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HomeMy WebLinkAboutStaff Report 331-08City of Palo Alto Manager’s Report TO:HONORABLE CITY COUNCIL 4 FROM:CITY MANAGER DEPARTMENT: UTILITIES DATE: SUBJECT: JULY 28, 2008 CMR: 331:08 FINANCE COMMITTEE RECOMMENDATION TO ADOPT A RESOLUTION AUTHORIZING THE CITY MANAGER TO EXECUTE AGREEMENTS FOR THE SHORT TERM ASSIGNMENT OF THE CITY’S SHARE OF ENTITLEMENTS ON THE CALIFORNIA-OREGON TRANSMISSION PROJECT TO OTHER MEMBERS OF THE TRANSMISSION AGENCY OF NORTHERN CALIFORNIA RECOMMENDATION Staff and the Finance Committee recommend that the City Council adopt the attached resolution authorizing the City Manager or his designee to execute Agreements for the short-term assignment of the City’s share of the electric high voltage California-Oregon Transmission Project (COTP) to 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 City of Palo Alto is a member of the Transmission Agency of Northern California (TANC), a California Joint Powers Agency, whose membership also includes: SMUD; TID; Modesto Irrigation District (MID); and the California cities of Alameda, Biggs, Gridley, Healdsburg, Lodi, Lompoc, Redding, Roseville, Santa Clara, and Ukiah. TANC currently owns approximately 87 percent of the COTP, a 1600 MW, 340 mile long electric transmission line fi’om the California-Oregon Border (COB) to the 500 kilovolt Tracy Substation in Northern California. The City has a share of approximately 50 MW of TANC’s entitlement on the COTP. While the City has utilized the COTP to manage the cost of its electric supply portfolio, the value of this transmission right in recent years has been lower than the cost of ownership. 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 has prompted staff to explore temporary assignment options to other members of TANC. The Utilities Advisory Commission in April conceptually approved staff’s recommendation to assign the City’s share of the COTP to interested parties. Since then, staff has been pursuing a 15-year assignment agreement with SMUD, TID, and MID. The effective date of this long-term CMR: 331:08 Page 1 of 3 assignment was projected for July or August 2008, but negotiations have taken longer than expected. When the negotiations are completed in the coming months, staff will bring the final 15-year assignment agreement to Council for approval. In the interim, until the 15-year assignment agreement is completed, SMUD and TID have requested a temporary assignment of the City’s rights in the COTP for the months of August 2008 through January 2009, or until the 15 year agreement becomes effective, whichever is earlier. MID is not interested in participating in the temporary assignment and is waiting for completion of the 15-year assignment: SMUD and TID will take MID’s share during the temporary assignment. Such a short-term assignment agreement is expected to have a savings of $128,000 to $144,000 per month to the City and will be based on the following terms: 1.The Contract shall be negotiated with SMUD and TID, with each entity receiving one- half of the City’s share of COTP. 2.The Contract will be based on industry standard Western System Power Pool Agreement. 3.Term of the Contract shall not extend beyond January 31, 2009, and shall terminate on the effective date of the 15-year Assignment Agreement. 4.Compensation for the assignment shall recover the full monthly cost the City incurs to own the asset (approximately $160,000/month). FINANCE COMMITTEE REVIEW AND RECOMMENDATIONS The Finance Committee reviewed and unanimously approved the staff recommendation on July 15, 2008 (CMR:307:08, Attachment C). The Committee discussed how savings from the assignment would be reflected in the budget and/or utilized. The Committee also discussed the possibility of increased price differentials between the Northern California and Pacific Northwest markets, and the difference in generation resource types sold in the two markets. RESOURCE IMPACT The net impact on the Electric Fund from the short-term assignment of the COTP is the difference between revenues from SMUD and TID (equal to the cost of owning the asset of approximately $160,000 per month), and the value to the City from the use of the COTP asset, expected to be between $16,000 and $24,000. Thus, the short-term assignment will result in a net savings of $128,000 to $144,000 per month. 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. These bilateral transactions by TANC members are also sanctioned under the TANC Commission-approved Procedures for Allocations of COTP Transmission (one year or less). 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. CMR: 331:08 Page 2 of 3 ATTACHMENTS A: Resolution of the Council of the City of Palo Alto Authorizing the City Manager to Execute Agreements for the Short-Term Assignment of the City’s Share of Entitlements on the California-Oregon Transmission Project to other TANC Members B~Draft Transaction Confirmation (WSPP) Agreements for Short-Term Assignment of COTP Entitlements to TID and SMUD. The complete Western System Power Pool (WSPP) Master Agreement is available at: www.wspp.org Report that went to the Committee C;CMR:307:08 - Recommendation to adopt a Resolution authorizing the City Manager or his designee to execute Agreements for the short-term assignment of the City’s share on the electric high voltage California-Oregon Transmission Project (COTP) to the Turlock Irrigation District (TID) and the Sacramento Municipal Utility District (SMUD) D: PowerPoint presentation made at the July 15, 2008 Finance Committee meeting E: Excerpted minutes from the July 15, 2008 Finance Committee meeting PREPARED BY:.~,~eEBRA LLOYD nior Resource Planner \~.~ SHIVA SWAM1NATHAN [/ Senior Resource Planner DEPARTMENT APPROVAL: CITY MANAGER APPROVAL: ;irAeLctEor o~lOesNG ~’ Deputy City Mi~nagers CMR: 331:08 Page 3 of 3 NOT YET APPROVED RESOLUTION NO. RESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO AUTHORIZING THE CITY MANAGER TO EXECUTE AGREEMENTS FOR SHORT-TERM LAYOFF (ASSIGNMENT) OF CITY’S SHARE OF ENTITLEMENTS ON THE CALIFORNIA- OREGON TRANSMISSION PROJECT TO OTHER MEMBERS OF THE TRANSMISSION AGENCY OF NORTHERN CALIFORNIA WHEREAS, the City of Palo Alto ("City"), a municipal utility and a chartered city, became a founding member of the Transmission Agency of Northern California ("TANC") in 1984 to facilitate construction and joint ownership of transmission projects; and WHEREAS, in addition to the City of Palo Alto, the California cities of Alameda, Biggs, Gridley, Healdsburg, Lodi, Lompoc, Reddingl Roseville, Santa Clara, and Ukiah; the Modesto Irrigation District ("MID"); the Turlock Irrigation District ("TID"); and the Sacramento Municipal Utility District ("SMUD") are also members of TANC; and WHEREAS, TANC currently owns approximately 87 percent of the California- Oregon Transmission Project ("COTP"), a 500-kV transmission line that interconnects with the Bonneville Power Administration at the Captain Jack Substation in Southern Oregon and with Pacific Gas & Electric Company in California at the Tesla Substation; and WHEREAS, the City became a participant in the COTP in 1990, by executing Project Agreement No. 3 (PA3); and WHEREAS, the City has a 3.6815%, or approximately 50 MW, share of TANC’s current entitlement to transfer capability on the COTP; and WHEREAS, the recent and projected value of the COTP to the City’s electric portfolio is lower than the cost of ownership, which prompted City staff to explore temporary assignment options of the City’s COTP entitlement; and WHEREAS, MID, TID, and SMUD have agreed to acquire the City’s COTP entitlements for a period of 15 years; and WHEREAS, the15-year contract will not be effective before November 2008; and WHEREAS, prior to execution of the 15-year contract, TID and SMUD have agreed to acquire the City’s COTP entitlements on a short-term basis, consistent with TANC’s Short- Term LayOff Procedures; and WHEREAS, bilateral transactions by TANC members are allowed under the TANC Commission approved Short-Term Layoff Procedures; follows: NOW, THEREFORE, the Council of the City of Palo Alto does RESOLVE as 080701jb 0073038 NOT YET APPROVED SECTION 1.The Council hereby authorizes the City Manager to execute Agreements for the short-term layoff (assignment) of City of Palo Alto’s share of entitlements on the California-Oregon Transmission Project (COTP) to the Turlock Irrigation District (TID) and the Sacramento Municipal Utility District (SMUD). SECTION 2.The Council finds that the adoption of this resolution does not constitute a project under the California Environmental Quality Act and the CEQA Guidelines and, therefore, no environment assessment is required. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: City Clerk APPROVED AS TO FORM: Mayor APPROVED: Senior Asst. City Attorney City Manager Director of Utilities Director of Administrative Services 080701 jb 0073038 City of Palo Alto Transaction Confirmation ATTACH Page 1 of 5 TRANSACTION CONFIRMATION (WSPP) Short-Term Assignment of COTP Entitlements Transaction Date: July 29, 2008 The purpose of this Transaction Confirmation is to confirm the short-term layoff (assignment) between the City of Palo Alto (Palo Alto) and the Sacramento Municipal Utility District (SMUD) of Palo Alto’s scheduling interest in the California Oregon Transmission Project (COTP). Palo Alto and SMUD are collectively known as Parties. The Parties, along with other Transmission Agency of Northern California (TANC) members are in the process of negotiating a Long Term Layoff Agreement with a term of fifteen (15) years, under a process facilitated by TANC. This Transaction Confirmation is to facilitate a bilateral layoff (assignment) under the TANC Short-Term Layoff Process until the Long Term Layoff Agreement becomes effective. The Transaction Confirmation shall be governed by the commercial terms of the WSPP (Western Systems Power Pool) Agreement. The Parties acknowledge that the WSPP Agreement is generally intended to address physical transactions in capacity and energy. The parties elect to utilize the WSPP Agreement, as modified herein, to govern this assignment of transmission capacity. If there is any conflict between this Transaction Confirmation and the WSPP Agreement, the provisions of this Transaction Confirmation shall control. 1.) Specific Terms and Conditions (a) Seller:Ci,ty of Palo Alto 250 Hamilton Avenue. 3rd Floor Palo Alto, CA 94301 Phone: (650)329-2465, Fax: (650)-3261507 (b) Purchaser:Sacramento Municipal Utility District 6301 S. Street, PO Box 15830 Sacramento, CA 95852 Phone: (916) 732-5802, Fax: XX (c) Period of Delivery: 8/1/2008 through Termination Date (d) Schedule (Days and Hours):7x24 (e) Delivery Rate: NA (f) Delivery Point(s): NA (g) Type of Service (Check as Applicable) Service Schedule A Service Schedule B Service Schedule C Physically-Settled Option Service Schedule B Physically-Settled Option Service Schedule C Other products per Section 32.8 X City of Palo Alto Transaction Confirmation Page 2 of 5 (h) (i) (k) (1) Contract Quantity:NA Total MWhrs. Contract or Strike Price:See Attachment A Transmission Path for the Transaction (If Applicable): Date of Agreement if different: Additional Information for Physically-Settled Options N._.~A /) Option Type:Put ii) Option Style: iii) Exercise Date or Period: iv) Premium: v) Premium Payment Date: vi) Method for providing notice of exercise vii) Special Terms and Exceptions: Call See Attachment A Authorized Signatures SMUD CITY OF PALO ALTO Cary Nethaway, Controller Frank Benest, City Manager Date Date City of Palo Alto Transaction Confirmation Page 3 of 5 Attachment A Special Terms and Conditions 1. Definitions: Unless otherwise defined herein, capitalized terms and conditions included in this Attachment A shall have the meaning defined in the TANC Project Agreement No. 3 to which both SMUD and Palo Alto are signatories. 2. Termination Date: The earlier of (1) the Effective Date of the TANC "COTP Long-Term Layoff Agreement" between TANC, Palo Alto, Turlock Irrigation District (TID), Modesto Irrigation District (MID) and SMUD, as that term is defined therein; or (2) at the end of the day, January 31, 2009. In an Event of Default, as that term is defined in Section 22 of the WSPP Agreement and as modified herein, that remains uncured according to the provisions of 22.2 of the WSPP Agreement, the non-Defaulting Party has the right to terminate this Transaction Confirmation prior to the Termination Date set forth hereiri and that earlier termination date will be considered the Termination Date. For the purposes of this Transaction Confirmation, Palo Alto’s failure to provide the Product in accordance with this Transaction Confirmation shall constitute an Event of Default. 3. Product: Palo Alto’s interest (scheduling rights) in 1.84075% allocation (one- half of Palo Alto’s COTP participation) of TANC’s share of COTP transmission capacity under the ownership interest of TANC in both Directions (Allocated Participation Percentage). 4.Direction: North-to-South and South to North 5. Layoff of Palo Alto’s COTP Scheduling Rights. During the Period of Delivery, Palo Alto lays off (assigns) and relinquishes to SMUD Palo Alto’s scheduling rights to the Product, in the percentage referenced in Section 3, above, to the extent permissible under, and in accordance with, TANC Project Agreement No. 3; TANC Procedure for Allocation for COTP Transmission (One Year or less); and associated TANC Intertie Agreements. Palo Alto also relinquishes any and all rights to TANC revenues associated with the Product including but not limited to the OATT refunds from fiscal year ending June 2009 available for owner’s distribution. SMUD hereby accepts and assumes the use of Palo Alto’s scheduling rights to the Product, in the percentage referenced in Section 3, above, under the provisions of TANC Project Agreement No. 3 for the Period of Delivery. 7. Return of Palo Alto’s Scheduling Rights. Upon the Termination Date set forth above, all of Palo Alto’s COTP scheduling rights to the Product laid-off (assigned) pursuant to the terms of this Transaction Confirmation, shall automatically and without any action of the Parties be relinquished from SMUD to Palo Alto, and Palo Alto hereby accepts those rights to the Product at that instant in the future except as those rights may be transferred subject to the provisions of the COTP Long-Term Layoff Agreement 8.Reimbursement of Palo Alto’s COTP Costs: On a monthly basis, SMUD shall City of Palo Alto Transaction Confirmation Page 4 of 5 reimburse Palo Alto for SMUD’s share, under this Transaction Confirmation, of Palo Alto’s COTP costs associated with Product, as billed by TANC to Palo Alto for each month for the Period of Delivery, and including any adjustments made to monthly billings within the TANC 2008/2009 fiscal year that occur within six (6) months of the end of that fiscal year. Palo Alto shall include with each invoice a copy of the monthly bill that it receives from TANC pursuant to Section 22 of TANC Project Agreement No. 3 for the purposes of verifying the invoice. Palo Alto shall generate an invoice thirty (30) days or less prior to the beginning of the month. SMUD in turn shall pay the requisite amount to Palo Alto the later of 10 business days after the invoice is received or 10 days before the beginning of the month. For the month of August 2008, an invoice will be generated by Palo Alto immediately upon execution of this Transaction Confirmation, and payment for the month is due within ten (10) days after the receipt of invoice. A schedule of TANC Cash Call per member per month is provided in Attachment B as a reference only. This schedule (or modification to this schedule that may be implemented by TANC from time-to-time) will form the basis of Palo Alto’s monthly invoice. Should TANC’s fiscal year actual COTP cost differ from budget and actual billings, one Party shall reimburse the other such that SMUD would have paid SMUD’s proportionate share based on the Period of the Delivery and rights allocated under this Transaction Confirmation. 9. Palo Alto Obligation to Reduce TANC OASIS Posting by Allocated Participation Percentage. Palo Alto’s COTP scheduling rights as purchased by SMUD will be aggregated with SMUD’s existing COTP share for SMUD’s use and posting on SMUD’s OASIS. Palo Alto will reduce its COTP share on the TANC OASIS to reflect the transfer to SMUD. 10. Integrated Agreement: This Transaction Confirmation does not amend TANC Project Agreement No. 3. In the event of a conflict between this Confirmation and TANC Project Agreement No. 3, TANC Project Agreement No. 3 shall control. 11. Severability: Any provision of this Transaction Confirmation determined by a court of competent jurisdiction to be invalid shall not be severed from this Transaction Confirmation if severance would materially adversely affect any Party, and if any Party in good faith concludes that severance would result in materially adverse consequences, such Party may give written notice under the notice provisions of Section 12 of the WSPP Agreement, that this Transaction Confirmation shall terminate on a date all of the Parties consider appropriate, and if no agreement is reached on an appropriate early termination date, then at the last hour of the day that is forty-five (45) days after the date written notice was first given. 13. Governing Law: Unless otherwise expressly agreed in writing by the Parties, this Transaction Confirmation shall be governed by and construed in accordance with the laws of the State of California, without giving effect to principles of conflicts of laws. City of Palo Alto Transaction Confirmation Page 5 of 5 Attachment B Schedule of TANC Cash Call by Member per Month via ROR for FY 08-09 Transmission Agency of Northern California Calculation of Cash Call per member, per month via NOR Table 4-7 TANC MENBERS Entitlement Share Entitlement % MODESTO IRRIGATION DIST.295.9351 21.2960% CITY OF REDDING 116.8950 ’8.4119% SMUD 383.0252 27.5631% CITY OF SANTA CLARA 284.5201 20.4745% TURLOCK IRRIGATION DIST.174.2501 12.5393% CITY OF ROSEVILLE 29.3482 2.1119% Subtotal 1,283.9737 92.3967% NCPA CITY OF ALAMEDA 17.0531 1.2272% CFPt OF HEALDSBURG 3.4132 0.2456% CITY OF LO[~26.6817 1.9201% CITY OF LOMPOC 2.5911 0.1865% CITY OF PALO ALTO 51.1594 3.6815% PLUMAS-SIERRA REO 2.0555 0.1479% CITY OF UKIAN 2.7026 0.1945% Sub.total 105.6566 7.6033% TOTAL 1,339.6303 100.0000% 2009 12 month coincident peak Monthly Cash Call 247.2466 1,024,841 97.6622 404,811 320.0076 1,326,436 237.7089 985,307 145.5813 603,437 24.5192 101,632 1,072.7258 4,446~464 14.2478 59,057 2.8514 11,819 22.2924 92,402 2.1653 8,975 42.7422 177,t67 1.7171 7,117 2.2581 9,360 88.2743 365,897 1,161,0000 4,812,361 2009 Annual Cash Call 12,298,092 4,857,732 15,917,232 11,823,684 Z,241,244 1,219~584 53~357~568 708,684 141,828 1,108,824 107,700 2,126,004 85,404 112,320 4,390,764 57,748,332 City of Palo ~Alto Transaction Confirmation Page 1 of 5 TRANSACTION CONFIRMATION (WSPP) Short-Term Assignment of COTP Entitlements Transaction Date: July 29, 2008 The purpose of this Transaction Confirmation is to confirm the short-term layoff (assignment) between the City of Palo Alto (Palo Alto) and the Turlock Irrigation District (TID) of Palo Alto’s scheduling interest in the California Oregon Transmission Project (COTP). Palo Alto and TID are collectively known as Parties. The Parties, along with other Transmission Agency of Northern California (TANC) members are in the process of negotiating a Long Term Layoff Agreement with a term of fifteen (15) years, under a process facilitated by TANC. This Transaction Confirmation is to facilitate a bilateral layoff (assignment) under the TANC Short-Term Layoff Process until the Long Term Layoff Agreement becomes effective. The Transaction Confirmation shall be governed by the commercial terms of the WSPP (Western Systems Power Pool) Agreement. The Parties acknowledge that the WSPP Agreement is generally intended to address physical transactions in capacity and energy. The parties elect to utilize the WSPP Agreement, as modified herein, to govern this assignment of transmission, capacity. If there is any conflict between this Transaction Confirmation and the WSPP Agreement, the provisions of this Transaction Confirmation shall control. 1.) Specific Terms and Conditions (a) Seller:Ci,ty of Palo Alto 250 Hamilton Avenue. 3rd Floor Palo Alto, CA 94301 Phone: (650)329-2465, Fax: (650)-3261507 (b) Purchaser:Turlock Irrigation District (TID) 333 East Canal Drive, (PO Box 0949) Turlock, CA 95380 (95381-0949) Phone: (209) 883 8216, Fax: (209) 632-3023 (c) Period of Delivery: 8/1/2008 through Termination Date (d) Schedule (Days and Hours):7x24 (e) Delivery Rate: NA (f) Delivery Point(s): NA (g) Type of Service (Check as Applicable) Service Schedule A Service Schedule B Service Schedule C Physically-Settled Option Service Schedule B __ Physically-Settled Option Service Schedule C __ Other products per Section 32.8 X City of Palo Alto Transaction Confirmation Page 2 of 5 (h) (i) O) (k) (1) Contract Quantity:NA Total MWhrs. Contract or Strike Price:See Attachment A Transmission Path for the Transaction (If Applicable): Date of Agreement if different: Additional Information for Physically-Settled Options N_AA i)Option Type:Put ii) Option Style: iii) Exercise Date or Period: iv) Premium: v) Premium Payment Date: vi) Method for providing notice of exercise vii) Special Terms and Exceptions: Call See Attachment A Authorized Signatures TURLOCK IRRIGATION DISTRICT CITY OF PALO ALTO James M. Farrar, Director Energy Markets Frank Benest, City Manager Date Date City of Palo Alto Transaction Confirmation Page 3 of 5 Attachment A Special Terms and Conditions 1. Definitions: Unless otherwise defined herein, capitalized terms and conditions included in this Attachment A shall have the meaning defined in the TANC Project Agreement No. 3 to which both TID and Palo Alto are signatories. 2. Termination Date: The earlier of (1) the Effective Date of the TANC "COTP Long-Term Layoff Agreement" between TANC, Palo Alto, Sacramento Municipal Utility District (SMUD), Modesto Irrigation District (MID) and TID, as that term is defined therein; or (2) at the end of the day, January 31, 2009. In an Event of Default, as that term is defined in Section 22 of the WSPP Agreement and as modified herein, that remains uncured according to the provisions of 2~.2 of the WSPP Agreement, the non- Defaulting Party has the right to terminate this Transaction Confirmation prior to the Termination Date set forth herein and that earlier termination date will be considered the Termination Date. For the purposes of this Transaction Confirmation, Palo Alto’s failure to provide the Product in accordance with this Transaction Confirmation shall constitute an Event of Default. 3. Product: Palo Alto’s interest (scheduling rights) in 1.84075% allocation (one- half of Palo Alto’s COTP participation) of TANC’s share of COTP transmission capacity under the ownership interest of TANC in both Directions (Allocated Participation Percentage). 4.Direction: North-to-South and South to North 5. Layoff of Palo Alto’s COTP Scheduling Rights. During the Period of Delivery, Palo Alto lays off (assigns) and relinquishes to TID Palo Alto’s scheduling rights to the Product, in the percentage referenced in Section 3, above, to the extent permissible under, and in accordance with, TANC Project Agreement No. 3; TANC Procedure for Allocation for COTP Transmission (One Year or less); and associated TANC Intertie Agreements. Palo Alto also relinquishes any and all rights to TANC revenues associated with the Product including but not limited to the OATT refunds from fiscal year ending June 2009 available for owner’s distribution. TID hereby accepts and assumes the use of Palo Alto’s scheduling rights to the Product, in the percentage referenced in Section 3, above, under the provisions of TANC Project Agreement No. 3 for the Period of Delivery. 7. Return of Palo Alto’s Scheduling Rights. Upon the Termination Date set forth above, all of Palo Alto’s COTP scheduling rights to the Product laid-off (assigned) pursuant to the terms of this Transaction Confirmation, shall automatically and without any action of the Parties be relinquished from TID to Palo Alto, and Palo Alto hereby accepts those rights to the Product at that instant in the future except as those rights may be transferred subject to the provisions of the COTP Long-Term Layoff Agreement 8.Reimbursement of Palo Alto’s COTP Costs: On a monthly basis, TID shall City of Palo Alto Transaction Confirmation Page 4 of 5 reimburse Palo Alto for TID’s share, under this Transaction Confirmation, of Palo Alto’s COTP costs associated with Product, as billed by TANC to Palo Alto for each month for the Period of Delivery, and including any adjustments made to monthly billings within the TANC 2008/2009 fiscal year that occur within six (6) months of the end of that fiscal year. Palo Alto shall include with each invoice a copy of the monthly bill that it receives from TANC pursuant to Section 22 of TANC Project Agreement No. 3 for the purposes of verifying the invoice. Palo Alto shall generate an invoice thirty (30) days or less prior to the beginning of the month. TID in turn shall pay the requisite amount to Palo Alto the later of 10 business days after the invoice is received or 10 days before the beginning of the month. For the month of August 2008, an invoice will be generated by Palo Alto immediately upon execution of this Transaction Confirmation, and payment for the month is due within ten (10) days after the receipt of invoice. A schedule of TANC Cash Call per member per month is provided in Attachment B as a reference only. This schedule (or modification to this schedule that may be implemented by TANC from time-to-time) will form the basis of Palo Alto’s monthly invoice. Should TANC’s fiscal year actual COTP cost differ from budget and actual billings, one Party shall reimburse the other such that TID would have paid TID’s proportionate share based on the Period of the Delivery and rights allocated under this Transaction Confirmation. 9. Palo Alto Obligation to Reduce TANC OASIS Posting by Allocated Participation Percentage. Palo Alto’s COTP scheduling rights as purchased by TID will be aggregated with TID’s existing COTP share for TID’S use and posting on the TANC OASIS. Palo Alto will reduce its COTP share on the TANC OASIS to reflect the transfer to TID. 10. Integrated Agreement: This Transaction Confirmation does not amend TANC Project Agreement No. 3. In the event of a conflict between this Confirmation and TANC Project Agreement No. 3, TANC Project Agreement No. 3 shall control. 11. Severability: Any provision of this Transaction Confirmation determined by a court of competent jurisdiction to be invalid shall not be severed from this Transaction Confirmation if severance would materially adversely affect any Party, and if any Party in good faith concludes that severance would result in materially adverse .consequences, such Party may give written notice under the notice provisions of Section 12 of the WSPP Agreement, that this Transaction Confirmation Shall terminate on a date all of the Parties consider appropriate, and if no agreement is reached on an appropriate early termination date, then at the last hour of the day that is forty-five (45) days after the date written notice was first given. 13. Governing Law: Unless otherwise expressly agreed in writing by the Parties, this Transaction Confirmation shall be governed by and construed in accordance with the laws of the State of California, without giving effect to principles of conflicts of laws. City of Palo Alto Transaction Confirmation Page 5 of 5 Attachment B Schedule of TANC Cash Call by Member per Month via ROR for FY 08-09 Transmission Agency of Northern California Calculation of Cash Call per member, per month via ROR Table 4-7 TANc MEMBERS 2009 Entitlement Share Entitlement %12 month coincident peak Monthly Cash Call MOOESTO IRRIGATION OlST.295.9351 21 ¯2960%247.2466 1,024,841 CITY OF REDOING 116.8950 ’8.4119%97.6622 404,811 SMUD 383.0252 27.5631%320.0076 1,326,436 CITY OF SANTA CLARA 284.5201 20.4745%237.7089 985,307 TURLOCK IRRIGATION DIST.174.2501 !~2.5393%145.5813 603,437 CI’FY OF ROSEVILLE 29.3482 2.1119%24.5192 101,632 Subtotal 1,283.9737 92.3967%1,072.7258 4,446,464 NCPA " CiTY OF ALAMEDA 17.0531 1.2272%14.2478 59,057 CITY OF HEALDSBURG 3.4132 0.2456%2.8514 11,819 CITY OF LODI 26.6817 1.9201 %22.2924 92,402 CITY OF LOMPOC 2.5911 0.’~ 865%2.1653 8,975 CiTY OF PALO ALTO 51.1594 3.6815%42.7422 177,167 PLUMAS-SIERRA REC 2.0555 0.1479%1.7171 7,117 "CITY OF UKIAH 2¯7026 0.1945%2.2581 9,360 Sub.fetal 105.5566 - 7.6033%88.2743 365,897 TOTAL 1,389.6303 100.0000%1,161.0000 4,0t2,361 2009 Annual Cash Call 12,298,092 4,857,732 15,917,232 11,823,884 7,241,244 1~219,584 53~357~568 708,684 141.828 1,108,824 107.700 2,126,004 85,404 t12,320 4,390,764 57,748,332 ATTACH TO:HONORABLE CITY COUNCIL ATTN: FROM: DATE: SUBJECT: FINANCE COMMITTEE CITY MANAGER DEPARTMENT: UTILITIES JULY 15, 2008 CMR: 307:08 RECOMMENDATION TO CITY COUNCIL TO ADOPT A RESOLUTION AUTHORIZING THE CITY MANAGER TO EXECUTE AGREEMENTS FOR THE SHORT TERM ASSIGNMENT OF THE CITY’S SHARE OF ENTITLEMENTS 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 authorizing the City Manager or his designee to execute Agreements for the short- term assignment of the City’s share on the electric high voltage California-Oregon Transmission Project (COTP) to 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; TID; Modesto Irrigation District (MID); 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. CMR:307:08 Page 1 of 8 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. However, from time to time, the City has executed temporary assignment agreements with other TANC members when the City’s electric supply portfolio did not have the need to access resources from Oregon or when it was uneconomical to do so. The last assignment agreement (with the City of Roseville) ended in December 2004. 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 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 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 has 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. DISCUSSION The City’s electricity supply related budget for FY 2008-09 is approximately $78 million, of which approximately $1.85 million is related to the COTP Transmission asset ownership cost. However, the value the City derives from this asset is well below the cost of ownership and is described in detail below. Cost Drivers The City’s share of TANC’s budget for FY 2007-08 was $1.852 million and consisted of the following components, with debt service accounting for 70% of the cost. Debt Service COTP O&M TANC operations Special projects Open Access Same-Time Information System (OASIS) Total $1.284 M $0.360 M $0.173 M $0.027 M $0.006 M $1.852 M.(-$0.16M per month) The debt service costs are expected to remain fiat 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 CMR:307:08 Page 2 of 8 charges such as SMUD transaction fees, transmission line losses from the COB, and other CAISO charges. These additional costs, which are highly variable and dependent 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. Since taking ownership of COTP, the City has entered into a number of long-term transactions to capture this basis value. However, in the past 5 years, the basis value captured has varied between $500,000 and $1.3 million per year, considerably below the $2 million annual cost of owning and operating the asset. Based on forward market prices, the basis Value of COB versus Northern California deliveries for the next 12 months is estimated at 40% to 70% of the cost of the COTP and declines even further in the outer years. Most of this annual value is derived during the spring months when low cost hydroelectric power from the Pacific Northwest is available to be imported into California. For the months of the short-term assignment - August 2008 through January 2009 - the basis value is on the low end, resulting in higher net costs to the portfolio. For this reason, regardless of any other transactions contemplated for this asset, this short- term lay-off proposal is in the best interests of City’s electric utility customers. 2. Capacity Value: Supplies imported from COB have capacity and ancillary service 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 15% planning reserve requirements (also referred to as system capacity requirements). Under current projections of the City’s load and purchases of capacity to meet local reliability requirements, the City’s electric portfolio has sufficient system capacity even when excluding contracts at COB. While there may exist the potential to sell the COTP capacity counting rights in the future, there is no market for this product at present. Also, the ability to apply imported energy towards system capacity requirements may change in future regulations. 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. CMR:307:08 Page 3 of 8 3.Operation Value: The COTP has value associated with access to resources and markets in the Pacific Northwest for non-economic reasons. Operational value is derived by accessing the Pacific Northwest markets to meet fluctuations in electric demand in real-time (referred to as real-time load following) and for green (renewable) energy. With respect to the need to access the Pacific Northwest markets for green energy, the COTP transmission remains an option. However, staff’s assessment is that there are currently sufficient renewable resources within California that could be economically obtained for the City’s medium- and long-term renewable portfolio goals. In addition, if the opportunity arises to access Pacific Northwest resources to meet short-term renewable energy needs, then there are alternative methods for transporting energy from the Pacific Northwest to the City that may be obtained at lower cost than COTP ownership. Such alternatives include CAISO service and other private and public sector suppliers. As mentioned above, for the months of the short-term assignment - August 2008 through January 2009 - the price difference between the Pacific Northwest and Northern California is low. Hence, staff suggests that the possibility of accessing Pacific Northwest renewable energy is not sufficient reason to reserve COTP capacity over the short- and medium-term (next 15 years). 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. Over the period proposed for the short-term assignment, the value of the COTP is estimated to be even lower at 10% to 20% of the cost, because the basis value is typically lower in the later part of the year, with most of the basis value captured during the spring and early summer. A~reement Terms The Utilities Advisory Commission in April conceptually approved staff’~ recommendation to assign the City’.s share of the COTP to interested parties. Since then, staff has been pursuing a 15-year assignment agreement with SMUD, TID, and MID. The effective date of this long-term assignment was projected for August or September 2008, but negotiations have taken longer than expected. When the negotiations are completed in the coming months, staff will bring the final 15-year assignment agreement to Council for approval. In the interim, until the 15-year assignment agreement is completed, SMUD and TID have requested a temporary assignment of the City’s rights in the COTP for the months of August CMR:307:08 Page 4 of 8 2008 through January 2009, or until the 15 year agreement becomes effective, whichever is earlier. MID is not interested in participating in the temporary assignment and is waiting for completion of the 15-year assignment: SMUD and TID will take MID’s share during the temporary assignment. Such a short-term assignment agreement is expected to have a value of $128,000 to $144,000 per month to the City and will be based on the following terms: 1.The Contract shall be negotiated with SMUD and TID, with each entity receiving one-half of the City’s share of COTP. 2.Contract to be based on industry standard Western System Power Pool (WSPP) Agreement. 3.Term of the Agreement shall not extend beyond January 31, 2009, and shall terminate on the effective date of the 15-year Assignment Agreement 4.The price of the sale shall recover the full monthly cost the City incurs to own the asset (approximately $160,000/month). Should the Council approve execution of the long-term 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, the overall electric portfolio could continue to benefit from having access to other regional markets during those times when the cost of taking delivery of imported energy is lower than the value of the imported energy: For example, there may be times when the market price of energy delivered to COB plus the cost of transmission from COB into Northern California is less than the market price for energy available in Northern California. 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 could be to enter into enabling agreements with members of TANC that will provide the optionto 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. Risk Assessment Assessment of Short-Term Assignment Risks: The risks of this short-term assignment agreement are minimal. Under the terms and conditions of the short-term agreement, Palo Alto will be compensated prior to the month, with the exception of the first month, when payment will be CMR:307:08 Page 5 of 8 received within 10 days of contract execution. As a result of this provision in the contract, any default caused by SMUD or TID not paying the monthly bills will be remedied prior to the start of the month’s delivery.. In the absence of such remedy, the assignment agreement will be terminated and the COTP asset then will revert to Palo Alto. Based on a cost-benefit analysis, staff has recommended, and the UAC has approved in concept, a long-term assignment of the asset at full cost. As the negotiations for the long-term assignment have been slower than anticipated and are delaying the start of the long-term assignment to November or December 2008, staff is now recommending to Council a short-term assignment to recover the monthly cost of owning the asset during the interim. Staff will return to the Finance Committee and the Council with a request to authorize the execution of a long-term assignment of the COTP entitlements at a later date. Due to the relative short time available to negotiate the agreement and seek Council approval, staff recommends that the City Manager or designee be authorized to enter into the Agreements for Short-Term Layoffs under the following terms: 1. The Contract(s) shall be with SMUD and TID, with each entity receiving one-half of the City’s COTP share. 2.Contract to be based on industry standard Western System Power Pool (WSPP) Agreement, and the final agreement shall be approved by the City Attorney’s Office. 3.Term of the Agreement shall not extend beyond January 31, 2009, and shall terminate upon the effective start date of the 15-year Assignment Agreement. 4.The price of the sale shall recover the full monthly cost the City incurs .to own the asset (approximately $160,000/month). BOARD/COMMISSION REVIEW AND RECOMMENDATIONS The UAC reviewed the concept of a long-term assignment of the COTP at its April 2, 2008 meeting and voted unanimously to recommend conceptual approval of a long-term assignment of the COTP, for up to 20 years. The subject of the short-term layoff, the need for which was a result of delays experienced in the negotiations over the long-term layoff, was not included in the review by the UAC because the delays were not anticipated at the time of the UAC review. CMR:307:08 Page 6 of 8 RESOURCE IMPACT The net impact on the Electric Fund from the short-term assignment of the COTP is the difference between sales revenues from SMUD and TID (equal to the cost of owning the asset of approximately $160,000 per month), and lost opportunity for the City to derive value from the use of the COTP asset. As illustrated in the following table, assuming that the monthly value of COTP during the period contemplated for the short-term assignment is 10% to 20% of the monthly cost of ownership, the short-term assignment will result in a net savings of $128,000 to $144,000 per month. Short-Term Value ($thousand/month) Monthly Cost $160 Monthly Value 1. Basis Value $8 - $24 (5%-15%) 2. Capacity Value $0 3. Operational Value -$8 (-5%) Range of Monthly Value $16 to $32 Monthly Value as a fraction of fixed cost 10% to 20% Net Savings $128 - $144 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. These bilateral transactions by TANC members are also sanctioned under the TANC Commission-approved Procedures for Allocations for COTP Transmission (One Year or Less). 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. CMR:307:08 Page 7 of 8 ATTACHMENTS A:Resolution of the Council of the City of Palo Alto Authorizing the City Manager to Execute Agreements for the Short-Term Assignment of the City’s Share of Entitlements on the California-Oregon Transmission Project to other TANC Members g~Draft Transaction Confirmation (WSPP) Agreements for Short-Term Assignment of COTP Entitlements to TID and SMUD. The complete Western System Power Pool (WSPP) Master Agreement is available at: www.wspp.org C: Minutes from the April 2, 2008 UAC meeting PREPAREDBY:DEBRALLOYD SeniorResourcePla~er 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: STEVE EMSLIE/KELLY MORARIU Deputy City Managers CMR:307:08 Page 8 of 8 ATTACHM OD C C C C C C C 0 C C C C z 0 0 0 0 [][][][] 0 (D 0 o Z 0 © t~0 ~ E E F- Z LU Z E LU ~ ! © o o ~ Z ~ LU o 0 c c II o ~ u~ 0 c ~- c c [] [] o ¯ 13_ 0 []Z [][][][][] 00 o 0000 c~ Z Z Z 0 ~ ~o 0 (D 0 ~0 [][][][] ~ o I © [][] e0 o o~ 0 00 0 o~ OoOo 0 "m 0 C 0© E U ~ C I O-’C0 ®o0~~ t-- 0~ © __.o o ATTACHM Excerpt Minutes - July 15, 2008 Finance Committee Meeting Director of Utilities Valerie Fong noted that temporarily assigning Palo Alto’s interest in its transmission asset is being pursued to save costs for the electric portfolio. Fong also noted that staff will discuss three agreements that are part of the overall plan, but that only one agreement is, presented for approval at this time. Senior Resource Planner Shiva Swaminathan discussed the California-Oregon Transmission Project (COTP), which was developed by a group of municipal utilities, the Transmission Agency of Northern California (TANC). Palo Alto owns 50 MW of the 1600 MW transmission line, which was operational in 1993, to access energy supplies in the Pacific Northwest. Palo Alto originally decided to become one of the owners of COTP as the COTP transmission line was the only way to access Northwest energy supplies during a time when investor-owned utilities enjoyed a monopoly on transmission access. Now, under federal rules, transmission access must be open equally to all market participants, so that the need to own the transmission line is not required to gain access to the Northwest energy markets. ¯In FY 07-08, 18% ofPalo Alto’s annual supplies were from the northwest and utilized the COTP. This is higher than usual due to the dry hydro year. COTP costs about $2 million per year of the $80 million annual electric supply portfolio cost. However, the value received was only $800,000 in FY 07-08. Swaminathan explained three agreements associated with the COTP assignment. Agreement #1 is a 15-year assignment of COTP to threeother TANC members (Sacramento, Turlock, and Modesto). The City of Roseville is also assigning its share to these three entities. This agreement is expected to come before the Council in October 2008. Since Agreement #1 is taking longer than expected to finalize, staff is pursuing Agreement #2, which is a bridging agreement to take effect from August 1, 2008 until Agreement #1 is effective (expected to be November 2008). Council Member Yeh asked whether it was possible that more flexibility could be needed beyond January 2009 resulting from delays in finalizing the 15-year assignment. Staff suggested that it did not anticipate delays beyond the January 2009 timeframe, but if it became apparent that there would be further delays, staff would return for approval of any extensions of the short- term assignment. Council Member Yeh also asked how the savings from the assignments would be reflected in the budget. Administrative Services Director Lalo Perez explained that any savings would be reflected at the end of the year in the electric fund reserves. Council Member Schmid asked where replacement supplies would come from if purchasing of the electric commodity is ’shifted from the northwest to northern California. Swaminathan and Senior Resource Planner Debra Lloyd explained that the purchases in the past 12 months reflected the dry hydro conditions, and that normally, purchases from the market would be much less than experienced in the past 12 months. Swaminathan and Lloyd explained that market purchases are not fled to a specific generation source, and in response to a question from Council Member Schmid, indicated that some of the generation behind the generic market purchases could indeed be coal. Council Member Schmid noted that on a net present value basis, the anticipated savings are substantial, and asked whether such economic advantage should be transferred to a capital investment. Fong concurred that the savings would provide some additional freedom to consider capital investments, and also noted that owning the COTP did not preclude consideration of capital investments. Chair Morton asked whether it is possible for benefits provided by COTP to exceed COTP costs. He noted that having access to northwest electric supplies could prove valuable, especially in dry times. Lloyd explained that the value would only be there if there were basis (price) differential between northwest and northern California supplies. Swaminathan agreed that there are times when the benefits provided by the COTP are greater than the cost of ownership (particularly during the 2000-2001 energy crisis) but indicated staff’ s assessment that this is unlikely to occur again over a prolonged period of time because of new transmission access being proposed to the northwest by others. Council Member Burt asked whether costs for Palo Alto increased in 2005 when the control of the COTP was moved from the California Independent System Operator (CAISO) control area to the SMUD control area. Swaminathan confirmed there was some cost increase for Palo Alto. Lloyd explained that the reason other entities such as the Sacramento Municipal Utilities District (SMUD) value the COTP differently and much more highly than Palo Alto is that SMUD is responsible for reliability in its own control area, that the COTP is one tool used to increase reliability in the SMUD control area, and that SMUD can avoid CAISO charges by buying and selling within its own control area. Council Member Schmid moved that the Finance Committee recommend to the City Council adoption of a resolution authorizing the City Manager to execute agreements for the short-term assignment of the City’s share of entitlements on the California-Oregon Transmission Project to other members of the Transmission Agency of Northern California. Council Member Burt seconded the motion. The motion passed unanimously (4-0). Council Member Burt closed the item by indicating his appreciation for the presentation of a very involved and complicated set of transactions, and congratulated staff on finding ways to reduce costs in an environment of rising electricity costs and rates. Council Member Burt requested that staff add the PowerPoint presentation to the Council report.