HomeMy WebLinkAboutStaff Report 393-08CMR: 393:08 Page 1 of 5
TO: HONORABLE CITY COUNCIL
ATTN: FINANCE COMMITTEE
FROM: CITY MANAGER DEPARTMENT: UTILITIES
DATE: OCTOBER 21, 2008 CMR: 393:08
SUBJECT: Consideration of a Recommendation to City Council to Adopt a
Resolution Approving the Execution of the Agreement for a Long-Term
Assignment of the City’s Share of Transfer Capability on the
California-Oregon Transmission Project to Other Members of the
Transmission Agency of Northern California
RECOMMENDATION
Staff recommends that the Finance Committee recommend that Council adopt the attached
resolution approving the execution of an agreement for a fifteen (15) year assignment of the
City’s share of the electric high voltage California-Oregon Transmission Project (COTP) to the
Modesto Irrigation District (MID), the Turlock Irrigation District (TID) and the Sacramento
Municipal Utility District (SMUD), thereby lowering the cost to serve the electric utility
customers of the City.
BACKGROUND
The Transmission Agency of Northern California (TANC) is a California Joint Powers Agency,
whose membership comprises SMUD, MID, TID, and the California cities of Alameda, Biggs,
Gridley, Healdsburg, Lodi, Lompoc, Palo Alto, Redding, Roseville, Santa Clara, and Ukiah.
TANC currently owns approximately 87 percent of the COTP, a 1600 MW, 340 mile long
electric transmission line from the California-Oregon Border (COB) to the 500 kilovolt Tracy
substation in Northern California. The City is a signatory to TANC’s 1990 Project Agreement
No. 3 (PA3) (Resolution No. 6877, adopted March 26, 1990). PA3 provides the City a share of
approximately 50 MW of TANC’s entitlement on the COTP.
Since the COTP became operational in March 1993, the City has utilized this asset to access
low-cost electricity resources from the Pacific Northwest to serve the electricity needs of the
City. While the City and the Northern California Power Agency (NCPA), as the City’s
electricity scheduling agent, have continued to utilize the COTP to meet the electrical loads of
the City at the lowest cost, the value of this transmission right in recent years has been lower
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than the cost of ownership. This is particularly pronounced for Palo Alto; the City is located
within the control area operated by the California Independent System Operator (CAISO), while
the COTP line is in a separate control area jointly operated by the SMUD and the Western Area
Power Administration (Western). While the City continues to consider the COTP a strategic
asset for future years when the cost of ownership can be offset by its market value, the projected
short-term value of the asset prompted staff to explore temporary assignment options to members
of TANC located within the SMUD-Western transmission control area. These entities have the
potential to garner greater value from the transmission asset.
The Utilities Advisory Commission (UAC) in April 2008 conceptually approved staff’s
recommendation to assign the City’s share of the COTP to interested parties. In July 2008, staff
presented the justification for the long-term assignment of the City’s COTP entitlements to the
Finance Committee and sought approval of a short-term assignment as a bridging agreement
while negotiations for the 15-year assignment continued. Following the Finance Committee’s
recommendation, the Council approved the short-term assignment of the City’s rights in the
COTP to SMUD and TID for the months of August 2008 through January 2009, or until the 15-
year agreement becomes effective, whichever is earlier (Resolution No. 8850, adopted July 28,
2008).
DISCUSSION
COTP Cost
The City’s electricity supply-related budget for FY 2008-09 (FY ’09) is approximately $78
million, of which approximately $2 million is related to the COTP transmission asset ownership
cost. The debt service costs are expected to remain flat at $1.284 million/year until 2024 when
the debt is fully paid-off. The other costs of $550,000 per year are expected to increase by 3%
per year. In addition to these costs of ownership, COTP owners incur a number of usage-based
charges such as SMUD transaction fees, transmission line losses from the COB, and other
CAISO charges. These additional costs, which are highly variable and depend on utilization of
the line, are estimated at between $100,000 and $400,000 per year. These costs could also
change due to regulatory changes.
Value Drivers
The value of the COTP is derived in multiple ways, but falls into three major categories:
1. Basis Value: Basis is the difference between the market prices for electricity delivered to
COB versus delivered into Northern California. Based on forward prices, the basis value of
the COTP for the next 12 months is estimated at 40% to 70% of cost and declines even
further in the outer years.
2. Capacity Value: Supplies imported from the Northwest have capacity and ancillary services
(electricity products sold in the market) value. Imports of firm energy delivered at COB and
scheduled over the COTP for the City’s load currently count towards meeting the City’s
reliability requirements. Staff estimates that the potential capacity and ancillary services
value associated with COTP could be $350,000 to $600,000 per year, or 15% to 30% of the
cost starting in 2010.
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3. Operation Value: The COTP has value associated with access to resources and markets in the
Pacific Northwest for non-economic reasons. Staff’s assessment of operational value of the
asset is $50,000 to a $100,000 per year, or less than 5% of the ownership cost.
In total, the value of COTP to the City is estimated to be about 60% to 75% of the annual cost of
owning and operating the asset based on the factors identified above. A summary of these costs
and values is in the Resource Impact section below.
Risk Assessment
The City faces low overall risk from the proposed agreement, both in the short-term, from
defaults by the assignees, and in the long-term from the impacts of potential regulatory and
industry changes in the future.
Short Term Assessment: Under the terms and conditions of the contract, Palo Alto will not be
billed for any COTP associated costs during the term of the assignment; these costs will be billed
directly to the assignees/counterparties. Any default by a counterparty will be remedied prior to
the start of the month’s delivery. In the absence of such remedy, the assignment of the layoff
will revert back to Palo Alto, limiting the cost to the lost opportunity of COTP use for one
month. In the event of a default by counterparty, the City’s COTP entitlement reverts back to the
City and the City will revert to its current ownership position.
Long Term Assessment: Although the COTP assignment is expected to create value for the City,
the outcome could prove to be unfavorable or more favorable than expected. Listed below are
the value-related uncertainties that staff considered in evaluating a long-term assignment:
1. The building of new transmission lines to the Northwest markets and British Columbia,
could shrink the COB/Northern California basis values. This factor favors the proposed
assignment.
2. The impact of the CAISO’s new market design could reduce the value of COTP imports
compared to resources from Northern California. These combined factors favor the
proposed COTP assignment.
3. An unexpected and large increase in Palo Alto’s electric demand or a move to increase
Palo Alto’s renewable portfolio goal to 50% may increase the City’s interest in accessing
Northwest resources. This uncertainty favors a medium-term assignment of 5-10 years.
Assessment of these risks led staff to recommend a 15-year assignment, coincident with the
extinguishing of the debt service for the COTP, and ending by 2023.
Summary
Based on staff’s cost-benefit analysis, the COTP will continue to have a net cost to the Electric
Fund until 2024. Since COTP is considered a strategic asset that provides flexibility to the
electric portfolio in meeting City’s long term loads, staff does not recommend an outright sale or
permanent assignment of its rights to the project. But, a medium- to long-term assignment of the
asset at full cost is likely to prove valuable to the electric portfolio.
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Should the Council approve execution of the 15-year assignment of the City’s interest in the
COTP transmission line, the City will no longer have long-term access to the Pacific Northwest
markets. However, there are alternative ways to access these markets on an as-needed basis, and
staff is exploring a number of other contractual mechanisms to achieve the objective of accessing
other regional markets when it is economically beneficial to do so. One such mechanism is to
enter into enabling agreements with members of TANC that will provide the option to the City
and interested TANC members to execute short-term bilateral transmission transactions for the
use of COTP during periods of value. Such access to COTP transmission in certain periods
might be obtained at a discount to full costs. When staff finalizes an evaluation of such
opportunities, staff will return to Council to seek additional approvals.
BOARD/COMMISSION REVIEW AND RECOMMENDATIONS
The UAC reviewed the concept of an assignment of the COTP at its April 2, 2008 meeting. At
the time of the UAC meeting, a contract was unavailable for review. The UAC voted
unanimously to recommend conceptual approval of a temporary (15-20 years) assignment of the
COTP.
RESOURCE IMPACT
The impact on the Electric Fund from the 15-year assignment of the COTP is reduced expenses,
including a reduction of debt service payments of approximately $1.3 million per year and a
reduction of the operation and maintenance costs of about $550,000 per year in 2008, which
would escalate each year. At the same time, the values derived from use of the COTP will
disappear when the asset is assigned. Staff estimates that the value of COTP is only 60% to 75%
of the cost of ownership; thus, a long-term assignment at full cost will save $400,000 to
$800,000 per year, which is equivalent to a favorable retail rate impact of approximately 0.5%.
Cost/Value ($/year) over the 20-year
assignment period
Annual Cost
1. Debt Service Payments $1,300,000
2. Operations and Maintenance 700,000
3. Usage-Based Charges 250,000
Total Annual Cost $2,250,000
Annual Value
1. Basis Value $750,000 to $1,300,000
2. Capacity Value $350,000 to $600,000
3. Operational Value $50,000 to $100,000
Range of Monthly Value $1,150,000 to $2,000,000
Annual Value as a fraction of cost 51% to 89%
Net Savings $250,000 to $1,100,000 per year
POLICY IMPLICATIONS
This recommendation is consistent with the Council-approved Utilities Strategic Plan with
regard to managing supply portfolio risk to preserve a supply cost advantage.
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ENVIRONMENTAL REVIEW
Approval of this agreement does not require review under the California Environmental Quality
Act (CEQA) because it does not meet the definition of a “project” pursuant to California Public
Resources Code Section 21065.
ATTACHMENTS
A: Resolution of the Council of the City of Palo Alto Approving the Execution of the
Agreement for a Long-Term Assignment of Palo Alto’s Share of Transfer Capability on the
California-Oregon Transmission Project to Other TANC Members
B: Resolution 2008-xx, Resolution of the Transmission Agency of Northern California
Authorizing the Execution of the Long-Term Layoff Agreement Between TANC and Certain
of its Members
C: Agreement for Long-Term Layoff By and Among the Transmission Agency of Northern
California and certain of its Members namely The City of Palo Alto, The City of Roseville,
The Modesto Irrigation District, The Turlock Irrigation District, and The Sacramento
Municipal Utility District
D: Minutes from the April 2, 2008 UAC meeting
PREPARED BY: DEBRA LLOYD
Senior Resource Planner
SHIVA SWAMINATHAN
Senior Resource Planner
REVIEWED BY: ________________________________
JANE O. RATCHYE
Utilities Assistant Director, Resource Management
DEPARTMENT APPROVAL: ________________________________
VALERIE O. FONG
Director of Utilities
CITY MANAGER APPROVAL: ________________________________
JAMES KEENE
City Manager