PURPOSE

Staff recommends the City Council adopt the proposed Resolution that would approve and authorize the execution and delivery of a Renewal Power Sales Contract with the Intermountain Power Agency, renewing Burbank�s generation entitlement share of 3.371% of the output of the Intermountain Power Project (IPP), along with associated transmission capacity rights.  On September 7, 2006, the BWP Board recommended approval of the proposed Resolution.

As is explained in greater detail below, this request relates to renewing entitlement to 3.371% of the plant�s output, down 0.797% from Burbank�s current entitlement of 4.168% of the plant.

OVERVIEW

The Intermountain Power Project has supplied Burbank with approximately half of the community�s electricity for nearly twenty years.  About half of the cost of IPP is used to pay the debt associated with the construction of the plant.  In 2023, that debt will be paid and there will be a corresponding reduction in the cost of electricity from the plant.  In 2027, the current Power Sales Agreement expires.  A provision in the current Power Sales Agreement calls for an offer of Renewal of the Power Sales Contract by Intermountain Power Agency (IPA), the project owner, to the participants.  This Renewal Power Sales Contract is a response to that requirement.

Associated with IPP is a major transmission resource, the Southern Transmission System, a

+/- 500 kV DC transmission line from the IPP in Delta, Utah to Adelanto, California.  This transmission system was built in conjunction with IPP.  This line is currently being upgraded from 1900MW to 2600MW.  Burbank uses this line for the transmission of wind energy from Wyoming, as well as energy from IPP.

Renewing the Power Sales Contract will allow Burbank to continue flowing electricity after 2027 from a resource where our construction costs have been fully paid.  The cost of power then will be comprised of the fuel, taxes, fees, consumables and labor.  It is expected that energy from IPP will represent 30% of the community�s needs in 2027.  It is estimated that the difference in cost between renewing this resource beyond 2027 or having to replace this source of electricity is expected to be in excess of $30 million dollars per year.  Accepting the offer to renew the Power Sales Contract will allow Burbank to enjoy the benefits of having paid off the construction costs of the project over the past 40 years.  The plant could operate an additional ten to twenty years after 2027, saving Burbank $300 million to $600 million dollars.

This renewal offer requires 85% of the plant�s capacity be accepted under this renewal offer.  Normally, such acceptance would not be a question.  However, at this time the policy issues associated with coal as a fuel complicate the issue and create a situation where some controversy exists making some unsure about renewal, despite the project�s favorable economics.  This may occur because of concerns over global warming and greenhouse gases.

BWP believes the prudent approach is to retain our interest in IPP and operate it in a manner consistent with Burbank policy.  BWP is developing a greenhouse gas reduction plan that will be using IPP as a strategic element to allow the integration of renewable resources into our generation mix without impacting and minimizing the economic impact, so that more renewable resources can be economically developed.  It is less costly to reduce IPP over time than to suddenly shut it down and replace it with a new resource.

THE GREENHOUSE GAS ISSUE

Over the last 150 years, there has been a gradual warming of the earth.  The warming has become most remarkable in that the 20 warmest years on a global basis have occurred in the last 25 years.  Further, 9 of the 10 warmest years have occurred in the last 10 years.  While there once was considerable debate regarding the existence of such warming, today that warming is generally accepted and the cause of such warming is now the issue.

Corresponding to this increase in temperature has been an increase in carbon dioxide in the atmosphere.  Carbon dioxide is one of four major greenhouse gases.  Greenhouse gases are gases which allow sunlight to pass through it and then reflect the sunlight�s heat back to the earth, thus keeping in some of the heat that would otherwise be lost into space.  The four major greenhouse gases are carbon dioxide, water vapor, nitrous oxide and methane.  Tropospheric ozone, while a greenhouse gas, increases the temperature in a local region by contributing to smog and is not necessarily a driver for global warming.  Chlorofluorocarbons are a class of synthetic gas that has greenhouse gas effects.  While the use of and release of chlorofluorocarbons has decreased since the 1970s, these gases have a very long life and will exhibit a greenhouse effect for many decades.  The greenhouse gases that are of principle concern are carbon dioxide, water vapor, nitrous oxide and methane.

The role of human activity regarding the level of greenhouse house gases is a subject of some debate.  Levels of all four greenhouse gas concentrations in the atmosphere have risen since the beginning of the industrial age from the use of coal and other carbon based fuels, as well as increased agriculture activity to feed a growing population.

The most studied greenhouse gas is CO2.  The production of CO2 has grown dramatically over the last 150 years.  Over that 150 years, CO2 emissions from fossil fuels have grown from 0 to over 27,000 million metric tons of carbon a year.  This CO2 production generates sufficient CO2 emissions to more than account for the increase in CO2 atmospheric concentrations.  In fact, it appears some buffering is occurring, as the CO2 concentrations appear to be increasing at a rate half as fast as would be expected if nature were not somehow absorbing about half of these fossil fuel CO2 emissions.

Given that the world is warming, given that the warming appears to be correlated to human generation of greenhouse gas emissions and that that principle component is CO2; there is a question whether the warming can be curbed or reversed by reducing CO2 emissions?  Most importantly, can reduced production of CO2 on a global basis reduce CO2 concentrations and slow if not stop the continued warming?

Using the more recent data (2004) on CO2 production from the Energy Information Agency of the Department of Energy, 27,000 million metric tons of carbon dioxide was produced globally from fossil fuels in 2004. The United States, the largest producer of CO2, generated 6,000 million metric tons.  The next highest producers of carbon dioxide are China which generated 4,700 million metric tons, European countries which generated 4,650 million metric tons, Russia which generated 1,680 million metric tons, Japan which generated 1,260 metric tons and India which generated 1,110 metric tons.  These six major energy consumers produce 70% of the fossil fuel related CO2 production in 2004.

The use of fossil fuel is strongly coupled to the standard of living, standard of health, and security of countries.  As those in less developed countries have sought improved standards, they have increased the use of fossil fuels and this use continues to increase.  World production of CO2 has risen between the years 2000 to 2004 from 23,850 to 27,000 metric tons.

In attempts to stem this CO2 production, California has recently approved AB 32, a forward looking approach to CO2 that seeks to develop a plan to reduce CO2 to specific targets in future years while taking into account the effect such reductions will have on the state.  In addition, SB 1368, another CO2 reduction measure, was made into law.  Unfortunately SB 1368 does not consider the impacts of the measures it prescribes.  In part, SB 1368 would prohibit the renewal of contracts for electricity from baseload coal-fired plants.  As this bill does not take effect until January 1, 2007, renewing the IPP contract must be completed prior to that date.

While not renewing the IPP Power Sales Contract would appear to reduce CO2 production, it in fact would not.  Instead, it would place a very low cost coal-fired plant in the hands of others.  The plant will continue to operate and produce CO2.  The world will be no better off and Burbank will face higher costs with no benefit.  Plans to reduce CO2 should be done in accordance with the CO2 reduction plan that is under development.  Turning the plant over to another party does not address the issue.

In the future, the Council will consider adding renewable resources beyond that needed to meet local load growth, thereby necessitating the raising of rates in order to pay for the renewable resources.  Acquiring renewable resources like wind to offset power produced by fossil fuel plants is a recognized approach for incorporating wind into a power system.  This approach assures a supply of electricity when the wind is not available, yet allows the wind energy to displace the fossil fuel.  In order to carry out such a strategy, the utility must have a fossil fuel plant to use in conjunction with the renewable facilities.

BACKGROUND

IPP is a two-unit coal-fired thermal plant located near Delta, Utah.  IPP Unit 1 went into service in June 1986 and IPP Unit 2 went into service in June 1987.  Intermountain Power Agency (�IPA�), a separate legal entity and political subdivision of the State of Utah, is the owner of IPP.  Intermountain Power Agency was organized under the Utah Interlocal Cooperation Act for the purposes of undertaking and financing the IPP.  IPP is operated by the Los Angeles Department of Water and Power (�LADWP�).

The IPP purchasers and respective share of  IPP are listed below:

Many of the Utah purchasers do not take their full share of IPP.  Six cooperative purchasers and one investor-owned utility who are participants do not take any power from the IPP at this time.  They are expected to take power under this renewal offer.  Since the plant became operational twenty years ago, the six California purchasers have taken virtually all of the power and energy of IPP.  The California purchasers will have completely paid for the project over the term of their current power sales agreements when they expire in 2027.

Intermountain Power Agency is a political sub-division of the state of Utah.  It generates no profits, nor does it provide any revenues for its member organizations.  It operates solely on an actual cost basis. 

Burbank currently has two cost-based long-term power sales contracts associated with the IPP resource that expire in 2027.  These contracts are comprised as follows:

• The original Power Sales Contract represents the share (1.704%) Burbank initially acquired.  Burbank also obtained additional rights (1.667%) through a Layoff Contract for a portion of the share that was originally held by Utah Power & Light.  The total of these two portions provide Burbank a total entitlement share of 3.371%.  This is the entitled share that is being renewed.

• The Excess Power Sales Agreement, (0.797%), relates to aforementioned interest in the project held by Utah municipal utilities and Utah Electric Co-operatives that are provided to the California participants at cost.  Burbank�s share under this Contract is for 0.797% of the plant�s output.  Under the Excess Power Sales Agreement, the Utah municipal utilities and co-ops have the right to take back their portion at any time with six (6) months notice.  This contract is not being renewed.

The following table summarizes the IPP contracts that Burbank currently has:

The contract renewal requested contemplated herein relates only to the Power Sales Contract.

Based on a plant rating of 1,900 MW, Burbank�s present 4.168% entitlement in this plant totals approximately 79 MW and annually produces about 576,000 MWh (slightly less than 50% of Burbank�s current over-all energy requirements) but year-to-year variations are inevitable due to occasional outages of the units.  With renewal of just the Power Sales Contract post 2027, Burbank�s capacity entitlement would decease from 79 MW to 64 MW.  Thus, post 2027, Burbank�s share of IPP would be reduced by about 20%.  The resultant annual energy output would be reduced to about 466,000 MWh annually which at that time is expected to correspond to approximately 30% of Burbank�s annual retail energy requirements.

The current agreements include the cost to repay the bonds that funded the construction of the project.  This cost is about $12,000,000 annually for Burbank and represents about half of Burbank�s total cost for IPP.  Under the renewal, the plant�s bonds will be retired, IPP�s cost of power would be reduced by $12,000,000 annually.   

CONSIDERATIONS FOR THE IPP RENEWAL

One of the requirements of the Power Sales Contract is that the IPA is required to offer the existing Power Sales Contract holders and other participants the right to renew their shares in the project.  This past August, after more than three years of developing a renewal contract, IPA made a renewal offer to existing Power Sales Agreement holders. 

It has been a long term goal for Burbank to renew this resource.  The terms for this renewal offer are for a full renewal of the capacity associated with the Power Sales Agreement for the remaining life of the unit, its components, or the Intermountain Power Agency.

FUEL DIVERSITY

The recently passed Federal Energy Policy Act of 2005 requires that electric utilities not be dependent upon a single energy source.  The principle sources are coal, natural gas, nuclear and hydro/renewables.  Wind is the fastest growing part of the renewable sector.  Oil, once a significant energy source for electricity is currently used very little to generate electricity today.

The installed base of wind energy has recently exceeded 10,000 MW, approximately the size of 10 to 15 coal-fired plants.  Because these wind mills are not able to operate at all times, 10,000 MW of wind replaces the energy of 3 to 5 coal-fired plants.  There are about 335,000 MW of coal-fired capacity in the United States today.  These coal plants produce 2,000,000,000 MWh, or about 50% of the annual electric requirements in the United States.  IPP produces 15,000,000 MWh.  BWP currently uses coal for a little less than 50% of the community�s electricity needs.

Natural gas-fired capacity in the United States is about 435,000 MW.  Natural gas is used to produce 758,000,000 or about 16.6% of the electricity in the United States and uses about 30% of the natural gas consumed in the United States.  There is not enough natural gas available in the United States to convert coal-fired power plants to natural gas.  BWP uses natural gas for about 35% of the community�s electricity needs.

Retaining existing capacity and replacing the energy with renewable energy such as wind, tidal power, bio-fueled generation, solar panels and geothermal over time allows for the reduction of greenhouse gas in a productive fashion that takes places as fast as people are willing to fund new plants beyond current needs.

MAJOR PROVISIONS OF THE RENEWAL

The Renewal Power Sales Contract requested herein only relates to rights associated with IPP Units 1 and 2 after June 15, 2027.  There are many similarities to the existing provisions of the current contracts.  These are as follows:

1. The contracts give participants rights to generation entitlement shares and transmission system capacity rights on the Southern Transmission System.  The Southern Transmission system brings power from the generating station to Adelanto in California. 

2. There will be continued oversight of the Intermountain Power Project by a coordinating committee comprised of contract holders.                                                                            

3. The Los Angeles Department of Water and Power will continue to be the operating agent of the plant.        

4. The billing and budgeting procedures will remain the same.                          

5. Contract holders have �several�, not �joint� liability.

Some significant new concepts include:

1. The creation of retirement reserves and decommissioning procedures for how to handle the physical plant assets at the end of their useful life in 2045.                                               

2. A mechanism to finance future unfunded capital improvements.

The Intermountain Power Agency has reserved the right to withdraw the offer to renew if there is less than an 85% subscription level by May 1, 2007.  However, participants would still have until January 1, 2026 to subscribe.  If the 85% threshold is met by May 2007, but less than 100% of the plant is subscribed to, the Renewal Power Sales Contracts will be executed by IPA, but potentially nothing will happen to the unsubscribed shares for about 20 years.  At that time, if there are still unsubscribed shares on January 1, 2026 (the �Entitlement Determination Date�), they will be divided among the parties that hold Renewal Power Sales Contracts in proportion to their interest in the overall subscription.  This would occur automatically pursuant to the provisions of the renewal contracts.

PacifiCorp and the Utah rural electric cooperatives have an interest of approximately 10% of IPP related to their interest in the project during its development in the 1970s.  They did not participate in the construction of the project, but they did maintain their interest associated with the development of the project.  These parties may not accept the renewal until after the tax exempt bonds used to finance the project are retired in 2023.

So, although BWP�s renewal rights correspond to 3.371% of the Intermountain Power Project�s output, there is a very small chance, depending on how the renewal process plays out, that our share may be subject to a small upward adjustment but in no event equal to the amount Burbank currently holds.  This is because, as explained above, a purchaser�s ultimate actual renewal generation entitlement share will be based on (1) what we actually subscribe for; and (2) what other purchasers actually subscribe for.  A recent preliminary straw poll of existing contract holders indicated that they are overwhelming expected to take advantage of IPA�s renewal offer by the May 2007 deadline making any adjustments unlikely. 

EFFECT OF MAINTAINING IPP  

IPP has been an integral part of BWP�s portfolio for over twenty years.  Retaining the Power Sales Contract is an opportunity to retain an integral part of our resources and provide the following benefits:                                                                                                                        

1. Resource Diversity.  As previously indicated, the IPP Renewal Power Sales Contract will supply about 30% of Burbank�s annual retail resource requirements after 2027, down from the current IPP Power Sales Contract amount of nearly 50% today and 40% in 2027, thereby providing considerable fuel diversity for Burbank�s power resource mix.                                                                                                                                  

2. Renewables.  With increased use of renewables, IPP could be reduced to back-up wind, solar, and other renewable resources, reducing coal�s share of resources to less than 20%.

3. Baseload Facility.  Although, Burbank is committed to meeting its renewable energy portfolio targets, many of the potential resources like wind can�t be relied on to be available at any given time.  Accordingly, having a facility available that is capable of operating in a baseload manner is highly desirable.                                   

4. Competitively Priced.  By the time the renewal takes effect in 2027, the Intermountain Power Project will be fully paid for which will result in BWP only having to pay for the plant�s operating costs.  Even, if in the future, a carbon tax is added to coal resources, this should result in a very competitively priced resource.                  

5. Environmental.  Because some of the rights to the Intermountain Power Project plant are held by various participants located outside of the state, it is expected that no matter what the California participants do (sell or retain their shares) the plant will still run.  Therefore maintaining control of the plant by California agencies ensures that in the future the plant will meet California standards.

CONCLUSION

Staff believes that it is in the best interests of Burbank to retain control and interest in the Intermountain Power Project plant.

RECOMMENDATION

If the Council concurs, the appropriate action would be a motion to adopt the Resolution entitled �A RESOLUTION OF THE COUNCIL OF THE CITY OF BURBANK APPROVING AND AUTHORIZING EXECUTION AND DELIVERY OF A RENEWAL POWER SALES CONTRACT BETWEEN THE INTERMOUNTAIN POWER AGENCY AND THE CITY OF BURBANK RENEWING BURBANK�S GENERATION AND TRANSMISSION CAPACITY ENTITLEMENTS IN THE INTERMOUNTAIN POWER PROJECT�

RED:FCF:BJ:tmw

/COUNCIL MEMO (IPP Renewal), 10.24.06 [rev. 10.11.06]

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