CITY OF BURBANK. Burbank Water and Power STAFF REPORT

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1 CITY OF BURBANK Burbank Water and Power STAFF REPORT DATE: June 30, 2015 TO: FROM: Mark Scott, City Manager Ron Davis, General Manager, Burbank Water and Power SUBJECT: AUTHORIZE THE GENERAL MANAGER OF BURBANK WATER AND POWER TO EXECUTE ENABLING AGREEMENTS WITH THE INTERMOUNTAIN POWER AUTHORITY FOR A SHARE OF THE OUTPUT OF A REPOWERED INTERMOUNTAIN POWER PROJECT RECOMMENDATION Adopt a resolution of the Council of the City of Burbank (1) authorizing the General Manager of Burbank Water and Power, as the designee of the City Manager, to execute and implement the Amendatory and Renewal Documents for the Intermountain Power Project, and to take certain actions in connection therewith and (2) finding that the City of Burbank s approval of such contracts is exempt from the requirements of the California Environmental Quality Act. BACKGROUND IPP is owned by the Intermountain Power Agency (IPA), a Utah state agency. Currently, IPP is composed of three sets of assets: 1) a 1,900 megawatt (MW) coal-fired power plant located in Delta, Utah; 2) a 490-mile 500 kilovolt (kv) direct current transmission line which transmits the electricity generated by the power plant to Southern California known as the STS; and 3) two (2) alternating current transmission lines which transmit the electricity from the power plant to delivery locations in Utah (and a portion of Nevada) known as the NTS. The plant has operated since the mid-1980s and serves 36 different municipal utilities in Utah and California, including Anaheim, Burbank, Glendale, Los Angeles, Pasadena, and Riverside (the purchasers). Los Angeles Department of Water & Power (LADWP), as the operating agent, operates and maintains IPP and the related IPP transmission. LADWP purchases the majority of IPP s output. BWP s share of IPP is approximately 74 MW of electricity generation, 108 MW (north to south) of STS capacity, and 27 MW

2 (north to south) of NTS capacity. BWP s share of the IPP is about 4 percent. The current power sales contracts will expire in BWP and the other California and Utah purchasers have been working for a number of years to determine IPP s future after the termination of the existing power sales contracts (i.e., post-2027). Under the existing IPP power sales contracts, that decision must be made unanimously by all 36 purchasers. A renewal of the IPP was proposed in 2006, only to have a California law come into existence at that same time that prohibited the approval of an electricity purchase agreement from such a high-carbon plant. Since 2006, other approaches to produce energy that use considerably less carbon-based fuels have been considered. Most of the approaches, many of which at first appeared promising, were found to be too costly. In that context, IPA and LADWP had proposed in 2012 that IPP be replaced with a 1,200 MW combined-cycle natural gas-fired power plant (the Gas Repowering ), with rights to STS and NTS transmission capacity again linked to power purchases from the new generating facility. IPA and LADWP have proposed that 1) this natural gas power plant begin commercial operation in 2025 and run to 2077 and 2) the coal plant be retired simultaneously, two (2) years earlier than the current (coal-based) contracts expire. Under this plan, LADWP would continue to be the major purchaser of IPP s output and major decision-making control regarding IPP would continue to rest with IPA and LADWP. There are two principal enabling agreements involved with the replacement of the coal plant with a gas-fired power plant: - An amendment of the current power sales agreement for the coal plant, called the Second Amendatory Power Sales Contract, ( Second Amendatory PSC ), along with its Exhibit A-3, a renewal power sales contract for the gas-fired plant, called the Renewal Power Sales Contract, ( Renewal PSC ); and - An agreement for the purchase of excess power, called the Agreement for Sale of Renewal Excess Power ( Renewal Excess Power Agreement ). Under the terms of IPA s and LADWP s proposal, purchasers (including BWP) must enter into these enabling agreements for the renewal, now, in order to participate in the renewal in As such, these enabling agreements include mechanisms whereby a purchaser s share of renewal generation (and, by formula, capacity on the STS and NTS) will be determined by a subscription process. DISCUSSION While for the first time this coming year, renewable energy will become the single largest source of the City s electrical supply, IPP still provides approximately 31 percent of the electricity that BWP provides to its customers. The other IPP participants also use IPP to provide a large part of the requirements for their customers as well. At the same time, BWP s long-term planning environment is uncertain: customer electricity demand (also known as load ) projections are flat to declining, BWP faces an over-generation situation for many hours of the day, and future regulatory mandates 2

3 (such as expanded renewable energy requirements, changing greenhouse gas regulations, and the like) are uncertain. In addition, as a coal-fired generator IPP faces regulatory pressure of its own. As a result, BWP staff has supported renewal but with concerns that the renewal proposed by IPA and LADWP would not adequately address BWP s needs in planning for continued reliable, affordable, and sustainable electric service. To facilitate a renewal that meets BWP s needs, BWP actively participated in negotiations with LADWP, IPA, and the other California purchasers to revise the terms of the IPA/LADWP proposal. Under the proposed IPP Renewal Documents, BWP and the other California purchasers (other than LADWP) have an option to reduce (including to zero) its share of generation and transmission in IPP on or before November 1, The California purchasers also received a non-binding assurance from LADWP that if a California purchaser reduced its share of the new power generation to zero, LADWP would enter into an agreement with such California purchaser to provide at least 50 percent of that California purchaser s IPP participation-linked transmission rights from the southern end of the STS at Adelanto, California to each California s purchaser s electrical system. Below is a general summary of the IPP Renewal Documents. Second Amendatory Power Sales Contract The Second Amendatory PSC amends the existing coal-based Power Sales Contract, including the following 1. Gas Repowering: A new provision was added so that the Gas Repowering will be treated as a capital improvement of the existing coal generation station. The Gas Repowering is described as two (2) combined cycle power blocks, each with a design of approximately 600 MW, provided, that a lesser design capacity can be provided in certain instances. Each such power block will include natural gasfired combustion turbine generating units, four (4) heat recovery steam generators and two (2) steam turbines, heat exchangers, zero liquid discharge systems and all associated equipment. 2. Alternative Repowering: The Second Amendatory PSC leaves open the possibility that the existing Coordinating Committee and the coordinating committee established under the Renewal PSC (see discussion below) may elect to have one or more alternatives to the Gas Repowering, including possibly a project with renewable energy or compressed air energy storage or some other combination of the foregoing. 3. Gas Repowering Completion: The Gas Repowering is permitting and construction is expected to commence no later than January 1, 2020 and is to be fully completed and in operation on July 1, Upon completion of the Gas Repowering, the generation station under the Power Sales Contract is to be amended from being a 1,900 MW coal-fired generation station to a 1,200 MW natural gas-fired generation station. 3

4 4. Decommissioning: The Second Amendatory PSC details the decommissioning process for the existing coal generation station. The decommissioning is planned to occur after the completion of the Gas Repowering, except that certain assets may be sold or leased. 5. Renewal Process: Within 45 days following the execution of the Second Amendatory PSC, IPA will commence an initial offer to all the purchasers (the Renewal Offer ). Once the Renewal Offer is sent out, BWP, together with the other purchasers, must respond with an offer acceptance that specifies the proportion that such purchaser desires in the Renewal PSC. The renewal process is specified in more detail in the Renewal PSC. 6. Term: The original term of Power Sales Contract will remain through July 15, In the event that a Gas Repowering does not take place, the Second Amendatory PSC adds a provision to extend the term of the Power Sales Contract solely for the decommissioning and retirement of the coal facility, but in no event later that than January 1, Renewal Power Sales Contract The Renewal PSC is a power sales contract for the purchase of energy from the Gas Repowering. The Renewal PSC is modeled on the existing Power Sales Contract with some modifications to reflect the nature of the Gas Repowering. The Renewal PSC contains the following general provisions: 1. Project: The project would be the 1,200 MW natural gas-fired generation station (or, if there is an alternative repowering, the alternative project). 2. Term: The Renewal PSC commences on the Effective Date occurring immediately after the completion of the renewal process. The purchase obligations would commence on the expiration of the Power Sales Contract (as amended by the Second Amendatory PSC) on June 15, 2027 and would end on June 15, 2077, unless terminated earlier (Operational Period). During the Operational Period, BWP will take its share of capacity, energy and associated services based on the subscription amount resulting from the renewal process. 3. Payments: BWP would be obligated to pay, for each month during the Operational Period, BWP s (a) generation cost share multiplied by the monthly power costs for such month, (b) NTS cost share multiplied by the monthly power costs for such month, (c) STS cost share multiplied by the monthly power costs for such month, and (d) proportion in the variable cost component for Project fuel used. 4. Point of Delivery: Adelanto substation. 5. Committees: The Renewal Contract Coordinating Committee is responsible for coordinating among the various purchasers, and has a number of responsibilities, including, but not limited to, approving bids and contracts, making recommendations to the construction and operation of the project, 4

5 reviewing practices and procedures, and approving bond financing for the project. 6. Renewal Process: Under the Second Amendatory PSC, IPA will deliver Renewal Offers to each existing purchaser under their Power Sales Contract and each such purchaser must respond by indicating how much of any interest, if any, will it take in the Project for the Term of the Renewal PSC. If 100 percent of the Project generation is accepted, then the renewal process is complete. On the other hand, if less than 100 percent of the Project generation is accepted, then a second round offer will occur where unclaimed interests in the Project generation will be offered to the purchasers that have accepted an interest in the Project. If 100% percent of the Project generation is accepted at that time, then the renewal process is complete. If there remain any unclaimed interests in the Project generation, a third round offer will occur. If 100 percent of the Project generation is accepted at that time, then the renewal process is complete. If less than 100 percent of the generation interests have been taken, each of the participating purchasers will have their interest increased by the remaining unclaimed interests in proportion to the generation interests that such purchaser has subscribed to during the initial renewal process. 7. Termination: The Renewal PSC may be terminated earlier, in the event that BWP defaults under the Renewal PSC or the existing Power Sales Contract. On November 1, 2019, BWP also has the right to reduce their interests in the Project generation by 20 percent or to terminate the Renewal PSC. Agreement for Renewal Excess Power The Renewal Excess Power Agreement is a contract entered into collectively among all of the purchasers and IPA. This contract is for the sale of excess power from the Gas Repowering Project by the Utah purchasers to the California purchasers of the Project. The Renewal Excess Power Agreement contains the following general provisions: 1. Excess Amounts: The Renewal Excess Power Agreement will set forth an initial amount of excess power that Utah purchasers desire to sell to California purchasers. At least twelve months prior to the beginning of the Operational Period, each of the Utah parties will furnish notice of what that Utah party desires to sell to the California purchasers. 2. Purchase of Excess Amounts: The California purchasers will purchase the excess power unless the Utah purchasers have elected to take the excess power. The purchase percentage will be set forth in the Renewal Excess Power Agreement. 3. NTS Transmission Rights: Each Utah seller will allow the California purchasers scheduling rights over the switchyard and will assign a portion of their rights in the NTS to the California purchasers. 4. Term: The Renewal Excess Power Agreement commences at the same time as the Renewal PSC and will continue until the Renewal PSC terminates, unless 5

6 otherwise terminated earlier for default. If BWP terminates the Renewal Power Sales Contract on November 1, 2019, it will be removed as a party to the Renewal Excess Power Agreement. 5. Default: If a California purchaser defaults on its obligation, IPA may stop delivery of capacity and energy under the Renewal Excess Power Agreement. Upon such discontinuance, IPA may transfer, on a pro rata basis, to all requesting California purchasers that are not in default. The City Attorney s Office has reviewed and approved the proposed agreements as to legal form. BWP staff believes that the proposed agreements provide the planning flexibility necessary to successfully serve Burbank with reliable, affordable, and sustainable electric service for years into the future. As such, BWP staff recommends that Council approve the agreements for the General Manager s execution at the appropriate time. Burbank Water and Power Board On June 4, 2015, the Burbank Water and Power Board recommended unanimously that Council approve the Second Amendatory PSA. CEQA Analysis Under the California Environmental Quality Act (CEQA), a project may be deemed to be exempt if a lead agency has determined, pursuant to Section 15061(b)(3) of the CEQA Guidelines, that there is no possibility that the activity in question may have a significant effect on the environment. On April 23, 2013, the City Council of Los Angeles voted unanimously to find that the Second Amendatory Power Sales Contract was exempt from CEQA pursuant to the Los Angeles City CEQA Guidelines Section 15061(b)(3). Since the Renewal Documents are replacing the coal-fired facility with a natural gas facility with a smaller emissions profile, the Renewal Documents should be exempt from CEQA in accordance with Section15061(b)(3) of the CEQA Guidelines. IPA s environmental counsel has advised us that a review under the National Environmental Policy Act will be required for the gas pipeline needed to provide natural gas to the natural gas facility. FISCAL IMPACT These agreements preserve important power resource planning options for BWP at the IPP site, including the option to participate in future power generation projects at that site. Without these agreements, it would be difficult (if not impossible) and certainly more expensive for BWP to benefit from participation in projects at the IPP site. CONCLUSION Adopt a resolution of the Council of the City of Burbank (1) authorizing the General Manager of Burbank Water and Power, as the designee of the City Manager, to execute and implement the Amendatory and Renewal Documents for the Intermountain Power Project, and to take certain actions in connection therewith and (2) finding that the City of Burbank s approval of such contracts is exempt from the requirements of the California Environmental Quality Act. 6

7 EXHIBITS Exhibit A - A resolution of the Council of the City of Burbank (1) authorizing the General Manager of Burbank Water and Power, as the designee of the City Manager, to execute and implement the Amendatory and Renewal Documents for the Intermountain Power Project, and to take certain actions in connection therewith and (2) finding that the City of Burbank s approval of such contracts is exempt from the requirements of the California Environmental Quality Act. Exhibit B - Second Amendatory PSC (including Renewal PSC as Ex A-3) Exhibit C - Agreement for Sale of Renewal Excess Power Exhibit D - California Code of Regulations Title 20, Sec. 2908(b)(3) Notice 7