PURPOSE

Staff seeks City Council approval granting authorization for the General Manager of BWP to enter into a Power Sales Agreement with the Southern California Public Power Authority (�SCPPA�) for the output associated with 5% (10 MW) of the Milford Wind Corridor Phase 1, LLC (�Milford Wind�) facility located in Utah.  This request will involve approval of both an Ordinance and a Resolution, as it is contemplated under the Power Sales Agreement, that SCPPA will be purchasing the facility during the term of the Agreement with Burbank�s proportionate share of the cost being financed through bonds issued by SCPPA.

BURBANK�S RENEWABLE PORTFOLIO STANDARD (RPS)

The Burbank City Council adopted a Resolution on June 5, 2007 that set a goal of 33% renewable energy by 2020 for BWP.  Acquiring the renewable energy associated with Milford Wind would be an important step in meeting Burbank�s RPS and in reducing the production of Greenhouse Gas (�GHG�).

JOINT DEVELOPMENT OF RENEWABLE ENERGY THROUGH SCPPA

To continue building its renewable energy portfolio, BWP through SCPPA and with nine other SCPPA members, participated in joint Request for Proposals (�RFP�) for renewable energy projects from qualified renewable providers in 2002, 2005 and 2006.  The proposals were evaluated based on the following criteria:

�        Price of the energy over the term of the agreement

�        Project development experience and expertise

�        Stability and creditworthiness of the counterparty

�        Expected output of the project based on historic wind patterns

�        Transmission availability from the point of delivery to Burbank

�        Project status and energy delivery start date

On April 25, 2006, Council authorized BWP to enter into a renewable energy project development agreement with other SCPPA members.  This provided BWP the means and opportunity to participate in large projects and take advantage of opportunities of both economy and scale.  The joint efforts through SCPPA have so far resulted in renewable energy for Burbank from the following:

1. The power sales agreement for Ameresco initially approved on Feb. 10, 2004 and subsequently amended for a price increase from $63 to $65.25/MWh on June 27, 2006 for energy from a landfill gas burning facility located west of Valencia, California.  This facility is still waiting for a permit from the SCAQMD and is currently expected to go into service in late 2008.                                                                                                                                   

2. The power sales agreement with PPM Energy Inc. approved on June 27, 2006 for wind energy from Wyoming.  Burbank began receiving energy under this contract in July 2006.

Since its initial solicitation for renewable energy projects in 2002, SCPPA has facilitated 155 MW of renewable energy for eight of its members.  The power sales agreement with SCPPA for the output associated with 5% (10 MW) of Milford Wind, which is the subject of this memo, arises from the 2005 SCPPA RFP.

THE MILFORD WIND PROJECT

The facility will be located in Beaver and Millard Counties in Central Utah.  Milford Wind Corridor Phase I, LLC "Milford Wind" is a subsidiary of UPC Wind Management, which has five projects in North America totaling about 300 MW (excluding Milford Wind). UPC Wind Europe has developed about 650 MW in Italy and Sardinia. Milford Wind is a single purpose entity.  It is expected to become operational in December 2008 and consist of eighty (80) Clipper 2.5 MW wind turbines for a total installed capacity of 200 MW.  The facility will interconnect to the Intermountain Power Project (�IPP�) Switching Station located in Delta, Utah via a new 345 kV 60-mile line that will be built as part of the project.  From the IPP Switching Station, the energy will be delivered to Burbank using rights that BWP has on the Southern Transmission System � the same transmission facility we use to deliver energy from the Intermountain Power Project. 

The Milford Wind Project is the best alternative available from the SCPPA proposals currently under consideration for the following reasons:

• The price of the energy associated with the proposed power sales agreement is competitively priced. 

• Burbank has existing transmission in place to bring the power to Burbank from the point of delivery at the Intermountain Power Project Substation in Utah. 

The following graph shows the anticipated hourly wind generation for the four seasons based on historical wind data.  This chart shows that a reasonable amount of energy can be expected during the afternoon to early-evening period when energy has the most value.

THE MILFORD WIND AGREEMENT

Under the proposed contractual arrangements, SCPPA will pass through all the benefits and obligations associated with a 200 MW wind project being developed in central Utah by Milford Wind Corridor Phase 1, LLC, which is a wholly-owned subsidiary of UPC Wind Management, LLC.  Los Angeles would receive rights to 92.5% (185 MW), Burbank 5% (10 MW) and Pasadena 2.5% (5 MW). 

The proposed contractual arrangements have several unique features that haven�t previously been used by either SCPPA or its member utilities.  These features are expected to be the template for future contracts and are as follows:

1. Ownership:  SCPPA and its members have an interest in the ultimate ownership of renewable energy facilities.  This will ensure a stable priced long-term supply rather than relatively short-term power purchase contracts which must be periodically re-negotiated with uncertainty of future availability or price.  Accordingly, if so desired by Los Angeles, Burbank and Pasadena, the contractual provisions allow SCPPA to buy the project from the developer.                                                                                    

2. Production Tax Credits (PTC):  Current tax laws allow generous federal tax credits and favorable depreciation rules to private entities subject to federal income tax.  The transaction has been structured to allow SCPPA (and passed through to Los Angeles, Burbank and Pasadena) to indirectly receive the benefits associated with federal production tax credits valued at approximately $21 million. 

3. Prepayment for Power:  A final feature that further improves the economics of the transaction is through the prepayment for the power with proceeds derived from tax-exempt revenue bonds that would be issued by SCPPA on behalf of the participants.  This feature is estimated to have a beneficial value of approximately $23 million compared to a normal power purchase of the facilities output.

Negotiations of the agreements have been finalized and contain the following key terms:

• Quantity: Burbank will receive rights to 10 MW including all associated capacity, energy and environmental attributes.  BWP�s share corresponds to 5.00% of the project�s output, or approximately 25,000 MWh/year at the expected annual capacity factor of 29%.                                                                                                                    

• Cost: The overall total average cost of the energy at the point of delivery depends on when and if, the buyout occurs.  If buyout occurs early, the cost is expected to be $74 - $76 per MWh.  If buyout occurs around the 10-year point into the contract as expected, the cost would be $71 - $73 per MWh.  

• Prepayment:  SCPPA will issue tax-exempt revenue bonds to prepay $269,502,397 on the commercial operation date, which will have an annual debt service requirement.  In exchange for this payment, SCPPA is guaranteed to receive an amount of energy associated with a 99% probability level of being produced, or 8,500,000 MWh of guaranteed generation over the 20-year term, in exchange for the prepayment amount.  Lehman Brothers has played an integral role in the development of the financing and SCPPA�s Finance Committee recommends that they be designated as the lead underwriter for the project.

• Excess Energy:  In addition to the energy which is being prepaid, on average over the term of the agreement, the facility is expected to produce an additional 1,668,560 MWh, depending on wind conditions at the site.  SCPPA has the right to purchase this excess energy at $56.94/MWh (plus the environmental attribute charge discussed below), escalated at 1.75% per annum.

• Renewable Energy Credits:  Burbank will receive all associated renewable energy credits and other environmental attributes including credit for reducing GHG emissions by offsetting electric generation from fossil fuels.  Because the environmental attributes of wind energy are considered �intangible,� and any prepayments would be taxed in the year prepayment is received, the contract has been structured so that SCPPA will pay $10.60/MWh, escalated at 1.75% per year, for all environmental attributes produced by the project on a monthly basis.  This charge is included in the overall cost addressed above.

• Taxes and Insurance:  SCPPA will reimburse Milford Wind for property taxes and insurance associated with the project, not to exceed $4 million per year escalated at 1.75% per year.

• Term:  20 years starting December 31, 2008, unless the facility is purchased by SCPPA which would result in perpetual rights to project facilities and the private land for an initial term of 40 years with the right to renew for two additional 10-year terms.                                                                                                                        

• Buyout:  SCPPA has the option to purchase the facility, including an undivided interest in the transmission line to the point of delivery, from Milford Wind on the 10th anniversary of the commercial operation date at the fair market value of the facility, subject to the power purchase agreement and not to exceed $150 million.  Tax regulations require an arms length transaction at fair market value, however, since the value will be subject to the power purchase agreement, it will not be subject to inflated market prices for energy or environmental attributes.

• PTC Put:  The expected commercial operation date of the facility is currently expected to be prior to the expiration of current production tax credits (�PTC�) which expire at the end of 2008.  The contract contains provisions that in the event the commercial operation date slips beyond the expiration date of currently authorized PTCs at the end of 2008, an extension of the PTC legislation would be required to complete the transaction as contemplated.  If either party believes that the PTCs are likely to be renewed, then there will be a waiting period of up to one year in which SCPPA would not make the prepayment on the commercial operation date and SCPPA would pay $52.50/MWh (plus taxes, insurance, O&M and the renewable energy attribute charge) until the PTC issue is reinstated, but not longer than one year.  If the PTCs are not extended by the end of the one year waiting period, then SCPPA would be required to either (i) pay an additional monthly payment to Milford Wind to make them whole for the value of the PTCs or (ii) purchase the facility for $2,050 per kW of installed capacity

RISK MITIGATION

The benefits of the proposed structure require that a substantial prepayment be made to a single purpose entity with no assets other than the facility. Since SCPPA is interested in ultimate ownership of the facility, the agreement was structured to use the facility itself as security for the prepayment. The prepayment and other risks were mitigated as follows:

• Prepay:  SCPPA will receive a first deed of trust securing all obligations of Milford Wind under the agreement. The construction financing will be paid off at closing, ensuring SCPPA�s first position. If Milford Wind defaults on the PPA or seeks bankruptcy protection, then SCPPA could foreclose on the facility.                                             

• Bankruptcy:  The PPA with Milford Wind requires that Milford Wind Corridor Phase I, LLC, remain a single purpose entity during the life of the project with wind generation being its only business purpose. The PPA also includes various covenants designed to minimize the need for bankruptcy protection.                 

• Leases:   The facility is to be constructed on property leased from one large landowner, the U.S. Bureau of Land Management, the State of Utah and several small individual owners. The private leases comprise about two-thirds of the property and have an initial term of 40 with two ten-year extensions.  SCPPA has negotiated a lease form that will ensure the assignability of the private leases at the time of purchase and step-in and cure rights should Milford Wind fail to meet its obligations pursuant to the leases. Also, Milford Wind Corridor Phase I LLC, will be the direct lessee for all generator and transmission property, and will not hold subleases, which may be subject to the performance of other unrelated lessees. 

• Wind:  The wind resource is obviously weather dependent, but it is relatively predictable on an annual basis. At least 90-days prior to the commercial operation date, SCPPA will receive an estimate of guaranteed generation, prepared by a third-party wind expert, based on the contract capacity of the facility in order to determine the prepay amount.      

• Quality:  The PPA has a requirement that Milford Wind adhere to prudent utility practices and an internal quality assurance program. SCPPA is protected by having the option not to purchase the facility if the quality of construction or maintenance is not satisfactory.

HOW RENEWABLE ENERGY FITS INTO BWP�S RESOURCE PORTFOLIO

Because BWP is a fully resourced utility, it is challenging to add renewable energy to our portfolio and control costs.  A way that it could be done is to back-down local gas-fired generation as low as practical and substitute renewable energy.  This can be most readily and economically achieved using wind power.  The idea is to bring wind power to BWP while simultaneously reducing natural gas generation by a like amount. 

Because of its high efficiency, the Magnolia Power Project (�Magnolia�) is expected to be on-line most of the time.  With current natural gas prices running around $8/Dth, wind energy is competitive with the cost of generation from Magnolia.  (Ignoring variable O&M costs - $8/Dth natural gas run through a 7,500Btu/KWh heat rate plant produces energy that costs $60/MWh.) Therefore, by backing down Magnolia to minimum load levels and substituting intermittent wind energy, it would be possible to increase the portion of renewable energy in our portfolio without increasing costs. There is however a limit on how much our local generating facilities can be �backed down� to accommodate renewable energy.  The exact point is difficult to ascertain because it is a function of when the wind blows and generates energy, the time of year and Burbank�s energy requirements.  Analysis suggests that once wind energy reaches 6% to 8 % of our portfolio, the aforementioned benefits of fuel displacement will begin to diminish and power supply costs will begin increasing significantly.

BWP'S RENEWABLE ENERGY PROCUREMENT STRATEGY

BWP has ongoing efforts underway to ensure that it meets its RPS targets as described below:

• Negotiations are underway for wind power from a resource in the Pacific Northwest which is expected to start producing energy in June 2009.  Twenty (20) MW of this resource would provide 4% of BWP�s energy requirements.

• BWP has entered into a development agreement through SCPPA with other members to study the feasibility of jointly developing a 200 MW geothermal energy facility in conjunction with Los Angeles Department of Water & Power (LADWP) and Imperial Irrigation District (IID) in the Imperial Valley in California.  BWP would get this energy home via the proposed Greenpath Transmission Project being developed by Los Angeles and scheduled for completion in June 2011.  BWP has an interest in ultimately acquiring twenty-five (25) MW of geothermal based resources from this area and has been allocated an initial allocation of nine (9) MW expected to go into service in 2011 when the Greenpath transmission line is completed.  Staff has expressed interest in an additional sixteen (16) MW in a second phase project which is anticipated to go into service in January 2013.                                   

• BWP is also involved with five other SCPPA members in a development study looking at the feasibility of green-waste to energy plants in the LA basin.  The work on this effort is just beginning and it is unknown at this time whether a project will ultimately come out of the work, so it is not being included at this time.

The following table shows the percentages of renewable energy that is existing, approved and how planned renewable energy additions would contribute to BWP�s resource portfolio and when they are expected to become available. 

FISCAL IMPACT

The fiscal impact of renewable energy on BWP is a function of several factors as follows:

1. BWP has approximately $700,000 available annually in Public Benefit Funds to subsidize the cost of renewable energy.  However, how to make the best use of these funds is a policy matter.  One use would be to use the funds to subsidize the out-of-market cost of renewable energy purchased from sources outside of Burbank.  Another would be to use the Public Benefit Funds allocated for renewable energy to promote customer programs like the Solar Rebate program for customers who install photovoltaic systems or large scale solar demonstration projects like the proposed photovoltaic system that will be incorporated onto the roof of BWP�s new parking lot.  A particular difficulty with using Public Benefit Funds to subsidize the out-of-market from third parties is determining the appropriate level of such subsidies.  The challenge is placing a comparative value on energy from intermittent sources like wind and from a power plant like Magnolia which can be scheduled.   Staff believes that the better use of Public Benefit Funds is for customer-related programs and initiatives and therefore recommends that these Funds first be used for such purposes, rather than subsidizing the cost of renewable energy from parties located outside of Burbank.

2. Another factor relates to how much of the renewable energy can ultimately be usefully used to meet the native load requirements of Burbank.  Referring back to the wind profile presented earlier in this staff report, it is apparent that a significant amount of the expected annual output of that project occurs during the first eight hours of the day when BWP�s energy needs are the lowest.  A similar situation prevails with the Wyoming wind.  As well, the output of the Ameresco project is expected to be constant throughout the day, including the early morning hours when customer loads in Burbank are at a minimum and the Magnolia project is likely to be already operating at its minimum load.  As a result, it may not be possible to lower Magnolia�s output further in order to absorb the wind energy.  Since BWP cannot control when the renewable energy from Wyoming wind, Ameresco and Milford Wind is going to be produced and the fact that BWP has to take the energy when produced, it would likely be necessary to sell off the �surplus� energy during those times of the day when it is not possible or practical to off-load Magnolia or other generation.  As indicated above, this would normally be expected to occur during the early morning hours.  However, this is also the period of the day when other utilities have also backed down their generation with the result being that energy prices are typically the lowest during this time.  As more renewable energy is added, it is expected that an increasing amount of it will have to be sold off at increasingly less attractive prices.

The following table has been prepared to show the expected affect on power supply costs for the projects mentioned earlier in this memo that BWP has under consideration, if Public Benefit Funds are used to subsidize the out-of-market cost of renewable energy from third parties located outside of Burbank.  The table shows that it would take approximate $289,080 to bring the cost of the renewable energy from Milford Wind down to what it would cost to generate an equivalent amount using Magnolia.  (As discussed earlier, a reasonable proxy price for such Magnolia generation would be $65/MWh comprised of $8/Dth natural gas run through a 7,500Btu/KWh heat rate plant which produces energy that costs $60/MWh plus $5/MWh for O&M expenses.)  Since BWP has $700,000 available from Public Benefit funds to subsidize this contract, lowering its effective cost, there would be no direct impact (increase) on expected power supply costs, as only $289,080 is needed to mitigate the above market cost of the resource.

 However, because a significant portion of the energy from this wind resource is produced at night, it is likely that it could not all be used to meet native load requirements and would have to be sold-off.  Based on the assumption that 20% of the energy would have to be sold off at 65% of the contract price, the net impact to BWP would be an increase in power supply costs of about $281,853 annually, corresponding to a potential impact on rates of about 0.2%.  Similarly, the table shows the impacts of adding all the other renewable energy projects that BWP has under consideration which would potentially result in cumulative rate increases of around 7.5%.

As discussed earlier, staff believes that BWP should not use its Public Benefit Funds to subsidize renewable energy from third parties located outside of Burbank.  Instead, the funds could be used for customer and demonstration programs.  In view of this, the previous table has been re-constructed below, showing the potential cumulative impact on rates if Public Benefit Funds are not used to subsidize the out-of-market cost of renewable energy.  It shows that the Utah wind resource is expected to increase annual power supply costs by $570,933 (rather than $281,853 when Public Benefit Funds are used) with an associated potential impact on rates of about 0.4% and that BWP�s renewable energy procurement program would result in cumulative rate increases of around 8%, if all the projects under consideration by BWP are acquired, when Public Benefit Funds are not used to subsidize the cost of renewable energy from third parties located outside of Burbank.

Efforts underway related to GHG reduction and regulation will likely necessitate that in the future, we scale back operations of our coal facilities in order to meet GHG emissions standards.  If that turns out to be the case, under certain scenarios, BWP may be able to use all the renewable energy it has contracted for retail load and not have to resell any during off-peak periods.  The extent to which GHG regulation may affect the use of renewable energy is not known at this time as the standards are currently underdevelopment and not expected to be finalized for several years.

RECOMMENDATION

Staff recommends City Council approval granting authorization for the General Manager of BWP to enter into a Power Sales Agreement with SCPPA for 5% (10 MW) of the Milford Wind Corridor Phase 1, LLC (�Milford Wind�) facility located in Utah. 

If the Council concurs, the appropriate action would be to recommend that staff take the following two motions to Council for approval:

1.                  Introduction of proposed ordinance entitled:  (motion and voice vote only)

AN ORDINANCE OF THE COUNCIL OF THE CITY OF BURBANK  APPROVING ENTERING INTO THE MILFORD WIND CORRIDOR PHASE I PROJECT POWER SALES AGREEMENT

2.         Adoption of the proposed resolution entitled:

A RESOLUTION OF THE COUNCIL OF THE CITY OF BURBANK AUTHORIZING OFFICIALS TO EXECUTE AND DELIVER THE MILFORD WIND CORRIDOR PHASE I PROJECT POWER SALES AGREEMENT AND APPROVING THE SHARE OF ENERGY AND ASSOCIATED ENVIRONMENTAL ATTRIBUTES TO BE PURCHASED PURSUANT TO SUCH POWER SALES AGREEMENT

RD:FF:BJ:tw

COUNCIL STAFF REPORT (Milford Wind), 08-08-07

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