CONFIDENTIAL INFORMATION REDACTED FOR PUBLIC RELEASE

STATE OF CONNECTICUT

PUBLIC UTILITIES REGULATORY AUTHORITY
TEN FRANKLIN SQUARE
NEW BRITAIN, CT 06051

DOCKET NO. 18-05-04 PURA IMPLEMENTATION OF JUNE SPECIAL
SESSION PUBLIC ACT 17-3

November 16, 2018

By the following Commissioners:

Katherine S. Dykes
John W. Betkoski, Hi
Michael A. Caron

Lead Staff: 8. Cadwallader
Legal Advisor: A. Martin

PROPOSED INTERIM DECISION

 

This proposed interim Decision is being distributed to the parties in this proceeding for comment.
The proposed Decision is not final. The Authority will consider the parties? arguments and
exceptions before rendering a final Decision, which may differ from the proposed Decision.
Therefore, this proposed Decision does not establish any precedent and does not necessarily
represent the Authority's final conclusion.

CONFIDENTIAL INFORMATION REDACTED FOR PUBLIC RELEASE


SUMMARY

In this Interim Decision, the Public Utilities Regulatory Authority (Authority or
PURA) finds Dominion Energy Nuclear Connecticut?s Millstone Units 2 and 3 located in
Waterford, Connecticut (Millstone Power Station or Millstone) to be an existing resource
at risk of retirement for purposes of evaluation in the Department of Energy and
Environmental Protection?s (DEEP) Notice of Request For Proposals From Private
Developers For Zero Carbon Energy dated July 31, 2018 (Zero Carbon RFP). This
Interim Decision does not reach the issue of whether a power purchase agreement (PPA)
with Millstone should be selected by DEEP or approved, but addresses solely the basis
on which such a PPA bid may be evaluated in the Zero Carbon RFP.

II. BACKGROUND AND CONDUCT OF THE PROCEEDING

On July 25, 2017, Governor Dannel P. Malloy signed Executive Order No. 59 (EC.
59) directing the Authority and DEEP to conduct a resource assessment of: (1) the current
and projected economic viability of the Millstone Power Station; (2) the role of zero
emission generation facilities like nuclear, large-scale hydropower, demand reduction,
energy storage, and zero emission renewable energy in helping the state meet its
statutory greenhouse gas emissions reductions targets and maintaining the reliability of
the electric grid; (3) the best mechanisms to ensure continued progress towards those
targets; (4) the compatibility of such mechanisms with competitive wholesale and retail
electricity markets, and the resulting financial impact on electric ratepayers of such
mechanisms. The Authority and DEEP were required to submit the findings of their
resource assessment to the Governor, the Chairpersons and ranking members of the
Energy and Technology Committee of the General Assembly, and to the Governor?s
Council on Climate Change no later than February 1, 2018. To implement the
requirements of E0. 59, the Authority and DEEP initiated a joint proceeding in PURA
Docket No. 17?07~32, DEEP and PURA Joint Proceeding to Implement the Governor?s
Executive Order Number 59.

In addition to the requirements of E0. 59, 1(b) and of June Special Session
Public Act 17?3, An Act Concerning Zero Carbon Solicitation and Procurement (Act), now
codified as 16a?3m of the Connecticut General Statutes (Conn. Gen. Stat), required
the Authority and DEEP to conduct an appraisal of nuclear power generating facilities
assessing: the current and projected economic condition of those facilities and the impact
on electric markets, fuel diversity, energy security, grid reliability, greenhouse gas
emissions and the state, regional and local economy if those facilities retire. This
appraisal, along with a determination of whether to conduct a procurement for nuclear
power generating facilities pursuant to the Act, was required to be submitted to the
Connecticut General Assembly by February 1, 2018. The Act provided that if the results
of the appraisal demonstrate that action is necessary, DEEP may issue one or more
solicitations for zero carbon generation facilities, such as nuclear power, hydropower,
Class renewable energy sources, and energy storage. If DEEP finds any proposals
submitted in response to a solicitation are in the best interest of ratepayers, DEEP may



i

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direct the EDCs to enter into long?term agreements with those resources and submit any
such agreements to PURA for review and approval pursuant to 

In response to directives in E0. 59 and the Act, the Authority and DEEP prepared
a Resource Assessment and Appraisal in which they jointly concluded that while the
Millstone nuclear units are estimated to be profitable under expected market revenues
through 2035, Millstone?s incomplete responses to data requests and refusal to provide
audited operational data and costs during the E0. 59 assessment process rendered
uncertain the State?s assessment of the financial viability of Millstone Nuclear Units.
Resource Assessment, Appraisal and Determination at p. 39, Docket No. 17?07?32 (Feb.
1, 2018) (Joint Determination). In recognition of this uncertainty and the significant value
the Millstone nuclear units and other existing or new zero-emission generating resources
provide to Connecticut and the region, PURA and DEEP concluded that pursuant to the
Act, DEEP should conduct a procurement or procurements for new and existing zero-
emission generating facilities. p. 41. In the Determination, PURA and DEEP indicated
that an existing resource may seek to be evaluated in any procurement conducted
pursuant to the Determination as an ?existing resource confirmed at risk.? Existing
resources deemed to have met this evidentiary burden would then be removed from the
assumed existing or reference set of resources and would be entitled to have their bids
scored on the same set of non-price benefits as new resources. E.

To facilitate the review of any request to be treated as an ?existing resource
confirmed at risk,? the Authority and DEEP on April 30, 2018, jointly issued a procedural
notice indicating that the Authority would open a proceeding, in which DEEP would
participate as a party, in order to evaluate and conduct discovery on a petitioning
resource?s ?at risk? status. Final Procedural Notice at 2, Docket No. 17-07-32 (Docket
No. 17-07-32 Procedural Notice). In the Docket No. 17?07-32 Procedural Notice, the
Authority and DEEP explained that this approach would enable both agencies to reach
separate conclusions about the ?at risk? status?as appropriate to their independent
roles?based on a common evidentiary record, and would be timed to run in parallel with
the RFP process, with appropriate sequencing to ensure fair and competitive bidding in
the RFP. Id.

As outlined in the Docket No. 17-07-32 Procedural Notice, in order to be eligible to
petition the Authority for a determination that it is an ?existing resource confirmed at risk,?
a resource must:

a. Be an existing resource that has delivered electricity to the ISO New
England (ISO-NE) grid in the past;

b. Be one of the following generating resource types:
i. An eligible nuclear power generating facility, as defined in the Act,



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ii. Hydropower not eligible to receive Class I Renewable Energy Credits
as defined by Connecticut General Statutes 16-1;

and

0. Have a nameplate capacity of no less than 2 MW, consistent with past
requirements in prior DEEP grid-scale procurements by DEEP.

lg. at p. 2?3.

The Docket No. 17?07-32 Procedural Notice further provided that the Authority
would issue an interim decision on any eligible resource?s request to be deemed an
?existing resource confirmed at risk." at p. 3. As explained in the Procedural Notice,
any existing resources not deemed an ?existing resource confirmed at risk" will be
included in the base case of evaluation in any RFP issued by DEEP pursuant to
the Act, subject to reasonable assumptions regarding anticipated resource retirements.
id.

On May 8, 2018, PURA initiated, on its own motion, the above?captioned docket,
Docket No. 18-05?04, PU RA implementation ofJune Special Session Public Act 17?3, for
the purpose of (1) reviewing any petition(s) received from an eligible resource seeking a
determination that the resource is at risk to retire and, subsequently, (2) evaluating any
contract(s) that may result from a DEEP?conducted procurement(s) pursuant to 
of Public Act 17-3. By Procedural Notice dated May 15, 2018 (Docket No. 18?05-04
Procedural Notice), the Authority established eligibility requirements for existing
resources seeking an ?at risk? designation, enumerated the information required to be
filed, and set the due date for filing such information. Docket No. 18?05?04 Procedural
Notice, at p. 1-2. In addition, the Docket No. 18?05?04 Procedural Notice provided a
process by which a petitioner could request that certain filed information be treated as
confidential and protected from public disclosure. at p. 3.

On May 31, 2018, Dominion Energy Nuclear Connecticut, inc. (DENC 0r
Dominion) filed with the Authority a petition seeking a declaratory ruling designating the
Millstone Power Station an ?existing resource confirmed at risk.? PURA received no other
at risk petitions in this proceeding.

Subsequent to Dominion filing its petition, the Authority, on July 3, 2018, issued a
Notice of Proceeding designating Dominion, the Office of Consumer Counsel (OCC), and
DEEP as Participants to this proceeding with access to protected information. On July 9,
2018, the Authority issued a preliminary ruling on Dominion?s petition deeming the filing
substantially complete, and clarifying that although Dominion had styled its filing as a
Petition for Declaratory Ruling, the Authority docketed the request as Motion No. 3 and
would treat the request as a motion for a determination that Dominion?s Millstone Power
Station be deemed an ?existing resource confirmed at risk.? By Motion Ruling dated
August 20, 2018, the Authority also designated The Connecticut Industrial Energy
Consumers (CEIC), The Connecticut Light and Power Company d/b/a Eversource Energy

Docket No. 18?05-04 Page 4
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(Eversource) and The United Illuminating Company (Ul) as Participants, but declined to
provide these Participants with access to protected material.

In addition to the information filed with Dominion?s petition, information was
provided in this proceeding in response to interrogatories requested by PURA and by
DEEP, at a hearing held on August 29, 2018 pursuantto a Notice of Hearing dated August
10, 2018, and through Late Filed Exhibits. Participants were invited to file Briefs and
Reply Briefs and the record in the proceeding was closed pursuant to a Notice of Close
of Record dated October 19, 2018.

POSITIONS 0F PARTICIPANTS
A. PETITION AND SUPPORTING EVIDENCE

Millstone Power Station is located in Waterford, Connecticut and consists of two
pressurized water nuclear reactors: Millstone Unit 2, an 882 megawatt (MW) Combustion
Engineering reactor that came online in 1975, and Millstone Unit 3, a 1230 MW
Westinghouse pressurized water reactor that came online in 1986. Petition for
Declaratory Ruling (Petition), p. 6. The Millstone reactors represent the largest single
generation facility and the only multi?reactor plant in New England. Dominion states
that DENC wholly owns Millstone Unit 2. DENC owns 93.47% of Millstone Unit 3;
4.8% of Unit 3 is owned by the Massachusetts Municipal Wholesale Electric Company,
and the remaining 1.73% of Unit 3 is owned by Green Mountain Power Corporation. 
Dominion states that the operating licenses for Units 2 and 3 issued by the Nuclear
Regulatory Commission (NRC) expire in July 2035 and November 2045, respectively. 
Dominion asserts that Millstone therefore meets the eligibility requirements for an
?existing resource confirmed at risk? established by the Authority and DEEP because it
(1) is an existing resource that has delivered electricity to the ISO-NE grid in the past; (2)
is an eligible nuclear power generating facility as that term is defined in the Act; and (3)
has a nameplate capacity of no less than 2 MW. g, p. 2?3.

In support of its Petition, Dominion submitted testimony from Paul D. Koonce,
Executive Vice President and President CEO Power Generation Group of Dominion
Energy, Inc., asserting that in order for Millstone to continue to operate safely, efficiently,
and in accordance with the standards required by the Nuclear Regulatory Commission
(NRC), Dominion would need to make continued capital investments in the plants.
Testimony of Paul D. Koonce on Behalf of Dominion Energy Nuclear Connecticut, Inc.
(Koonce Testimony), p. 4. Another Dominion witness, Dr. Susan F. Tierney, explains that
the array of recent nuclear retirements and announcements of planned retirements in
deregulated markets across the country in upcoming years results largely from financial
pressures facing merchant nuclear units in the organized markets. Testimony of Dr.
Susan F. Tierney on Behalf of Dominion Energy Nuclear Connecticut, Inc. (Tierney
Testimony), p. 16. Dr. Tierney further explains that the primary factor leading to such
premature retirements of nuclear generation is low wholesale energy market revenues in
recent years driven by low natural gas prices, flat demand and increasing penetration of
renewable energy capacity with no-to?low variable operating costs. Tierney Testimony,
p. 18. Dominion explains that as a merchant generation asset, Millstone does not receive

Docket No. 18?05?04 Page 5
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revenues from utility commission-approved rates as is the case under cost?of?service
regulation, and instead must rely on market-based revenues in a competitive energy
market. Petition, p. 7. Dominion notes that the Joint Determination acknowledged that
nuclear facilities are particularly dependent on energy revenues because of their very
high fixed costs and low marginal costs. Dominion further asserts that per unit energy
revenues must be higher than the marginal energy cost in order for the nuclear facility
owner to recover the high fixed costs and earn a sufficient return associated with the
market risk of a merchant resource. Dominion claimed that investors in merchant
generating assets require higher returns than those of regulated assets, but that market
trends and state public policies have made achieving such a return more uncertain.
Petition, p. 7 and 8, Tierney Testimony, p. 18-21.

According to Dominion witness Dr. Tierney, energy market prices are also low
because they do not fully reflect the cost of resources needed to meet demand, as market
rules prevent units from setting clearing prices if they are dispatched out of order in terms
of economic merit to fulfill reliability assurance needs. Tierney Testimony, p. 16.
Additionally, Dr. Tierney asserts that capacity markets with a forward period of three
years, such as those in ISO New England, may not provide sufficient visible revenue flows
for existing nuclear units given certain realities related to lumpy capital and other
expenses, such as committing to the costs of refueling a reactor for another three?year
service obligation. pp. 16?17. Dr. Tierney further explains that the outlook for capacity
payments is mixed, g, p. 17, and that wholesale power market designs in and
other regions either include no carbon pricing or produce carbon-allowance prices that
are relatively low. Q, pp. 16-18, Dominion Brief, p. 5. Dominion notes that the Entergy
Corporation?s premature shutdown of Pilgrim Nuclear Station (Pilgrim) located in
Massachusetts was due to low wholesale energy prices and lack of adequate
compensation for nuclear merchants for providing such benefits as ?reliable carbon-free,
large?scale 24/7 energy generation and onsite fuel storage.? E, p. 6. Similarly, Dominion
explained its decision to shut down its Kewaunee Power Station (Kewaunee) prematurely
in 2013 was based on many of the same reasons that Entergy gave for shutting down
Pilgrim. m, p. 7. Dominion witness Daniel Stoddard, Chief Nuclear Officer of Dominion
Energy, explains that Kewaunee, similar to Millstone, operated in a restructured energy
market and faced the same low?cost wholesale power price pressures due to low-cost
gas, reduced demand and increased incentives for renewables. Testimony of Daniel G.
Stoddard on Behalf of Dominion Energy Nuclear Connecticut, Inc. (Stoddard Testimony),
p. 5. Due to its significant output and the size of its workforce, Dominion emphasizes that
Millstone contributes significantly more to the economic well?being of the state of
Connecticut and the local area in which it is located than Kewaunee contributed to
Wisconsin. jg.

Dominion also explains that new methods of natural gas extraction have
significantly increased the availability of low?cost produced natural gas, increasing supply
of domestic natural gas, and driving down wholesale energy costs in markets that heavily
rely on natural gas?fired generation. Petition, pp. 8?10. Dominion states that in New
England, 80% of the new capacity built since 1997 relies on natural gas for fuel and 40%
of all new proposed generation in the region plans to use natural gas as fuel. p. 10.
Dominion further states that natural gas continues to set New England electricity market

Docket No. 18?05?04 Page 8
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clearing prices 75% of the time, and no change is expected in that trend for the
foreseeable future. According to Dominion, this reliance on natural gas and the
preferential treatment given to other non?gas resources has made it more difficult for non-
gas-fired resources, in particular merchant nuclear generators, to remain viable
investments. pp. 8?9.

Dominion also points to the high fixed costs of operating a nuclear power station
combined with low wholesale energy market prices as having resulted in a downward
trend in net energy revenues for all non?natural gas generators, with nuclear generators
such as Millstone seeing the greatest impact. g, p. 9. Dominion emphasizes that other
non-gas low? and no?carbon resources often benefit from state and federal incentives and
do not incur associated fuel costs, further driving down both the energy and capacity
markets, thereby harming nuclear plants dependent on these revenues. Dominion
reports that, during the last few years, five nuclear units have retired, totaling almost five
GW of capacity. Id.

Dominion witness Koonce emphasizes that the decision it faces with respect to
Millstone is not whether or not the asset remains marginally profitable going forward.
Koonce Testimony, p. 4. Given the capital intensive nature of running a nuclear station
in the safe, efficient, best?in-class manner required by the NRC and Dominion?s own high
standards, Mr. Koonce asserts that Dominion?s decision will be based on whether or not
making the needed investments in Millstone is the best use of Dominion Energy's limited
capital and operating resources. M. Mr. KoOnce further notes that the current New
England public policy environment may make continued investment in Millstone
unsupportable. Q.

In addition to sworn testimony, Dominion provided the 2013 to 2017 audited
consolidated financial statements of the Power Generation Group of Dominion Energy,
Inc. (Dominion Energy) and those of its operating subsidiaries, including DENC, the legal
entity owner of Dominion's portion of Millstone. Testimony of Corynne S. Arnett on Behalf
of Dominion Energy Nuclear Connecticut, Inc. (Arnett Testimony), p. 2; Petition,
Confidential Attachments C1 to C8. Dominion also submitted separate audited
supplemental schedules for 2013 to 2017 which separately present financial statement
amounts for DENC as well as the May 30, 2018 report on those supplemental schedules
produced by Deloitte 8 Touche LLP. Arnett Testimony, p. 2; Petition, Confidential
Attachments CS to 08. Additionally, Dominion augmented the audited supplemental
schedules for DENC to include affiliate activity performed on behalf of Millstone. Arnett
Testimony, p. 2; Petition, Confidential Attachment CQ. Finally, Dominion provided
Millstone's energy, capacity and ancillary services revenue for the historical period 2013
to 2017, and such revenue forecasts for the period 2018 to 2025. Arnett Testimony, p. 4;
Petition, Confidential Attachment C10. Dominion has also provided going-forward facility
costs, as well as a comprehensive forecast of revenue, projected effects of hedging, fuel
expense, gross margin, income before interest and income tax, estimated interest and
income tax expense, net income, and return on equity for years 2018?2025 for Millstone.
Arnett Testimony, p. 5?8; Petition, Confidential Attachment C1 1.

Docket No. 18?05?04 Page 7
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Dominion witness Corynne S. Arnett, Vice President Financial Management of
DENC, states that Dominion?s forecasted energy revenue was based on market energy
prices reported by the Intercontinental Exchange (ICE) for the Mass Hub as of April 25th
2018 for years 2018 through 2024. Arnett Testimony, p. 4. According to Ms. Arnett, the
2025 energy price forecast provided by Dominion was established using a forward market
heat rate calculated using prior years? Mass Hub power prices and the Henry Hub gas
price from ICE for 2025 because the ICE April 25th strip did not quote a Mass Hub price
for 2025. E. Dominion witness Arnett further explains that the forecasted capacity
revenues for Millstone are in part based on auction cleared capacity prices from the ISO-
Forward Capacity Auction (FCA) through May 31,2022. According to Ms. Arnett,
capacity prices beyond May 31, 2022, are estimated using forecasting techniques and its
assessment of the impact of the new ISO New England pay for performance (PFP)
capacity market rules. Late Filed Exhibit No. 5. Ms. Arnett also explains that the
forecasted ancillary services revenues it submitted are based on Millstone's realized
historic values, while the forecast facility costs for 2018 to 2025, including operations and
maintenance administrative and general depreciation, amortization, taxes
and return, are based on Millstone's five year annual budget plus escalations to
approximate cost of living and inflationary increases net of cost controls. Arnett
Testimony, pp. 4 and 5. According to witness Arnett, Millstone?s historic and projected
expenses reflect the costs necessary to safely, reliably and efficiently generate electricity.
Id., p. 5. Ms. Arnett testifies that, due to rigorous cost control efforts, Millstone's operating
expenses, including fuel, are forecasted to remain almost flat with an annual growth rate
of less than one percent for the twelve year period of 201 3 to 2022. M.

Dominion witness Arnett explains that Millstone is 100% equity capitalized and has
no debt. Arnett Testimony, p. 6. Pointing to the publicity regarding the economic viability
of Millstone, Ms. Arnett asserts that non?recourse and stand?alone debt financing may not
be available for Millstone. Accordingly, Dominion used as a proxy a hypothetical
capital structure of an independent power producer with significant nuclear. or other
baseload capacity to approximate Millstone?s debt and equity capitalizations. 
Dominion submits that the forecasted Millstone market value is based on Millstone?s

overall enterprise value,1 projected returns on investment, as well as its estimated capital
structure, and was based on comparable companies? stand?alone earnings and return
multiples. Response to Interrogatory EL-4.

Dominion witness Arnett indicates that Millstone?s estimated average return on
equity (ROE) over the 2019 to 2025 period shows a declining profile that is not sustainable
for an asset with its risk profile. Arnett Testimony, p. 6. Dominion proposes a cost of debt
and an average expected ROE for the forecast period based on what it considers to be
"comparable? merchant power assets or portfolios. The specific numbers Dominion
proposes are filed under protective order. a; Petition, Confidential Attachment C11.
Dominion asserts that there are no other comparable companies that have debt allocated
to them that would be investment grade on a stand-alone basis. Tr., p. 44.
Furthermore, Dominion claims that non?investment grade debt would be dilutive to
Dominion and result in an inefficient capital structure for Millstone. 

 

1 As used in this Decision, enterprise value refers to the value of the resources' continued operation.

Docket No. 18?05?04 Page 8
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Dominion disagrees with and use ofan analysis based on actual
net investment rather than enterprise value to determine Millstone?s profitability.
Dominion Reply Brief, pp. 2 and 3. Dominion agrees, however, with and 
conclusion that the facility is at risk of retirement even under the net investment approach.
id, p. 2. Dominion states that Millstone is not a regulated utility with a guaranteed return
on investment (ROI) but a merchant nuclear facility with a considerably higher risk profile
not captured through ROI analysis. Moreover, Dominion claims it uses market value
analysis to determine whether to continue operation of Millstone or allocate capital and
resources elsewhere, and that the statement by DEEP and 000 that there is no
connection between the financial analysis presented by Dominion and its decision to
continue to operate Millstone or retire it is incorrect. pp. 3-4.

Dominion indicated that and 000's proposal to use Dominion Energy?s
debt interest rate as a proxy for Millstone?s interest rate is inappropriate. ld., pp. 4.
Dominion states that Dominion Energy?s debt is supported by its over 90% regulated
credit profile, and that using its debt costs would equate to a transfer of value from the
regulated business to the unregulated businesses. Dominion also explains that the
interest on parent?s debt is based on an investment grade credit profile, which is
inappropriate for Millstone with its ratings. Further, Dominion states that even
using the ROI method proposed by DEEP and 000, it determined a ROE that confirms
that Millstone is ?at risk? now and is suffering from insufficient returns that will impact
Millstone well before and OCC's "At Risk? date ofJune 1,2023. pp. 4?5.

Dominion asserts that the determination by DEEP and COO that Millstone is not
at risk until June 1, 2023 because Dominion will not be able to shed any existing capacity
obligations before that date is not dispositive. g, p. 5. Dominion asserts that without an
additional financial assurance via an approved contract through the DEEP request for
proposals (RFP) that begins prior to June 1, 2023, Dominion will be forced to evaluate
submitting a retirement delist bid in the next forward capacity auction (FCA) and will
pursue all options for exiting existing capacity supply obligations. According to
Dominion, whether Millstone retires on June 1, 2023 or is able to retire earlier, the result
is the same: Connecticut will permanently lose the significant economic, environmental,
employment and reliability benefits provided by Millstone. lg.

Furthermore, Dominion asserts that DEEP and COO are mistaken in suggesting
that it is difficult to conclude that Millstone is likely to retire prior to June 1, 2023 due to
Dominion?s decision not to oppose market rule changes proposed by related to
retirement of resources needed for fuel security, and its advocacy for long-term changes
to value fuel security at the wholesale level. p. 6. Dominion emphasizes that it
exercised the option to retire its Salem Harbor units 3 and 4 located in Salem,
Massachusetts, ceasing operations and opting not to pursue an RMR contract for those
units even though those units were needed for reliability. id, pp. 7?8. Dominion states
that it is aware of Millstone?s role in the New England wholesale energy markets and
Connecticut's economy, but it also has a fiduciary responsibility to its shareholders to exit
from a business when the total return is not commensurate with the total costs and risks.
M, p. 6. Dominion asserts that the one?time costs that it will incur as a result of Millstone's

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early retirement, including costs to exit its capacity supply obligations, are not a factor in
the decision of whether to retire, but instead factor into the decision of when to wind down
operations. pp. 6?7. As long as prevailing market trends continue to result in a return
that is significantly below that deemed acceptable by investors for Millstone?s risk profile,
Dominion asserts that the facility will remain unprofitable and likely to retire without
ratepayer support. p. 7. Dominion indicated it protested short-term fuel
security proposals because they would result in depressed capacity prices in an already
deficient capacity market, and notes that proposal is currently being litigated
before the Federal Energy Regulatory Commission (FERC). g, p. 8. Accordingly,
Dominion states that there is no current regional mechanism to retain resources for fuel
security purposes, and the terms and timeline of any tariff changes remain
uncertain. Dominion emphasizes that it must make business decisions based on what
is known and knowable at the time and does not expect any regional fuel security solution
to materialize until mid?2023. 

Dominion asserts that the briefs mainly focus on the Zero Carbon RFP and
overlook the harm to Connecticut and to the region that would occur if Millstone
prematurely retired. pp. 11?12. Dominion states that the Joint Determination
recognized that a hypothetical early retirement of Millstone would cost the state's
ratepayers an estimated $1.8 billion associated with replacing at least 25 percent of
Millstone's 2,200 MW of zero emission generation facilities with large?scale hydropower,
demand reduction, energy storage, and zero emission renewable energy in order to
prevent backsliding on Connecticut's statutory greenhouse gas emissions reductions
targets, but even with that investment regional emissions would increase by 20 percent.
g, p. 12. Dominion also highlights the Joint Determination?s finding that replacing 100
percent of Dominion?s output with zero carbon resources would cost ratepayers an
estimated $5.5 billion. According to Dominion, these were the reasons the Act was
enacted and codified as Conn. Gen. Stat. 18a-3m, permitting DEEP to conduct the Zero
Carbon RFP to acquire twelve million megawatt hours of Zero Carbon electricity. The Act
allows eligible nuclear power generating facilities to participate. g.

B. DEEP AND OCC

The DEEP Bureau of Energy and Technology Policy (BETP) and the OCC
submitted ajoint brief. BETP and OCC state that DEEP issued the Zero Carbon RFP on
July 31, 2018 detailing how new resources, existing resources confirmed at risk of
retirement, and existing resources not at risk of retirement will be evaluated and scored.
Joint BETP and OCC Brief, pp. 1 and 2. With respect to the at risk determination portion
of this proceeding, BETP and OCC assert that the appropriate method for deciding
whether an existing resource is at risk of retirement is to evaluate the equity in the asset
based on the actual investment of capital in that asset. g, p. 4.

DEEP and OCC acknowledge that Dominion faces risks associated with the
continued operation ofMillstone. Joint BETP and OCC Brief, p. 5. DEEP and OCC state
that nuclear power plants have high capacity factors and rigid operational characteristics,
noting that as baseload units, nuclear resources operate for most hours of most days and
are price takers in the energy markets. DEEP and OCC also recognize that because

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nuclear facilities are reliant on energy market margins, energy prices must be sufficiently
high to allow the nuclear resource owner to recover the high fixed costs that non-nuclear
plants do not incur. DEEP and OCC also state that nuclear resources? reliance on
energy margins makes them more sensitive to unplanned shutdowns and extended
outages under which the plants continue to incur high fixed costs. 

DEEP and OCC also agree with Dominion that New England heavily relies on
natural gas generators and that natural gas generation dominates as the marginal unit
setting the market clearing prices of electricity in the region, reducing market clearing
prices and significantly impacting the profitability of nuclear generation units. g, p. 6.
DEEP and OCC also note that reduced market revenues resulting from low gas and
electricity wholesale prices as well as increased operational costs were major contributing
factors in the decisions to close two other nuclear facilities in the region: Vermont Yankee
in December 2014, and Pilgrim, slated to close in 2019. 1g.

DEEP and OCC assert that ROE is the appropriate measure for determining if
Millstone is at risk of retirement. 191., p. 7. DEEP and OCC explain that Dominion?s
market?based valuation of Millstone included assumptions of capital structure and cost of
debt for Millstone as a stand?alone entity, and the enterprise value Dominion calculated
was developed from corporate level financial information of two publicly traded parent
companies of comparable merchant generators. According to DEEP and OCC,
Dominion?s calculation ofthe enterprise value for Millstone is not connected to Dominion?s
actual capital investments in Millstone, and is aimed at estimating the total stand-alone
value of the asset. lg. DEEP and OCC claim that Dominion?s resulting enterprise value?
(earnings before income taxes, depreciation and amortizations) multiple
resulted in an unreasonable enterprise value in 2018 and significantly inflated net income
requirements and interest expense, and therefore, DEEP and OCC conclude that the
enterprise value approach is not an appropriate basis for valuing Millstone. DEEP
and OCC assert that the enterprise value approach also does not reflect Dominion's
actual capital investment in Millstone and is inconsistent with a rate base used to
determine the ?cost of service? for utilities and reliability must run contracts. g, p. 8.
DEEP and OCC further state that the enterprise value is most useful for developing the
market value of an asset. According to DEEP and OCC, however, this valuation
approach ignores Millstone?s current capacity supply obligations and Dominion has
repeatedly declared it will either operate Millstone or shut it down. pp. 8-9. Since
Dominion has no plan to sell the facility, DEEP and OCC infer that Dominion used market
valuation for an asset which it claimed there is no market for. p. 9.

DEEP and OCC agree that Millstone should earn a return on equity (ROE) that is
greater than that ofa natural gas merchant generator given the inherent risks ofoperating
a nuclear facility. g, p. 7. They conclude, however, that a more appropriate basis for
determining the equity in an asset is the actual investment of capital in the asset, and
therefore recommend evaluating the level of profitability using the return on actual
investment, which is calculated by dividing the profit by the actual investment that
investors have made. g, p. 8. To establish the appropriate net income and interest
expense for Millstone, DEEP and OCC indicate that the actual net asset value of the
property, plant and equipment for Millstone should be used. 3, p. 9. DEEP and OCC

Docket No. 18-05-04 Page 11
CONFIDENTIAL . - FOR PUBLIC 

state that they analyzed the actual costs invested, or the net asset value, rather than the
enterprise value, and divided the profit, or net income, by the investment, or net asset
value, to determine the ROE. pp. 8-9. DEEP and OCC recommend costs of debt
and ROE for Millstone, which they filed confidentially with their Brief. Attachments 1
and 2.

DEEP and OCC state that Dominion failed to connect its decision to continue to
operate or retire Millstone with the financial analysis Dominion presented. M, p. 9. DEEP
and 000 note that Dominion testified that going forward costs are important and that it
would need to invest almost $700 million in Millstone overthe next several years, but that
the $700 million capital investment could generate better returns if invested in its other
operations instead of Millstone. 3, pp. 9-10. DEEP and OCC state that Dominion?s
analysis of the going?forward costs relative to applying that investment elsewhere led to
its decision to shut down the Kewaunee nuclear power station, and assert that the
determination of whether Millstone is ?at risk" here should likewise be based on the
evaluation of Millstone's going?fonmard costs. 

DEEP and OCC explain that they conducted a sensitivity analysis of Millstone's
operating costs using multiple proxies and concluded that Dominion?s revenue projections
and all other cost estimates provided in this proceeding are reasonable with the exception
of Millstone?s interest expense and expected ROE. M, p. 10. After correcting and
significantly reducing the interest expense and the net investment to the actual amount,
DEEP and COO still found the calculated ROE to be insufficient to retain Millstone in the
market. DEEP and 000 acknowledge that Dominion's board of directors would
ultimately decide the expected and acceptable investment returns based on their
evaluation of the most effective allocation of capital and the opportunity costs associated
with the continued operation of Millstone. g, p. 11. Nonetheless, DEEP and 000
recognize that the recovery of and return on going forward costs may not be sufficient to
ensure Dominion?s continued operation of Millstone. DEEP and 000 recognize that
stable revenues as well as a reasonable control of the risks are appropriate
considerations to account for when evaluating the continued operation of high fixed cost,
energy revenue dependent nuclear generation. Despite the difficulty of estimating the
correct level of revenue, DEEP and 000 conclude that Dominion has proved that it is at
risk of retirement subsequent to June 1, 2023. Q.

DEEP and 000 state that an existing resource in the market would signal
its intention to retire by submitting a retirement delist bid in the annual Fonrvard Capacity

Auction (FCA) for Forward Capacity Market M, p. 11. DEEP and
COO assert that as an existing resource that did not submit a retirement bid in March of
2018, MillstOne will bid into the next #13?in February 2019, and will
undoubtedly obtain a capacity supply obligation (080) for the 2022?2023 capacity
commitment period (COP). DEEP and 000 further assert that the earliest Dominion
could submit a retirement bid and complete the retirement delist process forward market that procures capacity?the ability to produce electricity if called
upon?on an annual basis for a one-year period (running from June 1 through May 31) three years into
the future through a descending clock auction. DEEP and COO Joint Brief, pp. 11-12. To date, ISO-
NE has conducted twelve FCAs. lg, p. 12.

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CONFIDENTIAL FOR PUBI RELEASE

meaning that the earliest Dominion could be free of any CSO would be for the capacity
commitment period (CCP) beginning in June 2023. lg.

DEEP and OCC note that under current market rules, an existing resource
may shed a previously acquired CSO prior to the beginning of the CCP via bilateral
transaction(s) or by submitting a demand bid(s) in an Annual Reconfiguration Auction
(ARA). pp. 12?13. DEEP and OCC state that for Millstone to shed its almost 2,100
MW CSOs through the 2021?22 CCP, Dominion would need other large substitute
resources willing to assume its 080 or pay a very high price to buy its way out of its
CSOs. Despite this option, DEEP and OCC infer that it would be extremely expensive
and unlikely for Dominion to shed the Millstone Station's 080 in an ARA because most
qualified capacity resources are already committed in the FCM and there is limited
liquidity in the ARA to trade out a large CSO. 

Additionally, DEEP and OCC indicate that tariff revisions in the August
31, 2018 filing with FERC in Docket No. ER18-2364 suggest that a resource that submits
a retirement delist bid and is identified as a resource that is eligible for a cost?of?service
agreement for fuel security purposes would be ineligible to shed an obligation obtained in
FCA #13, #14, or #15 in an ARA and the associated costs would be regionalized on a
load share basis. pp. 14?16. Furthermore, according to DEEP and OCC, underthe
proposed tariff revisions, if Millstone submits a retirement delist bid in FCA #14 to retire
as of June 1,2023, it would create a fuel security concern and the facility would be eligible
for a cost?of?service agreement. Therefore, if the proposed tariff revisions are
accepted by FERC, DEEP and OCC suggest that Millstone would not be able to retire
prior to June 1, 2023. Q. DEEP and OCC also claim that while Dominion has publicly
indicated that Millstone could be prematurely retired during a period in which the facility
has a 080, it did not protest the provisions in the proposed tariff revisions that
limit the ability of resources needed for fuel security to trade out of existing 0808. E.
Rather, Dominion protested how resources retained for fuel security are treated in FCAs
13 and 14. DEEP and OCC state that based on Dominion's comments in that
proceeding, they believe Millstone will not trade or buy out of its current C805, and is
unlikely to retire prior to June 1, 2023. Q.

Finally, DEEP and OCC assert that the net income and ROE for the period 2018
through 2022 that they proposed are adequate to ensure the continued operation of
Millstone given its existing CSOs. g, p. 17. Nonetheless, DEEP and OCC, despite their
finding that Millstone is unlikely to retire prior to June 1, 2023, indicate that Millstone may
be selected and recommended for a PPA contract by DEEP prior to that date. lg.

In their reply brief, DEEP and OCC counter Ul?s assertion that at risk resources
will be able to offer at prices substantially higher than necessary to relieve any at risk
condition, noting that at risk resources are required to submit a cost?of?service model and
supporting documentation for the proposed PPA terms to ensure their bids are not
inappropriately inflated. DEEP and OCC Joint Reply Brief, pp. 1 and 2. DEEP and OCC
also explain that should additional sources of revenues become available to the at risk
facility, the at risk facility shall apply for and obtain the maximum such compensation
available, and the contract amount will be appropriately reduced. With respect to

Docket No. 18-05-04 Page 13
PUBLIC RELEASE

Eversource?s position that a determination that Millstone is at risk will compromise the
competitiveness of the RFP process, DEEP and 000 state that they and the
Procurement Manager will properly evaluate the indirect benefits of retaining an at risk
unit. g, p. 3. Since existing units that are not at risk also provide these benefits, DEEP
and 000 argue that the incremental benefits offered by each type of resource, at risk or
not, are appropriately considered and competitiveness is maintained. 

DEEP and OCC agree with the EDCs that it may be necessary to subsequently
adjust the terms of any PPA with Millstone to reflect federal and regional changes, but
disagree with recommendations to reopen or periodically revisit the determination that
Millstone is at risk. pp. 3 and 4. According to DEEP and OCC, the RFP already
contemplates such changes and is designed to provide the appropriate protections if and
when a market or regional solution is implemented. E. To that end, DEEP and OCC
note that the proposed PPA would require an at risk generator to seek compensation
under any new mechanisms or rule changes that could eliminate the need for Connecticut
customers to bear the full cost of the agreement. DEEP states that a reopening must
be limited to those specified in the contract. 

DEEP and OCC indicate that it would be inappropriate to limit any contract with
Millstone to a three year period as suggested by Eversource. pp. 4 and 5. DEEP and
000 asserted that the appropriate length of the contract term is governed by the Act,
which calls for an agreement period of three to ten years. 1g. Thus, it would be proper to
review the length of the contract proposals from the zero carbon resources during the
procurement process and when the Authority reviews and approves such a contract with
Millstone. 1g.

C. UI

Ul urges the Authority to consider and be guided by the twelve ?Principles of
Deregulation,? codified in Conn. Gen. Stat. ?16~244, as it considers making an at risk
determination here. Ul Brief, pp. 2?4. Ul emphasizes that Conn. Gen. Stat. ?16a-3m
allows, but does not require, a total procurement of up to 12 million megawatt hours per
year of zero carbon energy, which Ul states is equivalent to nearly 45% of Connecticut
EDC load. Ul further emphasizes that Conn. Gen. Stat. ?16a-3m allows, but does not
require, the selection of an existing resource confirmed at risk to provide that energy. E.
Ul asserts that if Millstone is confirmed at risk and is selected in the RFP, almost two
thirds of Connecticut?s energy will be obtained under power purchase agreement
obligations and not through wholesale energy markets. Q. If the Authority
determines that Millstone is at risk, Ul recommended certain actions to minimize harm to
customers. 

UI notes that Conn Gen. Stat. 16-19, 16?20 and 16-21 mandate the Authority
to ensure that rates charged to customers under power purchase agreements or contracts
are not ?discriminatory or more or less than just, reasonable and adequate to provide
properly for the public convenience, necessity and welfare.? pp. 5 and 6. UI states
that it is concerned that the provision in the RFP that an existing resource confirmed at
risk will be evaluated on the same basis as a new zero?carbon resource would create a

Docket No. 18?05?04 Page 14
CONFIDENTIAL INFORMATION . . FOR PUBI .IC RELEASE

situation where the selected resource can offer a pricesubstantially higher than what is
needed to alleviate the at risk condition and yet still undercut the price offered by new
zero?carbon resources into the RFP. According to UI, there is a potential that the
competitive RFP is not competitive at all if an existing resource has horizontal market
power. Accordingly, Ul states that the Authority should make sure that any contract
executed between an existing resource confirmed at risk and the EDC is in the best
interest of ratepayers, including through limiting contract payments to only that amount
necessary to alleviate the at risk condition. 

Ul also recommends that the Authority revisit the at risk determination if new
revenue is realized or becomes available to Millstone that could eliminate the at risk
condition. Ul Reply Brief, pp. 6 and 7. Noting that FERC has ordered that develop
market rules that would compensate resources for the fuel security attributes that those
resources offer by means of their participation in the wholesale electric market, and to file
those changes no later than July 1, 2019, Ul recommends that the Authority reopen this
docket no later than November 1, 2019, to examine whether the new revenue from the
ISO-NE Tariff has alleviated Millstone?s at risk condition and to accordingly adjust the
contract payments to Millstone. Ul also indicates an at risk determination in this
proceeding is premature because of and OCC's finding that Millstone is not at
risk until June 1, 2023. p. 5.

in its Reply Brief, Ul states that the use of any capital structure other than
Dominion?s own is improper and would result in a much higher ROE. Ul notes that the
Authority, DEEP and COO testified in the FERC proceeding in Docket No. 
000 that because Mystic does not have its own capital structure, FERC should assume
the consolidated capital structure of Mystic?s parent company. Ul Reply Brief, pp. 2 and
3. UI indicates that Dominion has a common equity ratio of 38.5 percent and a debt ratio
of 61.5 percent, and asserts that Millstone?s capital structure for this at risk proceeding
should reflect the same capital structure and expectation that investors relied upon to
inform short-term and long?term growth expectations of Dominion stock. 

Ul further states that Millstone was not listed for sale and even if it was, the
enterprise value methodology is an inappropriate appraisal method. g, p. 4. UI therefore
suggests that the Authority adopt and proposal that divides Dominion?s
actual capital expenditures by net income to determine a reasonable ROE and reflect an
acceptable net income requirement. E.

D. EVERSOURCE

Eversource states that the term of any PPA that the EDCs are directed to enter
into with Millstone should be limited to only the amount necessary for the continued
operation of the facility and should not include those years for which the facility already
has a binding capacity supply obligation with Eversource Brief, pp. 2-4.
Eversource asserts that the goal of a PPA with an at risk facility is mainly to meet any
proven financial need of the facility and at the same time also protect ratepayers? interests,
and suggests that the Authority periodically revisit the at risk determination to ensure that
the facility's status has not changed. 

Docket No. 18-05?04 Page 15
CONFIDENTIAL FOR PUBLIC RELEASE

Eversource states that the changes proposed by in the August 31, 2018
filing with the FERC in Docket No. if implemented, may allow a nuclear
facility like Millstone to obtain additional revenues for the purpose of encouraging fuel
diversity and reliability. pp. 4-7. Eversource notes that the while the proposal included
in the August 31 filing is a temporary, three?year fix, ISO-NE is working on a permanent
solution. Eversource thus recommends that the Authority limit the length of any PPA
to no more than three years. Eversource also asserts that under the short-term fuel
security proposal ISO-NE has submitted to FERC, Millstone could seek and receive cost-
of?service payments for continued operation of the plant. Noting that costs of those
arrangements would be borne by all New England ratepayers, Eversource asserts that
Dominion should apply to to retain Millstone for energy security and that all efforts
to implement a regional solution should be exhausted before the EDCs are required to
execute a PPA with Dominion. 

Finally, Eversource argues that the actual competitiveness of the RFP is
compromised if Millstone is determined to be at risk in this proceeding because the RFP
provides an existing nuclear resource that is found to be at risk is valued based on indirect
benefits that are not provided to an existing facility that is not at risk. Eversource
Reply Brief, p. 5.

In its Reply Brief, Eversource states that based on and 000?s assertion
that Millstone is at risk for retirement as of June 1, 2023, DEEP should not accept any
RFP proposal from Dominion claiming that Millstone is at risk of retirement earlier than
that date. Eversource Reply Brief, pp. ?1 and 2. Eversource notes that Dominion can
subsequently submit proposals for a PPA if it demonstrates that the Millstone plant is at
risk for retirement in June 2023 or later. Eversource indicates that because the EDCs
may not be provided the necessary information supporting Millstone?s proposal, under the
RFP, the EDCs are not obligated to accept any terms and conditions in state~initiated
wholesale power contracts that they deem unacceptable. Eversource also claims that
FERC can review any bilateral contracts that utilities enter into with generators. pp.
3-5.

Eversource agrees with DEEP's and determination that Dominion?s
proposed enterprise value results in an excessive net income requirement and that the
appropriate ROE should be based on Dominion?s actual investment of capital in the
Millstone asset. lg, p. 6. Furthermore, Eversource argues that Millstone will no longer
be subject to the same market risk as a new or existing merchant generating facility
deemed at risk if it is selected and negotiates a PPA with the EDC. Thus, Eversource
claims that the ROE premium that Millstone seeks should be reduced to reflect diminished
market risks as a result of such a PPA. Eversource also indicates that DEEP should
similarly evaluate the economic and environmental benefits of other proposals. pp. 6
and 7.

IV. AUTHORITY ANALYSIS

Docket No. 18?05-04 Page 16
CONFIDENTIAL INFORMATION REDACTED FOR RELEASE

In order to determine if Millstone Power Station is at risk of premature retirement,
and should therefore be deemed an existing resource confirmed at risk, the Authority
reviewed public and non?public financial and non?financial data provided by the
Participants in this proceeding. As a threshold matter, the Authority finds that Dominion
has satisfied the eligibility requirements established by PURA and DEEP, and has
adequately demonstrated that Millstone is eligible to seek an at risk designation from the
Authority for purposes of DEEP's Zero Carbon RFP. Based on record evidence
presented, the Authority finds that in this proceeding, Dominion sufficiently disclosed its
financial data in a manner that facilitated the Authority?s review of Millstone?s actual
financial circumstances in recent years, as well as the Company?s projections on its
financial condition going forward. The information provided by Dominion and others has
provided a clearer picture of the business and financial risks facing Millstone. The
Authority finds that demonstrated reductions in market revenues along with the
comparatively high fixed costs associated with operating a nuclear facility are critical
factors affecting the viability of the Millstone units. On the basis of this, and other
evidence more fully discussed below, the Authority finds the Millstone Power Station to
be an existing resource at risk of retirement.

To assess the risk of retirement, or, as Dominion has framed the issue, the
expected net value of retirement as compared to continued operation of the units, the
Authority determined that it is necessary to evaluate: 1) the likely costs of continued
operation; 2) the likely revenues gained from continued operation; and 3) the amount of
investment tied up by continued operation. The Authority then compared the likely costs
and revenues of continued operation of the Millstone units to alternatives to continued
operation to determine if the alternatives are superior uses of the tied-up investment.
While one of these alternatives could include sale of the units to an interested buyer,
Dominion has argued that this alternative is not possible and is not being considered. Tr.,
8/29/18, pp. 58?62. As a result, the Authority finds that in the case of continued ownership
by Dominion, the only alternative to its continued operation of the units is retirement.
Accepting Dominion?s assertion on the ownership issue limits the alternatives that need
to be compared to electing to retire the facility and clarifies how the tied-up investment
should be calculated. See Section IV.C., below.

A. OPERATIONAL Cosrs

In its Petition, Dominion provided a forecast of going forward facility costs for
Millstone, including operations and maintenance administrative and general
depreciation, amortization, taxes and return for the years 2018?2025. See
Confidential Attachment 011. The going-forward cost projections that Dominion
submitted were based on Millstone?s five-year annual budget plus an escalation of costs
in outlying years for cost of living and inflationary increases net of cost controls.
Dominion?s forecast of going-forward costs indicates that over the 2018?2025 period, fuel
costs range from - - I - - 
and that costs range from 
DEEP and OCC accepted these forecasted
costs for purposes of this proceeding and supplemented them to include the additional

Docket No. 18?05-04 Page 17
CONFIDENTIAL INFORMATION FOR PUBLIC RELEASE

years 2026 through 2029. DEEP and OCC Joint Brief, Attachment 1. DEEP and 
forecast for the 2026?2029 period shows fuel costs ranging from 
and costs
ranging from - I - - 
The Authority finds Dominion's forecast of going fonrvard facility costs
for Millstone, as supplemented by DEEP and OCC, to be reasonable and consistent with
the historical operating costs of the units, and accepts the supplemented forecast for
purposes of evaluating whether the units are at risk for retirement.

B. MARKET REVENUES

Dominion also provided as part of its petition a forecast of energy, capacity and
ancillary services revenues for the Millstone units for the period 2018 through 2025. See
Confidential Attachment C10. Dominion?s forecast of energy revenues is based on
market energy prices reported by ICE for the Mass Hub as of April 25th 2018 for years
2018 through 2024. Arnett Testimony, p. 4. The 2025 energy price was established using
a forward market heat rate calculated using prior years? Mass Hub power prices and the
Henry Hub gas price from ICE for 2025 because the ICE April 25th strip did not quote a
Mass Hub price for 2025. Q. Dominion based its forecast of capacity revenues on auction
cleared capacity prices from the FCA through May 31, 2022. Capacity prices
beyond 2022 are estimated by Dominion using forecasting techniques. Dominion?s
forecasted ancillary services revenue is based on Millstone?s realized historic values.
Additionally, in order to account for the impact of ISO New England's PFP capacity market
rules on forecasted capacity revenues, Dominion incorporates modeling assumptions that
estimate the expected Capacity Scarcity Condition events for Millstone. Late Filed Exhibit
No. 5. Due to the large size of both Millstone units, Dominion asserts that there is an
elevated risk that an outage of one or both units whether due to an unplanned
transmission outage or a planned refueling outage will contribute to or coincide with a
Capacity Scarcity Condition. M. If this is the case, Dominion expects Millstone will incur
substantial penalties for failing to be online and providing energy during the Capacity
Scarcity Condition. [91. As a result, Dominion indicates that it takes a conservative view
in its model forforecasting of capacity revenues that assumes the Millstone units will only
incur PFP penalties during the year and that these penalties will occur when a Millstone
unit is on an outage. 

Dominion?s forecast of going?forward revenues indicates that over the 2018?2025
period, energy revenues will range from 
- based on energy prices in the 
per range, and that capacity revenues will
range from - - I - 
based on capacity prices in the 
- per kW-month range.

DEEP and OCC have accepted these forecasted revenues for purposes of this
proceeding and have supplemented them to include the additional years 2026 through
2029. DEEP and OCC Joint Brief, Attachment 1. The DEEP and OCC forecast for the
2026 through 2029 period shows energy revenues ranging from 

Docket No. 18?05-04 Page 18
CONFIDENTIAL INFORMATION REDACTED FOR PUBLIC RELEASE

based on energy
prices in the per 
range and capacity revenues ranging from 

based on capacity prices in the 
per kW?month range.

The Authority finds Dominion?s forecast of going forward revenues for Millstone,
as supplemented by and 000's forecast, to be reasonable and 




Accordingly, the Authority accepts the
supplemented forecast for purposes of evaluating whether the units are at risk for
retirement.

In addition, DEEP provided, under protective order, the base case developed for

the ongoing drafting of the Integrated Resource Plan Supplemental Response to
Interrogatory EL-26. Given the confluence of the Zero Carbon RFP and the IRP, DEEP
indicated that the base case in the IRP and the reference case in the Zero Carbon RFP
will be the same. While the Authority has accepted the supplemented Dominion forecast
of revenues in the proceeding, it has also utilized the forecasted revenues from the IRP
base case as a check on the supplemented Dominion forecast. In general, the IRP base
case, which forecasts Millstone energy and capacity revenues from 2019 through 2028,
shows that DEEP expects the average energy prices over the 2019 2028 period to be



The IRP base case also shows that DEEP expects average capacity

prices to be 


While the differences between and
Dominion?s projections are not insignificant, the Authority finds that the market prices
forecasted by DEEP in its IRP base case are within a range of reasonableness in
comparison to the supplemented Dominion forecast. The Authority also finds the
revenues projected in the supplemented Dominion forecast to be appropriately
conservative for the purposes of evaluating Millstone?s at risk status.

C. TIED-UP INVESTMENT

One of the most contentious issues in this proceeding was the level of investment
that should be considered tied up by a decision to continue operation of the Millstone
units or, conversely, how much investment is freed up by a decision to retire the units.
Dominion argued that this level of investment should be based on the market value of
ongoing operation of the Millstone units, which they refer to as the enterprise value or EV.
Based on a projected EBITDA of 
calculated based on financial information from

 

3 DEEP indicated at the time of its response that the reference case associated with Zero Carbon
RFP pursuant to Conn. Gen. Stat. 16a?3m had not yet been run.

Docket No. 18-05-04 Page 19
CONFIDENTIAL INFORMATION FOR PUBLIC 

two publicly traded merchant generation companies, Dominion arrived at an enterprise
value of - - - - - 
Confidential Exhibit Confidential Exhibit Conversely,
DEEP and OCC found fault with Dominion?s use of enterprise value in this situation and
proposed, instead, that the investment level should be based on Dominion's actual
investment of capital in the Millstone units. Based on Dominion's Petition, DEEP and
OCC determined that Dominion?s net investment in Millstone is 
Dominion Petition, Confidential Attachment C8.

The Authority finds that both of these approaches are unrelated to the amount of
investment that is freed up by retiring the Millstone units. The enterprise value approach
presupposes that the units can be disposed of as an ongoing concern, and, thus, can
command the market value or enterprise value associated with this ongoing concern.
Assuming they are disposed of in this manner and gain the calculated enterprise value,
then this level of investment is ?freed up" to use elsewhere by Dominion Energy. Tr.,
8/29/18, pp. 70?73. However, if Dominion is retiring the units and not selling the facility,
their retirement negates any ongoing concern value they would otherwise have, a fact
that Dominion witness Mr. Koonce acknowledged. Tr. 8/29/18, pp. 52?62, 178 and 179.
Dominion witness Mr. Koonce also acknowledged that retirement relegates the freed up
investment related to the Millstone units to the going forward capital expenditures
otherwise needed to operate the units and the time value of tax benefits that are realized
at retirement. pp. 65?67, 182?185.

Setting aside its inappropriateness in a retirement situation, the Authority has
additional concerns with Dominion?s implementation of the enterprise value method. For
one thing, the main financial measurements of the proxies selected by Dominion, such as
capital structure, equity ratios and levels of debt, are incompatible with those of Millstone,
which is closely held, 100% equity financed, and ?non-marketable.? The defect with
Dominion?s implementation of the enterprise value methodoldgy was exacerbated by the
limited number of comparable companies. lg, pp. 84 and 85. The Authority found that
none of the proxy companies used by Dominion satisfied all the major factors used to
evaluate and derive the earnings and leverage multiples. The business and operation
profiles ofthe comparable entities are actually based on their parent companies? profiles,
as were the financial data used to calculate the earnings and debt multiples. pp. 138-
141.

The Authority finds that DEEP's and proffered valuation method using the
net actual investment also has limitations. This valuation method appears to presuppose
that net investments can be unwound for reuse or that the units can be disposed of under
a cost?of?service contract that pays a return on net investment. Retirement of the units
does neither ofthese, however. To the extent net investment approximates the remaining
tax basis in the units, then perhaps retirement provides a tax write?off equivalent to the
net investment, but the tax benefit of such a write-off is only a fraction of the write?off 
net investment) amount, and continued operation yields the same tax benefit, albeit over
time. If, on the other hand, DEEP and OCC are assuming a cost of service contract
alternative as the basis for their proposed net investment valuation, this assumption

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CONFIDENTIAL INFORMATION RFDACTED FOR PUBLIC RELEASE

bypasses the at risk assessment step, which is the purpose of this proceeding and which
serves to inform the acceptable terms of a cost of service or similar type contract.

In order to properly assess the amount of "investment freed up by retiring the
Millstone units, the Authority has taken Dominion?s forecast of going forward capital
expenditures for the period 2018 through 2025 and extended the forecast through 2029
by assuming annual capital expenditures for the 2026 2029 period equivalent to the
average annual capital expenditures during the last three years of Dominion?s forecast,
Le, 2023, 2024 and 2025. Dominion Petition, Confidential Attachment C12. This
extended forecast indicates total capital expenditures of 

over the 12-year period of the forecast,
with annual expenditures ranging from 
per year. In addition to these capital expenditures, the
Authority believes that some market value from the Millstone site, subsequent to
retirement and decommissioning, including from materials and supplies is likely. Based
on 
the Authority has added an additional amount of
as part of the freed up
investment. Confidential Attachment C16.

The Authority understands that the at risk analysis cannot look solely at the return
on this freed up investment, but must also provide for return of the investment. For this
reason, the Authority?s analysis maintained the depreciation expense in the supplemental
forecast, 
and expensed the capital
expenditures in addition to providing them with a one year return. Under this scenario,
the average level of tied up investment from continued Millstone operations is 
For purposes of
this analysis, the Authority has assumed that this investment is 100% equity, consistent
with Dominion?s assertion that an at risk merchant nuclear facility such as Millstone
cannot be debt financed and that Millstone is 100% equity financed. See, Dominion
Response to Interrogatory Tr., 8/29/18, pp. 42 and 43.

D. REQUIRED RETURN

In addition to determining the level of freed up investment, the at risk analysis must
also determine the level of return that is required on this freed?up investment. For
purposes of this part of the analysis, the Authority has assumed that Dominion Energy
has investment options that include investments that earn market-required returns.
Based on this assumption, the relevant return that Millstone must be expected to meet
from continued operations is the market?required return for an investment of its risk level.

Dominion asserted that the investment risk of a merchant nuclear facility was
greater than the risk associated with a merchant gas-fired generator. Response to
lnterrogatory In making this assertion, Dominion noted that compared to gas-fired
generators, nuclear plants are ?price takers and are exposed to greater volatility in power
prices and therefore have a higher risk profile. M. In addition, nuclear plants require

Docket No. 18-05?04 Page 21
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higher staffing levels, security expenses, and fixed costs, increasing the risk profile of the
cash flows.? Dominion also cited an analysis that found that merchant gas?fired
generators have market required returns of 13.4%. Lo].

In addition to the normal risk differences between gas?fired generation and nuclear
plants, Dominion asserts that the investment tied up in the continued operations of
Millstone has other risk concerns. Tr. 8/29/18, pp. 181 and 182. Since the level of tied?
up investment is small relative to the expected revenues and costs that drive the return
on that investment, proportionally small changes to revenues and costs can greatly
impact realized returns for good or bad. E. This potential exacerbation of returns adds
risk to the tied up investment and increases the required market return, as noted by
Dominion witness Mr. Koonce. 

Based on the analysis presented by Dominion discussed above, the Authority finds
that the market?required return on the tied up investment is likely to be in the range of
15% to 20%. This is based on a comparison of an assumed merchant rate of return
requirement of 13.4%, and the added risk associated with merchant nuclear generation.
This added risk includes, but is not limited to, revenue and earnings volatility that results
from selling significant quantities of energy as a price?taker in the market, while its high
fixed operational costs remain.

E. RETIREMENT CONSEQUENCES

In addition ,to the costs and benefits associated with continued operation, the at
risk assessment must take into consideration the additional costs and benefits that arise
from alternatives to continued operation?specifically, the additional costs and benefits
that arise from retirement of Millstone. In order for the assessment to be complete, the
comparison between continued operation and retirement must be a net comparison, with
retirement costs and benefits avoided or missed by the choice to continue operations
taken into account. In its responses to lnterrogatories and EL-17, Dominion
specified some of these benefits and costs. The most significant of these benefits and
costs appear to be the tax benefit of asset write?offs at the time of retirement and the cost
of repurchasing capacity to fulfill any capacity supply obligations outstanding at the time
of retirement.

1. Tax Benefits

In order to capture the tax benefit of early retirement, the Authority has taken the
net investment in the Millstone assets of 
- as a rough approximation of the current tax basis of the
assets and calculated the annual loss in return and the loss in tax benefit of delaying
retirement by one year. Dominion Petition, Confidential Attachment C8. The Authority
finds that this calculation yields an average annual tax benefit in the range of roughly
from early
retirement over the period 2018 2029. This missed tax benefit reduces the value of
continued operation relative to retirement.

Docket No. 18?05?04 Page 22
CONFIDENTIAL. INFORMATION REDACTED FOR PUBLIC RELEASE

2. Capacity Supply Obligations

The impact of existing capacity supply obligations (CSOs) Millstone has on the at
risk assessment was a contested issue during this proceeding, DEEP and OCC felt that
the cost of shedding these obligations would be so expensive that Dominion could not
realistically contemplate retiring Millstone until after its existing CSOs have all expired
(June 1, 2023). DEEP and 000 Brief, pp. 12 and 13. Conversely, Dominion holds that
these obligations will not impact the decision to retire, though perhaps are a factor on
when to wind down operations, and while the one?time cost to shed these obligations is
uncertain, it might be the appropriate course of action for Dominion to take. Dominion
Reply Brief, pp. 6 and 7.

While there is a great deal of uncertainty as to the ability to shed 0805 in the time
period 2019 2023 and the associated costs, for purposes of this proceeding, in order to
capture both the significant costs associated with buying out of the 0803 and yet leaving
such a buy out as an option, the Authority will assume an after tax annual CSOs buy out
cost of which expires
after 2023. This figure is based on Millstone?s historical capacity revenues, which have
typically been in the range of 
annually. The use of a figure at the low end of this range is intended to
assign a reasonable value to a (380 buyout that recognizes both the difficulty of buying
out these obligations as noted by DEEP and 000, and Dominion's optimistic
assumptions regarding their ability to shed these obligations. This buy out cost adds to
the value of continued operations relative to retirement.

I.
F. RETURN RESULTS

Based on the Authority?s review of operational costs, market revenues and tied up
investment recognized by the Authority, the Authority finds that continued operation of

Millstone 

Factoring in the missed tax benefits and avoided costs
associated with buying out of Millstone?s existing 0803, the Authority finds that
Millstone?s average return will be reduced, though still within the required range. The
Authority further finds that during that period, the going forward return (average annual
return over the remaining years) starts to dip below that range leading into 2023,
suggesting that the Millstone units are at risk of being retired effective in 2023. This
demonstrated drop in value and going forward return at that time appears to be a
combination of the expiration of existing CSOs, the continuation ofthe missed tax benefit
and relatively low forecasted market revenues for the year. While the revenues rebound
somewhat after 2023 and the going forward returns do as well, the Authority?s analysis
indicates that the units are at risk for retirement as soon as 2023, and it is therefore
reasonable that Dominion could take action in response to that risk as soon as March
2019, when Dominion will elect whether to submit a retirement bid in FCA 14, for
the capacity commitment period of June 2023 through May 2024.

Docket No. 18?05-04 Page 23
. FOR RELEASE

G. CONTRACT TIMING IMPLICATIONS

Based on the Authority's determination that Millstone is an existing resource
confirmed at risk, and concurrence in that determination as demonstrated in its
briefing, the Millstone bid(s) in the Zero Carbon RFP should be compared to a scenario
that, starting in 2023, excludes the units from the reference set of resources and that the
net value of its bid(s) include non-price benefits from 2023 going forward. Nothing in this
determination, however, precludes DEEP from selecting Millstone bid(s) with start dates
soonerthan 2023, provided the bid(s) are still net beneficial over the entire period of the
associated contract term.

The Authority?s own analysis, based on record evidence and assumptions drawn
from the evidence and arguments presented, including assumed costs associated with
shedding Dominion?s existing CSOs, confirms that Millstone is at risk beginning in at least
2023. The Authority acknowledges that some uncertainties exist with respect to
Dominion?s ability to shed its existing 0805 and retire sooner than 2023, but those
possibilities appear improbable, and the outcome of these uncertainties is unknowable in
the pendency of this proceeding. For this reason, the Authority finds that it is reasonable
for DEEP to conclude that Millstone is at risk of retirement beginning in 2023.

In reaching this conclusion, the Authority acknowledges that the three-year forward
feature of capacity market necessarily accelerates to 2019 the timing of
Dominion?s decisions to retire or take on a future capacity commitment. After years of
delay, is now taking measures to address the region?s fuel security crisis at
FERC's direction. While ISO-NE is in the initial stages of attempting to value fuel security
attributes needed for grid reliability?to which Millstone is an essential contributor?the
timing and valuation of fuel security by is unlikely to be resolved priorto selections
being made in the Zero Carbon RFP.

The Authority finds that approach to the Zero Carbon RFP enables
prudent analysis of future retirement risk in the evaluation of bids, as well as the ability to
provide revenue certainty for a resource at risk in the future. It does so by allowing for
the possibility that ?an existing resource may still be selected for a power purchase
agreement even if it is determined . . . to be at risk for only part of the period covered in
its bid and not at risk for another part of the period,? in which case ?the purchase price of
that bid would be evaluated against the expected cost of wholesale power over the
contract period, which is in turn impacted by the removal of an at risk project starting with
the date it is projected to retire." DEEP and 000 Brief, p. 3.

H. OPEN ISSUES

The Authority?s finding that Millstone is an existing resource confirmed at risk is
based on the information filed in this proceeding and known at the time of the issuance
of this Decision. As with any'forecast, there are multiple current uncertainties and/or
unknowns that may impact the actual results of continued Millstone operation. The
Authority?s analysis and calculations in this proceeding do not include any future impacts
from future ISO-NE market changes or other regulatory developments.

Docket No. 18-05-04 Page 24
CONFIDENTIAL INFORMATION FOR PUBLIC RELEASE

The Authority emphasizes, however, that future market conditions and regulatory
changes are yet unknown, and may be more appropriately addressed and/or mitigated in
the provisions of any contract with Millstone that may result from the Zero Carbon RFP.

V. CONCLUSION

On the basis ofthe analysis set out above, the Authority finds that Millstone Power
Station is an existing resource at risk of retirement. In accordance with the Procedural
Notice, the Authority will suspend this docket and will reopen the docket for the purpose
of reviewing any contract entered into with a resource selected in the procurement
conducted by DEEP pursuant to of Conn. Gen. Stat. 16a-3m.

CONFIDENTIAL INFORMATION REDACTED FOR PUBLIC RELEASE

DOCKET NO. 18?05-04 PURA IMPLEMENTATION OF JUNE SPECIAL
SESSION PUBLIC ACT 17-3

This Decision is adopted by the following Commissioners:

 

Katherine S. Dykes

 

John W. Betkoski, 

 

Michael A. Caron

CERTIFICATE OF SERVICE

The foregoing is a true and correct copy of the Decision issued by the Public
Utilities Regulatory Authority, State of Connecticut, and was forwarded by Certified Mail
to all parties of record in this proceeding on the date indicated.

 

Jeffrey R. Gaudiosi, Esq. Date
Executive Secretary
Public Utilities Regulatory Authority