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HomeMy WebLinkAboutStaff Report 2306-1634 City Council Staff Report From: City Manager Report Type: CONSENT CALENDAR Lead Department: Utilities Meeting Date: January 16, 2024 Staff Report: 2306-1634 TITLE Adopt a Resolution Approving an Amendment to the City’s 2009 California-Oregon Transmission Project Long-Term Layoff Agreement to Extend the City’s Layoff of its Share of the California Oregon Transmission Project (COTP) until 2034 and to Receive Annual Market Payments as Recommended by the Utilities Advisory Commission (UAC); CEQA Status – Not a Project RECOMMENDATION The Utilities Advisory Commission (UAC) and staff recommend the City Council adopt a Resolution approving Amendment No. 3 to the City’s 2009 California-Oregon Transmission Project Long-Term Layoff Agreement to extend the term for 10 years until 2034 and to receive annual market payments, as shown in Exhibit A to the attached Resolution. EXECUTIVE SUMMARY The UAC and staff recommend the City extend the current 2009 Long-Term Layoff Agreement (2009 LTLA) for ten years until February 1, 2034 and add an annual market payment to the City of $550k in years 2024-2028 and $800k in 2029-2033. Amendment No. 3, approved by the TANC Commission on November 15, 2023, is included for review as Exhibit A to the Resolution in Attachment A. In parallel with approval by TID, MID and SMUD’s governing boards, Amendment No. 3 will be considered by Palo Alto’s City Council on January 16, 2024. In 2009 Palo Alto entered into a 15-year temporary ownership agreement (or “layoff”) of its share of California Oregon Transmission Project (COTP) with three of these utilities who had not joined the ISO: Turlock Irrigation District (TID), Modesto Irrigation District (MID), and the Sacramento Municipal Utilities District (SMUD). The 2009 layoff term ends February 1, 2024 unless extended or replaced. Upon expiration in 2024 the City would be required to pay the TID, MID, and SMUD approximately $1M (which is the value of the remaining useful life of existing capital replacements). The UAC reviewed the history and options for Palo Alto’s share of the COTP in May 2023 (Staff Report: 2301-07951). The current 2009 Long-Term Layoff Agreement (2009 LTLA) and both of its amendments are included as Attachments B, C, and D. The proposed amendment and extension was reviewed by the UAC on December 6, 2023. The UAC discussion focused on why staff recommended the ten-year extension rather than another term; why staff recommended a layoff rather than a permanent sale; and understanding the net financial impact. A longer period layoff was preferable for cost certainty for Palo Alto, but ten years was negotiated. Regarding a permanent sale of the asset, the process of giving TANC members right of first refusal for a sale would have taken longer than the remaining duration of the layoff, at which point several benefits would have been lost to Palo Alto. Staff clarified that although the annual market payments will total up to $6.75M over the next ten years, staff also expects about $3.9M in accumulated capital replacement costs to be due to the layoff recipients in 2034, so the net financial impact will be saving approximately $7M in costs over the next ten years, plus a net collection of approximately $2.85M in market payments. The UAC voted unanimously to recommend to Council adopt the Resolution to approve the contract extension. BACKGROUND In 1984 the City of Palo Alto was a founding member of the Transmission Agency of Northern California (TANC), a joint powers agency formed in 1984 to facilitate the construction and joint ownership of transmission projects. TANC invested in construction the California Oregon Transmission Project, a high-voltage transmission extending from just north of the California- Oregon border to Tracy in the Central Valley. The purpose of this line was to ensure publicly owned utilities had sufficient transmission capacity outside of the PG&E-owned transmission system. With the formation of the California Integrated System Operator (ISO), the City of Palo Alto Utilities and several other publicly owned utilities joined the ISO. However, there were other publicly owned electric utilities, along with the federal hydroelectric project the Western Area Power Authority, which elected to not join the ISO and instead jointly decided to keep the COTP outside of the ISO market and transmission planning process. This decision stranded Palo Alto’s share of the COTP in a different balancing authority and limited the value of the asset to Palo Alto. The COTP is a 340-mile, 500-kV AC transmission line between Southern Oregon and Central California. The COTP became operational in March 1993, and has a total rated capacity of 1,600 MW. 1 Staff Report 2301-0795 https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes- reports/agendas-minutes/utilities-advisory-commission/archived-agenda-and-minutes/agendas-and-minutes- 2023/05-may-2023/05-03-2023-2301-0795-info.pdf From its northern end at the Bonneville Power Administration's Captain Jack Substation in Southern Oregon, the COTP continues south to the Western Area Power Administration's Tracy Substation and on towards the Tesla Substation (owned and operated by PG&E) in the CAISO balancing area. The Transmission Agency of Northern California (TANC) is a California Joint Powers Agency, formed in 1984 to facilitate the construction and joint ownership of transmission projects. Palo Alto was a founding member of TANC. Other members include MID, TID, SMUD and the Cities of Alameda, Biggs, Gridley, Healdsburg, Lodi, Lompoc, Redding, Roseville, Santa Clara, and Ukiah. TANC currently owns and operates approximately 87 percent of the COTP. Palo Alto is a signatory to TANC’s 1990 Project Agreement No. 3 (PA3) (Resolution No. 6877, adopted March 26, 1990), which provides the City a 3.6815%, or approximately 50 MW, share of TANC’s current entitlement to transfer capability on the COTP. That line is expected to be increased in rating in 2025, increasing Palo Alto’s share to 54 MW for north to south transmission. Palo Alto decided to lay off its share of the line in 2009 to MID, SMUD, and TID, and that layoff will come to end February 1, 2024 if not extended. DISCUSSION Analysis In 2009 laying off the COTP at cost to non-ISO public utilities was a reasonable choice; however, several fundamental policy and market changes have occurred in the last 15 years. These market changes have made transmission both more expensive and more valuable. Some of the market changes include high renewable electricity mandates, large increases in transmission costs to deliver renewable electricity, greater electricity market integration with neighboring states, and the California ISO’s 2020 creation of a revenue stream for ISO utilities who make their portion of the COTP available to the ISO. Overall these changes increased the value of the COTP to both Palo Alto and the utilities who currently operate Palo Alto’s share of the COTP under the 2009 layoff agreement. Figure 1. Map of COTP as part of the California-Oregon Intertie. There are also substantial upcoming capital and operating expenses planned for the COTP to which Palo Alto would need to contribute if it took back its share, and uncertainties around future value streams which could make value of the City’s share of the COTP lower than the City’s cost of ownership, as shown in Table 1. Changes to the Current Layoff in the Amendment Terms for an amendment to the current were negotiated with MID, TID and SMUD resulting in a 10-year amendment and extension of the 2009 layoff agreement as recommended to the Council for approval. Specifically, this amendment extends the layoff term until 2034, includes an annual market payment of $550k in years 2024-2028 and $800k in 2029-2033 from MID, TID and SMUD to Palo Alto. In addition, extending the layoff term would ensure that all the operating costs and a large percentage of the capital costs for the next 10 years would continue to be allocated to MID, TID and SMUD. Over the course of the current 15-year layoff PA3 participants have approved many required capital projects to the COTP, which have mostly been replacements to existing facilities. As detailed in the 2009 LTLA (Attachment B), the portion of the useful life of the capital replacements that extend beyond the duration of the current layoff will be the responsibility of the layoff entities, including Palo Alto. To date, approximately $1M of these capital obligations would be payable by the City at the end of the layoff term in February 2024. Again, this $1M represents the City’s share of the capital replacements whose life exceeds the duration of the layoff, were the City to end the current layoff in 2024. If the City amends the layoff agreement in accord with the terms in Amendment No. 3, then these previously accrued capital obligations would be reduced substantially and be due in 2034 instead. This reduction is shown in Table 1. The annual payments to the City from the Districts receiving the layoff of $550k will start in 2024, changing to $800k in 2029 through 2033. Comparison of Amended Layoff Agreement and Bringing COTP Back A summary table with approximation of the annual costs and value streams is below, for the 10- year layoff agreement, from February 1, 2024 to January 31, 2034. This table compares the different costs and values of bringing the COTP back to Palo Alto’s electric portfolio versus amending and extending the layoff agreement. The terms of the current layoff are shown as a comparison, although an extension of the current layoff without the annual payments to Palo Alto is not being considered. Table 1. Financial comparison of current estimates of value for bringing COTP Back versus the proposed terms for the Amended Layoff. The “Current Layoff Terms” are shown for comparison only, if the current layoff were extended, which is not under consideration, but simply shown for comparison purposes. All numbers are presented on an annual basis for the ten-year term covered by the proposed Amendment. Annual Cost or Revenue Bring COTP Back to Portfolio (2024-2034) RECOMMENDED Layoff Extension (2024-2034) Current Layoff Terms (2009-2024) O&M Obligations -$1,400,000 -- New Capital Obligations -$600,000 -$350,000 -$350,000 Prior Capital Obligations -$100,000 -$40,000 -$40,000 CRR Options Revenue $920,000 -- Energy Transfer System Resources Revenue $480,000 -- Average Layoff Payment -$675,000 - Low Cost Renewables Value unclear -- Total Cost (-) or Value (+) per year -$700,000 $285,000 -$390,000 Detailed Estimates of Costs and Values The prior capital obligation for repayment of about $1M (accrued from 2009 to 2024) is shown on an annual basis for different options for the duration. If the City were to bring the resource back rather than amend and extend the current layoff agreement, the City would be required to pay roughly $1M in prior capital obligations (shown in the table above as $100k per year over 10 years), effective February 1, 2024. The City is exempt from all operation and maintenance obligations related to PA3 during the current layoff, and that will continue with this layoff extension. Under the current 2009 LTLA Section 3.g. which remains unchanged via the potential extension, the City will be responsible for paying the Districts back at the end of the layoff for the percentage of the useful life of that capital replacement that extends beyond the term of the layoff agreement (in other words, when the COTP share returns to the City). There are substantial capital replacements planned for the next ten years, which TANC has preliminarily decided to finance. Staff projects that the expected capital costs to the City without a layoff extension will be approximately $600k per year for the 10 years covered by the proposed extension. Approximately $1M of that total of $6M over ten years is anticipated to be funded by TID, MID, and SMUD under a long-term layoff. Of the remaining $5M in capital expenditures from 2024-2034, Utilities staff, TANC staff, and NCPA staff are estimating approximately 70% of the capital replacements will need to be paid back to Districts in 2034, which is roughly $3.5M. This is estimated from the anticipated expenditures based on the timing of the expenditures and the lifetime of the actual equipment. These capital expenditures are shown in Table 1. These are for planned capital expenditures, and actual capital expenditures could potentially be higher. Under the 2009 layoff agreement, Palo Alto relinquishes “all of Palo Alto’s use of its interests, rights, and obligations under TANC Project Agreement No. 3” unless TID, MID, and SMUD default, and this would remain so under the amendment extending the current agreement. Two revenue streams which are both volatile and uncertain are Congestion Revenue Rights (CRR) Options, and Energy Transfer System Resources (ETSRs). The ISO made CRR options available to Palo Alto in 20202; they are available to COTP owners so that entities can turn over their percentage of the COTP on a monthly or annual basis to the ISO and collect both CRR value for north to south and south to north throughout the year. This is essentially allowing the ISO to optimize that portion of the COTP within the ISO full network model to minimize costs for all, and then pass the value of the cost minimization to the respective COTP rights-holders. ETSRs are the difference between the energy component of the locational marginal price at different locations between Balancing Authorities beyond ISO, but within the Western Energy Imbalance Market (WEIM) and the Extended Day Ahead Market (EDAM). EDAM is under development and is expected to launch with PacifiCorp in 2025, and SMUD in approximately 2026. ETSRs essentially pass on the energy value to transmission owners who are connecting lower cost resources to higher cost generation areas. The COTP CRR options for public utilities like Palo Alto have averaged about $17k/MW per year. Palo Alto’s current 51MW share will likely increase to 54MW by 2025, which staff estimates will generate approximately $920k/yr in CRR Options revenue. The revenue from ETSRs is harder to estimate and requires both that Palo Alto put its share of the COTP in the EDAM and that transmission owners to the north do the same with their transmission. The City’s consultants have also advised that there are additional nuances regarding how ETSRs are collected and distributed that may impact these estimates. CAISO has not yet finalized the EDAM rules. The potential value from lower cost renewable resources comes from the fact that there might be high-quality wind resources able to directly connect on the COTP, which would be of value to Palo Alto if the City opted to bring the asset back. However, securing transmission rights from the COTP’s northern end at Captain Jack to further north where the resources are located is very difficult. In addition, the COTP process for direct interconnection is only now being developed and is likely to take years and require expensive power flow studies. Alternatives Staff explored bringing the COTP share back and issued an RFP for renewables with preference for interconnection at Captain Jack intertie. The City did not receive any offers, although there was some potential for projects which would take several years to develop. Alternatively, an outright sale of the City’s share of the COTP was explored, the regulatory uncertainty with EDAM and other issues greatly diminished the value. There is also long-term interest in maintaining the City’s share of the COTP to maintain flexibility of resources into the 2 Explanation of the CRR Options developed for the COTP in 2020 https://www.youtube.com/watch?v=Io2ig60i9wo&t=146s future given the uncertain regulatory environment and the difficulty in siting and constructing new transmission lines. FISCAL/RESOURCE IMPACT The recommended action to amend and extend the 2009 Layoff will not require payments from Palo Alto until 2034, and Palo Alto will receive annual payments May 1st of $550k each year from 2024 to 2028 and then $800k from 2029 to 2033. The terms are the same as current cost obligations meaning that PA3-related operations and maintenance costs during the layoff will not be Palo Alto’s responsibility, while capital replacements made during the layoff will continue to be allocated as described in Section 3.g. of the 2009 LTLA (Attachment B). In 2034 Palo Alto will need to pay the City’s portion of capital costs and obligations that were prefunded by TID, MID, and SMUD during the layoff, if applicable. As shown in Table 1 these capital costs which are being prefunded by TID, MID, and SMUD from 2024-2034 can be tracked annually and funds can be set aside for that repayment. STAKEHOLDER ENGAGEMENT This proposed layoff amendment is consistent with the Utilities Strategic Plan, the Utilities Electric Integrated Resources Plan, Sustainability Implementation Plans, and the City’s Sustainability and Climate Action Plan (S/CAP). ENVIRONMENTAL REVIEW Staff’s recommendation does not require California Environmental Quality Act review, because it does not meet the definition of a project under Public Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(5), as an administrative governmental activity which will not cause a direct or indirect physical change in the environment. TANC certified the Final Environmental Impact Report for the COTP in 1988. ATTACHMENTS Attachment A: Resolution with Amendment No. 3 as Exhibit A Attachment B: Current 2009 Long-Term Layoff Agreement Attachment C: Amendment No. 1 to the 2009 LTA Attachment D: Amendment No. 2. to the 2009 LTA APPROVED BY: Dean Batchelor, Director Utilities Staff: Lena Perkins, PhD, Senior Resource Planner