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Regardless of Federal CPP, States' Push for NatGas, Renewables Mandated Action by Utilities, Says Black Hills Exec

Market forces continue to move U.S. utilities away from coal-fired generation toward natural gas and renewables, but the long-standing changes to the nation's infrastructure have come at a higher cost to customers as systems are revamped, a Black Hills Corp. executive said Wednesday.

Black Hills Energy's Christopher Burke, vice president of the Colorado electric utility operations, discussed the nation's transition toward "cleaner" energy sources in Denver at the Rocky Mountain Energy Summit sponsored by the Colorado Oil & Gas Association's 28th annual meeting. Former Democratic Colorado Gov. Bill Ritter, who founded and now directs the Center for the New Energy Economy at Colorado State University, moderated a one-hour discussion.

Ritter in 2010 signed into law Colorado's landmark Clean Air-Clean Jobs Act, which requires investor-owned utilities to replace coal-fired capacity with natural gas and alternative fuels (see Daily GPIApril 20, 2010). Other states since have enacted similar legislation, while utilities also await the fate of the U.S. Environmental Protection Agency's Clean Power Plan (CPP), now tied up in court, which would limit emissions from the power sector (see Daily GPIMay 18).

Ritter asked Burke how Black Hills has prepared for the transition, considering the level of uncertainty of the CPP.

"There's been a wholesale change up of a century's worth of infrastructure and how we get our power today," Burke said. "It forces utilities to be moving closer to being powered by natural gas and renewable energy. We are one of the few in Colorado that is completely all natural gas or renewable; we have no coal in our portfolio right now. That's typical, but the change up has come at a cost to our customers, something that is very difficult to do.

"It's important to keep in mind, from a public policy standpoint, that all of these things are valid and they are notable and laudable goals. But one thing we'd like to see happening is [to have regulators consider] the cost impact on customers at the front end, when policies are put in place, so there's not so much of a rate shock on the back end."

When Colorado enacted its legislation, it called for the primary state investor-owned utility, Xcel Energy and Black Hills to either convert to a cleaner burning source for supply or retire half of their coal units by 2017. At the time, Black Hills had a single 42 MW coal generator in its portfolio that needed to be converted to a different fuel source. Management considered wood pellets or more emission controls, but the only thing that "penciled out" was retiring the facility and replacing it with natural gas, Burke said.

A big concern for Black Hills are the inherent infrastructure costs to build gas and renewables services. The South Dakota-based utility serves about 95,000 customers in southern Colorado, while Xcel services more than one million across the state, including in the Denver area.

"When all of that is taken into account, the infrastructure cost per customer and the difference in scale, it's a significant cost, as they are 13 times our size," he said of Xcel.

Today, it's unknown how the federal CPP may impact utilities, but "state policy pushed us in the diction that we will be compliant" no matter how the courts decide, Burke said. Of implementing controls now, he quoted Damon Runyon. "The race is not always to the swift, nor the battle to the strong, but that's the way to bet." Black Hills doesn't have a "crystal ball for the future about what environmental regulations will look like, but we are confident we have made the decisions that put us in good stead with customers."

Black Hills' strategy going forward is centered around natural gas and renewables for power generation.

"The role of natural gas is referred to as a bridge fuel to whatever future, but we think that bridge is going to last a lot longer than what some people might think," Burke said. "Carbon emissions from an equivalent amount produced from coal is about a 2:1 delta there. We have converted our supply to 100% natural gas or renewable energy...That is increasingly become version of what a utility of the future will look like."

More innovation is needed to ensure that the price volatility associated with natural gas is effectively managed, he said. Earlier this month Black Hills CEO David Emery said the company was rethinking its approach to create cost-of-service gas reserve programs in six states after being rejected by Colorado and Nebraska regulators (see Daily GPI,Aug. 9). However, Doyle said the cost-of-service approach was still on the table.

Black Hills is vertically integrated, with an exploration and production (E&P) business, a coal business in Wyoming, gas distribution utilities in eight states, electric generation in three states and a power deliver/plant construction business. The cost-of-service program is designed to save consumers money in the long run, he claimed.

The program is "back on the drawing board to provide additional information on costs," Burke said. "For those vertically integrated entities that have expertise on the E&P side, that explore and produce natural gas like Black Hills, there is a real benefit to customers from a cost volatility standpoint. The amount of natural gas produced offsets the cost otherwise made in market purchases."

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