THE APPLICATION OF KENTUCKY POWER

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As explained in inore detail in Appendix C, the LTSA contract structures vary, but we asked Wood Group to assume a contract structure that would be appropriate to use over a range of operating profiles. The timing of LTSA payments (and inajor maintenance events) depends on plant operations as measured typically through factored fired stai-ts (“FFS”) or factored fired hours (“FFH”).37 For simple-cycle plants, LTSA costs are typically deteiinined on a stai-tsbasis as a function of FFS. For combined-cycle plants, LTSA costs may be either stai-ts-based or hours-based depending on how much the plant is cycling. Based on guidance from Wood Group about one type of typical contract sti-ucture,we assume that if the plant cycles fiequently with the FFH:FFSratio527,thenallLTSAcostswouldbeassessedonanstai-tsbasis. Iftheplantcycle less frequently with long duty cycles and an FFH:FFS ratio > 27 then the LTSA would be hours- based. CONEArea Table 36 Variable O&NI and LTSA Costs Gas CT Gas CC VOM LTSA VOM LTSA LTSA ($/MWli) ($/FFS) ($/MWi) ($/FFS) (YFFH) 1 FiastemMAAC $0.91 $19,846 $0.85 $10,370 $0.85 $9,144 $0.85 $9,700 $0.85 $8,866 $0.85 $8,823 - $311 $274 $291 $266 $265 2 Southwest MAAC 3 Rest ofRTO 4 Westem MAAC 5 Dominion $0.91 $17,501 $0.91 $18,565 $0.91 $16,968 $0.87 $16.887 Soirrces niid Notes For additional details see Wood Group report in Appendix C. All LTSA costs would be hours-based if FFH:FFS > 30, or all starts-based otherwise VI. FINANCIAL, ASSUMPTIONS A. INFLATION Inflation rates affect our net CONE estimates by foiining the basis for projected increases in several FOM costs over time. We also use the inflation rate as cost escalation rate in our level- realCONEestimateasdiscussedinSectionVI1.C. Weestimatedfutureinflationratesbasedon bond market data and consensus U.S. economic projections. Table 37 shows that the implied inflation rate from Treasuries is 2.3% over 5 years, 2.6% over 10 years, and 2.8% over 20 years as of late April 2011I Figure 3 shows the historical nominal and inflation protected yields, as well as the implied inflation since 2008. Since 2011, implied inflation averaged approximately 2.5%. These implied rates are consistent with consensus pro.jections. The monthly Blue Chip Economic Indicators report compiles analyst forecasts from various financial institutions and has 37 FFS and FFH account for the number of starts or the number of fire-hours experienced, but also consider other factors that will contribute to requiring maintenance to be scheduled earlier. Two examples of these factors include whether the starts were on gas or oil and whether the unit has tripped, although a full account of these factors can be obtained from the turbine manufacturer, see Appendix C . 32

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