing we would do is identify, and

19 we have been doing this already, identify what we have

20 to do upon immediate closure of that facility. And then

21 we would go forward and we would start putting it into

22 an environmentally safe condition.

23 From an outside view of that, the date selection

24 will be driven through negotiations and conversations of

25 when we would make the formal closing of the site and
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1 how we would make our formal notification to the

2 Commission on what we were doing.

3 Beyond that it is not a very hard process. It

4 is pretty much like turning out the lights. Our

5 employees, as we have talked about in our, in my

6 discussions with the Navajo Nation, we are not going

7 force any layoffs at 1, 2 and 3. We believe our

8 demographics are such that attrition will help us get to

9 where we need to be long term for the right staffing

10 levels for Units 4 and 5, which is, which was very

11 important to us in our discussions with the Nation. So

12 employees are not going to be impacted as a result of

13 this.

14 So it really becomes much more of a mechanical

15 closure than it is traditionally we would have with some

16 of the softer issues that we have with a closure of any

17 facility, whether it is a power plant or manufacturing

18 facility.

19 Q. Is the word closure synonymous with stop

20 producing electricity?

21 A. That's correct.

22 Q. Can you explain -- I heard you say something

23 about getting, it sounded like, an alternative boiler.

24 But what is that?

25 A. Okay. In order to start up a power plant, a
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1 steam plant, you need steam to do it. Most power plants

2 are built with an auxiliary boiler, is what it is

3 called, nothing but a steam unit. So it is built with

4 the steam unit that is normally gas fired or oil fired.

5 In our case it would be gas fired.

6 Gas fired, it produces steam. That steam then

7 goes to components in the plant. You are trying to

8 start up, and it is normally around -- I don't want to

9 get too into the weeds here -- but in order to have a

10 turbine roll, you need a place for steam to go through.

11 So the steam that's produced by the start-up in the

12 power plant goes through the turbine and goes to what is

13 called a condenser. In order for that condenser to

14 operate effectively, you have, you have a lot of system

15 and components that need to be sealed correctly because

16 it is a vacuum. That is what it is drawing.

17 So this condenser has got a vacuum. It is under

18 a vacuum. It helps to draw, helps the efficiency of the

19 turbine, draws it through the turbine, gets condensed,

20 gets pumped, gets cold, goes back in the boiler for that

21 cycle to start all over again.

22 In order for that to happen, you have all those

23 places where steam is used and seals and so on. The

24 turbine being a major example, you have to seal it in

25 order to be able to draw that vacuum. So you need a
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1 steam supply which, when is on line or operating, it

2 supplies its own steam until that point in time you need

3 an external source of steam in order to seal all these

4 particular components so you can draw a vacuum. That's

5 what this aux boiler gets used for.

6 It is a small boiler. It is not a very large

7 boiler, if you will. If you don't have that, then you

8 have to keep one of the larger units, 1, 2 or 3, which

9 are very inefficient up for producing that steam as it

10 does currently today. So that's what this aux boiler

11 does, if that helps clarify it for you. Or did I

12 confuse you more?

13 Q. But which plant needs this boiler?

14 A. 4 and 5. All power plants need an auxiliary or

15 a second steam supply in order to start up our steam

16 plants. So if we close 1, 2 and 3, 4 and 5 still need

17 an aux steam supply. That's what this would be.

18 Q. And they don't have it currently?

19 A. No. There was an auxiliary boiler at the

20 facility at one point in time that was decommissioned

21 many years ago. Because you had 1, 2 and 3, there

22 wasn't a need for another steam boiler there.

23 Q. Okay. SCE's share of Units 4 and 5 is about

24 739 megawatts, is that correct?

25 A. Yes.
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1 Q. And Units 1, 2 and 3 put out 560 megawatts?

2 A. That's correct.

3 Q. Okay. So if this transaction were to close in

4 October of '12 but Units 1, 2 and 3 aren't going to retire

5 until 2014, what will APS do with that additional

6 739 megawatts of output?

7 A. I will leave that for Mr. Dinkel to answer. But

8 '14 is the latest date. So it can close, we feel -- as

9 soon as I can get an aux boiler in place, it can close.

10 So it can close much earlier than that. In all

11 likelihood our preference would be to close it as soon

12 as we can.

13 Q. If by --

14 A. 1, 2 and 3.

15 Q. 1, 2 and 3, okay.

16 On page 14 of your rebuttal, this is at lines 22

17 down through about 25, you are discussing your

18 negotiations for a new fuel supply agreement. Can you

19 update the Commission on the status of those negotiations.

20 A. The negotiations are ongoing. We expect those

21 negotiations to conclude in, the formal part of the

22 negotiation, by February of 2012. We will have a

23 definitive pricing from BHP at that point in time. So

24 in the interim we are continuing to work with and

25 negotiate with BHP over a pricing.
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1 Q. Okay.

2 A. Which, if I may add, Your Honor, it is, again,

3 it is another complexity on the necessity for sooner

4 rather than later, because you need to have that fuel

5 agreement in place for the long term, 2016 and beyond.

6 And the longer this approval doesn't take place, we

7 wouldn't enter into a fuel agreement February of next

8 year if I don't have any certainty what is going on with

9 those assets. So you need certainty on the assets in

10 order to be able to negotiate a fuel agreement for the

11 future.

12 Q. Okay. On page 13, lines 21 through 24 about, you

13 are talking about the other regulatory approvals that must

14 be obtained. And I have asked you about the California

15 Public Utilities Commission and the status of that. Can

16 you update me on the status at FERC and at the California

17 ISO.

18 A. FERC has not received it. It hasn't been filed

19 yet. And California ISO, it has been received and it

20 was provided, I think, in one of the requests for

21 information. That has been completed.

22 We have not filed yet with Justice or Federal

23 Trade Commission with regards to Hart-Scott-Rodino

24 because that has a clock on it post-issuing to have a

25 transaction complete. So until we get certainty when
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1 this transaction will be complete, we will make it

2 complete, then we will make a filing for HSR.

3 Q. And when do you expect the Commission to make a

4 decision?

5 A. We would expect that we would be able to close a

6 transaction in October of '12 or sooner.

7 Q. Maybe I will ask Mr. Guldner that then.

8 A. Probably better suited for that.

9 MR. ROBERTSON: Your Honor, excuse me. May I

10 have that question and answer read back where you asked

11 the witness when he expected the transaction -- the

12 Commission to act on the matter.

13 CALJ FARMER: Yes. The court reporter can read

14 that.

15 (The record was read by the reporter as

16 requested.)

17 MR. ROBERTSON: Thank you.

18 BY CALJ FARMER:

19 Q. Has APS put Units 1, 2 and 3 into the harvest

20 mode as of today?

21 A. We have, not necessarily full harvest. We have

22 been very careful with our spend. To understand, we

23 weren't making spends that we didn't feel we could get

24 return back in the next two to three years. So we are

25 starting down the path without being full blown into a
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1 harvest mode, should have been much more judicious on

2 the things we are working on right now.

3 Q. I think you explained that the EPA had Plan 1

4 which was that all five units had to be in compliance by

5 2016.

6 A. That's correct.

7 Q. Is that correct? And is that the same time frame

8 that the co-tenancy agreement expires?

9 A. It could be. Actually, the way the, the way the

10 BART is written, it is five years from issuance. So

11 2016, if it gets issued this year, then it will be 2016.

12 So just coincidental, it wasn't planned that way.

13 Q. And I think I heard you say that under the

14 agreement, operating agreement, all owners have to agree

15 on the capital budget, is that correct?

16 A. It requires unanimous approval of just about

17 everything we do. All five or six, however many owners

18 there are, have to -- if there is one dissent, we don't

19 go forward with the project or with a line item, if you

20 will. We haven't run into that circumstance, but that's

21 the way the co-tenancy agreement is written.

22 Q. That seems odd, like one could sabotage your

23 whole plant.

24 A. Yes, it is.

25 Q. Do you know how the O&M expenses associated with
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1 Units 1, 2 and 3 compare to the O&M expenses associated

2 with Unit 4 and 5?

3 A. On an actual cost basis, they are pretty similar

4 depending year to year. You may have little variations.

5 We don't necessarily look at that O&M cost and

6 that type of breakdown. We look at it much more by

7 unit, what is the cost by unit, other than people, but

8 maintenance dollars by each individual unit. And they

9 are pretty comparable, because they are very similar

10 plants. Even though size is different, they are similar

11 in the number of people it takes to operate, what type

12 of components there are, and those types of things. So

13 they are comparable to each other. But on a megawatt

14 weighted basis, 4 and 5 are much cheaper in O&M space.

15 Q. How many employees does APS have working at all

16 units?

17 A. Today we have a little bit over 500 people

18 there. We have been much higher than that in the past.

19 But, again, per my discussion around the demographics,

20 from a harvest perspective, that's one of the things

21 where we are allowing that attrition to take place. We

22 are being careful. We don't want put ourselves in a

23 position where we don't have decisions and we have to

24 continue operating for an extended period of time where

25 we are going to have to rehire, get employees in to
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1 bring the staffing up. I can't let it go to a danger

2 level from a safety perspective. So right now we are

3 just allowing attrition to take place and trying to

4 manage that so at the end we don't have to worry about

5 how many people we have at that site.

6 Q. So APS bills the other owners for their share of

7 those O&M costs associated with Units 4 and 5?

8 A. That's correct.

9 Q. On page 6 of your direct testimony, if you could

10 go there, please.

11 A. Okay.

12 Q. Okay. On the last sentence you say APS will also

13 assume certain of SCE's current obligations, such as plant

14 decommissioning and mine reclamation liabilities. How

15 much are you talking about there?

16 A. I think it is in the testimony that currently

17 about $32 million is set aside, 9 million for

18 decommissioning, 23 million for reclamation.

19 Q. And that's just the 48 percent SCE ownership

20 cost?

21 A. My understanding, that's correct.

22 CALJ FARMER: Okay. Thank you.

23 Does APS have redirect for the witness?

24 MS. GRABEL: I do, Your Honor. Thank you.

25
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1

2 REDIRECT EXAMINATION

3 BY MS. GRABEL:

4 Q. Mr. Schiavoni, when did the opportunity to

5 acquire SCE's share of Units 4 and 5 first arise?

6 A. First arose in December of '09 when we received

7 notification of their intent.

8 Q. Did that notification follow shortly after the

9 CPUC issued a proposed order that denied SCE's request for

10 an exemption from the California regs implementing State

11 Bill 1368?

12 A. That's correct.

13 Q. Did APS act on that opportunity as quickly as

14 possible after learning of it?

15 A. Yes, we did.

16 Q. Did APS believe it could lose that opportunity if

17 it did not act quickly?

18 A. Yes, we did.

19 Q. Why did so much time pass between the

20 December 2009 date on which the opportunity to purchase

21 SCE's share first arose and the November 8th, 2010

22 contractual execution date?

23 A. Well, it was a negotiation. And as we had

24 talked about, there was many moving parts in this

25 negotiation that had to take place. So it wasn't due to
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1 lack of effort or not a desire to get this done sooner

2 rather than later, but it was just a function of getting

3 a negotiation done that drove the timing on this thing.

4 Q. I believe Mr. Robertson asked you about the

5 possibility of partitioning Units 4 and 5. And please

6 correct me if I am wrong, but I believe you indicated your

7 belief that the operating agreement did not permit

8 partitioning, is that correct?

9 A. I don't have the operating agreement in front of

10 my but my belief or my recollection, there was language

11 in the operating agreement concerning partitioning. But

12 without the contract I can't tell you with certainty how

13 it is written, how it is stated.

14 Q. Might the terms, then, be different than you

15 presently recall?

16 A. Yes.

17 Q. The contract aside, do any other operational

18 challenges exist with respect to the partition option?

19 A. Well, partitioning, for those that are not aware

20 of it, partitioning is just you have two units.

21 48 percent share that belongs to Southern Cal Edison

22 equates to one whole unit being gone. So 50 percent of

23 the two units is the same size equivalent you would be

24 with a single unit.

25 And from all the economies that were talked
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1 about by Mr. Rose and by testimony, a single unit is not

2 a cost effective way to operate any facility, let alone

3 a coal facility. It will affect your fuel contracts.

4 It will affect obviously the Navajo Nation and royalties

5 and things that happen from a financial perspective. It

6 would impact the number of employees that are needed for

7 it. It increases your risk with regards to the

8 management of the facility. Just from the sheer single

9 unit outage, it is much more difficult from a management

10 perspective than having the capability of multiple units

11 to be put in place from a marketing and trades

12 perspective.

13 So going to a single unit operation is just much

14 more challenging. It doesn't mean it can't be done. It

15 just means you do it at a higher cost than you would for

16 two units.

17 Q. Mr. Schiavoni, you were asked a series of

18 questions by both Mr. Ritchie and Mr. Robertson, I

19 believe, about the company's production model and what is

20 and is not reflected in the company's economic analysis.

21 Do you recall that?

22 A. Yes, I do.

23 Q. Are you the APS witness who is best positioned to

24 respond to questions on those topics?

25 A. No, I am not. That would be Mr. Dinkel.
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1 Q. Would you defer to Mr. Dinkel, then, in his

2 testimony on those issues?

3 A. Yes, I would.

4 Q. I would like to ask you another question about

5 the impact of delay on this proceeding. Are you aware,

6 and I am sure you are aware but I am going to remind you,

7 that CPUC as issued an order that purports to deny

8 recovery in rates of capital expenditures from three

9 units, 4 and 5 at Four Corners that are forecasted to be

10 incurred beginning in January, beginning January 1st, 2012

11 and beyond?

12 A. Yes, I am.

13 Q. And might SCE become increasingly reticent about

14 approving capital expenditures at Four Corners during and

15 after 2012 given that order?

16 A. Yes. I would expect them to have much more

17 difficulty approving any transactions beyond the one

18 January 12.

19 Q. How would that difficulty affect operations at

20 the plant?

21 A. As I alluded to earlier, a capital budget or an

22 O&M budget gets built, it is being built right now for

23 next year. Each owner has to take it and approve it.

24 And if a single owner does not approve it, it puts it

25 into basically a holding pattern until you can negotiate
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1 or figure out a way to get a budget approved.

2 This, quite frankly, would be unchartered

3 territory for us where we have an owner that would

4 refuse to approve a budget. But they have that right by

5 the co-tenancy agreement to do that. So it could make

6 it very difficult.

7 Q. I believe this is my final question, unless

8 anyone comes to me. You spoke, sir, about a $7 million

9 lease payment made under the renewed lease agreement with

10 the Navajo Nation. That lease agreement is spread along

11 all the parties to the renewed lease agreement, is that

12 correct?

13 A. That is correct.

14 MS. GRABEL: That's all I have.

15 CALJ FARMER: Any further questions for this

16 witness?

17 Mr. Robertson.

18

19 RECROSS-EXAMINATION

20 BY MR. ROBERTSON:

21 Q. Mr. Schiavoni, during her redirect examination of

22 you, Ms. Grabel referred to an order that apparently was

23 recently issued by the California Public Utilities

24 Commission. Do you recall that line of questioning?

25 A. Yes, I do.
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1 Q. Do you know when that order was issued?

2 A. No, I do not know the date.

3 Q. Was it issued subsequent to the filing of your

4 rebuttal testimony in this proceeding?

5 A. No.

6 Q. Okay. Would you be willing through the company's

7 counsel to provide a copy of that order to all of the

8 parties so that they may have it available and in

9 connection with the resumption of hearings in this

10 proceeding as well as briefing?

11 MS. GRABEL: Mr. Robertson, it is actually

12 alluded to in the testimony of Ms. Furrey.

13 MR. ROBERTSON: I'm sorry. I couldn't

14 hear Ms. Grabel.

15 MS. GRABEL: I am sorry. Ms. Furrey refers to

16 it in her testimony. I am happy to give you a copy of

17 it, but you might be able to get the docket number from

18 Ms. Furrey's testimony.

19 MR. ROBERTSON: That's fine, as long as I can

20 get it before the resumption of the hearings on

21 August 9th and the briefing.

22 BY MR. ROBERTSON:

23 Q. Are you familiar with the general contents of

24 that order, Mr. Schiavoni?

25 A. I have not read the order.
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1 Q. Okay. Ms. Grabel also asked you about the

2 activities that occurred subsequent to the company's

3 receipt of the letter from Southern California Edison in

4 December of 2009.

5 What did APS specifically do subsequent to its

6 receipt of that letter as it relates to the negotiations

7 which led to the November 8th agreement which is the

8 subject of this proceeding?

9 A. As I believe I talked about earlier, once we

10 received the letter, we took it, we looked at what the

11 letter meant, what is the background. The co-owners got

12 together. We had a dialogue with Southern Cal Edison

13 when Southern Cal Edison was walking us through with

14 what this meant to them.

15 And then I think, as I alluded to earlier, late

16 January APS, as a result of the conversation with all

17 the owners, instead of all us off individually

18 negotiating, we would go ahead and lead the negotiation

19 with Southern Cal Edison to see if there was something

20 there that would be worthwhile with all owners. And

21 that, I believe, commenced in January.

22 Q. Now, when you say it was determined that APS

23 would lead the negotiations to see if there was something

24 that was worthwhile there for all owners, was the

25 understanding that APS would be negotiating on behalf of
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1 all of the owners or just on behalf of APS?

2 A. I don't think the specificity was there from

3 that perspective. The idea was it was a ROFR. So

4 whoever, it didn't matter if it was APS, Tucson

5 Electric, whoever negotiated a deal with Southern Cal

6 Edison, the other owners had a right to it. So the

7 thought process was for the five of us not to negotiate

8 against each other. And so we said we would go ahead

9 and we would enter in and start this dialogue with them.

10 But it didn't preclude any other owner from doing it if

11 they so chose to do that.

12 Q. Was the purpose of taking that approach to see

13 whether or not there was a deal there that was worthwhile

14 from the perspective of all of the other owners?

15 A. The original intent was to go into this to keep

16 4 and 5 running and keep it. Because we all, including

17 Southern Cal Edison, believe there is tremendous value

18 in that asset. And they stated it more than once that,

19 if they weren't being forced into this position, they

20 would never -- they would not be thinking about selling

21 that asset today.

22 So from our perspective as a group of owners, it

23 was looking at what are all the possibilities to

24 potentially keep an asset open that has tremendous

25 value. And APS, we went and did our own independent
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1 look at this to figure out where we thought. And as I

2 alluded to earlier, then all the compounding factors

3 that were taking place with the Navajo Nation, EPA, et

4 cetera, it just kind of led us down a path that we could

5 do something that kind of, not kind of, but do something

6 different, do something that creates tremendous value

7 for three constituents that are important to us.

8 Q. At what point in time did this consensus amongst

9 other owners and APS occur? It sounds from your testimony

10 like it was early in 2010. Can you give us an idea of how

11 early in 2010?

12 A. Well, I think we all have had ownership of that

13 facility. All of us know the value to each of us of

14 that facility. So it wasn't like you were dealing with

15 parties that don't understand how it has been operated,

16 how it has been maintained, what the asset value is.

17 You are dealing with people that knew exactly what the

18 value of that asset was.

19 So it wasn't a lot of dialogue around what do we

20 do to -- do we make a decision to close it or not back

21 then. As I said, we were just starting that contingency

22 planning now. So back then it was much more this is a

23 valuable asset to all of us; if the right deal is

24 struck, is there something here that us, as owners, or a

25 third party would have an interest in. So I don't know
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1 that it was an exact point in time where we all came to

2 the same conclusion. I think it is a, it was a foregone

3 conclusion walking in we all thought there was a value.

4 Q. Now, earlier today during my previous

5 cross-examination of you you indicated that sometime

6 during mid to late summer, as a result of APS'

7 negotiations with Edison, you were able to assign a price

8 to go with the deal on the order of 294 million. Now, had

9 the other owners in Units 4 and 5 declined to exercise

10 their right of first refusal as of that point in time or

11 not?

12 A. No, they actually couldn't exercise the right of

13 first refusal until Southern Cal Edison gave them

14 basically the transaction. So they had to have a term

15 sheet signed. So they executed in November. They had

16 until March to execute their ROFR.

17 MR. ROBERTSON: Okay. Very good. I think

18 that's all I have.

19 Thank you, Your Honor.

20 CALJ FARMER: Okay. Thank you.

21 Anything further for this witness?

22 (No response.)

23 CALJ FARMER: Thank you, sir, for your testimony

24 today.

25 THE WITNESS: Thank you.
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1 CALJ FARMER: Given the lateness of the

2 afternoon, I don't believe we will start another witness

3 now. But let's talk for a few minutes about scheduling.

4 Okay. We can go off the record for this

5 discussion. Then we will come back on.

6 (An off-the-record discussion ensued.)

7 CALJ FARMER: Let's go back on the record. And

8 let the record reflect that we had a discussion off the

9 record concerning scheduling.

10 And we will be reconvening the hearing on

11 Monday, August 8th, at 11:00 a.m., or upon the

12 conclusion of the Southwest Gas prehearing conference,

13 beginning with the remaining APS witnesses, potentially

14 taking Staff witness Ms. Little, and potentially

15 Mr. Patterson, and then continuing on Tuesday, the 9th,

16 with Dr. Berry and the RUCO witnesses. And thereafter

17 we will have to figure out what dates we need if we

18 don't finish all our witnesses by that date.

19 Other procedural issues, APS?

20 MS. GRABEL: Yes, Your Honor. I neglected

21 yesterday to move APS Exhibit No. 5 into the record,

22 which is the Sierra Club's response to our data request

23 to it.

24 CALJ FARMER: Are there any objections to APS

25 Exhibit 5?
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1 MR. RITCHIE: No objection to that exhibit, Your

2 Honor. Although I did want to clarify Exhibits 4, 6 and

3 7 were not moved into the record, correct?

4 CALJ FARMER: I will go ahead and admit APS

5 Exhibit 5.

6 (Exhibit APS-5 was admitted into evidence.)

7 CALJ FARMER: And I do show 4 --

8 MS. GRABEL: 4 and 7 were not moved into the

9 record yet pursuant to our conversation, Your Honor.

10 And I did not offer Exhibit 6.

11 CALJ FARMER: And 8 you haven't offered yet

12 because it is Mr. Dinkel's?

13 MS. GRABEL: It is Mr. Dinkel's testimony,

14 correct.

15 CALJ FARMER: Anything further we need to put on

16 the record now?

17 (No response.)

18 CALJ FARMER: Okay. Thank you, all. We will

19 see you August 8th at 11:00 p.m.

20 (The hearing recessed at 4:50 p.m.)

21

22

23

24

25
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1 INDEX TO EXAMINATIONS

2 WITNESSES PAGE

3

JUDAH L. ROSE

4

 Direct Examination by Ms. Grabel 133

5 Cross-Examination by Mr. Ritchie 140

 Cross-Examination by Mr. Robertson 168

6 Cross-Examination by Mr. Pozefsky 178

 Cross-Examination by Mr. Van Cleve 200

7 Examination by CALJ Farmer 208

 Redirect Examination by Ms. Grabel 220

8 Recross-Examination by Mr. Ritchie 227

 Recross-Examination by Mr. Robertson 228

9 Recross-Examination by Mr. Van Cleve 229

10

BRUCE V. POLKOWSKY

11

 Direct Examination by Mr. Hogan 231

12 Cross-Examination by Ms. Grabel 232

 Cross-Examination by Mr. Ritchie 233

13 Cross-Examination by Mr. Robertson 235

 Cross-Examination by Mr. Pozefsky 236

14 Examination by CALJ Farmer 238

15

MARK SCHIAVONI

16

 Direct Examination by Ms. Grabel 242

17 Cross-Examination by Mr. Ritchie 247

 Cross-Examination by Mr. Robertson 276

18 Cross-Examination by Mr. Pozefsky 319

 Cross-Examination by Mr. Hesla 343

19 Examination by CALJ Farmer 348

 Redirect Examination by Ms. Grabel 363

20 Recross-Examination by Mr. Robertson 367

21

22

23

24

25
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1 INDEX TO EXHIBITS

2 NO. DESCRIPTION IDENTIFIED ADMITTED

3 APS-5 APS-SC 1.10, Sierra Club's

 Response to APS' First

4 Set of Data Requests 56 374

5 APS-9 Rebuttal Testimony of

 Judah L. Rose 134 135

6 CONFIDENTIAL

7 APS-10 Rebuttal Testimony of

 Judah L. Rose 134 135

8

9 APS-11 Direct Testimony of

 Mark A. Schiavoni 243 245

10

APS-12 Rebuttal Testimony of

11 Mark A. Schiavoni 244 245

12 SC-4 Excerpt of Rebuttal

 Testimony of Judah L.

13 Rose on Behalf of

 Entergy Louisiana 145 146

14

SC-5 Excerpt of Report and

15 Recommendation Concerning

 the Little Gypsy Unit 3

16 Repowering Project 148 148

17 SC-6 SC 1.13, APS' Response

 to Sierra Club's First

18 Set of Data Requests 272 272

19 EDF-1 Prefiled Testimony of

 Bruce Polkowsky 232 238

20

Alliance-2 ACPA's First Set of Data

21 Requests to APS 276 318

22 Alliance-3 SWPG's First Set of Data 276 318

 Requests to APS

23

24

25
WITNESS my hand this day 18th day of July, 

id 'Itil, 

GARY W. HILL 

Certified Reporter 

Certificate No. 50812 

COLETTE E. ROSS 

Certified Reporter 

Certificate No. 50658 

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1 STATE OF ARIZONA ) 

) ss. 

2 COUNTY OF MARICOPA ) 

3 

4 

5 

6 

7 We, GARY W. HILL, Certified Reporter 

8 No. 50812, and COLETTE E. ROSS, Certified Reporter 

9 No. 50658, for the State of Arizona, do hereby certify 

10 that the foregoing printed pages constitute a full, true 

11 and accurate transcript of the proceedings had in the 

12 foregoing matter, all done to the best of our skill and 

13 ability. 

14 

15 

16 2011. 

17 

18 

19 

20 

21 

22 

23 

24 

25 

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