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HomeMy WebLinkAboutStaff Report 2303-12131 9 5 8 City Council Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Utilities Meeting Date: January 16, 2024 Staff Report:2303-1213 TITLE Approval of a Substation Improvement Agreement With Tesla Inc. to Install Improvements and Reserve Capacity at Hanover Substation, and Approval of a Fiscal Year 2024 Budget Amendment in the Electric Fund to Establish the Hanover Substation Upgrade Project (EL- 24001); CEQA Status – Exempt under CEQA Guideline Sections 15301 and 15302 RECOMMENDATION Staff recommends that Council: 1. Approve and authorize the City Manager or their designee to execute the Substation Improvement Agreement (SIA) and attached Capacity Reservation Agreement between the City of Palo Alto and Tesla for the design and construction of a substation improvements at the City of Palo Alto’s Hanover Substation (Attachment A). 2. Amend the Fiscal Year 2024 Budget Appropriation for the Electric Fund (requires a 2/3 vote) by: a. Establish the Hanover Substation Upgrade Project (EL-24001) in the amount of $15,000,000; and b. Decrease the Electric Fund Operations Reserve by $15,000,000. EXECUTIVE SUMMARY Tesla is moving its engineering headquarters to the former HP Headquarters at 1501 Page Mill Road where it will perform advanced research and development to support the vehicles and products it produces. The City is proposing to rebuild the existing Hanover Substation to replace the existing substation facilities, which are nearing the end of their useful life, and to accommodate Tesla’s power needs, via improvements designed and installed by Tesla. To best meet the needs of Tesla and the City, a public private partnership is being proposed and will be implemented through a Substation Improvement Agreement (SIA), including an associated Encroachment Permit, and Capacity Reservation Agreement. 1 9 5 8 The maximum cost of the Hanover Substation project is estimated to be $24,000,000 with the cost being shared equally, subject to specified exceptions in the SIA (for an estimated $12,000,000 by each party). To facilitate the transfer of existing feeders not serving Tesla to the new transformers being installed and cover the costs of City inspections, the City will fund an additional $3,000,000. The total initial cost to the City for this project is $15,000,000. It should be noted that Tesla paid all costs to expedite materials needed for this project and the expediting fees have been excluded from the $24,000,000 total cost of the project. At the end of construction, all assets meeting City requirements as specified in the SIA will become City property. The assets to be transferred to City ownership and control will be general use assets that can be used to serve other City customers. Tesla will reserve capacity in exchange for additional demand-based charges as outlined in the Capacity Reservation Agreement, which is attached to the SIA. Tesla will receive monthly credits upon completion of the facilities for up to 7 years, based on Tesla’s projected energy usage. Total credits will be no more than the estimated $12,000,000 to be invested by Tesla. BACKGROUND Tesla announced its engineering headquarters to 1501 Page Mill—formerly known as HP headquarters. It plans to install computers and charging facilities to support research into the electric vehicles it produces. The existing transformers at Hanover Substation, closest to the Tesla site, require upgrades to meet Tesla’s anticipated needs and to continue to serve the City’s other customers in the area. Tesla has indicated that it would like to be operational at the Page Mill site by the Spring of 2024. The City’s Electric Utility staff have also determined that the existing HV 20 and HV 21 transformers at Hanover Substation need replacement. These transformers are undersized relative to the needs of customers in the Stanford Business Park, require a higher-than-normal level of maintenance, and are nearing or past their useful lives of 50 years. ANALYSIS The project proposes to install two 12 kV 50 MVA transformers to replace two 4kV transformers that served 1501 Page Mill Road and make all substation improvements necessary to accommodate the installations. Generally, three to four years are spent on a substation upgrade. However, Tesla is requesting to finish all construction at the substation and energize their new building by April 2024. The City cannot meet this timeline under normal City processes due to insufficient staffing to coordinate the design and construction of all facilities and the time required to complete the City public procurement process. To meet the proposed installation timeline the use of a public private partnership1 executed through a Substation Improvement Agreement (SIA) is recommended. 1 Public Private Partnership Policy https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes- reports/reports/city-manager-reports-cmrs/attachments/new-folder/public-private-partnership-policy.pdf 1 9 5 8 Pursuant to the SIA, Tesla will design, procure, install, and commission two-50MVA transformers, three 60Kv substation breakers, a Power Distribution Center (12kV Switchgear), two 12 kV feeders, and will reroute 12 kV feeders from existing transformers to the new transformers. These upgrades will serve Tesla, accommodate customers in the Stanford Research Park, replace outdated infrastructure, and modernize and reorganize the substation for greater efficiency. The design will be subject to CPAU approval and compliance with CPAU standards. The SIA has been structured to provide infrastructure for the capacity needed by Tesla, replace City equipment at the end of its useful life, and limit the financial risk to the City and the electric rate payers. Since the work being done at Hanover Substation is a joint project with benefits for both parties the initial costs for the project have been split equally, subject to limited exceptions in the SIA. The total cost for the project is estimated to be $27,000,000, not including any expediting fees. Costs for the work inside the substation (approximately $24,000,000) will initially be split in half with each party providing approximately $12,000,000. The City will fund another $3,000,000 of improvements (separately from the SIA) to move feeder connections not related to service for Tesla from substation banks being retired to the new transformers in the Hanover Substation and to fund engineering review and inspection services that will occur prior to and during construction of the project. Tesla will be responsible for all additional costs associated with expediting of materials and services that resulted from the accelerated schedule it has proposed. Tesla is providing the initial funding, design, and construction services for the improvements inside the substation, subject to partial City reimbursement. At the completion of the substation construction, the City will evaluate the installed systems for compliance with City-approved plans, specifications, and other requirements and providing the design and installation complies with the terms of the SIA, the City will accept the facilities. After acceptance, the actual costs for the project will be determined and the portion of the substation that was built solely for City distribution system use, (e.g., not related to the 1501 Page Mill Road project) will be reimbursed to Tesla. The City will reserve up to 11,200 kVA of capacity to serve Tesla’s facilities, in exchange for Tesla’s payment of a monthly Capacity Reservation Fee calculated based on Tesla’s monthly demand. The Monthly Capacity Reservation Fee is designed to compensate the City for reserving system capacity for Tesla’s future use and corresponds to the operation and maintenance costs of the facilities providing the capacity. It applies only if Tesla’s monthly demand falls below the levels specified in the Capacity Reservation Fee. Upon completion of the facilities, Tesla will receive a Monthly Capacity Usage Credit for up to 7 years based on Tesla’s projected energy usage and ramp up rate. Total credits will be capped at $12,000,000 and to protect the City against cost overruns, project costs subject to reimbursement under the SIA are limited to $12,000,000, subject only to any mutual agreement to amend the SIA. The Monthly Capacity Usage Credit is intended to reimburse Tesla for its financial contribution to general use facilities, i.e., that portion that is not already reimbursed by the City under the terms of the SIA, while reducing the risk of 1 9 5 8 the City investing in assets that end up being underutilized. This credit is based on the expected revenue from energy sales to Tesla over the term of the agreement. The calculations for these payments and credits are outlined the Capacity Reservation Agreement (Exhibit D). Due to the timeline for completion of this project the engineering design and the procurement of long-lead time materials have already been completed by Tesla, acting at its own risk. The City supplied specifications for the materials to be ordered and was consulted on the acceptability of the engineering design firm being used to prepare the plans. Since the award of the design contract, the City has been reviewing design drawings and materials to ensure that they comply with the City specifications and standards. Tesla has proceeded knowing that reimbursement for expenses from the City is contingent upon the completion of the SIA. City staff also reviewed the construction bids for this project. Tesla received four bids for the construction of Hanover Substation and selected the lowest bid. Staff reviewed references for the selected contractor and agreed that the contractor had sufficient experience to construct the substation improvements. FISCAL IMPACT To fund this project a new Capital Improvement Project, EL-24001 (Hanover Substation Upgrade) has been created. Staff recommends increasing the Fiscal Year 2024 Electric Fund CIP and establishing EL-24001 in the amount of $15,000,000 to fund the $12,000,000 contribution for the City’s half of the substation rebuild and $3,000,000 for the rearrangement of the distribution feeders and city costs for engineering review and inspection services and decreasing the Electric Fund Operating Reserve by $15,000,000. The Electric Fund Distribution and Supply reserves has a balance of $38.5 million. The Electric Fund reserves will continue to stay within the minimum and maximum reserve guidelines after the transfer. Staffing for the engineering review and inspection services will be provided by internal staff and outside consultants that are under contract. The expected total cost of these services is $400,000 and will be funded from the $3,000,000 funding being allocated to this project for City work on the site. RESOURCE IMPACT The approval of this agreement is consistent with existing City policies governing Public-Private Partnerships, and the Council approved 2018 Utilities Strategic Plan – Strategic Objectives, Priority 4 – Strategy 1 “Establish a proactive infrastructure replacement program, based on planned replacement before failure to support reliability and resiliency”. Facing an evolving utility business environment, aging infrastructure needs, and sustainability objectives, CPAU must maintain a competitive position in the market. Remaining financially sustainable and competitive in the market while optimizing our resources is key to maintaining and enhancing our value of City of Palo businesses and customers. 1 9 5 8 STAKEHOLDER ENGAGEMENT This project is located in an existing substation on Stanford lands. City staff has had discussions with Stanford informing them of the intention to upgrade Hanover Substation. Stanford indicated that they were supportive of this project to provide service to a lessee on their property. A City Encroachment Permit, which attaches and incorporates the Stanford lease terms, granting Tesla, its employees, and contractors a revocable privilege to enter and use the substation property during construction is attached as Exhibit B to the Substation Improvement Agreement. ENVIRONMENTAL REVIEW This project is categorically exempt from the California Environmental Quality Act (CEQA) pursuant to CEQA Guidelines 15301 (repair, maintenance, of existing facilities) and 15302 (replacement or reconstruction of existing facilities). ATTACHMENTS Attachment A: Tesla Substation Agreement APPROVED BY: Dean Batchelor, Director Utilities Staff: Tomm Marshall, Assistance Director of Electric Utilities