Agenda Item No. 9a July 8, Honorable Mayor and City Council Attention: David J. Van Kirk, City Manager

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1 Agenda Item No. 9a July 8, 2008 TO: FROM: SUBJECT: Honorable Mayor and City Council Attention: David J. Van Kirk, City Manager Mike Palombo, Economic Development Manager APPROVAL OF GROUND LEASE AGREEMENT, A CONSTRUCTION LAYDOWN LEASE AGREEMENT, AND EFFLUENT AND POTABLE WATER SERVICES AGREEMENT AND MEMORANDUM OF UNDERSTANDING (DESIGN, CONSTRUCTION AND OPERATIONS OF PUMP STATION AND EFFLUENT AND POTABLE WATER PIPELINES) BETWEEN CPV VACAVILLE, LLC AND THE CITY OF VACAVILLE FOR THE DEVELOPMENT AND OPERATION OF A PROPOSED ELECTRICAL GENERATION FACILITY ON THE EASTERLY WASTEWATER TREATMENT PLANT SITE BACKGROUND: CPV Vacaville, LLC ( CPV ) approached the City of Vacaville ( City ) in the fall of 2007 with a proposal to lease property from the City, on which they would develop a natural gas-fired, 500 megawatt (MW), electrical generating facility and ancillary equipment ( Plant ) on an approximately 25-acre portion of the Easterly Wastewater Treatment Plant site. The proposal arose out of CPV s desire to respond to a then anticipated competitive solicitation from Pacific Gas and Electric (PG&E). The solicitation was in the form of a Request for Offer (RFO), to private electrical power companies, calling for the generation of up to 1,200 MW of new power from a variety of new plants in several locations within PG&E s service territory. The RFO was finally released in April, The Easterly site was selected by CPV principally because of the confluence of the following features: availability of treated wastewater, proximity to both a high capacity PG&E natural gas pipeline and electrical transmission lines, and separation from densely populated areas. These features are key factors in the RFO that CPV is preparing to submit for PG&E s consideration. The selection process begins with PG&E choosing one or more of the submitted proposals and completing negotiations with the selected companies for long-term power supply contracts. The selected projects must be submitted by the selected private firms for review and approval by the State of California. The State has preempted local control of the development process for larger thermal power plants and placed the review, approval, and licensing responsibility with the California Energy Commission (CEC) and the California Public Utilities Commission (CPUC). The CEC review process leading to the licensing of an electrical generating facility typically takes 12 to 18 months to complete. Part of the licensing process is the requirement that the CEC conduct an environmental review and analysis pursuant to the California Environmental Quality Act ( CEQA ) on the impacts of the proposed Plant. Overall, the entire process could take several years to complete before a project is finally selected and approved and allowed to proceed to construction. The City Council, at its December 11, 2007 meeting, considered CPV s development proposal and approved a Memorandum of Understanding and an Option to Lease Agreement that identified key lease terms for the proposed Plant site. After that meeting, further research was conducted and it was determined that State law specifically permitted local public agencies to proceed with executing a lease for the Plant site prior to the completion by CEC of the environmental analysis for the project. Consequently, the need for an Option to Lease period did not have to wait until the completion of CEC s environmental review and, therefore, staff proceeded forward with its negotiations with CPV.

2 DISCUSSION: At today s meeting, the City Council is not considering whether or not the electrical generating facility should be approved; that task is solely the responsibility of the State of California. The Council is considering the terms under which CPV will have the right to use City-owned property at the Easterly Wastewater Treatment Plant and treated wastewater effluent. The two proposed Leases under consideration at this time are for two separate but adjacent sites. The Ground Lease for the Plant applies to a 25+ acre site on which the electric generating facility is proposed to be located. That site is located on the southeast corner of the Easterly WWTP property and fronts on both Fry and Lewis Roads. The second lease is for a construction laydown area that will be used during construction of the Plant and supporting facilities as a staging area. That site, which fronts on Lewis Road, is 21+ acres in area and is north and adjacent to the Plant site. The third agreement, the Effluent and Potable Water Services Agreement, which includes a Memorandum of Understanding (Design, Construction and Operations of Pump Station and Effluent and Potable Water Pipelines), covers the terms under which treated wastewater and potable water will be supplied to the Plant. As mentioned above, the project, if it proceeds, will have to go through an extensive public environmental review process conducted by the CEC. There will be ample opportunity for both the public and the City to comment once the California Environmental Quality Act (CEQA) process is initiated by the CEC. That process will provide the public and other interested parties, such as the City of Vacaville, to discover potential impacts of the project on the environment and then identify ways to mitigate those impacts. While the CEC has the primary responsibility for permitting and licensing the electric generation plant, the City intends to take an active role in minimizing the visual impacts of the proposed plant. Toward that end, the City has moved the boundaries of the leasehold back 70 feet from the Lewis and Fry Road frontages. In that strip, the City proposes to develop a Landscape Buffer of medium and tall trees to screen the view of the Plant. The Ground Lease requires CPV to pay $400,000 to the City to cover the cost of installing the trees. The landscape screen will be installed as soon as it is known that the project will proceed and where the various elements of the facility will be placed on the site. Planting could begin as early as next summer. One of the positive features of the proposed project is that California needs more and cleaner sources of electrical generation. Natural gas-driven plants are the cleanest, in terms of emissions, of the thermal plants. While the amount of electricity produced by renewable sources is growing, those efforts are not nearly sufficient by themselves to meet Statewide power demands. Consequently, a new state-of-the-art natural gas-driven plant is preferable to other alternatives. The proposed Plant, if approved, will generate a significant revenue stream for the City of Vacaville. A portion of that will be derived from the sale of reclaimed wastewater from the Easterly WWTP, which currently is being released into Old Alamo Creek. Depending upon a variety of factors, a 500 MW Plant could produce about $3.3 million of annual revenue for the City. These funds are needed to cover the rising costs of services; both for the General Fund and for the Utility operation. Because the revenue is tied to inflation indexes, the payments will increase over time. The property is currently zoned for Community Facilities use, and a thermal electrical generation plant is a permitted use in that district. CEQA ANALYSIS: Under CEQA, the responsibility for conducting a full and complete environmental analysis of thermal power plants lies with the CEC, as the approving body for the project. Consequently, 2

3 Section 21080(b)(6) of the Public Resources Code and Section of the California Code of Regulations exempts the early planning and development activities of a public agency, such as the City, relating to such a facility so long as the thermal power plant site is to be the subject of full environmental review by the CEC. The project cannot proceed without CEC and CPUC approval and licensing. A summary of the primary terms of each lease and a copy of each of the proposed leases are attached as Exhibit A and A-1 and Exhibit B and B -1. RECOMMENDATION: 1. By simple motion, to approve a Ground Lease Agreement for an approximate 25-acre portion of the Easterly Wastewater Treatment Plant Property Between CPV Vacaville, LLC and the City of Vacaville, find that the action is exempt from CEQA, and authorize the City Manager to make minor changes to the Lease and to execute the Lease Agreement once the site legal descriptions have been finalized. 2. By simple motion, to approve a Construction Laydown Lease Agreement for an approximate 21-acre portion of the Easterly Wastewater Treatment Plant Property between CPV Vacaville, LLC and the City of Vacaville, find that the action is exempt from CEQA, and authorize the City Manager to make minor changes to the Lease and to execute the Lease Agreement once the site legal descriptions have been finalized. 3. By simple motion, to approve the Effluent and Potable Water Services Agreement and Memorandum of Understanding (Design, Construction and Operations of Pump Station and Effluent and Potable Water Pipeline), find that the action is exempt from CEQA, and authorize the City Manager to make minor changes to the Agreement and MOU and to execute the Agreement and MOU once the site legal descriptions have been finalized. ATTACHMENTS GROUND LEASE Exhibit A Summary of Terms Exhibit A-1 Ground Lease Agreement LAYDOWN LEASE Exhibit B Summary of Terms Exhibit B-1 Construction Laydown Lease EFFLUENT AND POTABLE WATER SERVICES AGREEMENT AND MEMORANDUM OF UNDERSTANDING Exhibit CF Summary of Terms Exhibit C-1 Effluent and Potable Water Services Agreement Exhibit C-2 Memorandum of Understanding (Design, Construction and Operations of Pump Station and Effluent and Potable Water Pipelines) MISCELLANEOUS EXHIBITS Exhibit D Annual Benefits Exhibit E Proposed Lease Sites Exhibit F Easterly Area Map 3

4 EXHIBIT A Summary of Principal Terms and Conditions Ground Lease Agreement for a Portion of the Easterly Wastewater Treatment Plant Property 1. Parties. Lease is between the City of Vacaville, California, a California municipal corporation, and CPV Vacaville, LLC. 2. Premises. An approximate 25-acre portion of the Easterly Wastewater Treatment Plant Property located at the southeastern corner of the site (Lewis and Fry Roads). 3. Term. The lease term shall begin on July 8, 2008 and shall end on the twentyfifth (25th) anniversary of the Commencement Date The lease term may be extended at CPV s election for an additional two periods of ten (10) years each. 4. Lease Consideration (Rent) 4.1 Rent Following Effective Date: Commencing upon the Effective Date of the Lease extending to the Commencement Date, CPV shall pay as rent on an annual basis as follows: (a) July 8, 2008 to December 31, $59,100 (b) January 1, 2009 to December 31, $125,000 (c) For each calendar year commencing on January 1, 2010, rent payment shall be equal to rent for the previous calendar year, plus $25, Rent Following Commencement Date: Starting with Commencement Date and extending to the Commercial Operations Date, CPV shall pay to the City one-half (1/2) annual Base Rental of Six Hundred Fifty Thousand Dollars ($650,000) which Base Rental shall increase annually at a rate equal to the increase in the U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Index All Urban Consumers, San Francisco-Oakland-San Jose CA. 4.3 Rent Following Commercial Operations Date: Starting with the Commercial Operations Date and extending to the last day of the Lease Term, CPV shall pay to the City the annual Base Rental of Six Hundred Fifty Thousand Dollars ($650,000) which Base Rental shall increase annually at a rate equal to the increase in the U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Index All Urban Consumers, San Francisco-Oakland-San Jose CA. 5. Lease Consideration (Additional) 5.1 Lump Sum Payment. On Commencement Date, CPV shall pay City $900,000. Of this amount, $500,000 is a Sewer Utility Benefit Payment and $400,000 is a reimbursement payment for the City s cost to install perimeter landscaping on City-owned land along Lewis and Fry Roads. 5.2 Property Tax. Each tax year during the Lease Term commencing upon the Commercial Operations Date, CPV shall pay to the City the difference between what it receives annually from property taxes plus the Tax Premium payment on the project and $1,000,000 indexed from May 13, 2008 (City expects to receive around $1,700,000 initially in property taxes due to the Indexing). The CPVI\46763\

5 guarantee payment shall be capped at $250,000, indexed, during any period when CPV is out of contract with a power purchaser. 5.3 Tax Premium Payment. CPV shall pay to the City an additional sum equal to fifteen percent (15%) of the City s Designated Property Tax Receipt (the Tax Premium ). 5.4 Sales Tax: CPV shall cause to be established a Vacaville point of sale location and cooperate with the City to ensure that the City collects its share of sales tax revenues on the Project. 5.5 Utilities. The provision of utilities are covered in a separate Effluent and Potable Water Services Agreement and a Memorandum of Understanding (Design, Construction and Operations of Pump Station and Effluent and Potable Water Pipelines), Effluent and Easterly Potable Water Agreement. (Attached to this Staff Report) 6. Use. CPV with a statement of the deemed proceeds of developing, constructing and operating a gas-fired electric generation facility and certain ancillary equipment. 7. Assignments. With some specified exceptions, neither CPV nor the City will assign or transfer any right, obligation, or interest without consent of other Party. 8. Insurance. CPV agrees to carry insurance naming the City and others as additional insureds of a type and coverage listed below: 8.1 Commercial General Liability Insurance - $1, & $2,000, Auto Liability - $1,000, Umbrella Liability - $25,000, Workers Compensation - $1,000, Pollution Liability - $5,000, Termination. The Ground Lease Agreement may be terminated for: 9.1 Default. Failure to make required payments and/or failure to comply with terms of the Ground Lease Agreement, Water Supply Agreement Failure to Act in Timely Manner. (a) Construction Commencement Date shall not have occurred within 4 years of Commencement Date. (b) Commencement Date shall not have occurred on or prior to December 11, (c) CPV has right to terminate at anytime prior to December 12, Expiration of Lease Term 10. Condition of Leased Premises. City is leasing premises in its present AS-IS, WHERE-IS CONDITION WITH ALL FAULTS without representation or warranty regarding the condition of the Leased Premises. 11. Surrender Condition of Leased Area Upon Termination or Expiration. Premises shall be free and clear of all liens. CPV agrees to remove all improvements above ground and those 6 feet below the surface grade and return the site to a condition suitable for agriculture. CPVI\46763\

6 EXHIBIT B Summary of Principal Terms and Conditions Construction Laydown Lease Agreement for a Portion of the Easterly Wastewater Treatment Plant Property 1. Parties. Lease is between the City of Vacaville, California, a California municipal corporation, and CPV Vacaville, LLC, a Delaware corporation. 2. Premises. An approximate 21- acre portion of the Easterly Wastewater Treatment Plant Property located at the southeastern corner of the site, fronting on Lewis Road, immediately adjacent to the north of the proposed Ground Lease with CPV. 3. Term. The Base term of this Agreement shall commence on July 8,2008, which is the Effective Date of the Agreement. CPV has until December 11, 2012 to initiate the Commencement Date for the lease. The lease will terminate no later than the Fifth Anniversary of the last day of the calendar quarter in which the Commencement Date occurs. The Lease could last from July 8, 2008, to December Lease Consideration (Rent) 4.1. No Rent Period. In the period between the Effective Date and the Commencement Date, no rent shall be due the City from CPV. During that period, the City retains the right to use the Lease property for its own purposes. 4.2 Rent Following Commencement Date: Starting with Commencement Date and extending to the termination of the lease, CPV shall pay to the City an initial Base rent of $125,000 annually. The Base Rental shall increase annually at a rate equal to the increase in the U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Index All Urban Consumers, San Francisco- Oakland-San Jose CA. The C.P.I. Index is measured from the last Index published prior to December 11, Use. Tenant shall use the Leased Premises solely for the purpose of staging and storing materials and equipment that support the development of the proposed electrical generation plant and certain ancillary equipment.. 6. Assignments. With some specified exceptions, neither CPV nor the City will assign or transfer any right, obligation, or interest without consent of other Party. 7. Insurance. CPV agrees to carry insurance naming the City and others as additional insureds of a type and coverage listed below: 7.1 Commercial General Liability Insurance - $1, & $2,000, Auto Liability - $1,000, Umbrella Liability - $25,000, Workers Compensation - $1,000, Pollution Liability - $5,000, Termination. The Ground Lease Agreement may be terminated for: 8.1 Default. Failure to make required payments and/or failure to comply with terms of the Construction Laydown Lease Agreement Failure to Act in Timely Manner. CPVI\46763\

7 (a). Construction Commencement Date shall not have occurred within 4 years of Commencement Date. (b). Commencement Date shall not have occurred on or prior to December 11, Term. (c). CPV has right to terminate at anytime prior to expiration of Lease 8.3. Expiration of Lease Term 9. Condition of Leased Premises. City is leasing premises in its present AS-IS, WHERE-IS CONDITION WITH ALL FAULTS without representation or warranty regarding the condition of the Leased Premises. 10. Surrender Condition of Leased Area Upon Termination or Expiration. Premises shall be free and clear of all liens. CPV agrees to remove all improvements above ground and those six (6) feet below the surface grade and return the site to a condition suitable for agriculture. CPVI\46763\

8 EXHIBIT C Summary of Principal Terms and Conditions Effluent and Potable Water Services Agreement and Memorandum of Understanding (Design, Construction and Operations of Pump Station and Effluent and Potable Water Pipelines) 1. Parties. Agreement and MOU are between the City of Vacaville, California, a California municipal corporation, and CPV Vacaville, LLC, a Delaware corporation. 2 Term. The Base term of this Agreement shall commence on July 8, 2008, which is the Effective Date of the Agreement. The Agreement shall continue until the 25 th anniversary of the Initial Effluent Delivery Date. 3. Daily Effluent Contract Quantity. City shall reserve 5 million gallons per day of Effluent and deliver such to CPV at the Effluent Point of Connection. 4. Easterly Daily Potable Water Contract Quantity. City shall deliver a maximum of 840 gallons per day at a maximum rate of 5 gallons per minute and deliver such potable water to the Easterly Potable Water Point of Connection. 5. Price of Effluent. The price of the Effluent shall mean a sum equal to $168/acre foot, multiplied each year by the San Francisco Oakland-San Jose Consumer Price Index (CPI). 6. Price of Potable Water. The price payable by CPV shall the City s published potable water rates at the time of delivery. 7. Assignments. With some specified exceptions, neither CPV nor the City will assign or transfer any right, obligation, or interest without consent of other Party. 8. Insurance. CPV agrees to carry insurance naming the City and others as additional insureds of a type and coverage listed below: 8.1 Commercial General Liability Insurance - $1, & $2,000, Auto Liability - $1,000, Umbrella Liability - $25,000, Workers Compensation - $1,000, Pollution Liability - $5,000, Memorandum of Understanding. Contains certain understandings and agreements with respect to (a) the design, construction, and operation of a pump station and a pipeline conveying the effluent to the Plant. 9.1 CPV shall be responsible for the design and all expenses incurred in the design and construction of the Pump Station and Effluent Pipeline and the Potable Water Pipeline. 9.2 City and CPV agree to negotiate an Operation Agreement that shall set forth procedures to govern the construction, repair, maintenance and operation of the Pump Station and Effluent Pipeline and the Potable Water Pipeline. CPVI\46763\

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10 COMPETITIVE POWER VENTURES, INC. Proposed Electrical Generation Facility EXHIBIT D Annual Financial Benefits: Utility Operation 25 acre Ground Lease (indexed) $650,000 Reclaimed Water Sales (indexed) 150,000 $800,000 General Fund Property Tax: Plant Value $550,000,000 1% Prop Tax $5,500,000 18% City Share $990,000 15% Premium (CPV) 148,500 ( indexed; floor of $1,000,000) $1,138,500 City Paramedic Tax ($.03/$100AV) 165,000 VLF Growth (% change in AV x VLF Backfill): ($550,000,000 / $9,270,452,011) X $6,845, ,122 1,709,622 Overall Annual Benefits $2,509,622 One-Time Financial Benefits: Sewer Utility Benefit Payment (CPV) $900, acre Laydown Area Lease (2yrs) 250,000 General Fund - Estimated Sales Tax on Development Cost 1,375,000 $2,525,000

11 Exhibit E

12 Exhibit F Easterly Area Map