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HomeMy WebLinkAboutMahoney Lake Hydro Project memo 2000SPIEGEL & MCDIARMID 1350 NEW YORK AVENUE. NW WASHINGTON, DC 20005-4798 \ TELEPHONE (202) 879-4000 FACSIMILE (202) 393-2866 EMAIL SPIEGEL@SPIEGELMCD COM AUG - 8 2000 FRANCES E. FRANCIS DIRECT DIAL (202) 879-4050 velopment EMAIL FRANCES FRANCIS@SPIEGELMCD.COM @ Alaska Industrial D Authority and Export Avinor'’August 4, 2000 Robert S. Grimm, General Manager Ketchikan Electric Company 14 Borch Street Ketchikan, Alaska 99901 Re: Your Letter of July 14, 2000 re the Mahoney Lake Hydropower Project Dear Bob: I am in receipt of your letter dated July 14, 2000, in which you advise the City of Ketchikan that iL KEC has abandoned its attempts to negotiate a contract with KPU; 2 KEC elects to rely on PURPA; U2 KEC agrees to sell the output of the Mahoney Lake Project to KPU, presumably under PURPA provisions; 4. KEC elects to provide energy and capacity (presumably from Mahoney Lake), “pursuant to a legally enforceable obligation for the delivery of energy or capacity at rates based on avoided costs calculated...as of the date of this notification letter,” citing 18 CFR §292.304(d)(2)(ii) as your authority; S: the City should acknowledge its obligation to purchase the Mahoney Lake Project power under PURPA within 30 days, to KEC; 6. absent a response by the City, KEC will interpret the non-response as a refusal to comply with PURPA and take “appropriate action to secure its statutory rights.” In addition, you request KPU to provide you with (1) an updated calculation of avoided costs; (2) a determination of the applicable rate for purchase of the Project output, and (3) “such other provisions for the power purchase agreement as KPU is authorized under PURPA to require.” Robert S. Grimm, General _nager August 4, 2000 Page 2 The City’s Response Points 1-3 above are informational, and do not require a response from the City. On Point 4, the City cannot accept your statement as correct, since PURPA imposes no obligation on KPU to purchase power from Mahoney Lake as of July 14, 2000, and as explained below, there is consequently no obligation on the City’s part to pay the avoided costs rates as of that date. As to the first point, KEC cannot impose an obligation on KPU simply by writing KPU a letter, and providing notice. The Mahoney Lake Project is many times too large to qualify for a mandatory “standard offer” rate under FERC’s regulations; and therefore a PURPA contract for sales of capacity or energy for a specified term must be negotiated. What the City can do, under the law, is to seek a PURPA contract and subject to its meeting the criteria that would allow a PURPA contract to go forward between KEC and the City, KEC could elect to have the contract rates established as of the date of the delivery of the power or fixed in the contract. 18 CFR §292.304(d)(2). Whether a QF generator can impose a legally binding obligation upon the targeted purchaser utility is subject to a finding under 18 CFR §292.304(a) that the rates are “just and reasonable to the electric consumer of the electric utility and in the public interest.” If the City cannot use the power from the QF Project and would have to pay for that power in addition to the power supplies it currently has and for which it has contractual obligations, then the City finds it neither just and reasonable to its electric customers nor in the public interest to raise the rates for the City’s consumers in order to purchase electricity it does not need and the purchase of which would cost its customers more money than not buying that electricity. Because of this fundamentally sound and unremarkable proposition and for the reasons explained below, PURPA provides that PURPA rates may be subject to adjustment to reflect value and such sales can subject to notice, be halted for operational reasons. The PURPA provisions, in particular Section 292.304(e), set out the basis for fixing the avoided costs over a specified term at the time the obligation is incurred, and these take into account: (1) the data for avoided energy and capacity costs; (2) the availability of the QF to supply capacity and energy to supply the system daily and seasonal peak periods, under seven criteria; and (3) the “relationship of the availability of energy or capacity from the QF as derived in paragraph e(2) ...to the ability of the electric utility to avoid costs, including the deferral of capacity additions and the reduction of fossil fuel use”; and (4) any costs or savings from line losses as a result of self-generation or other power purchases. Based on the above criteria, the City’s avoided cost and the basis for its rates from a new QF facility would arguably be zero, since there is no other cost that would enable the City to maintain its current costs. Indeed, if the City were penalized for failing to take as much as its contracts require, the PURPA price could be negative, to offset the cost of the penalties. KEC seemed to recognize this aspect of the law when it agreed to indemnify the AEA for displacements that would occur in the City of Ketchikan’s Swan Lake purchases because of the Mahoney Lake Project purchases. For a QF project to be revenue neutral to the City’s ratepayers, there could be an obligation to purchase on a one-for-one kwh formula that would enable the City to purchase energy from the QF facility only if the QF could displace the cost of fossil fuel at the time the City required such fossil fuel generated energy at a cost lower than Robert S. Grimm, Genera] nager August 4, 2000 Page 3 would be incurred by the City at that time, and subject to all existing obligations of the City at that time. The statute provides for this option, but KEC has declined to accept that option. The City has access, through its own resources and through its ongoing contracts, to adequate capacity to provide service to its customers. Occasionally and depending on the factual circumstances, especially the price of fuel oil, the City could use alternate energy priced below its diesel fuel costs, provided it were as reliable as the energy from the diesel units and available at the time the City’s dispatch would rely on diesel. These increments of energy are relatively small and would not necessarily coincide with the availability of Mahoney Lake Project power. For example, the Mahoney Lake Project requires the buyer to take 40% of its output during the months of July and August, when the City has little need for diesel generation. Even if the City might be able to use some of the Mahoney Project power on the formula basis described above, the City presently anticipates that its future needs will not exceed its purchase of power from the State’s Swan Lake Project, and the Tyee Project after the Intertie is completed. While the City may need additional capacity in smaller amounts in the future, the Mahoney Lake Project at 10 MW exceeds the City’s capacity requirements for many years. KEC is familiar with the City’s power supply resources and the City’s avoided costs, since it has negotiated with the City over some period of time as to a power contract and has received the City’s evaluation of its future power needs and plans. To put it as plainly as possible, the City of Ketchikan, as the governing body, cannot at this time obligate itself to a contract for a new QF Project of the magnitude and with the operating characteristics of the Mahoney Project on the terms proposed by KEC or on a basis that would allow KEC to recover the cost of the Project. Either path would increase the cost of electricity to its customers. If KEC were willing to enter into an avoided cost contract that reflects the rates produced in the City’s 1999 avoided cost study (which we understand you have), until such time as the Intertie were to become available and at a level that reflects dispatch after Swan and the City’s own resources, then such a contract might be possible. This would involve only a few years and would terminate thereafter when the Intertie to Tyee becomes operational. It was our understanding that such a contract would not be acceptable to KEC and could not support outside financing. We believe the law is clear in this regard. Furthermore and most importantly, we note that the City Council on June 15 voted to defer consideration of Mahoney while it pursued the Intertie. Attempts by KEC to interfere with and block the City’s efforts to obtain funding for the Intertie are not in the community’s interests or those of its ratepayers, including those ratepayers in the City of Saxman. The City has spent considerable time and funds to work out a power contract for the Mahoney Lake Project with KEC, but the terms could not be worked out in a way that would benefit the consumers served by the City of Ketchikan’s Department of Public Utilities. It is time for the City to pursue other avenues. To summarize, PURPA does not give KEC the right to obligate the City for excess capacity and energy for years to come pursuant to avoided costs calculated as of July 14, 2000. A Robert S. Grimm, Gener: anager August 4, 2000 Page 4 PURPA contract must be based on the City’s avoided costs over the contract term, whether calculated at the time of delivery or estimated at the time the contract is negotiated. The City does not need capacity. As a result of the City Council’s decision on June 15. the City anticipates that its energy needs will likewise be met by existing resources and commitments to the Swan Lake and Tyee Projects. As KEC is aware, the City prepared an avoided cost study in 1999, which calculated avoided costs for the period through 2004. As to conditions 5 and 6, the QF facility is required to pay for reasonable interconnection costs. The City has stated to KEC that it believes these interconnection costs could be as high as $1-million, depending on the results of an independent consultant's assessment of the interconnection point selected by KEC. In addition, there would be additional annual costs associated with dispatch and other monitoring and regulatory activities that KEC would have to pay to KPU for its services. Absent KEC’s agreement to pay these costs, there can be no reciprocal obligation on KPU’s part to purchase from the QF. Finally, KEC is free to interpret a non-response any way it chooses, but there is no legal authority for it to assume a non-response as a refusal to comply with PURPA. The City has stated herein why it is complying with PURPA. KPU cannot preclude KEC from taking such action as it may feel appropriate to secure its statutory rights. but the City strongly opposes any action by KEC that is without merit and would serve only to impede the action of the Council in its determination to move forward with the Intertie and the State’s intent to restructure the power industry in Alaska. Sincerely. Be a ee Yew & Ch—— Frances E. Francis Attorney for the City of Ketchikan Enclosure cc? The Honorable Tony Knowles. Governor. State of Alaska Executive Director. Alaska Energy Authority The Honorable Frank Murkowski. U.S. Senate The Honorable Ted Stevens. U.S. Senate Dennis Lewis, Superintendent. City of Petersburg. Alaska Mr. Karl R. Amylon. City of Ketchikan. Alaska an Ketchikan Electric Company 14 Borch Street Ketchikan, Alaska 99901 907-225-1950 907-225-4169 fax S EC [E { V E [D) July 14, 2000 JUL 19 2000 KPU Manager's Office KETCHIKAN PUBLIC . Karl Amylon, General Manager UTILITIES Ketchikan Public Utilities City of Ketchikan 2930 Tongass Avenue Ketchikan, Alaska 99901 Re: Mahoney Lake Hydropower Project: Notice of Commitment to Sell Power from Qualifying Facility and Mandatory Obligation to Purchase under the Public Utility Regulatory Policy Act. Dear Mr. Amylon: Ketchikan Electric Company (“KEC”) has previously advised Ketchikan Public Utilities (“KPU”) of its status as a “qualilying facility” under the regulations of the Federal Energy Regulatory Commission implementing the provisions of the Public Utility Regulatory Policy Act of 1978, as amended (“PURPA”), In addition, by letter dated March 3, 1998, KEC made a formal request of KPU for interconnection, following the Alaska Administrative Code in absence of any implementing regulation by KPU. ‘Ihercafict, KEC and KPU began negotiating a power purchase agreement for the output of the Mahoney Lake Project (“Project”), a process that has been ongoing now for 28 months. Unfortunately, the lack of progress in these power purchase negotiations has led KEC to conclude that it can longer follow the option of a negotiated contract. Accordingly, please be advised that as of the date of this letter KEC is no longer pursuing a negotiated contract with KPU. KEC elects to rely on the statutory rights and obligations under PURPA and herewith formally advises KPU that KIC agrees to sell the output of the Project to KPU and invokes KPU’s consequent obligations with respect to KEC’s Project under PURPA, including, inter alia, the obligation to purchase the Project output at KPU’s avoided costs, calculated consistent with the requirements of PURPA See 18 C.F.R. § 292.304. KEC further advises that it elects to provide the energy and capacity pursuant to a legally enforceable obligation for the delivery of energy or capacity at rates based on avoided costs calculated not on the date of delivery, but C:\WINNT2\PROFILES\BGRIMMIDESKTOMKECPURPAT7142000.D0C "y cINcc77INR ‘NN YH4 NUYTHATAY AN ATTO WH AGIAT MAM ANNZ-RI-1N¢ en rathcr as of the date of this notification letter pursuant to the provisions of 18 C.F.R. § 292.304(d)(2)(ii). Within 30 days of the date of this letter, KEC requests that KPU acknowledge reccipt of this notification and its obligation to purchase the Project power under PURPA. Failure by KPU to timely provide this acknowledgment will be interpreted by KEC as a refusal to comply with its obligations PURPA and KEC will take appropriate action to secure its statutory rights, KEC further requests that KPU provide the updated calculation of avoided costs requested and a determination of the applicable rate for purchase of the Project output and such other provisions for the power purchasc agrcement as KPU is authorized under PURPA to require. Although KEC’s commitment expressed herein to sell the Project output to KEC as authorized by PURPA is not conditioned on KEC’s acceptance of KPU’s calculation of the applicable avoided cost rates or of such other conditions as KPU may impose, KEC does reserve the right to challenge such rates and conditions in appropriate forums to the extent they may be unreasonable or inconsistent with the requirements of PURPA. KEC looks forward to your prompt response. Robert S. Grimm, General Manager Ketchikan Electric Company bob.g@aptalaska.com CAWINNT2\PROFILES\B GRIMM\DESK TOP\KECPURPA7142000.D0C ‘a GINGC7Z7INR ‘AN YHA NUYTHOIAY AN ATTO WH TG:AT Mam ANNZ-RI-7N¢