INTEGRATED RESOURCE PLANNING REPORT TO …aep.com...integrated resource planning report . to the ....

INTEGRATED RESOURCE PLANNING REPORT

TO THE

KENTUCKY PUBLIC SERVICE COMMISSION

CASE NO. 2016-00413

VOLUME A PUBLIC VERSION

December 20, 2016

KPSC Case No. 2016-00413 2016 Integrated Resource Plan

Of Kentucky Power Company Volume A - Public Version

Page 1 of 1497

INTEGRATED RESOURCE PLANNING REPORT

TO THE

KENTUCKY PUBLIC SERVICE COMMISSION

CASE NO. 2016-00413

VOLUME A PUBLIC VERSION

PAGES 2-199 of 1497

December 20, 2016



Page 2 of 1497

Table of Contents

LIST OF FIGURES .................................................................................................................... VI

LIST OF TABLES ................................................................................................................... VIII

EXECUTIVE SUMMARY .......................................................................................................... 1

INTRODUCTION ................................................................................................................ 1 1.0

1.1 Overview .................................................................................................................................................. 1

1.2 Integrated Resource Plan (IRP) Process .................................................................................................... 1

1.3 Introduction to Kentucky Power .............................................................................................................. 2

1.4 Power Coordination Agreement (PCA) ..................................................................................................... 3

1.5 The Impact of Coal Mining on KPCo Service Territory ............................................................................... 4

1.6 Significant Changes from the 2013 IRP ..................................................................................................... 5

LOAD FORECAST AND FORECASTING METHODOLOGY .................................... 8 2.0

2.1 Summary of KPCo Load Forecast .............................................................................................................. 8

2.2 Forecast Assumptions .............................................................................................................................. 8 2.2.1 Economic Assumptions ................................................................................................................................ 8 2.2.2 Price Assumptions ....................................................................................................................................... 9 2.2.3 Specific Large Customer Assumptions ......................................................................................................... 9 2.2.4 Weather Assumptions ................................................................................................................................. 9 2.2.5 Demand Side Management (DSM) Assumptions ......................................................................................... 9

2.3 Overview of Forecast Methodology ....................................................................................................... 10

2.4 Detailed Explanation of Load Forecast ................................................................................................... 12 2.4.1 General ...................................................................................................................................................... 12 2.4.2 Customer Forecast Models ........................................................................................................................ 13 2.4.3 Short-term Forecasting Models ................................................................................................................. 13 2.4.4 Long-term Forecasting Models .................................................................................................................. 14 2.4.4.1 Supporting Models ................................................................................................................................. 15

2.4.4.1.1 Consumed Natural Gas Pricing Model ................................................................................................ 15 2.4.4.1.2 Regional Coal Production Model ........................................................................................................ 15

2.4.4.2 Residential Energy Sales ......................................................................................................................... 16



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2.4.4.3 Commercial Energy Sales ....................................................................................................................... 18 2.4.4.4 Industrial Energy Sales ........................................................................................................................... 18

2.4.4.4.1 Manufacturing Energy Sales ............................................................................................................... 18 2.4.4.4.2 Mine Power Energy Sales ................................................................................................................... 18

2.4.4.5 All Other Energy Sales ............................................................................................................................ 19 2.4.5 Internal Energy Forecast ............................................................................................................................ 19 2.4.5.1 Blending Short and Long-Term Sales...................................................................................................... 19 2.4.5.2 Losses and Unaccounted-For Energy ..................................................................................................... 19

2.4.6 Forecast Methodology for Seasonal Peak Internal Demand ..................................................................... 20

2.5 Load Forecast Results and Issues ............................................................................................................ 20 2.5.1 Load Forecast ............................................................................................................................................. 21 2.5.2 Peak Demand and Load Factor .................................................................................................................. 21 2.5.3 Weather Normalization ............................................................................................................................. 21

2.6 Load Forecast Trends & Issues ............................................................................................................... 21 2.6.1 Changing Usage Patterns ........................................................................................................................... 21 2.6.2 Demand-Side Management (DSM) Impacts on the Load Forecast ............................................................ 24 2.6.3 Interruptible Load ...................................................................................................................................... 24 2.6.4 Blended Load Forecast............................................................................................................................... 25 2.6.5 Large Customer Changes ........................................................................................................................... 26 2.6.6 Wholesale Customer Contracts ................................................................................................................. 26

2.7 Load Forecast Scenarios ......................................................................................................................... 26

2.8 Energy-Price Relationships ..................................................................................................................... 27

2.9 Significant Changes from Previous Forecast ........................................................................................... 29 2.9.1 Energy Forecast ......................................................................................................................................... 29 2.9.2 Peak Internal Demand Forecast ................................................................................................................. 30 2.9.3 Forecasting Methodology .......................................................................................................................... 30

2.10 Additional Load Information .................................................................................................................. 30

2.11 Data-Base Sources.................................................................................................................................. 31

2.12 Other Topics ........................................................................................................................................... 31 2.12.1 Residential Energy Sales Forecast Performance ........................................................................................ 31 2.12.2 Peak Demand Forecast Performance ........................................................................................................ 32 2.12.3 Forecast Data and Model Results .............................................................................................................. 32 2.12.4 Forecast Updates ....................................................................................................................................... 32 2.12.5 KPSC Staff Recommendations Addressed .................................................................................................. 33

RESOURCE EVALUATION ............................................................................................ 34 3.0

3.1 Current Supply-Side Resources............................................................................................................... 34

3.2 Environmental Issues and Implications .................................................................................................. 37



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3.2.1 Mercury and Air Toxics Standards (MATS) ................................................................................................ 37 3.2.2 Cross-State Air Pollution Rule (CSAPR) ...................................................................................................... 39 3.2.3 National Ambient Air Quality Standards (NAAQS) ..................................................................................... 40 3.2.4 Coal Combustion Residuals (CCR) Rule ...................................................................................................... 40 3.2.5 Effluent Limitations Guidelines .................................................................................................................. 41 3.2.6 Clean Water Act 316(b) Rule ..................................................................................................................... 41 3.2.7 New Source Review Consent Decree ......................................................................................................... 42 3.2.8 Carbon Dioxide (CO2) Regulations, Including the Clean Power Plan (CPP) ................................................ 44

3.3 Current Demand-Side Programs ............................................................................................................. 47 3.3.1 Impacts of Existing and Future Codes and Standards ................................................................................ 47 3.3.2 Demand Response (DR) ............................................................................................................................. 49 3.3.2.1 Existing Levels of Active Demand Response (DR) ................................................................................... 51

3.3.3 Energy Efficiency (EE) ................................................................................................................................. 51 3.3.3.1 Existing Levels of Energy Efficiency (EE) ................................................................................................. 53

3.3.4 Distributed Generation (DG) ...................................................................................................................... 53 3.3.4.1 Existing Levels of Distributed Generation (DG) ...................................................................................... 57 3.3.4.2 Cogeneration / Combined Heat and Power (CHP) ................................................................................. 57

3.3.5 Volt VAR Optimization (VVO) ..................................................................................................................... 58 3.3.6 KPSC Staff DSM Recommendations Addressed ......................................................................................... 59

3.4 AEP-PJM & Kentucky Power Transmission ............................................................................................. 63 3.4.1 General Description ................................................................................................................................... 63 3.4.2 Transmission Planning Process .................................................................................................................. 65 3.4.3 System-Wide Reliability Measure .............................................................................................................. 66 3.4.4 Evaluation of Adequacy for Load Growth .................................................................................................. 66 3.4.5 Evaluation of Other Factors ....................................................................................................................... 67 3.4.6 Transmission Expansion Plans ................................................................................................................... 67 3.4.7 FERC Form 715 Information ....................................................................................................................... 67 3.4.8 Kentucky Transmission Projects ................................................................................................................ 69

3.5 Distribution ............................................................................................................................................ 70

MODELING PARAMETERS .......................................................................................... 72 4.0

4.1 Modeling and Planning Process An Overview ...................................................................................... 72

4.2 Methodology ......................................................................................................................................... 73

4.3 Fundamental Modeling Input Parameters .............................................................................................. 73 4.3.1 Commodity Pricing Scenarios .................................................................................................................... 75 4.3.1.1 Emission Reduction Credit (ERC) Pricing ................................................................................................ 75 4.3.1.2 Mid Scenario .......................................................................................................................................... 76 4.3.1.3 Low Band Scenario ................................................................................................................................. 76 4.3.1.4 High Band Scenario ................................................................................................................................ 77 4.3.1.5 No Carbon Scenario ................................................................................................................................ 77 4.3.1.6 Forecasted Fundamental Parameters .................................................................................................... 77



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4.4 PJM Capacity Performance Rule Impacts ............................................................................................... 81

4.5 Demand-Side Management (DSM) Program Screening & Evaluation Process ........................................ 82 4.5.1 Overview .................................................................................................................................................... 82 4.5.2 Levels of Energy Efficiency (EE) Potential .................................................................................................. 82 4.5.3 Evaluating Incremental Demand-Side Resources ...................................................................................... 83 4.5.3.1 Incremental Energy Efficiency (EE) Modeled ......................................................................................... 83 4.5.3.2 Volt VAR Optimization (VVO) Modeled .................................................................................................. 86 4.5.3.3 Demand Response (DR) Modeled .......................................................................................................... 87 4.5.3.4 Distributed Generation (DG) .................................................................................................................. 88 4.5.3.5 Combined Heat and Power (CHP) .......................................................................................................... 89

4.6 Identify and Screen Supply-side Resource Options ................................................................................. 89 4.6.1 Capacity Resource Options ........................................................................................................................ 89 4.6.2 New Supply-side Capacity Options ............................................................................................................ 90 4.6.3 Base/Intermediate Options ....................................................................................................................... 91 4.6.3.1 Natural Gas Combined Cycle (NGCC) ..................................................................................................... 92

4.6.4 Peaking Options ......................................................................................................................................... 92 4.6.4.1 Simple Cycle Combustion Turbines (NGCT)............................................................................................ 93 4.6.4.2 Aeroderivatives (AD) .............................................................................................................................. 93 4.6.4.3 Reciprocating Engines (RE) ..................................................................................................................... 94 4.6.4.4 Battery Storage ...................................................................................................................................... 95

4.6.5 Renewable Options .................................................................................................................................... 96 4.6.5.1 Solar ....................................................................................................................................................... 96

4.6.5.1.1 Large-Scale Solar ................................................................................................................................. 96 4.6.5.1.2 Trends in Solar Energy Pricing ............................................................................................................ 98

4.6.5.2 Wind ....................................................................................................................................................... 99 4.6.5.3 Hydro .................................................................................................................................................... 102 4.6.5.4 Biomass ................................................................................................................................................ 102

4.7 Integration of Supply-Side and Demand-Side Options within Plexos Modeling ................................... 102 4.7.1 Optimization of Other Demand-Side Resources ...................................................................................... 103

RESOURCE PORTFOLIO MODELING ..................................................................... 104 5.0

5.1 The Plexos Model - An Overview ......................................................................................................... 104 5.1.1 Key Input Parameters .............................................................................................................................. 105

5.2 Plexos Optimization ............................................................................................................................ 106 5.2.1 Modeling Options and Constraints .......................................................................................................... 106 5.2.2 Optimization Scenarios ............................................................................................................................ 108 5.2.2.1 Optimized Portfolios of Commodity Pricing Scenarios ........................................................................ 109 5.2.2.2 Optimized Portfolios of Load Scenarios ............................................................................................... 110

5.3 Preferred Plan ...................................................................................................................................... 111 5.3.1 Demand-Side Program Levels .................................................................................................................. 112 5.3.2 Comparing the Cost of the Preferred Plan ............................................................................................... 113 5.3.3 Rate Impacts of the Preferred Plan ......................................................................................................... 115



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5.3.4 Comparing Costs of Clean Power Plan Compliance ................................................................................. 117 5.3.5 Risk Analysis ............................................................................................................................................. 118 5.3.5.1 Stochastic Modeling Process and Results ............................................................................................ 119

SUMMARY AND CONCLUSIONS ............................................................................... 122 6.0

6.1 Conclusion ........................................................................................................................................... 128



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List of Figures

Figure 1. Kentucky Power Service Territory ...................................................................................3

Figure 2. Economic Impact of Lost Mining Load on KPCo Regional Economy ............................4

Figure 3. KPCo Internal Energy Requirements and Peak Demand Forecasting Method ..............11

Figure 4. Eastern Kentucky Coal Production (Millions of Tons) 2000-2015................................16

Figure 5. KPCo Normalized Use per Customer (kWh) .................................................................22

Figure 6. Projected Changes in Cooling Efficiencies, 2010-2030 .................................................23

Figure 7. Projected Changes in Lighting and Clothes Washer Efficiencies, 2010-2030 ...............23

Figure 8. Load Forecast Blending Illustration ...............................................................................25

Figure 9. KPCo "Going-In" Capacity Position throughout Planning Period (2017-2031) ............36

Figure 10. Total Energy Efficiency (GWh) Compared with Total Residential and

Commercial Load (GWh) ............................................................................................49

Figure 11. Residential and Commercial Forecasted Solar Installed Costs (Nominal $/WAC)

for Kentucky ................................................................................................................54

Figure 12. Breakeven Cost vs. Forecasted Installation Costs for Residential Rooftop Solar

System; Discount Rate = 10%; Capacity Factor = 19.7% ...........................................55

Figure 13. Breakeven Cost vs. Forecasted Installation Costs for Residential Rooftop Solar

System; Discount Rate = 10%; Capacity Factor = 16% ..............................................56

Figure 14. Range of Residential Distributed Solar Breakeven Values Based on Discount

Rate; Capacity Factor = 19.7% ....................................................................................57

Figure 15. Volt VAR Optimization Schematic ..............................................................................58

Figure 16. Long-term Power Price Forecast Process Flow ............................................................74

Figure 17. Dominion South Natural Gas Prices (Nominal $/mmBTU) .........................................78



Page 8 of 1497

Figure 18. Dominion South Natural Gas Prices (2015 Real $/mmBTU) ......................................78

Figure 19. NAPP High Sulfur Coal Prices (Nominal $/ton, FOB origin) .....................................79

Figure 20. CO2 Prices (Nominal $/short ton).................................................................................79

Figure 21. PJM On-Peak Energy Prices (Nominal $/MWh) .........................................................80

Figure 22. PJM Off-Peak Energy Prices (Nominal $/MWh) .........................................................80

Figure 23. PJM Capacity Prices (Nominal $/MW-Day) ................................................................81

Figure 24. Energy Efficiency Bundle Levelized Cost vs. Potential Energy Savings for 2019......86

Figure 25. KPCo Forecasted Rooftop Solar Installations ..............................................................88

Figure 26. Large-Scale Solar Pricing Tiers with Investment Tax Credits .....................................98

Figure 27. U.S. Average Solar Photovoltaic (PV) Installation Cost (Nominal $/WAC) Trends,

excluding Investment Tax Credit Benefits ..................................................................99

Figure 28. Levelized Cost of Electricity (LCOE) of Wind Resources (Nominal $/MWh) .........101

Figure 29. KPCo Energy Efficiency Savings According to Preferred Plan ................................113

Figure 30. Bill Impacts ($/Month) of Preferred Plan Compared to Do Nothing Plan .................115

Figure 31. Range of Variable Inputs for Stochastic Analysis ......................................................119

Figure 32. Revenue Requirement at Risk (RRaR) ($000) for Preferred Plan and Do Nothing

Plan ............................................................................................................................120

Figure 33. 2017 KPCo Nameplate Capacity Mix ........................................................................123

Figure 34. 2031 KPCo Nameplate Capacity Mix ........................................................................123

Figure 35. 2017 KPCo Energy Mix .............................................................................................124

Figure 36. 2031 KPCo Energy Mix .............................................................................................124

Figure 37. KPCo Annual PJM Capacity Position (MW) According to Preferred Plan ...............126

Figure 38. KPCo Annual Energy Position (GWh) According to Preferred Plan.........................126



Page 9 of 1497

List of Tables

Table 1. PJM Energy and Capacity Prices in 2013 IRP and 2016 IRP, in 2011 $ ..........................6

Table 2. Natural Gas and Coal Prices in 2013 IRP and 2016 IRP, in 2011 $ ..................................6

Table 3. KPCo Existing Supply-Side Resources ...........................................................................35

Table 4. Consent Decree Annual NOx Cap for AEP-East.............................................................43

Table 5. Modified Consent Decree Annual SO2 Cap for AEP-East .............................................44

Table 6. Modified Consent Decree Annual SO2 Cap for Rockport Plant .....................................44

Table 7. KPCo State Mass-Based Clean Power Plan Goals ..........................................................46

Table 8. KPCo State Rate-Based Clean Power Plan Goals ...........................................................46

Table 9. Forecasted View of Relevant Residential Energy Efficiency Code Improvements ........48

Table 10. Forecasted View of Relevant Non-Residential Energy Efficiency Code

Improvements ..............................................................................................................48

Table 11. Energy Efficiency Market Barriers ................................................................................52

Table 12. Efficiency Potential for Industrial Sector, as Provided by AEG in the 2015 KPCO

Market Potential Study ................................................................................................62

Table 13. Incremental Residential Energy Efficiency (EE) Bundle Summary .............................84

Table 14. Incremental Commercial Energy Efficiency (EE) Bundle Summary ............................85

Table 15. Volt VAR Optimization (VVO) Tranche Profiles .........................................................87

Table 16. Incremental Demand Response (DR) Resource Blocks ................................................87

Table 17. New Generation Technology Options with Key Assumptions ......................................91

Table 18. Optimization Scenarios ................................................................................................109

Table 19. Cumulative PJM Capacity Additions (MW) and Energy Positions (GWh) for Mid,

Low Band, High Band, and No Carbon Scenarios ....................................................110



Page 10 of 1497

Table 20. Cumulative PJM Capacity Additions (MW) and Energy Positions (GWh) for Low

and High Load Scenarios ...........................................................................................111

Table 21. Cumulative PJM Capacity Additions (MW) and Energy Positions (GWh) for

Preferred Plan.............................................................................................................112

Table 22. Approximate Rate Impacts of Preferred Plan ..............................................................116

Table 23. Estimated Costs of Mass-Based and Rate-Based Compliance with Clean Power

Plan (CPP) ..................................................................................................................118

Table 24. Risk Analysis Factors and Relationships .....................................................................119

Table 25. Preferred Plan Capacity Additions throughout Planning Period (2017-2031) ............127



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Executive Summary

This Integrated Resource Plan (IRP, Plan, or Report) is submitted by Kentucky Power

Company (KPCo or Company) based upon the best information available at the time of its

preparation. However, changes that impact this Plan can occur without notice. Therefore, as with

any planning document, this Plan is not a commitment by the Company to specific resource

additions or other courses of action, since the future is highly uncertain, particularly in light of

current economic and political conditions, the movement towards increasing use of renewable

generation and end-use efficiency, as well as current and future environmental regulations,

including the U.S. Environmental Protection Agencys (EPA) Final Clean Power Plan (CPP).

An IRP explains how a utility company plans to meet the projected capacity (i.e., peak

demand) and energy requirements of its customers. KPCo is required to provide an IRP that

encompasses a 15-year forecast period (in this filing, 2017-2031). KPCo plans to aggressively

pursue economic development throughout its service territory, however, this IRP does not

include any assumptions for economic development opportunities, but rather, has been

developed using the Companys current long-term assumptions for:

customer load requirements peak demand and energy;

commodity prices coal, natural gas, on-peak and off-peak power prices, capacity

and emission prices;

supply-side alternative costs including fossil fuel and renewable resources; and

demand-side program costs and impacts.

In addition, KPCo considered the effect of environmental rules and guidelines, such as

the CPP, which could add significant costs and present significant challenges to operations. The

CPP is still being reviewed by the courts, and individual state plans to implement it may not be

finalizedlet alone approvedfor a number of years. In preparing this Report, KPCo has analyzed

multiple scenarios, with differing commodity pricing conditions, as well as multiple internal load

conditions. KPCo has also conducted analyses which specifically address certain aspects of

compliance with the CPP.



Page 12 of 1497

Summary of KPCo Resource Plan

KPCos customers consist of both retail and wholesale customers located in the Eastern

portion of the Commonwealth of Kentucky. Currently, KPCo serves approximately 168,000

retail customers. The peak load requirement of KPCos total retail and wholesale customers is

seasonal in nature, with distinctive peaks occurring in the summer and winter seasons. KPCos

all-time highest recorded peak demand was 1,685 MW, which occurred in January 2005; and the

highest recorded summer peak was 1,358 MW, which occurred in July 2005.

Over the next 15 year period (2017-2031)1, KPCos service territory is expected to see

population and non-farm employment decline 0.1% per year. KPCo is projected to see its

customer count decline at a similar rate of 0.2% per year. Over the same forecast period, KPCos

retail sales are projected to decline at 0.2% per year with growth expected from the industrial

class (+0.1% per year) while the residential class experiences a decline (0.5% per year) over the

forecast period. Finally, KPCos internal energy and peak demand are expected to decline at an

average rate of 0.2% and 0.3% per year, respectively, through 2031.

KPCos IRP provides adequate supply and demand resources to meet its peak load and

energy obligations for the next fifteen years. The key intial assumptions in developing this plan

are for Kentucky Power to:

continue operation of the Mitchell Plant (KPCo share 780 MW);

continue operation through 2030 of Big Sandy Unit 1 (285 MW) which was

converted to burn natural gas instead of coal;

continue to receive power under the Unit Power Agreement (UPA) from the

Rockport Units (393 MW);

add cost-effective wind and large-scale solar as needed to continue to

diversify its mix of supply-side resources;

incorporate demand-side resources, including but not limited to additional

1 15 year forecast periods begin with the first full forecast year, 2017.



Page 13 of 1497

Energy Efficiency (EE) programs and Volt VAR Optimization (VVO)

installations; and

Residential and commercial customers will add distributed resources,

primarily in the form of residential and commercial rooftop solar.

Additionally, KPCo evaluated other supply- and demand-side measures and, as a result,

expects that there will be opportunities for utility-scale storage (i.e. batteries) and Combined

Heat and Power (CHP) resources in the KPCo service territiory within the next 10 years. KPCo

also expects that customer-owned solar generation will continue to expand, further reducing the

requirements for new utility-owned generation.

The Rockport Plant UPA for 393 MW expires at the end of 2022. While KPCo is

assuming, for purposes of this IRP, that the UPA will be renewed and continue through the

planning period, the actual decision to extend the UPA will be made in the future. KPCo is

currently committed to this purchase through 2022, and there remains much uncertainty with

regard to load growth, carbon regulations, commodity pricing, and the future UPA cost.

KPCo can meet its customers requirements with existing resources and modest

investments in renewable resources and energy efficiency. Figure ES-1 below present KPCos

Going-In capacity position. The Going-In position represents how KPCos existing and

planned capacity resources would compare with the capacity requirements absent any

incremental changes in capacity.



Page 14 of 1497

Figure ES-1. KPCo "Going-In" PJM Capacity Position (MW)

To determine the appropriate level and mix of incremental supply-side and demand-side

resources to include in its portfolio, KPCo utilized the Plexos Linear Program optimization

model to develop least cost resource portfolios under a variety of pricing and load scenarios.

Although the IRP planning period is limited to 15 years (through 2031), the Plexos modeling

was performed through the year 2035, so as to properly consider various cost-based end-

effects for the resource alternatives being considered.

KPCo used the results of the modeling to develop a Preferred Plan. To arrive at the

Preferred Plan composition, KPCo developed six Plexos-derived, optimum portfolios under

four long-term commodity price forecasts, and two load sensitivity forecasts. The Preferred

Plan is presented as an option that attempts to balance cost and other factors while meeting

KPCos peak load obligations. In addition, this IRP considers existing and future environmental

requirements, including those that may result from the CPP, and the practical limitations of

customer self-generation.

In summary, the Preferred Plan:



Page 15 of 1497

invests $6 million/year in demand-side management through 2024;

adds 75 MW (nameplate capacity)/year of wind resources beginning in 2018 for

a total of 300 MW through 2021;

adds utility scale solar, beginning with 10 MW in 2019, for a total of 130 MW

by 2031.

implements customer and grid EE programs, including VVO, reducing energy

requirements by over 90 GWh and 70 MW of capacity by 2031;

assumes KPCos customers add Distributed Generation (DG) (i.e. rooftop solar)

capacity totaling 1.1 MW (nameplate) by 20312;

adds 10MW (nameplate) of battery storage resources in 2025;

assumes a host facility is identified such that a CHP project can be implemented

by 2022;

continues operation of KPCos existing generation facilities including Big

Sandy 1 through 2030, and the KPCo share of the Mitchell Units (West

Virginia), and

continues the UPA for a 15% share of the energy and capacity from the

Rockport Plant (Indiana)..

Specific KPCo capacity changes over the 15-year planning period associated with the

Preferred Plan are shown in Figure ES-2 and Figure ES-3, and their relative impacts on KPCos

annual energy position are shown in Figure ES-4 and Figure ES-5 .

2 KPCo does not have control over the amount, location or timing of these additions



Page 16 of 1497

Figure ES-2. 2017 KPCo Nameplate Capacity Mix

Figure ES-3. 2031 KPCo Nameplate Capacity Mix



Page 17 of 1497

Figure ES-4. 2017 KPCo Energy Mix

Figure ES-5. 2031 KPCo Energy Mix

Figure ES-2 through Figure ES-5 indicate that this Preferred Plan would reduce KPCos

reliance on coal-based generation and increase reliance on demand-side (EE, CHP, VVO) and

renewable resources, further diversifying the portfolio. Specifically, over the 15-year planning



Page 18 of 1497

horizon the Companys nameplate capacity mix attributable to coal-fired assets would decline

from 80% to 71.3%. Natural Gas capacity would be 0% by 2031. Wind and solar assets climb

from 0% to 26%, and demand-side resources (including EE, VVO, DG, Demand Response [DR],

and CHP) increase from 0.5% to 2.5% over the planning period.

KPCos energy output attributable to coal-fired generation shows a decrease from 94.9%

to 82% over the period. The Preferred Plan shows a significant increase in renewable energy

(wind and solar), from 0% to 14.9%. Energy from these renewable resources, combined with EE

and VVO energy savings reduce KPCos exposure to energy, fuel and potential carbon prices.

Figure ES-6 and Figure ES - 7 show annual changes in capacity and energy mix,

respectively, that result from the Preferred Plan. The capacity contribution from renewable

resources is fairly modest due to their intermittent performance, as well as the implications of

PJMs Capacity Performance rule; however, those resources (particularly wind) provide a

significant volume of energy. KPCos model selected those wind resources because they were

lower cost than alternative resources. When comparing the capacity values in Figure ES-6 with

those in Figure ES-2 and Figure ES-3, it is important to note that Figure ES-6 provides an

analysis of PJM-recognized capacity, while Figure ES-2 and Figure ES-3 depict nameplate

capacity.



Page 19 of 1497

Figure ES-6. KPCo Annual PJM Capacity Position (MW) According to Preferred Plan

Figure ES - 7. KPCo Annual Energy Position (GWh) According to Preferred Plan



Page 20 of 1497

Table ES-1 below provides a summary of the Preferred Plan.

Table ES-1. Preferred Plan Capacity Additions throughout Planning Period (2017-2031)

(1)

(2)

(3)

(4)

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Page 21 of 1497

The Clean Power Plan (CPP) and KPCos Preliminary Modeling Assessment

On October 23, 2015, EPA published a final rule the CPP - in the Federal Register

establishing carbon dioxide (CO2) emission guidelines for existing fossil fueled electric

generating units under Section 111(d) of the Clean Air Act. The CPP established interim and

final uniform national emission standards for two subcategories of generating units: (1) fossil-

fueled electric steam generating units; and (2) natural gas-fired combined-cycle units. EPA also

determined equivalent state-specific CO2 emission rate-based goals and mass-based goals. The

interim goals decline over the period from 2022-2029, with final goals effective in 2030 and

beyond.

Twenty-seven states, many utilities, coal producers, unions, national business

associations and other interested parties challenged the final rule, and sought to stay its

implementation pending judicial review. Although the D.C. Circuit denied these motions for

stay, on February 9, 2016, the U.S. Supreme Court granted the applications, staying

implementation of the CPP during review by the D.C. Circuit and any subsequent petitions for

review by the Supreme Court.

To account for potential incremental costs associated with the CPP or any future CO2

regulations, KPCos commodity price forecast assumes costs associated with CO2 emissions will

begin in 2024, escalating through 2030.

Conclusion

This IRP, based upon various assumptions, identifies adequate capacity resources at

reasonable cost, through a combination of supply-side resources (including renewable supply-

side resources) and demand-side programs throughout the forecast period.

Moreover, this IRP also identifies a means to enhance KPCos energy position. The

Preferred Plan offers incremental resources that will providein addition to PJM installed

capacity to achieve mandatory PJM (summer) peak demand requirementsadditional energy to

reduce the long-term exposure of the Companys customers to PJM energy markets.

The portfolios discussed in this Report attribute limited capacity value for solar and wind



Page 22 of 1497

resources, in part due to PJMs Capacity Performance rule. It is possible that intermittent

resources can be combined, or coupled, and offered into the PJM market as Capacity

Performance resources. Now that the final PJM Capacity Performance tariffs have been

accepted, the Company will investigate methods to maximize the utilization of future

intermittent resources within that construct. An example could be the additional coupling of wind

and solar resources in a manner that would mitigate potentially costly non-performance risk.

This IRP also addresses the Commission Staffs 2013 IRP recommendations. A table

showing the location of KPCos responses to the staffs recommendations is included at the end

of this executive summary, as well as in Exhibit A of the appendix to this report.

The IRP process is a continuous activity; assumptions and plans are reviewed as new

information becomes available and modified as appropriate. Indeed, the capacity and energy

resource portfolios reported herein reflect, to a large extent, assumptions that are subject to

change; an IRP is simply a snapshot of the future at a given time. As noted previously, this IRP

is not a commitment to specific resource additions or other courses of action, as the future is

highly uncertain. The resource planning process is becoming increasingly complex when

considering pending regulatory restrictions, technology advancement, changing energy supply

pricing fundamentals, uncertainty of demand and end-use efficiency improvements. These

complexities exacerbate the need for flexibility and adaptability in any ongoing planning activity

and resource planning process.

To that end, KPCo intends to pursue the following three-year action plan:

1. Pursue economic development opportunities to increase and diversify our industrial and commercial load. This includes looking at green power tariff alternatives for the growing number of customers who seek green power in the upcoming years.

2. Continue the planning and regulatory actions necessary to implement cost-effective Demand-Side Management (DSM)/EE programs.

3. Monitor renewable resource costs, particularly wind and solar, and based on consumer demand for green energy or other economic/strategic factors,



Page 23 of 1497

determine the appropriate schedule to pursue cost-effective solicitations that would include self-build or acquisition options.

4. Monitor the status of, and if necessary, participate in formulating plans for Kentucky (as well as West Virginia and Indiana) pertaining to the CPP. Once plans are established, perform specific assessments as to the implications of the CPP on KPCos resource profile. And

5. Monitor this action plan and future IRPs to address changing circumstances.



Page 24 of 1497

Cross Reference Table of Staff Comments from 2013 Final IRP Report

Topic Staff Comment Section Load Forecast

Provide a comparison of forecasted winter and summer peak demands with actual results for the period following the 2013 IRP, along with a discussion of the reasons for the differences between forecasted and actual peak demands (update of one of the recommendations in the previous IRP Staff Report)

2.12.5, 2.12.2

Provide a comparison of the annual forecast of residential energy sales, using the current econometric models, with actual results for the period following the 2013 IRP. Include a discussion of the reasons for the differences between forecasted and actual results

2.12.5, 2.12.1

Depending on the timing of its next IRP filing, Kentucky Power should, as needed, update the information relied upon in developing its forecast in order to reflect a greater amount of actual data for the year in the forecast is prepared

2.12.5

DSM/EE Include all environmental costs, as they become known, in future benefit/cost analyses

3.3.6

Research and report on best practices for DSM/EE program promotion, educational programs, and innovative marketing opportunities;

3.3.6

Research and report on possible partnering with adjoining AEP operating companies in order to enhance marketing and reduce advertising costs by using common program titles and offerings

3.3.6

Report on work undertaken to enhance evaluation, measurement, and verification procedures to ensure DSM/EE programs are achieving expected goals

3.3.6

Report on the results of the market potential study and, specifically, on industrial sector potential for implementing DSM/EE measures

3.3.6

Monitor the PJM capacity markets for economic opportunities related to demand response and DSM/EE and include an update on the potential for bidding peak savings from demand response and DSM/EE in the PJM capacity markets

3.3.6

General Include a discussion of and any changes or modifications that are under consideration for the PCA, and potential impacts to Kentucky Power

1.3

Provide current specific discussions of pending renewable generation sought by Kentucky Power in its system, or by coordination with other utilities

3.1

Discuss the status of cogeneration and CHP opportunities in its 3.3.4.2



Page 25 of 1497

service territory and the consideration given to cogeneration and CHP in the resource plan Identify and describe currently installed net metering systems 3.3.4.1 Provide a detailed discussion of the ways in which net metering systems are encouraged and considered in the IRP, along with customer specific statistics

3.3.4.1

Provide detailed discussions of the consideration, suitability, and evaluation given to distributed generation

3.3.4

Provide additional specific discussions of the improvements and more efficient utilization of generation, transmission and distribution facilities as required by 807 KAR 5:058, Section 8(2a). The discussion should cover all modifications since the filing of the 2013 IRP and should address Kentucky Power's plans for the three years immediately following the filing of its next IRP.

3.1, 3.4.8, 3.5

Discuss system reliability and the criteria used to determine appropriate summer and winter reserve margins. Identify the capacity margin required by PJM and how it correlates to the reserve margin the Company used prior to its RTO membership.

3.1

In addition to describing how Kentucky Power is addressing current and pending environmental regulations and anticipated new regulations and legislation, the next IRP should address the expected impact and changes on the costs and operations

3.2, 5.3.3, 5.3.4

Discuss how Kentucky Power has addressed uncertainty in modeling future load and the resources to meet that load.

5.2.2



Page 26 of 1497

Introduction 1.0

1.1 Overview

This Report presents the 2016 Integrated Resource Plan (IRP, Plan, or Report) for Kentucky

Power Company (KPCo or Company) including descriptions of assumptions, study parameters,

and methodologies. The results integrate supply- and demand-side resources.

The goal of the IRP process is to identify the amount, timing and type of resources required to

ensure a reliable supply of power and energy to customers at the least reasonable cost.

In addition to developing a long-term plan for achieving reliability/reserve margin

requirements as set forth by PJM, resource planning is critical to KPCo due to its impact on:

Capital budgeting; rate case planning; and environmental compliance and other planning processes.

1.2 Integrated Resource Plan (IRP) Process

This Report covers the processes and assumptions used to develop the IRP for the

Company. The IRP process for KPCo includes the following components/steps:

Description of the Company, the resource planning process in general, and the

implications of current issues as they relate to resource planning;

provide projected growth in demand and energy which serves as the

underpinning of the Plan;

identify and evaluate demand-side options such as Energy Efficiency (EE)

measures, Demand Response (DR) and Distributed Generation (DG);

identify current supply-side resources, including projected changes to those

resources (e.g., de-rates or retirements), and transmission system integration

issues;

identify and evaluate supply-side resource options; and

perform resource modeling and use the results to develop various portfolios.



Page 27 of 1497

Figure 1. Kentucky Power Service Territory

1.4 Power Coordination Agreement (PCA)

Prior to 2014, the AEP-East utilities operated as part of the AEP integrated public utility

holding company system under the now-repealed Public Utility Holding Company Act of 1935.

As part of that arrangement, those companies coordinated the planning and operations of their

respective generating resources pursuant to the AEP Interconnection Agreement (Pool or Pool

Agreement). The Pool Agreement was terminated on January 1, 2014.

As of January 1, 2014 KPCo has been responsible for maintaining an adequate level of

power supply resources to meet its own load requirements for capacity, including any required

reserve margin. KPCo is also a party to the Power Coordination Agreement (PCA)3. The most

recent change to the PCA was the addition of Wheeling Power Company (WPCo) effective June

1, 2015. This addition was the result of WPCo acquiring a 50% undivided interest in the Mitchell

3 The Power Coordination Agreement currently provides Appalachian Power Company (APCo), Indiana Michigan Power (I&M), KPCo and Wheeling Power Company (WPCo) the opportunity to participate collectively (a) under a common Fixed Resource Requirement (FRR) capacity plan in PJM, and (b) in specified collective off-system sales and purchase activities. Under the Power Coordination Agreement, generation is not planned on a single-system basis as it was under the previous Pool Agreement. Rather, APCo, I&M, KPCo and WPCo individually are required to own or contract for sufficient generation to meet their respective load and reserve obligations. Additional information regarding the PCA as it pertains to Kentucky Power can be found in FERC Docket No. ER13-234.



Page 29 of 1497

Plant. This change had no impact on KPCos obligations under the PCA. No further changes to

the PCA are under consideration at this time.

1.5 The Impact of Coal Mining on KPCo Service Territory

For decades, coal mining has been a significant portion of KPCos industrial load.

Approximately 85% of KPCos customers live in counties that are part of the Appalachian coal

basin. As market conditions and environmental regulations have evolved and gas prices have

declined over the past decade, the demand for Appalachian coal produced in KPCos service

territory has declined.

While the direct impact of the lost mining loads within KPCos service territory has been

severe, an indirect impact on other industries located within the area has also been felt. Since the

2008 recession, mining employment within KPCos coal counties is down 68% (approximately

7,900 jobs), while total employment is down 13%. KPCos residential customer counts have

also dropped by 6% (approximately 8,000 customers) since the 2008 recession. The population

within the coal counties has also declined by over 15,000 people since the recession. Figure 2

below illustrates the overall impact the lost mining loads have had on the regional economy

within KPCos service territory.

Figure 2. Economic Impact of Lost Mining Load on KPCo Regional Economy



Page 30 of 1497

1.6 Significant Changes from the 2013 IRP

KPCo generally updates its load forecast and commodity price forecasts on an annual

basis. KPCo also monitors the cost of supply and demand side resources and incorporates the

latest forecasts and trends into its analysis when preparing its IRP. The changes to the load

forecast since the 2013 IRP filing are described in Section 2.9, Exhibit C-11 and Exhibit C-12 of

this report. Pricing trends for renewable resources are generally discussed in Section 4.6.5,

although the most significant change is related to wind and solar pricing, which now include the

benefits of the production tax credit and investment tax credit, respectively, in their pricing

assumptions. In the 2013 IRP, the Production Tax Credit (PTC) for wind was assumed to expire

for projects not in service before 2017. In the 2016 IRP the PTC is now available on a

diminishing scale for projects that begin construction prior to the end of 2019. For solar projects,

in addition to extending the Investment Tax Credit (ITC) benefit, a lower priced tier of solar

projects were also made available for modeling purposes.

Changes to the fundamental pricing forecast reflect the impact lower natural gas prices

have had on the energy market and demand for coal. Table 1 and Table 2 below show, in

constant 2011 dollars, the difference in the base commodity price forecast for energy, capacity

and fuels. Note that the current forecasts for all these commodities, with the exception of Powder

River Basin coal, are now lower than previously forecasted.



Page 31 of 1497

Table 1. PJM Energy and Capacity Prices in 2013 IRP and 2016 IRP, in 2011 $

Table 2. Natural Gas and Coal Prices in 2013 IRP and 2016 IRP, in 2011 $

Finally, the assumptions regarding Carbon Dioxide (CO2) pricing have also been revised.

In the 2013 IRP, a $15/ton cost, in nominal dollars, associated with emitting CO2 would take

effect in 2022, and this cost would remain flat through the forecast period. The 2016 forecast

2013 IRP 2016 IRP 2013 IRP 2016 IRP 2013 IRP 2016 IRP2017 $50.35 $24.12 $32.26 $19.16 $113.52 $114.592018 $49.80 $30.87 $32.38 $22.26 $167.62 $123.402019 $49.24 $33.18 $32.37 $24.54 $176.81 $96.042020 $49.59 $33.87 $32.87 $25.70 $185.83 $41.552021 $50.52 $34.17 $33.33 $25.87 $194.93 $17.952022 $56.10 $34.53 $41.56 $26.11 $204.01 $17.562023 $56.09 $34.88 $41.40 $26.05 $213.09 $17.182024 $56.01 $36.87 $41.49 $28.37 $222.27 $16.822025 $55.99 $38.56 $41.35 $30.30 $231.22 $16.472026 $55.75 $40.15 $41.11 $32.06 $240.15 $16.132027 $55.75 $41.88 $40.84 $33.92 $249.07 $22.912028 $55.54 $43.46 $40.78 $35.59 $258.10 $31.072029 $55.50 $45.46 $40.77 $37.48 $260.33 $40.402030 $54.86 $48.26 $40.74 $39.33 $260.33 $50.902031 $54.76 $50.43 $40.86 $41.72 $260.33 $62.57

On-Peak Energy Prices Off-Peak Energy Prices Capacity Prices

2013 IRP 2016 IRP 2013 IRP 2016 IRP 2013 IRP 2016 IRP2017 $5.48 $2.74 $46.57 $32.92 $11.60 $11.542018 $5.45 $4.04 $48.02 $33.80 $11.54 $10.802019 $5.39 $4.18 $50.02 $35.43 $11.89 $14.702020 $5.47 $4.18 $51.13 $36.99 $12.49 $16.282021 $5.61 $4.18 $50.15 $36.10 $12.18 $17.022022 $5.82 $4.22 $50.13 $35.25 $12.62 $17.122023 $5.78 $4.23 $51.19 $34.43 $12.80 $15.412024 $5.82 $4.31 $50.24 $36.62 $12.35 $15.712025 $5.87 $4.38 $49.32 $37.25 $12.05 $16.482026 $5.82 $4.45 $48.33 $35.97 $11.93 $18.082027 $5.82 $4.55 $47.36 $36.45 $11.85 $16.952028 $5.83 $4.64 $46.11 $35.33 $11.77 $17.122029 $5.83 $4.73 $45.50 $34.01 $11.87 $19.532030 $5.79 $4.85 $45.21 $34.81 $13.06 $18.592031 $5.81 $4.94 $44.41 $35.45 $14.31 $20.52

(A) TCO = Columbia Gas Transmission Corporation(B) Powder River Basin (PRB) Coal, 8,800 Btu/lb.

Nat. Gas TCO(A)-Delivered Illinois Basin Coal PRB - 8800 Coal(B)



Page 32 of 1497

assumes costs associated with CO2 would not begin until 2024, and those costs would start at

$3/ton, but escalate to $20/ton by 2030.

Changes in the load forecast, commodity price forecast, and resource pricing assumptions

have resulted in a resource plan recommendation that is different than the one proposed in 2013.

The 2016 Preferred Plan includes 300 MW of wind, compared to the 2013 plan which added 100

MW. The utility scale solar profile is very similar with the 2016 plan adding 130 MW of utility

scale solar by 2031 compared to the 2013 plan adding 90 MW by 2028. The 2013 plan included

an aggressive 41 MW of DG by 2028, while the 2016 plan has only 1 MW, based on current

trends. The 2016 plan replaced the 59 MW biomass project with a 15 MW Combined Heat and

Power (CHP) installation, and adds a 10 MW battery. Demand side programs, including Volt

VAR Optimization (VVO) have more than doubled in the 2016 plan compared to the 2013 plan,

from 44 MW to 89 MW.



Page 33 of 1497

Load Forecast and Forecasting Methodology 2.0

2.1 Summary of KPCo Load Forecast

The KPCo load forecast was developed by the American Electric Power Service

Corporation (AEPSC) Economic Forecasting organization and completed in June 2016.4 The

final load forecast is the culmination of a series of underlying forecasts that build upon each

other. In other words, the economic forecast provided by Moodys Analytics is used to develop

the customer forecast, which is then used to develop the sales forecast, which is ultimately used

to develop the peak load and internal energy requirements forecast.

Over the next 15-year period (2017-2031)5, KPCos service territory is expected to see

population and non-farm employment decline of 0.1% per year. KPCo is projected to see

customer count decline at a similar rate of 0.2% per year. Over the same forecast period, KPCos

retail sales are projected to decline at 0.2% per year with growth expected from the industrial

class (+0.1% per year) while the residential class experiences a decline (0.5% per year) over the

forecast horizon. Finally, KPCos internal energy and peak demand are expected to decline at an

average rate of 0.2% and 0.3% per year, respectively, through 2031.

2.2 Forecast Assumptions

2.2.1 Economic Assumptions

The load forecasts for KPCo and the other operating companies in the AEP System

incorporate a forecast of U.S. and regional economic growth provided by Moodys Analytics.

The load forecasts utilized Moodys Analytics economic forecast issued in December 2015.

4 The load forecasts (as well as the historical loads) presented in this Report reflect the traditional concept of internal load, i.e., the load that is directly connected to the utilitys transmission and distribution system and that is provided with bundled generation and transmission service by the utility. Such load serves as the starting point for the load forecasts used for generation planning. Internal load is a subset of connected load, which also includes directly connected load for which the utility serves only as a transmission provider. Connected load serves as the starting point for the load forecasts used for transmission planning. 5 Fifteen year forecast period begins with the first full forecast year of 2017.



Page 34 of 1497

Moodys Analytics projects moderate growth in the U.S. economy during the 2017-2031 forecast

period, characterized by a 2.0% annual rise in real Gross Domestic Product (GDP), and moderate

inflation, with the implicit GDP price deflator expected to rise by 2.0% per year. Industrial

output, as measured by the Federal Reserve Board's (FRB) index of industrial production, is

expected to grow at 1.5% per year during the same period. Moodys projects employment growth

of -0.1% per year during the forecast period and real regional income per-capita annual growth

of 2.1% for the KPCo service area.

2.2.2 Price Assumptions

The Company utilizes an internally developed service area electricity price forecast. This

forecast incorporates information from the Companys financial plan for the near term and the

U.S. Department of Energy (DOE) Energy Information Administration (EIA) outlook for the

East North Central Census Region for the longer term. These price forecasts are incorporated

into the Companys energy sales models, where appropriate.

2.2.3 Specific Large Customer Assumptions

KPCos customer service engineers are in frequent touch with industrial and commercial

customers about their needs and activities. From these discussions, expected load additions or

deletions are relayed to the Company.

2.2.4 Weather Assumptions

Where appropriate, the Company includes weather as an explanatory variable in its

energy sales models. These models reflect historical weather for the model estimation period and

normal weather for the forecast period.

2.2.5 Demand Side Management (DSM) Assumptions

The Companys long term load forecast models account for trends in EE both in the

historical data as well as the forecasted trends in appliance saturations as the result of various

legislated appliance efficiency standards (Energy Policy Act of 2005 [EPAct], Energy



Page 35 of 1497

Independence and Security Act [EISA] of 2007, etc.) modeled by the EIA. In addition to general

trends in appliance efficiencies, the Company also administers multiple Demand-Side

Management (DSM) programs that the Commission approved as part of its DSM portfolio. The

load forecast utilizes the most current Commission-approved programs at the time the load

forecast is created to adjust the forecast for the impact of these programs.

2.3 Overview of Forecast Methodology

KPCo's load forecasts are based mostly on econometric, statistically adjusted end-use and

analyses of time-series data. This is helpful when analyzing future scenarios and developing

confidence bands in addition to objective model verification by using standard statistical criteria.

KPCo utilizes two sets of econometric models: 1) a set of monthly short-term models

which extends for approximately 24 months and 2) a set of monthly long-term models which

extends for approximately 30 years. The forecast methodology leverages the relative analytical

strengths of both the short- and long-term methods to produce a reasonable and reliable forecast

that is used for various planning purposes.

For the first full year of the forecast, the forecast values are generally governed by the

short-term models. The short-term models are regression models with time series errors which

analyze the latest sales and weather data to better capture the monthly variation in energy sales

for short-term applications like capital budgeting and resource allocation. While these models

produce extremely accurate forecasts in the short run, without logical ties to economic factors,

they are less capable of capturing structural trends in electricity consumption that are more

important for longer-term resource planning applications.

The long-term models are econometric, and statistically adjusted end-use models which

are specifically equipped to account for structural changes in the economy as well as changes in

customer consumption due to increased energy efficiency. The long-term forecast models

incorporate regional economic forecast data for income, employment, households, output, and

population.



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The short-term and long-term forecasts are then blended to ensure a smooth transition

from the short-term to the long-term forecast horizon for each major revenue class. There are

some instances when the short-term and long-term forecasts diverge, especially when the long-

term models are incorporating a structural shift in the underlying economy that is expected to

occur within the first 24 months of the forecast horizon. In these instances, professional

judgment is used to ensure that the final forecast that will be used in the peak models is

reasonable. The class level sales are then summed and adjusted for losses to produce monthly net

internal energy sales for the system. The demand forecast model utilizes a series of algorithms to

allocate the monthly net internal energy to hourly demand. The inputs into forecasting hourly

demand are internal energy, weather, 24-hour load profiles and calendar information.

A flow chart depicting the sequence of models used in projecting KPCos electric load

requirements as well as the major inputs and assumptions that are used in the development of the

load forecast is shown in Figure 3, below.

Figure 3. KPCo Internal Energy Requirements and Peak Demand Forecasting Method



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2.4 Detailed Explanation of Load Forecast

2.4.1 General

This section provides a more detailed description of the short-term and long-term models

employed in producing the forecasts of KPCos energy consumption, by customer class.

Conceptually, the difference between short- and long-term energy consumption relates to

changes in the stock of electricity-using equipment and economic influences, rather than the

passage of time. In the short term, electric energy consumption is considered to be a function of

an essentially fixed stock of equipment. For residential and commercial customers, the most

significant factor influencing the short term is weather. For industrial customers, economic

forces that determine inventory levels and factory orders also influence short-term utilization

rates. The short-term models recognize these relationships and use weather and recent load

growth trends as the primary variables in forecasting monthly energy sales.

Over time, demographic and economic factors such as population, employment, income,

and technology influence the nature of the stock of electricity-using equipment, both in size and

composition. Long-term forecasting models recognize the importance of these variables and

include all or most of them in the formulation of long-term energy forecasts.

Relative energy prices also have an impact on electricity consumption. One important

difference between the short-term and long-term forecasting models is their treatment of energy

prices, which are only included in long-term forecasts. This approach makes sense because

although consumers may suffer sticker shock from energy price fluctuations, there is little they

can do to impact them in the short-term. They already own a refrigerator, furnace or industrial

equipment that may not be the most energy-efficient model available. In the long term, however,

these constraints are lessened as durable equipment is replaced and as price expectations come to

fully reflect price changes.



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2.4.2 Customer Forecast Models

The Company also utilizes both short-term and long-term models to develop the final

customer count forecast. The short-term customer forecast models are time series models with

intervention (when needed) using Autoregressive Integrated Moving Average (ARIMA) methods

of estimation. These models typically extend for 24 months into the forecast horizon.

The long-term residential customer forecasting models are also monthly but extend for 30

years. The explanatory jurisdictional economic and demographic variables include gross regional

product, employment, mortgage rate, population, real personal income and households are used

in various combinations. In addition to the economic explanatory variables, the long-term

customer models employ a lagged dependent variable to capture the adjustment of customer

growth to changes in the economy. There are also binary variables to capture monthly variations

in customers, unusual data points and special occurrences.

The short-term and long-term customer forecasts are blended as was de

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