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HomeMy WebLinkAboutKetchikan Elec Presentation on Mahoney Lake Hydro 2000=- - : t/ = MAR-20-90 11:34 am ket eY7 ae, KETCHIKAN ELECTRIC COMPANY PRESENTATION ON THE MAHONEY LAKE PROJECT March 14, 2000 eP. c Project cost is $17.5 million, annual energy output is about 46 million kWh and capacity of 9.6 MW, According to the recent D. Little analysis, KPU and KEC are in basic agreement about the near-term goals for new KPU resources. “Any new generation installed at the present time would be primarily added to offset diesel energy generation.” The Mahoney Lake project is the best way of accomplishing this objective. The Mahoney Lake Project (46 million kwh average) is the only alternative available to the City that has the hydro energy to displace diesel generation (33 million kwh in 1999 alone). In contrast, Metlakatla currently has 10 million kwh of excess energy available, while Whitman Lake could produce 19 million kwh. Mahoney Lake is licensed and ready for construction, and can be operational by 2002. Other projects wil) not be available until later. The costs and benefits of Mahoney are fully known compared to the other alternatives. We have shared our pro forma financial statements. We have described how we will reduce project capital costs significantly — and pass those savings to you. ‘The cost estimates for KPU's other options are speculative at best. Because Mahoney Lake is a private sector initiative, it is the only option available to KPU that will not burden the City with debt. Choosing Mahoney will leave the City with more financial flexibility to deal with other future projects. Community Interests The overarching issue is this: What is in the best interest of the ratepayers of the City of Ketchikan, the Ketchikan Gateway Borough and the City of Saxman? Power supply decisions should not be influenced by territorial protection concerns over non-KPU power suppliers, so long as those suppliers and their project are credible, as is the case with KEC and Mahoney. There will be local economic development benefits during construction. Cape Fox Corporation is a participant. MAR-20-06 11:35 am P.o7 * Mahoney is a renewable project. Hydropower will displace diesel (existing and possible future diesel generation), and consequently reduce environmental impacts. ¢ Cape Fox/Alaska Power & Telephone have been discussing Mahoney with KPU for more than three years now. Power sales agreement negotiations have been held over the past several months. Last July, the Ketchikan City Council directed KPU to engage in power sales negotiations with KEC. The Draft Mahoney Contract © We have never proposed any contract on a take-it-or-leave-il basis. Instead, we have tried repeatedly since 1996 to respond to KPU’s requests. We remain willing to continue negotiations to conclusion. © Mahoney will be financed with capital from a cooperative bank that finances electric projects across the United States. e Our contract, as proposed, would not saddle KPU with any long-term obligations. View it, instead, as an 8-year contract, followed by two 8-year options for KPU to exercise as it pleases, After 8 years and again after 16 years, KPU can simply terminate our contract for any reason. On the other hand, if Mahoney continues to make economic sense for KPU, you can retain all project benefits for a full 24 years. ¢ These contract options are yours exclusively to exercise. KEC remains on the hook to bear all the long-term risks the City would otherwise assume. « In return for KEC’s assumption of these long-term risks, we need contractual assurance that a reasonable amount of Mahoney energy will be used by KPU -- at least during the first 8 years. If we don't gencrate, we don’t get paid. In our proposed contract, we ask KPU to dispatch Mahoney ahead of your diesel generation — most of the time. Our contract would still allow KPU to generate a considerable amount of diesel energy each year to help you maintain the operational flexibility of your system. e Jf our contract ever requires you to use Mahoney energy, while spilling water at your other hydro projects, KEC’s energy is free during that hour--and each hour thereafter-until KPU has used up a total “Spill Credit” of $150,000 each year of our contract. © Alternatively, if KPU would prefer the price certainty of a long-term contract, we also offer a 30 year contract with a fixed price of 6.7 cents per KWh, KPU’s Analysis e KPU’s approximately 75-page analysis was just made available on Sunday, and much supporting data is lacking. MAR-26-66 11:35 AM The analysis recommends that Mahoney discussions be terminated, in favor of alternative projects, which are only in the early discussion stages with little hard data. While most references to Mahoncy in the analysis are very negative. In fact, we think that your staff has failed to mention any positive feature of our project. Yet, the City Manager/KPU Manager several days ago suggested to the Cape Fox CEO that KEC consider the idea of selling the project rights to KPU. The analysis says the Ketchikan area will experience an energy shortfall of 58,090,000 hours through the year 2017. Mahoney and an Annette Island intertie would more than provide such energy. The Whitman Lake Hydroelectric Project, which is repeatedly rated over Mahoney in the analysis, is at least four years from reality, and would provide half the energy and capacity of Mahoney, The analysis (Page 5) says KPU’s existing generation, including reserves, is sufficient through 2008, but how heavily do those facilities rely on diesel, which Mahoney would displace? ‘The analysis (Page 7) uses a current average cost of diesel fucl at 85 cents per gallon, but the price currently is skyrocketing amid much worry over future volatility. The analysis (Page 9) shows Mahoney availability in July 2005. This is incorrect. In fact, it could be in service as early as late next year. The analysis (Page 15) says existing federal grant funds could be reprogrammed for the Whitman Lake project. The same federal grant funds could be reprogrammed for Mahoney. The analysis (Page 15) projects the cost of Whitman power at 5.1 cents per kWh. What is the hard supporting data? The analysis (table on Page 25) shows Mahoney competitive or ahead of alternatives in most all cases, including the favored medium-growth scenario. The report contains no documentation to support any offer by Metlakatla for energy priced at only 4 cents per KWh. Other parts of the report use a price of 6.25 cents per kWh. Neither price includes the cost of interconnecting the systems of Metlakatla and KPU, nor does the analysis address who would own the intertie. -os8 MAR-20-66 11:36 am ee Summary © Mahoney Lake js competitive and, unlike all other alternatives, is fully licensed and ready for construction without the need for public funding. ¢ here appears to be an “anything but Mahoney” tone to the hastily prepared KPU analysis. * KEC believes that delay after delay, barrier after barrier have been thrown up over the past three years of discussions with KPU. it has been nearly a year now since the council directed KPU to enter into power sales negotiations with Mahoncy. ¢ Unlike other projects, Mahoney’s feasibility is fully supported by data. On merit as opposed to emotion, Mahoney is eminently supportable. ¢ The fact that a Mahoney license sale was floated just last week by the city administration validates the efficacy of Mahoney. ¢ Predisposition and rhetoric must be put aside: the bedrock consideration must be what is in the best interest of all Ketchikan arca rate payers. Mahoney makes sense. MAR-26-66 11:37 AM P.106 — — 90°. CH MAR-26-66 11:32 AM P.9o2 KETCHIKAN ELECTRIC COMPANY DETAII.ED ANALYSIS OF THE KPI] REPORT DATED MARCH 12, 2000 March 14, 2000 To: City Council and Mayor We have reviewed the Evaluation and Asscssment of Hydroelectric Generation Supply Alternatives dated March 12 as prepared by KPU. While we feel the analysis is necessary to address the need for additional hydroelectric gencration resources for the community, we have been given a lot of information in a short period of time, nonetheless we wanted to provide you with our comments on the KPU analysis. We do not agree with the conclusion as put forth by KPU and would ask that you consider the following information in your review of the KPU analysis. |. KPU has based its analysis and recommendations by combining Whitman and Metlakatla together. Why did they not consider an alternative of Mahoncy/Whitman, Mahoney/Metlakatla or Mahoney/Whitman/Metlakatla? (Page 3 & 25) iS) KPU states that based on discussions with Stevens and Murkowski’s office the DOE grant in the amount of $9,900,000 could be reprogrammed for Whitman and Metlakatla. What about for Mahoney? (Page 15 & 16) In our initial PSA we proposed that KPU support our etTorts in applying for grant moneys which would allow us to reduce the rate (Section 10.2.2). KPU requested this section be deleted. 3. Contingent on a signed PSA in March, Mahoney would be available December 2001, not July 2005 as is stated on page 9 Table 2. 4. The following table outlines the Total Investment Cost per Capacity and Kilowatt hour: TOTAL TOTAL INSTALLED INSTALLED CAPACITY PRODUCTION COST PER COST PER PROJECT COST MW. kWh MW. kWh A Whitman Lake $ 8,786,000 i 19,641,000 $1,910 B Connell Lake $ 6,424,000 1.9 11,960,000 $3,381 $0.537 C Metlakatla (*) $ 3,800,000 1.7 10,300,000 $2,235 _ $0.369 Metlakatla (**) $ 6,900,000 1.7 10,300,000 $4,059 $0.670 D Mahoney Lake $ 22,000,000 9.6 46,000,000 $2,292 $0.478 E Swan/Tyee Intertie $ 80,000,000 N/A 88,269,000 WA $0.906 * Estimated cost of Mctlakatla Intertie— R.W. Beck 2000 ** Estimated cost of Metlakatla Intertie- R.W. Beck 1998 a It should be noted that although it is assumed that KPU would “not be obligated to pay for power that is not purchased,” KPU would also not be guaranteed that the power that they need would be available. The Metlakatla power supply would not be a dedicated source of power for KPU, unlike the Mahoney project, which would be totally dedicated. This statement also assumes that Mctlakatla has no intention of promoting any form of economic development to replace the closure of the mill and that all of their surplus power would be available to KPU. (Page 16) MAR-20-66 11:32 AM P.os 10. ne 12. 13. 14, KPU asserts that the Mahoney is “probably the most complex”, primarily due to contract provisions and “yet to be determined FERC license conditions.” All of the other alternatives are not in the same stage. To our knowledge there have been no PSA contract drafts for the other alternatives, which would more than likely result in complex issucs arising. Also the Whitman Lake project has not been issued its FERC license and there more than likely will be “yet to be determined” FERC license conditions imposed. (Page 16 & 17) KPU states that “unlike the other alternatives under consideration, the Mahoney lake Project places minimum takes on the Utility regardless of whether it is in the best interests of KPU to dispatch Mahoney power or not”, Until a PSA is developed or projects are fully licensed, there is really no way to be certain that the other alternatives will not have some sort of minimum requirements. ‘The analysis uses only the 8 year (24 ycar) proposal for Mahoney instead of including an analysis using the 30 fixed rate with no inflator at $.06.7. (Page 24) D. Hittle’s analysis (Page 3 item 9) states Metlakatla surplus power would be sold at a rate of $.04 cents per kWh for the year 2005. This is assuming that there is a firm ofter for a rate of $.04 cents per kWh by Metlakatla as opposed to the $06.25 cents per kWh as stated in their December 1999 letter. We know of no 4 cent proposal. KPU states that “depending in the load/percipitation scenario chosen, the combined Whitman/Metlakatla option is the least costly in the majority of cases considered followed by Swan Lake/Tyee Lake Intertie.” According to the analysis on page 25 Table 6 just the opposite is true. Out of the 9 possible scenarios analyzed, the Swan/Tyee altcrnative was rated lower 5 times versus 4 times for the Whitman/Metlakatla option. (Page 26) The analysis states “in no case was thc Mahoney Lake Project the most inexpensive alternative available,” Mahoney is also, according to the report, in all cases more costly than the Intertie. We have requested to review the detail information (spreadshects) that supports the summary information (page 25 Table 6) but at this time the request has not been granted. This request for detail information is not unusual, since such information is often contained within the appendices of engineering reports. We renew our request for a copy of this information. ‘The analysis that Mahoney is more costly than the Intertie in all of the 9 possible scenarios is totally contradictory tothe independent analysis performed by CH2M Hill on 4/12/99 as commissioned by AIDA, The findings on page 9 of the ATTA report indicate that in several scenarios Mahoney was the least costly. KPU states that “with the exception of the Swan Lake/Tyee Lake Intertie alternative, none of the options under consideration provides sufficient capacity to meet the projected energy deficit.” This is because KPU did not consider an alternative of Mahoney/Metlakatla (77,555,000 kWh), Mahoney/Whitman (65,641,000 kWh) or Mahoney/Metlakatla/Whitman (97,196,000). In KPU’s report reference has been made that the PSA would be concurrent with the Sctrlement Agreements for Beaver Falls. This issue should not be a part of these discussions. However it should be brought to the attention of the council should know that Cape Fox has done everything that has been requested of us by KPU. It is KPU that has not responded to our attorncy’s phone calls or his letter written on December 21, 1999. We have also sent a letter to the Mayor, and have 2 MAR-20-60 11:33 am P.o4 15. 16. 17. 18. 125 20. received no response. To date we have paid for all the costs associated with the subdivision. We have invoiced KPU approximately 1 year ago for their agreed 50% share and to date have not received any payment. This sentence in Alternative # 3 should be stricken from the motion and the council should instead direct staff to finalize the settlement agreement. KPU claims that Mahoney construction cost is unrealisticaly low, and yet the construction cost for Whitman is lower than that of Mahoney on a per Kwh basis. This represents a major inconsistency in KPU’s analysis, which needs to be explained. Given this contradiction, the more likely scenario is that Mahoney’s construction cost is accurate, and the cost of constructing Whitman is grossly understated. Mahoney's construction cost is less important to the City, because KEC will bear the costs of any overruns, not the City. KPU claims that all other projects would not obligate the city to pay for power that they do not use. Tt should be noted that the same is true of Mahoney. Mahoncy does not force the City to pay for powcr that it does not use either. Mahoney only imposes a minimum purchase requirement (ie the City must use at least 20 million kWh annually) to meet FERC requirements. KPU maintains that the minimum purchase requirement is too restrictive, and effectively subsidizes KEC’s risk on the project. This is an inaccurate characterization. Any project KPU undertakes will have a long-term fixed cost associated with it. If for example KPU bonds for Whitman it will be paying a fixed debt service on the bonds for 20 or 30 years or more. With Mahoney, this fixed obligation in the form of a minimum purchase requirement can be eliminated by KPU after only 8 years under the termination clause of the contract. Therefore, the City’s risk under Mahoncy is actually !ess than it would be under any other alternative. Furthermore a, 20 million kWh minimum is not enough revenue for Mahoncy to meet its debt service obligations. KEC is counting on future growth of the economy to generate profits. If the economy doesn’t grow, KEC makes no profit. Therefore, it can be said that KEC has and will continue to bear almost all of the risk associated with the Mahoney project. The risk that the City is being asked to bear is no more, and is in fact less, than that which it would bear under any of its other alternatives. KPU argues that the l'LiRC requirements of Mahoney are too restrictive. It should be pointed out that the FERC restrictions on Mahoney, and in particular the restrictions concerning fish habitat, arc no more restrictive that any other project of this type. Compare for example, the FERC restrictions for Ketchikan Lakes hydro to thal of Mahoney. KPU argues that the FERC restrictions on Mahoney are too severe, and yet KPU has been KPU’s offered to buy the FERC license for Mahoney from KEC, so that KPU can develop the project itself. The fact that KPU is interested in buying the project gives validity to the merits of the project, and also dampens the case that the FERC restrictions are somehow unworkable from KPU's perspective. KPU makes mention of the oft-misunderstood characterization that Mahoney is in the same watershed as Swan Lake, and as such has less appeal than other alternatives. [t should be pointed out that the energy productive capacity of a lake system depends not only on the gross amount of rainfall, but also on other factors, The amount of the gross rainfall that is actually caught by the surrounding basin and which finds its way into the lake depends on the size and topography of the basin itsclf. Additionally, the size and depth of the water in the lake are determinates of both pressure as well as storage capacity (ie how long the project can continue to produce power without 3 MAR-26-66 11:34 AM P.9S ZV. 22. 23, any rain). Lastly, and, in the case of Mahoney, most importantly, the elevation of the lake is of critical importance. All things being equal, the higher the elevation of a lake, the more power that can be produced with the same amount of water. For example, Mahoney Lake at 1900 foot elevation, will generate 880 psi (pressure). Compared to Beaver falls, for example, which at a lower elevation produccs approximately 300 psi. This means that, all else being cqual, Mahoney can produce almost 3 times the amount of cnergy than Beaver Falls with the same amount of water. Whitman Lake’s elevation is similar to Beaver Falls, and will produce similar results, KPU disagrees with the maximum diesel limits under the PSA. Mahoney's financial feasibiltiy depends on the presumption that KPU will attempt to use as little diesel as necessary. This presupposition is based on the fact that over time, on average, diesel is the least cost effective means of generating power. KPU contends that from time to time diesel may be cheaper than hydro, and insists on having the flexibility to use diesel in place of Mahoney hydro during these periods. We have attempted to negotiate flexible usage of diescl generation. KPU contends that “ Any diesel amounts, in any hour, that could have been supplied by the Mahoney Lake Project (in KEC’s opinion) can be billed as if generated at Mahoney and therefore billed to the City”. This is only if Mahoney were up and running and KPU elects to use diesel in its place. The City is not obligated to pay KEC for power that is produced over and above what Mahoney can supply. Unless KPU uses diesel at times when Mahoney power could have been used in its place, there will be no extra charge under our proposed contract. KPU’s report states that “ the Finance Director and I have concluded that the City is not ina position to assume this (Intertie) debt. Not only does the remaining $25 Million have to be funded, but additional diesel capacity will have to be financed at an estimated cost of $15 million.” KPU also states that “ the Swan-Tyee Intertie alternative pre-supposes the future need of additional diesel generation at the South end of the Utility’s system. The cost of such additional diesel capacity is estimated at $15 million and has been programmed into the Utility’s recent capital budget.” It should be noted that KEC has always maintained that this additional gencration on the South end of KPU’s system could best be furnished by Mahoncy, instead of a new diesel unit. “it MAR-12-86 63:49 PM KETCHIKAN PUBLIC UTILITIES OFFICE OF THE GENERAL MANAGER Karl R. Amylon, General Manager Jim Voetberg, Assistant General Manager Korry L. Olsen, Executive Secretary Ronald L. Settje, Administrative Manager TO: The Honorable Mayor and City Council FROM: Kart R. Amylon, General Manager DATE: March 12, 2000 RE: Evaluation and Assessment of Hydroelectric Generation Supply Alternatives - Ketchikan Publlc Utilities By report dated February 10, 2000 my office advised the City Council of its intent to complete staff's evaluation and assessment of the five (5) hydroelectric generation supply alternatives that are currently under consideration by Ketchikan Public Utilities. As the City Council is aware, this subject has been under active review by the Utility for the last several years, The desire of Ketchikan Electric Company (KEC) to enter into a Mahoney Lake Power Sales Agreement (PSA) with KPU; the appropriation of additional federal funding for the Swan Lake - Lake Tyee Intertie; the recent solicitation from Metlakatla Power & Light to provide excess electric generation to the Utility, and renewed efforts by the Project Management Committee (PMC) to purchase the Four Dam Poo! hydroelectric projects from the State of Alaska are recent events that have not only brought this Issue to the forefront, but have extended the review by staff as well. What follows is staffs analysis, beginning with an executive summary; the criteria of the evaluation; a review of KPU’s existing hydroelectric generation system; a discussion of the Utility's use of diesel generation; a description of the alternatives available to Ketchikan Public Utilities; an in-depth assessment of these options; and staff conclusions and recommendation. The City Council should keep in mind that given the complexities of this issue, staffs report is intended as an overview. My Office fully expects that there will be the need for extensive discussion and that there will be numerous questions that may or may not be fully answered by this report. To that end it is my Intent to have the technical, financial and legal consultants retained by KPU available when this subject is considered at the City Council's special meeting of March 14, 2000. ], Executive Summary. Based on the analysis undertaken by staff, in conjunction with technical, financial and legal consultation, the following conclusions and recommendations are offered: e The Electric Division of Ketchikan Public Utilities is capable of 1 MAR-12-906 63:49 PM a providing 149,400,000 kilowatt hours of hydroelectric generation on an annual basis, either through self-generated or purchased power. Diese! generation is essential to KPU's electric generation system, both for backup to the Utility’s hydro resources and Swan Lake, as well as to insure system reliability. At times diese! generation may be more cost effective than Swan Lake generation. The community's present annual energy requirements total approximately 167,748,000 kilowatt hours (1999 net generation). The estimated energy demand of KPU through 2017, including the Ward Cove Sawmill and the proposed Veneer Plant, is 207,490,000 kilowatt hours. A shortfall of 58,090,000 kWh is projected through the same time period, Staff recommends that the Connell Lake Project be removed from further consideration at the present time. Given an estimated capacity of only 11,960,000 kWh, mitigation measures to address anadromous fish passage would essentially make the project uneconomical in the context of limited generation. Due to power cost considerations. as well mandated contractual provisions regarding “minimum takes,” dispatch and artificial limits on diesel generation and spill credits proposed by Ketchikan Electric Company, staff recommends that any further consideration of the Mahoney Lake Project be discontinued at this time. Power costs considerations include rate escalators, a questionable construction cost and a $5,000,000 financing component that KEC has yet to put into place. A combination of the Whitman Lake and Mellakatla Projects could provide KPU with capacity of at least 47,576,000 kWh, at a blended rate of between $0.051 and $0.0625/kWh (sufficient to 2011). Upon retirement of the debt, the blended rates will decrease to between $0.02 and $0.04 per kWh. The Swan Lake — Lake Tyee Intertle could provide KPU with capacity of 88,269,000 kWh, at a rate of $0,068/kWh., Depending on load growth and the amount of sales over the Intertie, the Four Dam Pool wholesale rate could be adjusted downward. The Utility does not have the ability to finance $25,167,189, which is the outstanding balance required to complete a Swan Lake — Lake Tyee Intertie funding package. 2 -8s MAR-12-98 63:58 PM ow e Should divestiture of the Four Dam Pool Hydroelectric Projects occur, the Purchasing Utilities propose to assume the responsibility for the flnancing, construction and operation of the Swan Lake = Lake Tyee Intertie. If this occurs, KPU would be relieved of the burden and risk of financing the balance of the Intertie. Eighteen to twenty-four months could be required to determine a final resolution. e Of the hydroelectric generation alternatives under consideration, only the Swan Lake — Lake Tyee Intertie option is capable of meeting the shortfall of 58,090,000 kWh projected through 2017 and beyond. e Staff recommends the Utility support the efforts of the Four Dam Pool Purchasing Utilities to complete divestiture and secure a funding package to complete the Iniertie. e During this Interim period, the Utility should continue ongoing efforts to secure a FERC license for the Whitman Lake Project (Whitman Lake can serve in lieu of diese! backup generation to the Intertie). Concurrently, negotiation of a Power Sales Agreement with Metlakatla Power & Light should commence. KPU should be authorized to proceed with permitting and design of the Metlakatla transmission line and submarine cable to the Utility's Mountain Point substation. If divestiture is unsuccessful, KPU is positioned to move forward to implement the combined option of Whitman Lake and Metlakatta. ll. Evaluation Criteria. Throughout its evaluation, staff has attempted to assess each alternative against the following criteria: 1. Which alternative is in the best economic interests of KPU's ratepayers, Le., what Is the lowest cost hydroelectric electric generation supply option available? 2. What alternative provides the community with its most reliable hydroelectric generation supply option, both from a short-term and long-term perspective? 3. Which alternative provides the greatest flexibility to KPU, in order to insure the reliability of the Utility's hydroelectric production and distribution systems? In order to provide the City Council with as accurate an assessment of the alternatives as possible, technical, financial and legal consultation was sought from the failowing entities: 1. R.W. Beck, Inc. (technical) ” MAR-12-66 63:56 PM 2s 3. 4. D. Hittle & Associates, Inc. (technical/financial) A. Dashen & Associates. (financial) Spiegel & McDiramid. (legal) Additionally, extensive discussion has taken place between KPU and the following parties, which have direct or indirect involvement in any of the options presently under consideration by the Utility: OPNOAPwDY = Alaska Industrial Development and Export Authority (AIDEA) Project Management Committee (PMC) of the Four Dam Pool Ketchikan Electric Company (KEC) : Metlakatla Power & Light (MP&L) Denali Commission Office of Senator Ted Stevens Office of Senator Frank Murkowski Robertson, Monagle and Eastaugh Lastly, various documents are referenced throughout the report. Should the City Council wish to review this information at length, the materials have been incorporated as appendices to the analysis. Included are the following documents: is 1998 Update, Power Supply Planning Study, R.W. Beck, Inc, (Appendix No. 1), Review of KPU Proposal for Funding and Construction of the Swan Lake - Lake Tyee Intertie, Alaska Industrial Development and Export Authority (Appendix No. 2). Draft 24 Year Power Sales Agreement, Ketchikan Electric Company (Appendix No. 3). March, 2000 Analysis of Metlakatla Power & Light Hydroelectric Generation Capacity, R.W. Beck, Inc. (Appendix No. 4). Analysis of Ketchikan Electric Company Power Sales Agreement by Spiegel! and McDiramid, Privileged and Confidential (Appendix No. 5). Financing Options for the Proposed Swan Lake - Lake Tyee Intertie, A. Dashen & Associates, Privileged and Confidential (Appendix No. 6) Correspondence from Purchasing Utilities of the Four Dam Pool Regarding Financing, Construction and O&M of the Swan Lake — Lake Tyee Intertie (Appendix No. 7). Analysis of Cost of Power Supply Alternatives by D. Hittle & Associates, Inc. (Appendix No. 8). Ill, Existing KPU Hydroelectric Generation System. Presently, the Electric Division of Ketchikan Public Utilities Is capable of providing approximately 149,400,000 kilowatt hours of hydroelectric production on an 4 -85 MAR-12-606 63:56 PM « annual basis, either through self-generated or purchased power. Such existing hydroelectric generation consists of: (1) the Ketchikan Lakes Project, FERC License No. 420 (4.2 megawatt capacity); (2) the Beaver Falls/Silvis Lake Project, FERC License No. 1922 (7.6 megawatt capacity); and (3) the Alaska Energy Authority (AEA) owned Swan Lake Project, FERC License No. 2911 (22 megawatt capacity). The Utllitys existing hydroelectric generation capacity, in addition to 24 megawatts of diesel generation capability, is sufficient to meet the community's present annual energy requirements of approximately 167,748,000 kilowatt hours (1999 net generation). According to the Utility’s Power Supply Planning Study as updated by R. W. Beck, Inc. in February of 1998 (see Appendix No. 1), by the year 2023 the community's energy demand was anticipated to Increase to 162,400,000 kilowatt hours under low growth conditions; to 191,900,000 kilowatt hours under medium growth conditions (the base case) and to 272,100,000 kilowatt hours under high growth conditions. Although the Utility's generation in 1999 has already exceeded the low load growth projection, this is attributable primarily to the decommissioning of the former KPC powerhouse and the connection In 1998 of the Ward Cove sawmill to KPU’s generation grid. Figure No. 1 KPU Industrial Energy Sales (kWh) Energy Sales (KWH) - Industrial 1999 Based on the revised load growth included in its study scenarios and the installation of the 10.5 megawatt Wartsila generating unit at the Bailey Powerhouse, R.W. Beck concluded that “KPU’s existing generating capacity Is sufficient to supply projected base case capacity requirements, including reserves, through 2008.” Beck further concluded that for all load growth scenarios, small hydro resources would “provide the lowest life-cycle cost of power supply” and that “KPU would only need to construct the Whitman Lake and Connell Lake projects if loads were to grow at the low or medium growth rates through 2017.” Lastly, Beck indicated that “the cost of power from the Metlakatla Interconnection scenario is reasonably comparable to the Small Hydro scenarlo, the lowest cost resource altemative” . .. and that “KPU may want to conduct additional independent review" of the estimates provided by MP&L. The above excerpts from the Beck report are not intended as arguments in favor of one altemative over the other. Rather, given the fragile state of the Ketchikan - 86 MAR-12-66 63:58 PM of economy, these conclusions are offered to demonstrate that any decision must be made in the context of a certain degree of economic uncertainty. If, for example, the sawmill operated by Gateway Forest‘Products were to cease operations, KPU would lose approximately 15,319,000 kilowatt hours or 9.1% of its current electrical load. Under such a scenario any evaluation of the hydroelectric generation supply alternatives that are carey under consideration would seap ener change. Consequently, staff Prior to evaluating each of the hydroelectric generation supply alternatives under consideration by the Utility, staff believes it is important to briefly discuss the reasons and methodology by which KPU utilizes diesel generation. As the Alaska Industrial Development & Export Authority (AIDEA) concluded in Its April 12, 1999 review of the Swan Lake - Lake Tyee Intertie, even ‘if the Intertie or other hydroelectric alternatives were chosen to meet Ketchikan’s energy requirements, under certain scenarios, additional diesel backup reserve generation would nonetheless be required" (see Appendix No, 2). Consequently, it is incumbent that any evaluation of hydroelectric supply alternatives takes into account the role of diese! generation in KPU's system. As was noted above, the Utility has 24 megawatts of diesel capacity available at the Bailey Powerhouse. The four diesel units are operated by KPU for the following reasons; a) Reserves or Backup Generation of KP) Hydro Resources and Swan Lake - If the KPU hydroelectric plants or Swan Lake are not expected to be able to provide their customary output of generation to meet projected demand, the Utility will make up the shortfall with existing generation from its diesel units. This is essentially a planning function that allows the Utility to maintain reliability and meet loads. b) Failure of KPU Hydro Resources or Swan Lake - In the event of a mechanical failure of the Utility's hydroelectric plants or Swan Lake, the Utility will engage diesel generation to serve the existing load. Periodically, the Utility has lost use of the transmission line between Swan Lake and Ketchikan. In such situations diesel generation is used to offset the loss of Swan Lake power, as it is available either immediately or on a long-term basis. c) Maintain Reliability of System - KPU will operate its diesels for system standby, stability, voltage control, and other legitimate system purposes. The Bailey Powerhouse consumes, for example, 2,227,260 kWh of combined hydroelectric and diesel generation annually, in order to maintain the dlesels' oil and water systems for Immediate operation. Moreover, diversity of generation resources provides an added measure of reliability to the system. d) Overall System Economic Considerations: A projected dry water year could require the use of diesel generation to optimize the Utility's own hydro resources; that is, diesels might be used early in the year to -o7 MAR-12-606 63:51 PM re keep natural runoff in storage at KPU's other projects, to the extent possible, This would reduce overall system costs, generally. In addition, external factors like steep drops in diesel prices will allow the system to take advantage of such economic events to reduce overall system costs. The diesels are essential to the Ketchikan electrical generation system. They are not run solely for the purpose of making up load differentials due to inadequate generation by KPU's hydro resources or Swan Lake. They are also operated to insure the availability of standby generatlon and for system reliability, e.g., expedited system restoration following power outages and balancing the system for frequency and voltage fluctuations. Additionally, the cost of diesel generation Is not always as cost-prohibitive as some may contend. The avoided cost of diesel generation per kWh is made up of three components: (1) the cost of diesel fuel; (2) the variable cost of operations & maintenance; and (3) the cost of lubricants. The cost of diese} fuel is determined by the price per gallon of diese! fuel and the number of kilowatt hours generated by one gallon of diesel fuel. As a result of the installation of the new diese! generator and Improvements made to the existing generators by the Utility, the number of kilowatt hours generated from one gallon of diesel fuel has increased. In 1999, 15.7 kilowatt hours were generated from one gallon of diesel. In prior years, the number of kilowatt hours generated ranged between 14 and 15 kWh per gallon. Despite the increase in efficiency that KPU is able to document, the Utility's technical/financial consultant, D. Hittle & Associates, Inc., has recommended that KPU consider a conservative estimate of 15.3 kilowatt hours per gallon when determining the cost of diesel fuel for the purposes of computing the avoided cost of diesel generation. Although the actual variable cost of operations & maintenance in 1999 was $0.01 per kWh, Hittle again recommends using a conservative projection of $0.0134 kWh. This is in part due to the extended use of the diesel generators in 1999 that resulted in jower variable costs. Based on a long-term projected average cost of diesel fuel of $0.85 per gallon,’ the long-term avoided cost of diesel generated is calculated as follows: Table No. 1 KPU Avoided Cost of Diesel Generation Per kWh Component Cost Fuel $.0556 Varlable O&M $.0134 Lubricants $.0030 Total $.0720 ‘D. Hittle & Associates, Inc. -o8 MAR-12-66 63:51 PM «f Although the currently projected avoided cost of diesel generation exceeds the price of energy from any of the alternatives presently under consideration by KPU, the City Council should note that KPU's actual 1999 avoided cost of diesel generation was approximately $.051 per kWh. This occurred as the result of the average price of diesel fuel being $.59 per gallon and the variable cost of operations & maintenance being approximately $.01 per kWh. As illustrated in the figure below, It is important that the City Council keep in mind that despite major increases and decreases that have occurred In fuel prices over the last ten years, the cost tends to center around the long-term average of $17 per barrel. During this time period, KPU was paying approximately $.73 per gallon. Utilizing the variable O&M and lubricant cost detailed above, KPU’s avoided cost of diesel generation would have been approximately $.064 per kilowatt hour based on the rolling average. Figure No. 2 ANS West Coast and Future Market Ol! Prices Alaska Department of Revenue Figaere 4. ANS Wont Caant and Futurca Murket Ol Pricon 60 muntn Mowing Average If KPU had, when the cost of diesel fuel was $0.69 per gallon, the flexibility to dispatch the diesels ahead of $.068 per kWh Swan Lake power, it would have been more economic to do so. Regardless of what hydroelectric generation supply alternative Is ultimately developed by KPU, it will not completely displace the use of diesel generation. The Issue becomes, therefore, one of integrating a supply alternative into KPU's overall hydroelectric generation dispatch methodology in as an efficient, cost-effective and reliable a manner as possible. V. Hydroelectric Generation Supply Alternatives Available to KPY. As indicated in the table below, there are currently five (5) hydroelectric generation supply altematives that are under active consideration by KPU. Although this report Is intended to evaluate each of the five aptions, the City Council should note that the projects under review are in varying stages of development. Consequently, the Information avallabie to critique each altermative may vary from project to project. -89 MAR-12-66 63:52 PM ef " Table No, 2 Hydroelectric Generation Supply Alternatives Under Consideration by Ketchikan Public Utilities Prolect § Type § Capacity §§ Status © Availability Cost/kWh Whitman Lake Hydro 19,641,000 kWh Pre. Permit Mar., 2004 $0. 051 (a) Connell Lake Hydro 11,960,000 kWh Pre, Permit Mar., 2004 $0. 066 (a) MP&L Mixed 31,555,000 kWh Licensed 16 rmonths $0. 0625 «) Mahoney Lake Hydro 46,000,000 kWh Licensed Jul, 2005 $0. 065 to $ 0. 087 (c) Intertie Hydro 90,070,000 kWh Licensed Jan., 2004 $0. 068 @) (a) Assumes financing through the use of Utility revenue bonds; should alternative funding become available, the cost per kWh may decrease. (0) Assumes capital improvements funded by MP&L; should alternative funding become available, the cost per kWh may decrease. (c) Aseumee conventional financing by KEC; the corporation has proposed two alternative Power Sales Agreements (PSA's); the first Is a twenty-four year agreement commencing at a rate of $0.065 per kWh, with charges adjusted in the ninth and seventeenth year by a factor of 50% of the average change in prices over the preceding eight contract years, as measured by the Consumer Price Index (CPI) for the Anchorage Metropolitan Area: the second Is a thirty year agreement at a fixad rata of $0.067 per kWh; should alternative funding become available to displace a portion or all of the conventional financing, the cost per kWh may decrease. (d) Assumes prevailing Four Dam Pooi rate of $0.068 per kWh; depending on the outcome of divestiture and should additional funding become available, the cost per kWh may decrease. a) Whitman Lake. The Whitman Lake Project consists of the construction of a surface penstock, an eighth of a mile transmission line, powerhouse and other associated facilities. The Whitman Lake Dam is presently owned by KPU. Estimated average energy production at Whitman Lake is 19,641,000 kilowatt hours based on an installed capacity of 4.6 MW and a plant factor of 49%. Power would be delivered to the south end of KPU’s system at Herring Cove and eliminate the need of additiona! diesel generation at the south end of KPU's system. As proposed in January of 1998, the project schedule was to have had the license. application completed by September, 1999; a FERC license issued by March, 2001; and on line hydroelectric generation commencing by March, 2003. Due to high water flows in 1999, KPU’s technical consultants were unable to complete fishery data requested by the various regulatory agencies. The Preliminary Draft Environmental Assessment (PDEA) will now not be issued prior to September, 2000. A FERC License is anticipated in March of 2002 and the project is expected to come on |ine in March, 2004. The total estimated cost to construct the project Is $8,786,000, estimated in August, 1998 dollars. This cost estimate included a project contingency of $876,000 plus a 3% per year cost escalator of $1,037,000. Assuming no contingencies and had the project been built in 1998, the cost would have been $6,873,000. The total! investment cost per Installed kilowatt hour is $1,910. The first year energy cost is estimated at 5.1 9 P.16 MAR-12-66 63:52 PM a oe per kWh. The first year cost of power without debt service would be 1.0 cents per mee Funding of the project Is anticipated through the issuance of Utility Revenue onds. b) Connell Lake. The Connell Lake Project consists of the construction of a powerhouse, extension and utilization of the former Ketchikan Pulp Company (KPC) penstock and other associated facilities. The project incorporates the Connell Lake Dam, formerly utilized by KPC. KPU and what is now Gateway Forest Products currently operate under a Memorandum of Agreement (MOA) regarding the use of the dam. Estimated average energy production at Connell Lake is 11,960,000 kilowatt hours based on an Installed capacity of 1.9 MW and a plant factor of 72%. Power would be delivered to the north end of KPU’s system in the vicinity of the former puip mill. As proposed in January, 1998, the project schedule was to have had the license application completed by September, 1999; a FERC license issued by March, 2001; and hydroelectric generation initiated by March, 2003. Due to high water flows in 1999 and concerns raised regarding anadromous fish passage, KPU’s technical consultants were unable to complete the fishery data requested by the various regulatory agencies. The Preliminary Draft Environmental Assessment (PDEA) will now not be issued prior to September, 2000. A FERC License |s anticipated In March of 2002 and the project is expected to come on line in March, 2004. The total estimated cost to construct the project is $6,424,000, estimated in August, 1998 dollars. This cost estimate Included a project contingency of $612,000 plus a 3% per year cost escalator of $758,000. Assuming no contingencies and had the project been built in 1998, the cost would have been $5,927,000. The total investment cost per installed kilowatt hour is $3,381. The first year energy cost is estimated at 6.6 cents per kWh. The first year cost of power without debt service would be 1.7 cents per kWh. Funding of the project Is anticipated through the issuance of Utility Revenue Bonds. c) Metlakatla Power & Light. In December of 1999 Metlakatla Power & Light (MP&L) approached KPU, in order to propose the sales of excess electrical generation to the Utility via a possible 34.5 transmission line between Metlakatla and Race Point and a submarine cable crossing to KPU's Mountain Point substation. The present annual energy requirement of the Metlakatla community is 17,250,000 kilowatt hours, excluding the Annette Hemiock Mill which recently ceased operations. The average annual generation capability of MP&L’s 1.0MW Chester Lake Plant and the 3.7 MW Purple Lake Plant is estimated to be 27,540,000 kilowatt hours, which leaves a potential surplus of approximately 10,300,000 kilowatt hours. Additionally, MP&L owns 5,165 kW of diesel generation and 100 kW of installed battery energy storage. Based on studies completed in 1997, MP&L has represented that an additional 10 ed. MAR-12-66 63:52 PM 3.0MW of capacity could be installed at the Chester Lake project utilizing a siphon intake at nearby Edgecomb Lake, which could increase average annual generation by about 14,800,000 kilowatt hours. Additionally, MP&L further maintained that a 1.0 MW hydroelectric project at Tamgas Lake and a 4.0 MW hydroelectric project at Triangle Lake could also be developed and would provide estimated annual energy generation of 5,520,000 kilowatt hours and 17,650,000 kilowatt hours, respectively. In February of 2000 KPU retained R.W. Beck, Inc., in order to assess the surplus generation potential of MP&L’s existing and proposed hydroelectric projects. Since a copy of Beck's study is attached to this report (see Appendix 4), a summary of the firm's conclusions is detailed in the table below: Table No. 3 Avallable Surplus Generation Metlakatla Power & Light Project Capacity Availability Cost/kWh (c) Existing Capacity 7,400,000 to 10,660,000 kWh 18 months - Chester Lake Upgrade 3,211,000 kWh Unknown $0,0016/kWh Purple Lake Upgrade 360,000 kWh 2years $1.1300/kKWh Tamgas Lake (a) - = Triangle Lake 17,324,000 kWh 3 years $0.0690/kWh Total kWh 28,295,000 to 31,555,000 kWh (b) (a) Given a lake elevation of 90 feet, msl, with a fish hatchery that uses about 20 cfs of water for its operation, Beck conciuded that a hydro plant at Tamgas Lake would likely result In more expensive power than the other sites reviewed, (b) An auditions! 16,400,000 kWh in potential capacity was Identified at Todd and Melanson Lakoa. (c) MP&L has proposed an overall price of $0.625 per kWh, Including the cost of the proposed transmission fine and submarine cable to KPU's substation at Mountain Point; the costs per kWh detailed in the table reflect Beck’s estimated cost per kWh for new hydro plants or expansion of existing projects. Incorporating Beck's conservative estimate of 7,400,000 kWh’s of currently available capacity, as well as discounting the higher priced energy resulting from expansion of the Purple Lake Project, MP&L appears to have the ability of providing KPU with 27,935,000 kWh’'s in either existing or expanded hydroelectric generation capacity. Although less capacity than either the Swan Lake - Lake Tyee Intertie or the Mahoney Lake project, MP&L's projects could offer greater capacity than either Connell Lake or Whitman Lake. In December of last year, Metlakatla Power & Light proposed a rate of $0.0625 per kilowatt hour. This was predicated on the assumption that an investment of $6,900,000 would be required for the construction of a transmission line and submarine cable for interconnection to KPU's substation at Mountain Point. R.W. Beck has estimated a preliminary cost of $3,800,000, a reduction of forty percent (40%). If Beck’s projection is accurate, the rate proposed by MP&L could decrease. Lastly, MP&L is proposing a contractual arrangement by which KPU would 14 = ae MAR-12-86 83:53 PM oe purchase power as required. The Utility would not be obligated to pay for power that is Detused, d) Mahoney Lake. The Mahoney Lake Project consists of the construction of a powerhouse with a single/turbine generator, a 3,300 foot vertical water conveyance tunnel, a 4.6 mile electric transmission line and other associated facilities. The project is located on George Inlet. The estimated average energy production at Mahoney Lake is 46,000,000 kilowatt hours based on an installed capacity of 9.6 MW and a plant factor of 55%. Power would be delivered to the south end of KPU's system at Beaver Falls by means of the proposed transmission line. A project license was issued to the City of Saxman in January of 1998. Although the licensee of project, Saxman later that year entered into a “Lease and License- Performance Agreement” with Ketchikan Electric Company (KEC), which is a limited llabllity company comprised of Cape Fox Corporation and Alaska Power and Telephone (AP&T). Under the terms of this agreement, Saxman has assigned responsibility for all project purposes to KEC, which would become the operator of the project. As represented in the original license application, the project was initially estimated to cost $28,521,000 In 1998 dollars. Although not yet officially approved by FERC, the design of the project is being revised and KEC is now projecting a project cost of approximately $22,000,000, including surveying, licensing and land development. The reduction in cost is the result of KEC’s intent to utilize new drilling technology to construct the 3,300 foot vertical water conveyance tunnel. KEC has represented that this technology is being extensively used in other parts of the United States and Canada. If the project moves forward, KEC is contemplating that two construction seasons would be required to build the plant. KEC has proposed that KPU assume responsibility for dispatch of the project's entire hydroelectric generation output. This would require the Utility to integrate the dispatch of Mahoney Lake with the Utility's other hydro and diesel generation, in order to comply with (1) the provisions of the proposed Power Sales Agreement; and (2) FERC imposed conditions on the license, which require releases of water from the project within specified minimum and maximum levels measured in cubic feet per second (CFS): Tabie No. 4 FERC Imposed Fiow Requirements Mahoney Lake Flows Oct. 4 - July 34 Aug. 1- Sep, 30 Hourly Minimum Flow (all hours) 13 CFS 13 or 40 CFS Hourly Maximum Flow (all nours) N/A 50 CFS Note: The project must also be dispatched at its full rated capacity for a continuous period of forty-eight 12 -13 MAR-12-66 63:53 PM hours as soon as practical after an upstream rainfall, anytime within the Dispatcher's discretion between May 1 and July 31 each year. The mandatory flows required by the license are the result of concerns by the regulatory agencies regarding fish attempting to traverse Mahoney Creek to spawn in Mahoney Lake. Depending on the time of year, the generation capacity of the project could range from 1.5MW to $.6MW as a result of these conditions, KEC contends that the restrictions are not equitable given the project's limited impact on the flows into Mahoney Lake watershed and has requested intervention by the Utility to seek Modifications to the license. Additionally, further environmental studies are being undertaken by KEC as a requirement of the license. It is not known at the present time If the results of these studies could result in further revisions to the conditions of the license, but a complete report is due three years after the project has been in operation. KEC proposes to limit the dispatch of KPU’s diesel generation, regardless of cost, to 1,000,000 kWh annually, excluding monthly testing and the unavailability of hydroelectric. generation above and beyond that which can be replaced by Mahoney Lake power. Exceeding the !imit would subject KPU to a penalty of $0.065/kWh for each kWh in excess of the annual cap. Additionally, KEC proposes to cap the reimbursement to the Utility for any spills associated with KPU hydro projects or Swan Lake as a result of dispatching Mahoney Lake power. KEC has proposed two alternative power sales agreements. The first Is a twenty- four year agreement commencing at 4 rate of $0.066 per kWh, with charges adjusted in the ninth and seventeenth year by a factor of 50% of the average change In prices over the preceding eight contract years, as measured by the Consumer Price Index (CPI) for the Anchorage Metropolitan Area (see Appendix No. 3). The second is a thirty year agreement at a fixed rate of $0.067 per kWh. 6) Swan Lake - Lake Tyee Intertie. The Swan Lake - Lake Tyee Intertie consists of the construction of a fifty-seven (57) mile hydroelectric transmission line connecting the State owned Four Dam Pool hydroelectric projects at Swan Lake on the Upper Carroll Inlet and Lake Tyee on the Bradfield Canal. The fifty-seven mile Intertie will allow the transmission of surplus electrical energy, currently estimated at 88,269,000 kilowatt hours, from the Lake Tyee hydroelectric project to Swan Lake. Power would subsequently be distributed from Swan Lake to the Bailey Powerhouse. With the exception of negotiating the terms and conditions of a Forest Service Special Use Permit for timber removal, ail permitting requirements have been completed. The Forest Service has issued a Record of Decision, which has withstood legal appeal. Based on discussions with Raytheon Engineers and Constructors, KPU’s technical consultant for this project, should the Utility elect to proceed with construction of the Intertie, a period of one year will be required to finalize permits and have the bid documents prepared. A contract could be awarded in 2002, with construction taking approximately two years. The Intertie is projected to be operational in January, 2004. The most recent cost estimate for construction of the Intertle was prepared in January, 1998 by Raytheon. The costs were calculated in 1997 dollars and included three estimates, depending on the value of the timber cut for right-of-way clearance. The 13 -~14 MAR-12-66 63:53 PM estimates in 1997 dollars and 2002 dollars, assuming a 2% annual escalation rate, are shown below. Table No. § Intertie Cost Estimate Estimate 1997 Dollars 2002 Dollars No Timber Credit $77,200,000 $85,235,038 Minimum Domestic Timber Credit $71,827,126 $79,302,951 Maximum Export Timber Credit $63,049,126 $69,611,330 For the purposes of this analysis, the “No Timber Credit" cost estimate is used. if the Utility receives a timber credit, the cost-effectiveness of the Intertie increases. KPU has secured or tentatively secured $40,067,849 of grants towards the cost of this project, including an anticipated $4,500,000 award from the FY0O State Southeast Energy Fund; $5,000,000 from the Denali Commission; and $6,000,000 in disaster funding made available to the Ketchikan Gateway Borough and programmed for this project. An additional three percent (3%), twenty-year loan in the amount of $20,000,000 has also been obtained from the State of Alaska. Based on the “No Timber Credit" cost estimate in 2002 dollars, this leaves an unfunded balance of $25,167,189 which will have to be financed if the project is to go forward. Although not directly addressed in the cost estimate detailed above, the City Council should note that depending on the community's load growth, consideration of the Swan Lake - Lake Tyee Intertle altemative pre-supposes the future need of additional diesel generation at the south end of the Utility's system. Assuming Whitman Lake is not developed and, as a result of the Intertie connecting directly at Swan Lake, reserve diesel generation would be required for those times as the Intertle and/or Swan Lake transmission lines are unavailable due to maintenance or infrastructure failure. The cost of such additional diesel capacity is estimated at $15,000,000 and has been programmed in the Utility's recent capital budgets. Under the Intertie alternative, KPU would have the same obligations to purchase power over the transmission line as it currently has now for the Swan Lake hydroelectric project. That is, the Utility would first use its own hydro resources and Swan Lake, with any additional required purchases coming from the Intertie to the extent such power is available. The Utility would not be obligated to pay for power that is not used. Pursuant to the terms of the Power Sales Agreement between the State and the Four Dam Pool participants, power is purchased at a rate comprised of two components - a fixed debt service component of 4 cents/kWh and a variable operation and maintenance ("O&M") component, currently comprised of 2.8 cents/kWh. It is anticipated that the combined rate would apply to KPU Intertie purchases. 14 «Lo MAR-12-68 63:54 PM Of the five hydroelectric generation supply alternatives under consideration by the Utility, the Whitman Lake Project is probably the most straight forward. Although the project is approximately a year behind schedule in the licensing process, no insurmountable issues of concern have been ralsed by the regulatory agencies. Negotiations with the Southern Southeast Regional Aquaculture Association (SSRAA) regarding the location of the powerhouse continue to progress. No additional project costs have been Identified beyond those previously reported to the City Councll. Although the Herring Bay Water Users Association continues to be concemed about impacts to water quality, staff believes that this is an issue that can be resolved as the project moves forward. According to the Utility's Power Supply Planning Study as updated by R. W. Beck, Inc. In February of 1998, for “the medium and low load forecast scenarios, the Whitman Lake project would provide sufficient capacity to supply KPU's excess power supply requirements through 2017, the end of the study period." The projected first year cost of energy at 5.1 cents per kWh appears competitive and could be substantially reduced were grant funds previously committed to the Swan Lake - Lake Tyee Intertie directed towards this project. Based on discussions with the offices of both Senator Stevens and Senator Murkowski, the Department of Energy (DOE) grant in the amount of $9,900,000 secured for the Intertie could likely be re-programmed for alternative hydroelectric generation projects. b) Connell Lake. Unlike the Whitman Lake project, the development of Connell Lake as an alternative source of hydroelectric generation Is currently questionable. As alluded to above, the Alaska Department of Fish & Game (ADF&G) has advised KPU of its strong desire that the Utility study anadromous fish passage past the Connell Lake dam. KPU's technical consultant for this project, WESCORP, has advised the Utility that were FERC to require fish passage past the dam, this project would no longer be economically feasible. Secondly, the Issue of instream flow passage requirements has yet to be resolved with ADF&G. In 1998, the agency filed instream flow reservations with DNR that effectively uses all of the water in Ward Creek for anadromous fish. At this time the Department of Natural Resources (DNR) has not adjudicated the instream flow request. Lastly, staff remains concerned that the future capital and O&M costs associated with this project, including the cost of maintaining the wood penstock; the cost of constructing the electrical circuit from the Connell powerhouse substation to the 115kV circuit; and the cost to maintain recreation facilities at Ward Lake may be understated. These concerns were shared with the City Council in September of last year and staff was directed not to undertake $107,600 in additional studies as had been requested by the regulatory agencies. Although staff has attempted to negotiate with the agencies under the review auspices of FERC, to date little, if any, relief has been forthcoming. Until such time as a change occurs In the regulatory perspective towards 15 -=16 MAR-12-66 G3:54 PM Connell Lake, staff is hesitant to move forward. Again, according to the Utility's Power Supply Planning Study as updated by R. W. Beck, Inc. in February of 1998, the Connell Lake project was anticipated to be installed In 2009 when additional demand and capacity were forecast under the high growth scenario. Given a first year cost of 6.6 cents per kWh, Connell Lake is not as financially attractive as Whitman Lake. A re-programming of previously secured federal funding to reduce the per kWh cost is likely not to be desirable given what staff believes are as of yet unresolved anadromous fish passage and Instream flow requirement issues, as well as understated capital and O&M costs associated with the project. ¢) Metlakatla Power & Light. The Metlakatla Power & Light proposal! is second only to the Whitman Lake project in terms of it being considered as a relatively straightforward alternative. Generation capacity is avallable once the transmission line and submarine cable are constructed, which is anticipated to take eighteen months. Existing capacity in the amount of at least 7,400,000 kWh’s would be available at that time. An additional 20,535,000 kWh's could be available within thirty-six months if demand warranted expansion of existing plants or new projects. According to the Utility's Power Supply Planning Study as updated by R. W. Beck, Inc. In February of 1898, the Metlakatia scenario closely followed the Smal! Hydro scenario in providing “the lowest cost power supply for ail load growth scenarios . . .” As its potential capacity exceeds that of the Whitman Lake project, MP&L could, based on the Beck load growth study, provide sufficient capacity to supply KPU's additional power supply requirements under the low and medium growth forecasts through 2017. The projected first year cost of energy at 6.25 cents per kWh is not as competitive as the Whitman Lake project, but is less than the Connell Lake and Mahoney Lake projects, as well as the Swan Lake - Lake Tyee Intertie. If KPU were willing to bear the cost of the transmission line and submarine cable to Mountain Point, it is believed that the rate proposed by MP&L could be substantially lower. Based on discussions with the offices of both Senator Stevens and Senator Murkowski, the Department of Energy (DOE) grant in the amount of $9,900,000 secured for the Intertie could likely be re-programmed for altemative hydroelectric generation projects. The City Council should note that MP&L, as part of the Metlakatla Indian Community, is not subject to the FERC regulatory review process. As such, expansion of existing plants or new projects by MP&L would probably not face as many regulatory obstacles as the Utility is accustomed to dealing with in securing licenses from FERC for KPU projects. Lastly, MP&L is proposing a contractual arrangement by which KPU would purchase power only as required. The Utility would not be obligated to pay for power thatis not used. qd) Mahoney Lake. Of the five alternatives under consideration by the Utility, the Mahoney Lake Project is probably the most complex. This is primarily due to the contractual provisions 16 cre a MAR-12-68 @3:55 PM that Ketchikan Electric Company desires to impose upon KPU, as well as identified and yet to be determined FERC license conditions, This requires somewhat of a more detailed examination of the project and the proposed Power Sales Agreement (PSA). While the project is capable of supplying KPU with generation In quantitles and at costs that are relatively comparable to other alternatives, there are risk factors associated with the proposed PSA, particularly under low load growth assumptions and certain operating conditions. Additionally, the contractual obligations proposed by KEC place significant restrictions on the Utility's ability to dispatch generation resources, in order to achieve the lowest cost and maintain system reliability. As noted above, a project license was issued to the City of Saxman in 1998 and at that time the estimated cost of the project was $28,521,000. KEC is now projecting a project expenditure of $22,000,000, based on new drilling technology to construct the 3,300 foot vertical water conveyance tunnel. Although this technology apparently has been utilized in other parts of the United States and Canada, KEC has acknowledged that it has not been used in the context of the vertical shaft that the project now intends to incorporate. The City Council should note that KEC has not yet sought or obtained FERC approval to amend the Project design, which could be a lengthy process. This is not just a question of technical feasibility, but is also an issue of obtaining approvals by the regulatory agencies for an amended design in an environmentally sensitive area. The matter is further complicated by terms of the project license, which require the completion of environmental studies, as well as imposing certain environmental conditions that must be met during construction and in operating the project. One of the more troublesome Issues is the requirement that the Licensee conduct a three-year survey after the plant has been constructed and put into operation, and then recommend fish mitigation measures as a result of the study. Appendix B of the Department of Interior's mandatory conditions includes the following: "(6) | The applicant shall provide a report to the service after three years of post construction monitoring, describing salmon access to spawning habitat within Lower Mahoney Lake, and fish population status. This report shall make recommendations for improving salmon recruitment, or otherwise Improving aquatic habitat conditions. The report shall be provided by January 16 following the third spawning season after project construction. Within one year of submission of this report, the applicant and the Service shall negotiate a remediation plan to correct any perceived problems, and the applicant shall implement the plan. The Alaska Department of Fish and Game and National Marine Fisheries shall be invited to participate in the discussions.” "Order Issuing Original License to the City of Saxman, Project No. 11382, 82 FERC 7] 62,041, p. 64,506 (1998). As will be further discussed below, existing restrictions on the project license and 17 -18 . MAR-12-66 63:55 PM or those which may be imposed as a result of ongoing environmental studies may have an adverse impact on project output and dispatch. Consequently, the proposed Power Sales Agreement incorporates provisions that could materially affect the value of the contract to KPU depending on the final disposition of license conditions. Within this context the City Council should be aware that the Alaska Department of Fish and Game recently admonished the licensee for what the State perceived as the failure of KEC to adhere to the conditions of the license for project clearing. Assuming that these issues can be addressed, the proposed Power Sales Agreement provides for the sale of energy produced at the Mahoney Lake Project by KEC and the purchase of the energy by the Utility, for all City loads in excess of the energy produced at KPU’s own hydro projects and Swan Lake. The intent of the PSA is to replace the City’s diesel generation at all times, with the following exceptions: e When the Mahoney Lake Project has no energy available to supply KPU; ¢ Regardless of the price, the City is allowed approximately 3,000,000 kWh of diesel production annually to accommodate certain testing of its diesel units (approximately 2,000,000 kWh) and ail other diesel generation (a 1,000,000 kWh ceiling). Additionally, the City is required to dispatch its use of energy from the Project according to FERC-ordered flow requirements. These flow requirements require that a large amount of water be released in August and September of each year. For the remainder of the year, there is a minimum flow requirement. These flow requirements translate into minimum takes of energy by the Utility in the amounts of 8,700,000 kWh between August and September and 11,600,000 kWh between October and July. As noted above, these could change depending on the outcome of mandated environmental studies in the first three years of project operation. Given the “must taka" nature of the Power Sales Agreement, this is an issue that has yet to be resolved to the satisfaction of the Utility. Currently, KPU has the ability to review the generation resources available to it and is able to select the mix that will provide the least cost of electricity to its customers wilhin a given, relatively short period of time, i.e., for the hour, for the day, etc. Superimposed on this flexibility is another set of KPU criteria that permit the system to meet other objectives, such as reliability during different seasons, minimization of waste of fuel or water, the need to accommodate for downtime for maintenance and testing, and, over the long-term, to plan for growth. What is critical to make the system work efficiently is that the dispatch and the planning functions of the Utility work in coordination to meet the hallmarks of a good system: low cost and reliability. If, however, a rule is superimposed that limits KPU's ability to exercise Its judgment by requiring it to dispatch one project in a certain way, above ail other criteria, then the Utility could find (a) its decision-making becoming more complicated as to how to optimize KPU's remaining generation alternatives to meet the system's objectives of low costs and reliability; and (b) the Utility's ultimate objectives could be compromised and a “second best” situation might result. The Mahoney Lake Project draft PSA is pot aimed at system optimization for 18 -19 ” MAR-12-68 63:55 PM Ketchikan Public Utilities. its primary objective is to require KPU to take energy from the Project to maximize revenues to KEC, subject only to the Utility's use, first, of its three existing hydro projects (frozen at their current capability) and second, of its Swan Lake hydro contract. System economics is not the intent, nor is system reliability or optimization of the system's existing generation resources, the objective of the Power Sales Agreement. Based on the provisions of the draft PSA, KEC proposes that the Mahoney Lake Project be dispatched according to the following criteria: ¢ Schedule KPU-hydro and Swan Lake. e Schedule Mahoney. « Only if Mahoney Is not available, schedule diesel. e For any month, there will be no diesel generation unless there is testing; or unless a Utility resource was i out of commission, In which case the amount allowed to be scheduled from diesel could only add up in any hour to the amount that the Mahoney Lake Project could not supply in that hour. e Any amounts, In any hour, that could have been supplied by the Mahoney Lake Project (in KEC’'s opinion) can be billed as If generated at Mahoney and therefore billed to the City. Given such dispatch criteria, the contractual provisions of the Power Sales Agreement places the Utility in the position of having to assume substantial financial risk, as well as having to operate its system under less than desirable restrictions. First. regardless of whether the Mahoney Lake output is required or not, the Utility is obligated to purchase minimum takes from the project at an initial estimated value of $1,319,500 per year. In the event of an economic downturn and a concurrent decrease in load, the Utility remains obligated to pay for these minimums. The City Council should note that the minimum takes are based on achieving a minimum flow requirement of at least 13 cubic feet per second (CFS) during the contract year. During August and September, the minimum flow requirements could reach 50 CFS. If KPU fails to dispatch the Mahoney Lake Project in a manner that maintains the minimum flow requirements, at any given point, KPU will be required to pay for the power as if it had been dispatched in accordance with the minimum flow requirements. For example, if KPU dispatches power at the rate of 15 CFS for thirty minutes, 13 CFS for twenty-five minutes and then drops to 6 CFS for five minutes, the amount paid by KPU will be based on 15 CFS for thirty minutes and 13 CFS for thirty minutes. Secondly, in order to purchase the minimum takes required by the PSA, KPU may be forced to back off its own lower cost hydro projects, thus resulting in spills. This is of particular concern in wet years. Although KEC proposes to reimburse the Utility for such occurrences, no spills can exceed the amount of energy produced by the Mahoney Lake Project during the hour of the spill to meet a minimum flow requirement, provided that there was no diesel generation at the same hour in excess of the 1,000,000 kWh 19 +28 MAR-12-66 63:56 PM annual ceiling. Such a restriction places KPU in the position of having to continually document and defend its dispatch methodology. KEC further proposes to cap such spill reimbursements on an annual basis at $150,000, which would be calculated once a year, after the end of the contract year. Since no database exists from which to extrapolate, staff doesn't have the ability to assess whether this is a reasonable cap or one that is artificially low, It should be noted, however, that KEC has recognized this as an issue. KEC has entered Into an agreement with the Alaska Energy Authority (AEA) to reimburse the State for any loss of revenue duc to the spill of Swan Lake Project as a result of KPU utilizing Mahoney Lake. What remains unresolved Is whether the Utility would be eligible for reimbursement by KEC under such circumstances and under the spill ceiling that is proposed. Lastly, in its April, 1999 “Review of KPU Proposal for Funding and Construction of the Swan Lake — Lake Tyee Intertie” (see Appendix No. 2) the Alaska Industrial Development and Export Authority (AIDEA) concluded that Mahoney Lake and Swan Lake were in the same watershed. If a dry year is anticipated, for example, KPU may opt to use diesel generation at the beginning of the year in lieu of hydro to store water for later use, Including having the capability of meeting FERC flow requirements in August or September at Mahoney Lake or to satisfy other requirements that may be added, Based on the provisions of the Power Sales Agreement, KEC could bill the Utility for Mahoney power in January or February, regardless of whether or nol it was dispatched, because Mahoney had generation capability. When the stored water was actually released later in the year, KPU could again be billed. The Issue is further complicated by the fact that there is no way to determine, until the end of the year, whether the 1,000,000 kWh diesel ceiling is sufficient to cover all reasonable contingencies. The overall effect of the proposed Power Sales Agreement is to permit KEC to apply hindsight to KPU's monthly and hourly dispatching decisions, and then bill the Utility on the basis of its hindsight. This places the Utility In an untenable position of having to constantly defend and justify its dispatching criteria. Unlike the other alternatives under consideration, the Mahoney Lake Project places minimum takes on the Utility regardless of whether it Is in the best interests of KPU to dispatch Mahoney power or not. Staff believes the only way to resolve this Issue is to place the Mahoney Lake Project on an equivalent footing with all other City-owned resources. If the Project remains comparably or lower-priced than the cost of the City’s alternatives, then, subject to any existing contract obligations such as those associated with Swan Lake, KPU should be able to and will dispatch Mahoney Lake. This would result in no adverse impact on Utility customers. If the Mahoney Lake Project costs are, however, higher than the KPU's alternatives, then KEC would have to absorb any costs it cannot recover from sales to the Utility. Such a solution would hald the Utility's customers harmless and would not interfere with the City's dispatch and planning discretion, which are critical to assuring system reliability and adequate capacity. To date Ketchikan Electric Company has not been receptive to such an approach, The “must take” provisions of the contract assure KEC the financing it requires to build the project, while placing the risk on the Utility. Although the project is capable of supplying KPU energy that is or will be required In the future, the dispatch provisions of the contract under certain conditions expose the Utility to an unacceptable 20 -21 MAR-12-66 83:56 PM risk. Other issues regarding the Mahoney Lake Project and proposed Power Sales Agreement are addressed in the legal analysis from Spiegel & McDiramid, which Is attached to this report (see Appendix No. 5). While portions are redundant to the Narrative contained In this document, my office urges the City Council te take the time necessary to review the analysis at length. Until such time as the issues of the “must take” provisions and dispatch are resolved, the Mahoney Lake Project alternative wil! remain difficult to incorporate into KPU's overall hydroelectric generation system. d) Swan Lake - Lake Tyee Intertle. As indicated above, with the exception of negotlating the terms and conditions of a Forest Service Special Use Permit for timber removal, all permitting requirements have been completed for the construction of the Intertie. Available generation in the amount of 88,269,000 kWh Is available at the Lake Tyee Project, which exceeds the individual capacities of the other projects under consideration. Although a Power Sales Agreement (PSA) has not been negotiated between KPU and the Project Management Committee, recent discussions indicate that the Utllity would be expected to pay the Four Dam Pool rate of $0,068 per kWh. While slightly higher than the thirty year power sales agreement option offered by Ketchikan Electric Company for Mahoney Lake, the purchase of excess Tyee energy has the potential of reducing the O&M component charged to the PMC participating utilities. In other words, the cost of purchasing both Lake Tyee and Swan Lake power could decrease depending on the amount of Intertie sales. Again, unlike the Mahoney Lake Project, the Utility would not be obligated to pay for power that Is not used, An additional argument in favor of the Intertie is that Swan Lake and Lake Tyee are supplled by independent watersheds. As alluded to in staff's assessment of the Mahoney Lake project, AIDEA’s April, 1999 report concluded that the Intertie allows for optimization of water resources and could provide, under critical water conditions, greater generation dispatch flexibility. Lastly, the Swan Lake - Lake Tyee Intertie is the first phase of a comprehensive plan for a Southeast Alaska grid, which could provide benefits to a large portion of this area of the State. Although a much longer-term project than the Intertle, its success could in !arge part be dependent on this project moving forward. If not for a funding shortfall of $25,167,189 and voter approval of the $20,000,000 State loan, construction of the Intertie could commence in approximately twelve months. As such, the remainder of staff's analysis is limited to reviewing financing options for the Intertie. Given the uncertainty regarding Ketchikan’s economy, both the Finance Director and | have concluded that the City is not in a position to assume this debt. As was alluded to carlicr, not only does the remaining $26,167,189 have to be funded, but additional diese! capacity will have to be financed at an estimated cost of $15,000,000. If the $20,000,000 State loan is taken into account as well, in excess of $60.1 million would have to be funded to construct the Intertie. Although this amount could be reduced by $5.9 to $15.6 million depending on the timber credit obtained, the ability of KPU to market such debt is questionable and voter approval is even less certain. Lastly, a debt issue of such magnitude would certainly erode KPU's City’s future borrowing capabilities. 21 P.22 MAR-12-66 63:57 PM Given the State’s fiscal gap and continued efforts by the Legislature to decrease the budget, State financing of the project's unfunded balance appears remote. AIDEA's report of last year was less than favorable regarding further participation by the State and the current climate appears not to have changed significantly. Although the efforts by the Congressional Delegation have been invaluable to date, additional funding in the amount necessary to complete the project also appears unrealistic. While my office has been advised by Steve Silver that a commitment from the Utility to complete the Intertie could possibly leverage additional federal funding, It would not be in the amount necessary to finance the balance of the project. Given KPU's inability to complete a funding package from sources that the Utility has attempted to pursue over the last three years, the last viable alternative to finance the Intertie appears to be the Four Dam Pool. Financing of the intertie by the participants of the Four Dam is directly tied to divestiture of the projects, since there is no economic incentive for the PMC utilities to construct the Intertie without having ownership of the dams. Although divestiture remains an unresolved issue, KPU retained the services of A. Dashen & Associates to review this concept. The company prepared a series of proformas under the assumption that divestiture will occur (see Appendix No. 6). Since the analysis is privileged to the PMC as a divestiture working document, It cannot be released publicly at this time, What can be stated is that under certain assumptions an economic case can be established for PMC participation in the intertie. The Dashen analysis was forwarded to the Purchasing Utility Members of the Four Dam Pool for review and has been the subject of a number of meetings during the last three weeks. On Friday, March 10, 2000 the Purchasing Utility Members and my office again met to consider this matter. After extensive review and discussion a determination was reached that should divestiture occur, the newly created entity would assume “responsibility for the financing, construction and O&M of the Intertie. Under such an arrangement, KPU would have no financial obligation for intertie debt or operating costs, other than as a member of the Four Dam Pool entity.” A copy of the Purchasing Utility Members’ correspondence is attached within the appendices to this report (see Appendix No. 7). As of the date of this report, it is anticipated that eighteen to twenty-four months will be required to complete divestiture, put the required financing into place, both for the sale of the projects and the Intertie, and complete the transfer the projects. Upon approval of the appropriate entities, KPU would be expected to assign federal, state and other funding previously secured for the Intertie to the newly formed entity, which would be created as a result of divestiture. Although divestiture of the Four Dam Pool Projects is far from certain, the proposal of the Purchasing Utility Members does relieve KPU of financing the balance of the Swan Lake - Lake Tyee Intertie. What is not covered is the cost of backup generation, which could either be the Whitman Lake Project ($8,786,000) or additional diese! generation ($15,000,000). If the Whitman Lake Project were the preferred backup generation alternative, the City Council should be aware that in all Iikellhood it would have to be dispatched behind the Intertie. 22 23 MAR-12-06 @3:57 Pm P24 VII. Staff Conclusions and Recommendation: Although KPU presently has sufficient capacity to meet its current peak demand, it is incumbent upon the Utility to continually assess Its load growth and how best to address the system's needs for power, i.e., power which can be delivered in a reliable, economic and efficient manner. Based on KPU’s Power Supply Planning Study as updated by R.W. Beck, Inc. In February of 1998, there is no question that the Utility should be pursuing additional hydroelectric generation supply alternatives, Figure 3 Projected Energy Requirements And Existing Hydroelectric Resources (Base Case) 250,000 225,000 200,000 175,000 150.0110 125,000 100,000 75,000 Energy (Megswat hours) 50,000 25,000 198 1999, 2000 2003 2002 2003 2004 200s 2006 2007 2008 009 20 2011 2012 2013 2614 2015 Wib 2017 The community's present annual energy requirement of 167,748,000 kilowatt hours (1999 net generation) exceeds both the low and base (medium) case scenarios. Although this Is largely attributable to the Ward Cove sawmill connecting directly to the KPU grid, a modest growth In load is occurring. This Is consistent with the conclusions of the ISER analysis as noted by Beck in its Power Supply Planning Study, which concluded that KPU's power requirements will “ temporarily drop but subsequently begin growing again, although at a slower rate than in the past.” As alluded to earlier, the state of Ketchikan’s economy can currently be best described as fragile. Further restrictions on the Tongass National Forest, continuing uncertainty regarding the state of the fishing Industry and the continued loss of school enrollment are just a few examples of the economic challenges that confront the community. Any additional downtum could seriously erode the local economy further and materially affect KPU’s load base. Although there are potential bright spots such as the veneer plant and Wal-Mart, staff reiterates Its position that a certaln degree of caution be taken when evaluating the various hydroelectric generation supply alternatives that are available. As such, the high load growth scenario has been disregarded and the base case (medium growth) scenario, modified for the sawmill and veneer plant, has been utilized to complete staff's assessment of the available alternatives. 23 MAR-12-96 83:57 PM P.25 Figure 4 Revised Projected Energy Requirements And Existing Hydroelectric Resources (Base Case), Ward Cove Sawmill and Proposed Veneer Plant 175,000 150,000 125,000 100,000 75,000 j 50,000 25,000 PPPEPPPEPEESES EES E As Indicated in Figure 4, staff Is projecting a 58,090,000 kWh shortfall through 2017, The question then becomes one of which supply alternative Is best able to satisfy the demand, both in terms of cost and Integration Into the KPU system. The remainder of the report addresses this issue. Staff recommends that the Connell Lake Project be removed from further consideration at the present time. Although the projected cost of power is $0.066/kWh, this rate is likely to increase if the Utility is required to address anadromous fish passage, Given an estimated capacity of only 11,960,000 kWh, mitigation measures would essentially make the project uneconomical In the context of limited generation. Figure No. 5 illustrates the kWh rates of the four remaining altematives. Figure No. & Projected Cost of Power for Alternative Generation Resources Nominal Cents per kWh, Excluding Connell Lake MAR-12-68 83:58 PM The Whitman Lake Project and the Metlakatia alternatives are the least costly, followed by the Mahoney Lake Project and then the Swan Lake - Lake Tyee Intertle. What is interesting to note is that the cost of power from the Whitman Lake, Metlakatla and the Swan Lake — Lake Tyee Intertie alternatives decrease significantly following the retirement of the debt. The Mahoney Lake Project reflects the two escalators detailed in the Power Sales Agreement and an assumed third escalator. The decrease in the cost of the Intertie assumes that the Four Dam Pool lowers rates following the retirement of divestiture and Intertie debt. In order to assess the financial impact of the power supply alternatives under consideration, the firm of D. Hittle & Associates, Inc. was engaged to estimate KPU's annual cost of power for each alternative. The cost estimates were developed using load levels projected for 2005, the year that power would be available from ail the power supply alternatives, assuming that they were developed and constructed within the time frames specified elsewhere in this report. The cost estimates for each power supply alternative were developed within the context of different load assumptions and various operating conditions, i.e., the availability of water to supply both existing and planned hydroelectric generation facilities. The load assumptions included low, medium and high load levels and operating conditions included wet, average and dry years. Other assumptions were made regarding Inflation, the price of diesel fuel, and the operating efficiancies of the KPU diesel generators. Given the assumptions noted above, D Hittle & Associates, Inc. developed a model to estimate the total annual cost of power for each power supply alternative in 2005 (see Appendix No. 8). The estimated annual cost of power includes the annual cost of operating KPU's existing power supply resources and the annual cost of the power supply alternative under consideration. The table below summarizes the projected annua! cost of power for each of the power alternatives that are being evaluated in this report. The City Council should note that for the balance of the report the Whitman Lake and Metlakatla options are treated as one alternative. Table No. 6 Ketchikan Public Utilities Power Supply Alternatives Annual Cost of Power (2005 Load Levels) (In Thousands) Load/Resource Scenario Low Load Ketchikan Hydros and Diesel Mahoney Lake Metlakatla Intertle/Whitman Lake Swan Lake-Lake Tyee Intertle Medium Load Ketchikan Hydros and Diesel 9,287) 9,860 8,346 Mahoney Lake 8,893 9,548 8,005 | Metlakatla Intertie/Whitman Lake 8,624 9,490: 9,393 [Swan Laxe-Lake Tyee interio ——=S~dC*é‘“ YC CSC 25 26 MAR-12-66 83:58 Pm Swan Lake-Lake Tyee Interie The lowest cost option is highlighted in bold for each load and operating condition. Notes: 1. Costs are shown at 2005 cost levais with inflation applied at 3% per year. 2. Diese! fuel priced at $0.85 per gallon in 2000. Price assumed to increase at rate of inflation. 3. Diesel fuel usage rate is 15.3 kWh/gallon. Variable diesel O&M Is 1.3 cents per kWh. 4. Total power cost includes fuel, O&M, capital recovery and purchased power expenses. 5. The Triangle Lake Project Is not included, as it is not expected to be on line in 2005. &. The lowest cost option is highlighted In bold for each load and operating condition, Depending on the load/precipitation scenario chosen, the combined Whitman Lake and Metlakatla option is the least costly In the majority of cases considered, followed by the Swan Lake — Lake Tyee Intertie. In no case was the Mahoney Lake Project the most Inexpensive altemative available. Consequently, when the cost of power Is added to consideration of the issues of “minimum takes,” dispatch and artificial limits on diesel generation and spill credits discussed above, the Mahoney Lake Project becomes even a less attractive alternative. For these reasons staff recommends that any further consideration of a Power Sales Agreement with Ketchikan Electric Company be discontinued. Figure No. 6 Projected Cost of Power for Alternative Generation Resources Nominal Cents per kWh, Excluding Connell Lake and Mahoney Lake 11,00 Cane par KWh 5 26 -27 MAR-12-66 63:58 PM With the exception of the Swan Lake — Lake Tyee Intertie Project alternative, none of the options under consideration provide sufficient capacity to meet the projected energy deficit. Given a potential capacity of 88.269,000 kWh, the Tyee Project has sufficient capacity to serve Ketchikan if the Intertie is constructed. As shown in Figure 6, Intertie Power, at an initial anticipated cost $0.068/kWh, is more expensive than Whitman or Metlakatla Power and Light. The Whitman Lake/Metlakatla option is, on the other hand, significantly less than the Intertie, but only has sufficient capacity to 2011 if the base case scenario holds. Other than indicating that the current legislative environment appears to be more receptive to divestiture than it has been in the past, staff is unable to assess the chances for success of the Four Dam Pool Purchasing Utilities’ objectives regarding the Swan Lake - Lake Tyee Intertle. What can be said with some certainty Is that the Utility cannot fund the investment required to complete the project. Additionally, given the current standing of Alaska’s Congressional Delegation, abandonment of the intertie at this time would most likely preclude it from further consideration for the foreseeable future. What the City Council must determine is which of two criteria is more important: cost vs. capacity? If It Is the former, the decision is relatively straightforward. The Whitman Lake/Metlakatla altemative is the most economical and should be pursued accordingly. If the latter criterion is of more importance, the Swan Lake — Lake Tyee Intertie is the preferred option. Staff does not believe that a decision can wait for the next eighteen to twenty- four months to determine /f the efforts of the Four Dam Pool Purchasing Utilities are successful. in this context, and given that capacity is believed by staff to be the more important long-term consideration, the following strategy is recommended: 1. Ketchikan Public Utilities should support the Four Dam Pool Purchasing Utlilties’ efforts to conclude divestiture and finalize a funding package for the Swan Lake — Lake Tyee Intertle. An eighteen to twenty-four effort Is anticipated. If successful, the Intertle moves ahead. 2. Staff should be authorized to continue efforts to secure a FERC License for the Whitman Lake Project. A license is anticipated in March, 2002 and the project is expected to come on line by March, 2004. The Whitman Lake Project can serve in lieu of reserve diese! generation to the Intertie. Sales of Whitman Lake power would most likely have to be dispatched behind Intertie sales. 3. Efforts to conclude a forma! Power Sales Agreement should be pursued with Metlakatla Power & Light. A budget transfer of $200,000 should be authorized, in order to commence permitting and design of the Metlakatla transmission line and submarine cable to KPU’s Mountain Point substation. A twelve to eighteen month effort is anticipated. 4. If the Four Dam Poo! Purchasing Utilities are unsuccessful in their efforts to conclude divestiture and complete a funding package for the Swan Lake — Lake Tyee Intertie, the Utility Is pasitioned to move forward with the Whitman Lake/Metlakatla alternative. 27 -28 . MAR-12-66 63:59 PM Alternative motions have been prepared for City Council consideration. Since they have not been noticed by the City Clerk’s Office, the City Council may wish to defer formal action until official publication can take place. Alternative Motion No. 1 directs staff to pursue ajternative hydroelectric generation options as detailed in the General Manager's report dated March 12, 2000, including the Swan Lake — Lake Tyee Intertie and Whitman Lake/Metlakatla options. if divestiture of the Four Dam Pool projects is unsuccessful and funding for the Intertle Is not secured, the Intertle project would be abandoned and only the Whitman Laka/Metlakatla option would move forward, If the Purchasing Utilities are successful, the Intertic and Whitman Lake (as backup to the Intertle) would proceed. Alternative Motion No. 2 directs staff to pursue the Whitman Lake/Metlakatla hydroelectric generation option as detalled in the General Manager's report dated March 12, 2000. Under this motion the Swan Lake — Lake Tyee Intertie would be abandoned and staff would seek federal and state approval to re-program Intertie funds secured to date for other hydroelectric projects. Altemative Motion No. 3 approves in first reading Ordinance No. 00-1429 authorizing Ketchikan Public Utilities to execute a Wholesale Power Sales Agreement with Ketchikan Electric Company. The City Council should note that the Power Sales Agreement, as it currently exists in draft form, Is not recommended by Spiegel and McDiramid and that major revisions are required. It Is submitted only upon the request of Ketchikan Electric Company. RECOMMENDATION It is recommended that the City Council adopt Altemative Motion No. 1 directing staff to pursue alternative hydroelectric generation options as detailed in the General Manager's report dated March 12, 2000, including the Swan Lake — Lake Tyee Intertle and Whitman Lake/Metlakatla options; contingent upon the understanding that should the Four Dam Pool Purchasing Utilities not complete divestiture and secure a funding package for the Swan Lake — Lake Tyee Intertle, the Utility will abandon the project and move forward with the Whitman Lake/Metlakatla alternative only. Alternative Motion No. 1; | move that the City Council direct staff to pursue alternative hydroelectric generation options as detailed In the General Manager's report dated March 12, 2000, including the Swan Lake — Lake Tyee Intertie and Whitman Lake/Metlakatia options; contingent upon the understanding that should the Four Dam Pool Purchasing Utilities not complete divestiture and secure a funding package for the Swan Lake — Lake Tyee Intertie, the Utility will abandon the project and move forward with the Whitman Lake/Metlakatla alternative only. Alternative Motion No, 2: | move that the City Council direct staff to pursue the Whitman Lake/Metlakatla alternative hydroelectric generation option as detailed in the General Manager's report dated March 12, 2000; that the Utillty discontinue efforts for the Swan Lake — Lake Tyee Intertie; and that efforts be undertaken to reprogram federal and state Intertie funding secured to date for other hydroelectric projects accordingly. Alternative Motion No, 3: | move that the City Council approve in first reading 28 -29 MAR-12-68 63:59 PM Ordinance No, 00-1429 authorizing the City of Ketchikan, Alaska d/b/a Ketchikan Public Utilities to execute a Wholesale Power Sales Agreement with Ketchikan Electric Company; providing for the filing of referendum petitions; establishing an effective date; and directing the General Manager to execute such Power Sales Agreement concurrent with any Settlement Agreements as may be required with Cape Fox Corporation to resolve the Beaver Falls Land Dispute. AGENDA - 03/14/00 - KPUNBI 29 -368 MAR-12-86 63:59 PM Ketchikan Public Utilities Estimated Annual Cost of Power from Power Supply Alternatives An estimation of the annual cost of power to KPU for several alternatives available to KPU has been prepared. The purpose of the analysis is to determine the lowest cost power supply alternative for KPU and its customers. Since the analysis uses many assumptions and parameters based on information currently available, it is important that varying inputs are used to address the uncertainty that exists in the future. In this manner, KPU can gain an understanding of the cost risks that exist in the future and plan its generation and transmission investments to best manage these risks, Power supply related costs include projected diesel fuel, diesel operations and maintenance (O&M) expenses, power purchase expenses, hydroelectric generation O&M expenses, an annual capital recovery (debt service) for new hydroelectric and transmission resources that KPU would construct. Costs have been projected for the year 2005 for each power supply scenario. Three different load levels have been used for the analysis corresponding to previously forecasted low, medium and high growth projections for KPU. The estimated total annual cost of power for the various power supply and load growth levels serves as a means to compare the options available to KPU and determine the cost impact of each scenario on KPU and its customers. A primary element of the analysis is the projection of power supply requirements and generating resources used to supply these requirements. The basis for the projected power supply requirements is the load forecast developed by ISER in 1998 adjusted in carly 1999 by CH2M-Hill in an analysis for the State to acknowledge increased KPU power sales to the Gateway Forest Products (GFP) sawmill. Each power supply scenario is designed to fully supply KPU’s capacity reserve and energy generation requirements for each year of the analysis. The power supply scenarios considered in the analysis are: 1. Existing System with Diesel (Status Quo) 2. Mahoney Lake Purchased Power 3, Metlakatla Intertie with Whitman Lake 4. Swan Lake - Lake Tyee Intertie Generally, the generating units available to KPU are projected to be used (dispatched) starting with KPU-owned hydro since this is KPU’s lowest cost resource. As such, KPU- owned hydro is used to its full capability in each year of the analysis. Swan Lake is used next because of provisions in KPU’s long-term agreement for powez purchases from the State. In some years depending on water conditions, Swan Lake can provide KPU’s entire net energy requirement. For the diesel scenario, energy requirements not supplied with KPU-hydro or Swan Lake are met with diesel generation. D. Hittle & Associates, Inc, DRAFT - 3/12/2000 Page | -=31 MAR-12-68 64:88 PM The Mahoney Lake scenario uses energy from the Mahoney Lake project to supply KPU’s energy requirements net of KPU-hydro and Swan Lake. In accordance with the proposed power purchase agreement with KEC, minimum in-stream flow requirements for Mahoney Lake would require KPU to forego generation at Swan Lake or the KPU- owned hydro units under certain circumstances. The third resource scenario involves the construction of a transmission interconnection between the electric systems of KPU and Metlakatla Power & Light (MP&L) and the development of the Whitman Lake hydroelectric project. Approximately 10,600 MWh annually of hydroelectric energy generation capability is estimated to be surplus to the needs of MP&L. This energy is presumed to be available to KPU for purchase if the transmission interconnection is developed. If KPU loads continue to increase in the future, the Triangle Lake hydroelectric project on Annette Island could be developed. In the fourth resource scenario, the Swan Lake to Lake Tyee intertie is assumed to be constructed and Lake Tyee project generation surplus to the needs of Petersburg and Wrangell is made available to KPU. The five electric utilities that purchase power from the Four Dam Pool recently proposed to purchase the Four Dam Pool projects from the State. The purchasing utilities also recently indicated a desire to pursuc development and financing of the intertie, Pursuant to this proposal, the Four Dam Pool would finance the cost to construct the Intertie and KPU would purchase power from Lake Tyee at the Four Dam Pool rate. For the purpose of the analysis, all the new resource scenarios, any remaining energy requirements of KPU after application of the new hydroelectric resources, are supplied with diesel generation. Additionally, the power cost analysis has been prepared for alternative water conditions which can significantly affect the generation capability of KPU’s hydroelectric resources from year to year. . A number of assumptions have been used in the analysis. Principal among these are the following: 1. General inflation of 3% per year. 2. Total future power supply requirements are those forecasted by ISER in its 1998 load forecast for KPU, adjusted in 1999 to accommodate KPU’s additional energy sales to the GFP sawmill. Average annual load growth rates reflected in the forecast, are 0.6%, 1.1% and 2.1% for the low, medium and high growth scenarios, respectively. In 2005, total KPU energy requirements are forecasted to be 176,000 MWh, 146,400 MWh and 227,700 MWh for the medium, low and high growth scenarios, respectively. 3. KPU investments in new resources are to’ be funded with tax-exempt debt at an interest rate of 6.5% and repayment period of 20 years for hydroelectric, transmission resources and diesel generators. 4. Diesel fuel price of $0.85 per gallon in 2000 escalated at the rate of general inflation to $0.99 per gallon in 2005. D. Hittle & Associates, Inc. DRAFT - 3/12/2000 Page 2 -32 , MAR-12-88 64:06 PHM ; Diese] fuel usage of 15.3 kWh per gallon. 6. Diesel variable O&M of 1.3 cents per kWh in 2000. 7. Mahoney Lake project becomes available January 2003. Power is sold to KPU 10. al over a 24-year term at a rate of 6.5 cents per kWh for the first 8 years, 7.37 cents per kWh for the next 8 years and 8.35 cents per kWh for the final 8 years. The Metlakatla Intertie becomes available January 2003 and is constructed for a cost of $3.45 million. The construction cost is to be financed by KPU. Annual O&M costs of the Intertie are $50,000. Surplus hydroelectric energy available to KPU from MP&L is 10,660 MWh per year. This surplus hydroelectric generation is to be sold to KPU, as needed, by MP&L at a rate of 4.0 cents per kWh. No escalation in this rate is applied over the term of the analysis. The 4.6 MW Whitman Lake project is constructed at a cost of $7.6 million (2000 dollars) and becomes available January 2004. Annual O&M costs are $193,000. The Whitman Lake project is estimated to provide 19,640 MWh annually to KPU under average water conditions. For the dry year scenario, this amount decreases to 17,000 and increases to 22,000 for the wet year scenario. The enst of power from Lake Tyee to KPU is based on recent estimates by A.Dashen & Associates for the Reduced Power Rate scenario for Four Dam Pool power, The rate is 6.96 cents per kWh in 2005. Results Principal results of the analysis are summurized as follows: Le For the medium load growth case, KPU has sufficient generating capacity to meet peak loads and provide necessary generating reserves until 2016. For the low load growth case, existing generation capacity is sufficient through at least 2032. If loads grow at the high rate, additional capacity would be needed as early as 2002. Any new generation installed at the present time would be primarily added to offsct dicsel energy generation. The total melded cost of power supply for KPU at the present time is estimated to be 4.6 cents per kWh. If loads grow at the medium rate, fuel prices follow the assumptions above, and KPU does not construct or contract for any new resources over the next ten years, the total melded cost of power is estimated to be 5.3 cents per kWh in 2005. Minimum purchase requirements from the Mahoney Lake project as a result of FERC required minimum in-stream flows, would require KPU to forego energy generation at KPU-owned hydroelectric resources. In accordance with KPU’s D. Hittle & Associates, Inc. DRAFT - 3/12/2000 Page 3 -3s MAR-12-06 64:60 PM P.34 agreement with the State, Swan Lake generation could not be reduced to accommodate minimum purchases from Mahoney Lake. 5. The variance in precipitation in the Ketchikan area causes variation each year in energy generation at Swan Lake and the KPU-owned hydro resources. This variation would significantly affect KPU’s need to purchase power from Mahoney Lake. In wet years, KPU should be able to provide all of its energy requirements with its existing energy resources, even if loads increase beyond the present level. During these wet years, KPU would potentially need to forego a significant amount of generation from its existing resources in order to meet minimum purchase requirements from Mahoney Lake. During dry years, the energy generation at all area hydroelectric resources is lower. Mahoney Lake could contribute to the shortfall in these years, but the lower available water in Mahoney Lake would reduce the amount of generation Mahoney Lake can produce, 6. The total estimated annual power supply cost for KPU in 2005 for the alternative power supply scenarios, load growth and water conditions is as follows: Power Supply Alternatives Annual Cost of Power (2005 Load Levels) (2008 Doilars - In Sar Load/Resource Scenario Yom ae a a a Ketchikan Hydros and Diesel Mahoney Lake Metlakatia Intertie/Whitman Lake Swan Lake-Lake Tyee Intertie Ketchikan Hydros and Diesel Mahoney Lake Metlakatla Intertie/Whitman Lake Swan Lake-Lake Tyee Intertie Ketchikan Hydros and Diese! Mahoney Lake Metlakatla Intertie/Whitman Lake Swan Lake-Lake Tyee Intertie 7. A significant advantage of the Metlakatla Intertie scenario is the ability to add new generating capacity as needed depending on load growth in the future and other factors. With this scenario, new resources would be added in smaller increments that more closely align with KPU’s projected growth, D. Llittle & Associates, Inc. DRAFT - 3/12/2000 Page 4 MAR-12-66 64:61 PM P.ss WAR~10-2000 FRI 12:03 PM REGAL ALASKAN FAK NO. 9072438815 P, 02/04 Four Dam Pool Project Management Comminee March 10, 2000 ‘The Honorable Bob Weinstein Mayor of City of Ketchikan The Honorable Lew Williams Lf Vice Mayor of City of Ketchikan Tom Coyne, City Council Robert Norton, City Council Joy Butler, City Council Marty West, City Council Steve Williams, City Council Mike Harpold, City Council City of Ketchikan 334 Front St. Ketchikan, AK 99901 Re: Support of Four Dam Pool Utilities For Tyee-Swan Lake Intertie Dear Mayor Weinstein, Vice Mayor Williams and City Council Members: The Tyce-Swan Lake Intertie has the full support of the five utility power purchasers of Four Dam Pool power (including Ketchikan Public Utilities). As you are aware, these utilities have made 2 proposal to the Alaska Energy Authority (“AEA”) to purchase the Four Dam Pool- Initial Project (four hydro projects and related transmission facilities) from the State, The completion of the Intertie has been and continues to be a key part of our future plans for the ultimate acquisition and development of these projects, At our meeting with AEA officials on Friday, March 10, we again made clear that any Proposal to the State to purchase the Four Dam Pool must include continued State and Federal Support for the Intertic. We intend to submit legislation which will create a new entity. Initial Project Agency, for the purpose of purchasing the Four Dam Pool-Initial Project and taking on the responsibility for the financing, construction and O&M of the Intertie, Under such an arrangement, KPU would have no financial obligation for intertic debt or operating costs, other than as a member of the Four Dam Pool entity. _ MAR-12-88 04:01 PM “ P.se HAR-10-2000 FRI 12:04 PH REGAL ALASKAN FAX NO, 9072438815 P, 03/04 City of Ketchikan March 10, 2000 Page 2 As part of our effort to determine legislative support for the acquisition of the Four Dam Pool-Initial Project, we have found wide support for our effort and are encouraged that we can form the new entity and purchase the Project in due course. Thank you for your support Purchasing Utility Members of the Four Dam Pool Project Management Commitice CITY OF KETCHIKAN Z, By CITY OF WRANGELL By moore Title a _ a pee _SHofop CITY OF PETERSBURG By Title Charronan JH Wal-tlag bdlageh Date ~J/D— .MAR-12-98 94:01 PM P.3s7 HAR-]0-2000 FRI 12:04 PH REGAL ALASKAN FAX NO, 9072438815 P, 04/04 City of Ketchikan March 10, 2000 Page 3 COPPER VALLEY ELECTRIC ASSOCIATION, INC. tite _ Chef Fxcenlere Hfrcer— _ Dats 3-0-2000 KODIAK TION, INC. By Title ed Sr gaS 4/7 hike es fe eo MAR-12-66 64:61 PM . Draft—March 1, 2000 : ; | OMETLAKATLA- KETCHIKAN INTERTIE PROJECT (+. sSIRECONNAISSANCE I REPORT - , Ketchikan, Alaska MARCH 2000 -38 , MAR-12-66 64:82 PM KETCHIKAN PUBLIC UTILITIES METLAKATLA-KETCHIKAN INTERTIE TABLE OF CONTENTS LETTER OF TRANSMITTAL TABLE OF CONTENTS THE EXISTING FACILITIES. ......ccosscoosenscescsansentanssrescrssecsssenpecscoases cared DeSCription ....ccscsssreseeeserees as) Diesel Plant <coccesoceosessessesrerstss 4 Battery Energy Storage System... v4 Chester Lake Hydro .......-ssssssssessessecssnesscnnseraeenees vet Purple Lake Hydro.....ssesecsescesssstseneserscsssesanseesenreeee wd Review of Technology...... od Hydroelectric Power.... ao Site REVIEWS.....scceveeees «6 Darnsiarid RESEIVOII secossceocecseeeosasessccvesavevorsvestovesescarenceccecacescaccosacaesosesssed 6 Structure and Gate Conditions ........cssrcsssssssssccsscocsssenosseccnsvenencseasesaracease ie POWEL CONMEUUS:...<..c000s orasesvepocscoScilovsnonecnosssbeatss~ceqistoveasssicecepeceaveaseneses ze POWEr Plants co csccczscstevvassoccceussssoasssverssvsssoyasesencvenvensooastevsbereqsauesesasrastasce 7 Diesel RO Wer sescsccsccecescscecsreocvescovdiccssatsvacseonvscesensesdatstanaeass 260 SUMIMALY .1..00..sesercrsscssseronsncncsscostoverersenenonessonsosassoesesseessreees +8 Estimated Useful Life of the Existing Facilities «9 Operating History......ssscssscssessscsccrsrecnssastseneceronensssessossenvensaneocanenssnrsseseteceenesess 9 Power Studies........ ool Hy CrOlogy....cosssrssesnssessssesensnesscssscerenssneseootorsensenensrea cess gotil I Power Production ......sssccccssescsssssnsssecnssacsceecasseneecsarssnes 11 Operating Programs and Procedures .. <3 (GENOA 5, cccsesscrevstesesasconsconcnnsqaserusies 313 Dam Safety Inspections.... enol Operating Expenses ......essseserseerresersecsrs ssp FUTURE HYDROELECTRIC POTENTIAL... acl QV CIV OW ives ccctscesathensaacusvovecseconrecesvavssases wel Cost Estimates......cccrerccecssscntsrssnresseeseees gees 5 Direct Construction Cost Estimate .....sssesesssecsscenserscserecsessnsseasantenenesees 7S Otal | Gonstructlon Gost) Estimate <:1<:.2-.0s-caseseeccscoavecsssstees eeneeuaabassvessesses> 16 AGMitial! COStSssccesecececsescocsecessecese ste Generation Estimates ......-.--s+ Chester Lake Hydro Expansion Project Description ......cscrssessserssrsescersssnssasenronsessereseseseoes GOnStUGHION GostiEStimale jcesqaccecscscevseeeseneesomeavenstsgasosucqaeos-Sonoesssesenceeeasesso xovs130500 Yo Dwr RW} aa P. 33 , MAR—12-66 64:62 PM METLAKATLA-KETCHIKAN INTERTIE Power Generationirc.c.cc-sccsosessrscacocencsessouccostsssasntasssrsetecsstensvoesesocasesacangaseoss ng Purple Lake Hydro Expansion .......sesssosssssesesssssecsmesnessatessnesnssaesnesenseseasansenees 19 Project Description ......0.-.-.+ ere VD Construction Cost Estimate +20 Power Generation... Triangle Lake Hydro... ee Project Description ..........- +23 Construction Cost Estimate neces Power Generation... +26 SUMM ALY ..se-eseeesecaeineee cooled, Other Hydro Potential .....s.sccsessercssssrsereenesseseeenes 28 PROPOSED METI LAKATLA-KETCHIKAN WINTER E scoctecscecscscessccessneseseeceseceseees 28 Proposed Interconnection.............0++ snesenerscsnecasacsocasseavecteneneceoeresesenes 28 Construction Activities .... nvekD TrANSMISSION ...-....e0eee-0+ .30 DOSCTIPLION ......ecsessrererncacaoneensnssoancccenennacnneneneseeaesatenensceseeasennsessennenaes +30 Intertle Construction Cost ....ccsesssevssascasctscuqessesceescseavensesoesiieassseenn==d mie) IMLEFCOMMECTION ....escecccsororsscacesonseveveaccccensenrssncoseserenses se PRINCIPAL CONSIDERATIONS AND ASSUMPTIONS... coe, SUMMARY... ccctcasceccssorecsessececsncotercecctacuaveussssecscasecosescensnsensncacdsssotsscseasesot vanasaes 33 APPENDICES APPENDIX A REFERENCES APPENDIX B SITE PHOTOGRAPHS DURING SITE VISIT (FEBRUARY 9 & 10, 2000) This report has been prepared for the use of the client for the specific purposes Identified in the report. The conclusions, observations, and recommendations contained herein attributed to R. W. Beck, Inc, (“R. W. Beck”) constitute the opinions of R. W. Beck. To the extent that statements, information, and opinions provided by the client or others have been used in the Preparation of this report, K. W. Beck has relied upon the same to be accurate, and for which No assurances are intended and no representations or warranties are made. R W. Beck makes no certification and gives no assurances except as explicitly set forth in this report. Capyright 2000, R. W. Beck, Inc, All rights reserved. 028130300 301/00 DeFt R.WBeck i -48 MAR-12-66 64:62 PM “ . Mr. Jim Voetburg Assistant General Manager Ketchikan Public Utilities 2930 Tongass Avenue Ketchikan, Alaska 99901 Subject: Metlakatla - Ketchikan Intertie Project Reconnaissance Report Dear Jim, Presented herein is our Reconnaissance Report of the proposal provided by Metlakatla Power and Light's (“MP&L’) to sell excess power to Ketchikan via a new transmission line that would be constructed to intertie MP&L's electric system with the Ketchikan Public Utilities’ (“KPU”) electric system. If KPU decides that the proposed concept has merit, then further analysis will be necessary to; (i) better define the costs and sizing of project components, (ii) assess economic feasibility, including loads and resources, projected annual costs and projected life of project based on projected utilization and (iii) assess pricing of energy to be sold to KPU. Our review and analyses included a physical review of MP&Ls current generating assets, a summary review of the proposed Metlakatla-Ketchikan Transmission Intertie (“Intertie”) and proposed future generating resources to be located on Annette Island. The generating resources reviewed included the Centennial Diesel Plant, the Battery Energy Storage System (“BESS”), the Chester Lake Plant and the Purple Lake Plant (collectively, the “Existing Facilities”), We also reviewed the cost to construct the Intertie and evaluated: (i) the proposed 3-MW expansion to the Chester Lake Plant, (ii) a potential 24-MW expansion to the Purple Lake Plant, and (iii) a potential new 4-MW hydro plant at Triangle Lake, all to be located on Annette Island (see Figure 1). During the course of our review, we visited and made general observations of the Existing Facilities sites. The general field observations were visual, above ground examinations of selected areas, which we deemed adequate to comment on the existing condition of the Existing Facilities. The site visit examinations were not to the level of detail necessary to reveal conditions with respect to geological or environmental conditions, the internal physical condition of any equipment, or the facilities conformance with agreements, codes, permits, rules, or regulations of any party having jurisdiction with respect to the Existing Facilities or their sites. 20vi2813_0300 3/100 Drart R. W. Beck 1 =~41 STATON BW 22 ANNETTE ISLAND Wd £8:%68 Boo-zrI—aHW ' Kas te een Sanne — . MAR—12-66 64:85 PM In addition, we have reviewed available historic monthly records of the Existing Facilities with regard to; (1) the energy production, (2) maintenance expenses, and (3) operating records. We did not perform an environmental site assessment nor have we independently analyzed other options available to KPU for meeting its power requirements. Based on our review, we have prepared estimates of energy that could be transmitted from MP&L to KPU. For the proposed hydro additions in the MP&L system we have prepared conceptual cost estimates for an upgrade at the Purple Lake Plant and for a new hydro project at Triangle Lake. In the course of our review, we have relied on the work of other consultants who have evaluated and analyzed the Existing Facilities. The goal of this Reconnaissance Report is to provide planning level information to help with the analysis of whether the existing and future planned resources of MP&L can reasonably be expected to produce excess energy, in sufficient amounts and at necessary times, to meet the load requirements of KPU. Our report first addresses the “Existing Facilities” followed by a review of the future “Proposed MP&L Resources” and then a review of the “Intertie Project” The report is concluded by identifying the “Principal Considerations and Assumptions” used in our analysis and the key findings based on the reviews and analysis herein. THE EXISTING FACILITIES DESCRIPTION The MP&L electrical system, located on Annette Island, was examined to assess the condition of the Existing Facilities and to estimate the potential quantity of energy available from MP&L facilities. MP&L presently provides electric service to residential customers with a peak demand of approximately 3.8 MW. The MP&L system is comprised of the following generating assets, which in aggregate amount to 8.9 MW: = Three 1.2-MW hydroelectric generating units at Purple Lake m One 1.0-MW hydroelectric generating unit at Chester Lake = One 3.3-MW diesel unit at Centennial = 1.0-MW Battery Energy Storage System (the “BESS”) MP&L currently operate the hydro facilities as base-load generation for meeting their energy needs. The diesel unit and BESS are used for emergency backup during outages of the hydro plants and for meeting rapid load changes. 20V12813_0300 31/00 Drart R. W Beck 3 ~43 . MAR-—12-66 84:85 PM ' . DIESEL PLANT The 4,500 hp Caterpillar Diesel has historically been the lead unit for MP&L, prior to the installation of the BESS. It was commissioned in 1986 and underwent extensive overhaul in July 1996. Replacement of the heat exchanger with a higher capacity radiator was completed during May 1997. Fuel storage for 440,000 gallons of diesel exists on site. With the closure of the Annette Hemlock Sawmill in November 1999, the diesel unit is not used as extensively as before and is primarily used as a backup emergency reserve. BATTERY ENERGY STORAGE SYSTEM The Battery Energy Storage System (the “BESS”) is a 1.0 MW resource, which was installed in 1997. It acts as a buffer for the existing hydro generation against fast load swings and to balance the system for frequency and voltage fluctuations. The BESS can be used as either a load or a resource depending on the dynamics of the electric system. The result is a more efficient system that can more quickly accommodate changes in loads and resources. An Automatic Generator Control (“AGC”) system commands each of the MPé&L generators, as well as BESS, to reliably supply system loads, thus minimizing frequency and voltage fluctuations. The BESS is capable of providing approximately 1.0 MW over a 1-hour period to provide black-start and system support function, for example due to inadvertent tripping of the hydro units. Black-start is the ability to restart a generating resource without having access to energy from another generating resource. CHESTER LAKE HYDRO Chester Lake Hydro is comprised of a dam, reservoir, penstock and powerhouse containing a single 1,042 kW Felton (fixed blade) turbine generating unit, which was constructed in 1986. The turbine is rated for accommodating water with a head of 781 feet at a velocity of 18 cubic feet per second (“cfs”) at a machine speed of 1200 rpm. The dam is a 40-foot high concrete arch dam with normal maximum pool elevation of 854 feet above mean sea level ("msl"). The reservoir has an active storage capacity of 1,544 acre-feet between El 854 and its minimum operating poo! FI... 835. The intake to the penstock is integral with the dam and is comprised of a slide gate located near the bottom of the dam with a centerline elevation of 835.9 feet, msl. The penstuck is a 20-inch diameter stcel pipe constructed above ground and is approximately 3,521 feet long. The community of Metlakatla relies on Chester Lake for water supply. There is a 4 inch water supply connection from the penstock for delivering water to the community. M2513 _030U L/00 Drart R. W Beck 4 44 eee cee Ei) ee) Theme || baa | (etg)) ee me .MAR-12-66 84:84 PM . . PURPLE LAKE HYDRO Purple Lake Hydro is comprised of a dam, reservoir, tunnel, penstock and powerhouse containing three horizontal Francis-type, (fixed-blade) turbine- generating units. The rated capacity of each of the Francis turbines is 1,000 kW during normal operation, defined as 0.8 power factor (“pf”), 900 rpm, 3-phase, 60 cycle and 2,400 Volts. Each unit is capable of operating at approximately 1,200 kW. Each Francis turbine has a rating of 1,765 horsepower (“hp”) at 300 feet head (design basis). The equipment was originally installed in 1956, however a new control system was installed in 1997, which allows the plant to be remotely controlled from the control room at the diese! plant The Purple Lake dam is comprised of a rockfill embankment with a height of about 30 feet. An overflow-weir spillway is located in a Saddle adjacent to the dam with a crest EL of 321. Purple Lake has an active storage capacity of approximately 25,000 acre-feet. Area and volume curves were available from a 1953 study performed by Hubble & Waller Engineering, and the data was regenerated by Atlas Engineering Group ('? . Minimum pool Elevation is 294 feet, msl. The natural outlet located at the east end of the lake is at EL 316 feet, msl. Purple Lake has a surface area of approximately 960 acres at normal madmum pool EL 321. The tunnel intake is at El. 282 feet, msl. The intake building has a floor elevation at El 326 feet, msl. The intake shaft is 44 feet deep and contains a 5-ft by 7-f Rodney Hunt slide gate. The intake is also equipped with a stop log slot. The trashracks are 8-feet wide and extend down to EL 282.6 feet, msl. There are four trashrack panels, each 11-feet long. A second outer trashrack panel, measuring 19’-6”long by 6’ wide, is located in front of the intake structure through a submerged entry tunnel. The intake generally receives little trash since it is located at the opposite end of the reservoir away from the spillway outlet. The approximate tunnel length is 2,586 feet and has an unlined 7.5-ft high by 7-ft wide horseshoe-shaped cross section. The surge chamber is located at the downstream end of the tunnel and has a 1¢-foot diameter The penstock is a 66-inch diameter, above ground steel pipeline and is approximately 1,250-feet long. A 48inch-diameter guard valve is located at the tunnel portal. REVIEW OF TECHNOLOGY HYDROELECTRIC POWER Hydroelectric power is a conventional form of electricity generation with a proven track record for over 100 years. The hydroelectric power plants contain equipment that converts hydraulic energy into electric energy. Water under pressure is released in a controlled manner through waterways, called penstocks, to drive waterwheels, er turbines. The turbines are connected to generators that rotate to produce electricity through magnetic coils, The “de-energized” water is discharged from the turbines into a tailrace channel that returns the water to the river. Hydroelectric XM2813_0300 3100 DRart R. W Beck 5 45 MAR-12-66 64:04 PM projects can make use of natural features such as waterfalls or cascades or manmade dams to develop the head required creating the pressure in the water behind the turbine. Dams can also create reservoirs that allow for storage of water during wet periods and subsequent release of water during dry periods. The intake structure is equipped with service gates and tashracks. The intakes have an extra slot in front of the service gate for an emergency gate of stop logs. The trashrack located in front of the Inlet prevents unwanted debris from entering the hydraulic passage and possibly damaging the turbine runner (or water wheel). The penstock is comprised of a steel pipe, a tunnel, or other pressure vessels. Surge tanks are needed at the Purple Lake Plant to reduce the effects of pressure increase resulting from a quick change of flow through the turbine. At the Chester Plant, the Pelton Turbine technology has a deflector that redirects the nozzle flow away from the turbine runner, which helps to limit transient pressures in the pipeline. The powerhouse is a structure that houses the electromechanical equipment, including the turbine runner, generator and auxiliary components, that together convert hydraulic energy to electrical energy. SITE REVIEWS DAMS AND RESERVOIR Because the dams are located wholly within Metlakatla Indian Community (“MIC”) lands, there is no Federal or State regulatory agency that overseas the safety of the dams. Consequently, these dams do not have the annual inspections that is typical of most dams. The Chester Lake Dam was rebuilt in 1986. The concrete arch dam shows little sign of weathering. The Purple Lake Dam was originally constructed in 1956. The rockfill dam was overgrown with trees and several logs were piled on top of the concrete spillway crest. Trees and brush need to be cleared from the embankment dam and the logs removed from the spillway crest MP&L operators reported that when the reservoir ices over, operation of the hydro units at either the Purple Lake Plant or Chester Lake Plant becomes difficult because a negative vacuum is created which causes the turbine units to cavitate. Under these conditions the hydro ums are shut down and the diesel plant is relied upon for meeting system loads. To restore operation to the hydro plants, holes are blasted through the ice to eliminate the vacuum. However, this is a temporary solution. Generally the ice needs to melt to the point where the vacuum is eliminated. 30v2813_0300 3100 Drart R. W. Beck 6 ~ 46 MAR- 12-986 64:64 PM STRUCTURE AND GATE CONDITIONS The dams likely would be classified as “low hazard” under Federal Energy Regulatory Commission (“FERC”) definition, since It has been reported that there are no homes located below these dams where property and lives would be endangered. The Chester Dam spillway has been modified to include a stop-log structure that can be used to allow water to be stored above its crest, thereby increasing the active storage. Stop-logs are generally designed to fail when a couple feet of flow occurs over the top of the structure. When this occurs the capacity of the reservoir returns to normal, however there can be a considerable increase in water flow as the stop-log structure fails. There are trashracks upstream of the intake headgates at both dams to protect the turbines. There is no trashrack remoyal equipment at either site, but trash is not believed to be a problem. At Chester Lake, vegetation is sparse around the lake; at Purple Lake, the power intake is at the opposite end of the lake outlet, where spill occurs during high flows during the spring runoff period. Power CONDUITS The Chester Lake penstock was constructed during 1986 and is in good condition. The Purple Lake penstock was reported to have been inspected recently by Acres International (“Acres”). MP&L staff indicated that Acres also reported the penstock to be in good condition. The Purple Lake tunnel was not inspected and its condition is unknown. Power PLANTS Powerhouse Structure All powerhouse structures appear to be in satisfactory condition, and both power plants were clean and tidy. : Generators The generator windings are usually the most expensive maintenance item in a hydroelectric power plant Most of the generator windings in these plants are original, with the exception of the Purple Lake Plant where all of the generators were reported to have been rewound during the 1990's. The generators have been operated well within their ratings over the years, with winding temperatures significantly below the maximum allowed. This has contributed to the life of these windings. We found all other major components of the generators in satisfactory condition. The static exciters are original and are performing well. XM2813_0300 1/00 DRAFT R. W. Beck 7 -47 — .MAR-12-88 94:85 PM Turbines All the turbines are original equipment. All are reported to be operating satisfactorily and our site visit confirmed this. All of the Purple Lake turbine runners were refurbished in the 1990’s at the same time the generators were rewound. MP&L indicated that the runner for Purple Lake Unit 3 will be replaced with a new one sometime later this year The old one can then be refurbished and used as a spare for any of the three units. No other turbine work is planned, nor did we find the need to do so. These turbines should continue to provide reliable and trouble-free service for many years. Miscellaneous Mechanical Equipment While the mechanical auxiliary equipment is in satisfactory condition, the equipment appears to be original. No components are scheduled for replacement in the foreseeable future. Accessory Electrical Equipment While the accessory electrical equipment was found to be in satisfactory condition, the equipment appears to be original, with the exception of new batteries at the Purple Lake Plant, which are used for black start capability. Mié&L have added new Automatic Generator control (“AGC”) controls at each of the power plants so that the plants could be operated remotely from a control room located at the Centennial Diesel Plant. No components have yet been scheduled for replacement over the foreseeable future; although MP&L staff have been directed to investigate the cost of replacing the switchgear and switching equipment at the Purple Lake Plant. Power Transformers All of the transformers are original and, according to MP&L staff, the transformers have been operating satisfactorily. MP&L staff have been directed to investigate the cost of replacing the Purple Lake power transformers. DIESEL POWEK The Centennial Diesel unit was put in service in 1985. Various upgrades and modifications have been accomplished since the original construction of the units in order to increase the capability and operability of the unit. SUMMARY Based on our limited review of the various components comprising the Existing Facilities, the Existing Facilities have been designed and constructed in accordance XM2813_0300 100 DRAFT R. W. Beck 8 -48 ened Reine oats ‘ Osea - _ MAR=12-68 o4:85 PM with generally accepted engineering practices and the technology in use at the Existing Facilities utilizes conventional methods which are sound and proven. ESTIMATED USEFUL LIFE OF THE EXISTING FACILITIES The useful life of hydroelectric facilities is typically much longer than for thermal generating plants. Properly maintained hydro facilities can operate reliably for well over 100 years, although renewals and replacements of mechanical and electrical equipment will be necessary. This is primarily because hydroelectric plants’ large, slow rotating units have long life expectandes. Also, the hydro project's civil works features, which includes dams, waterways and powerhouses, if properly maintained, generally perform well with little deterioration. The useful life of diesel generating equipment is not as long as hydroelectric facilities. For planning purposes a term of about 25 years is often used, however depending on usage, maintenance and renewal and replacement programs, much longer lives have been achieved. We have reviewed the quality of equipment installed at the Existing Facilities, the general plans for operating and maintaining the Facilities and the performance of the Facilities to date. On the basis of this review and assuming that MP&L operates the Facilities consistent with prudent utility practice and equipment vendor recommendations, including timely renewals and replacements, we are of the opinion that the existing hydroelectric facilities should have a useful life of 20 years or more. While the Centennial Diesel and the BESS may achieve longer lives, using an additional 10 years for planning purposes is reasonable. OPERATING HISTORY One of the key issues to review before proceeding with more detailed planning work for the Intertie is to determine the operating history of the Existing Facilities. The operating levels of the Existing Facilities, as measured in megawatt-hours, will help to establish whether during the recent past there would has been sufficient energy that could have been sold to KPU to support more extensive study of the Intertie. For the Existing Facilities, we have prepared operating summaries, which include reported availability factor and capacity factor Availability factor is traditionally defined as the number of hours that the plant is available to operate divided by the number of hours in the period. Capacity factor is defined as the net electrical generation measured in megawatt-hours produced in a given period divided by the product of the plant's rated capacity and the number of hours in the period. Data published by NERC for 326 hydroelectric units ranging in capacities from 1 to 29 MW operated by 25 utilities for the years 1992 through 1996 shows an average capacity factor of 50 percent and an availability factor of 91.5 percent. The forced and XM2813_0300 3700 DrarT R. W. Beck 9 49 Limes Rained rare oe y x . ies tow bol . MAR-—12-68 84:85 PM scheduled outage factors for these 326 units were 3.5 percent and 4.9 percent, respectively. Table 1 is a summary of the historical generation data for the six-year period 1994 through 1999. Table 2 presents the average capacity factors for the same period of 1994 through 1999. The outage reports that we have received do not include scheduled outages and the forced outage reports were not entirely clear on outage duration. Consequently we assumed that all of the units have availability factors similar to the NERC average for the 326 hydroelectric units used in the benchmark. TABLE 1 EXISTING FACILITIES—NET GENERATION (MW) 1994 - 1999 Chester Lake Purple Diesel Year Piant Lake Plant Plant, Total el 1999 4,672 14,183 1012 19,867 1998 4,700 13,772 2,382 20,854 1997 5,374 14111 1,847 21,332 1996 5,070 13,005 5,856 23,931 1995 4,870 13,939 5,450 24,259 1994 3,698 13,356 6,013 23,067 Avg. 4731 13,728 3,760 22,219 TABLE 2 EXISTING FACILITIES—PLANT CAPACITY FACTORS 1994 — 1999 AVERAGES 1994-1999 Average Total Annual Net No.of Capacity Generation 1994-1999 Plant Plant Units (MW) (MWh) Capacity Factor Chester Lake i 1.0 4,731 a 54.0 Purple Lake 3 3.6 13,728 43.5 Diesel 2, 3.3 3,760 12.6 Total 5 79 22,219 32.1 ' Station service use Is subtracted from gross generation. AS XM2813_0300 41/00 Drarr R. W Beck 10 -568 is) Cae -,MAR—=j}2-80 64:06 PM POWER STUDIES HYDROLOGY Another question that is important is.how much energy could have been generated, if there had been a large load. Unfortunately there is limited flow data available for the ML&P hydroelectric projects. A United State Geological Survey (“USGS”) gage was located at the Purple Lake Outlet from July 1947 through September 1956. In earlier studies, Harza estimated monthly discharges for Purple Lake using a correlation between the rainfall data from Annette Airfield and the Purple Lake gage. The Corps of Engineers in its evaluation of the Chester Lake expansion reviewed the methodology and concurred with it Monthly flows were estimated from October 1942 through September 1983. Although these correlations are not ideal for determining average flow, we believe that these estimated flows will be sufficient for purposes of this Reconnaissance Report. These flows were also used in the Atlas studies that provided estimates of power generation for the existing facilities, for the Triangle Lake Project and for the Chester Lake Expansion Project. Part of the rationale for this determination is that the basins for Chester Lake and Triangle Lake are approximately at the same general elevation as that of Purple Lake. Based on this information it has been assumed that the rainfall and runoff at each facility would follow the same pattern (but not volume) as for Purple Lake. Monthly inflows were estimated by taking a ratio of the drainage areas. For Chester Lake the ratio used is 0.25 and 0.882 for Triangle Lake. POWER PRODUCTION Performance data for the Existing Facilities was obtained from information made available to us by MP&L. The hydro plants operate to meet the energy load of the MP&L electric system. The Diesel provides electric energy during extended outage periods of the hydro plant. When the Annette Hemlock Sawmill was still operating, the diesel plant was operated to meet power needs above the hydro plant capabilities, From our review of the plant data provided, the average net annual generation produced from the hydroelectric facilities was 18,456 MWh for the six- year period from 1994 to 1999. However, the hydro plants are capable of higher generation based on estimated historical stream flows. The estimated higher generation is suuunarized in the following table, and can be compared to the average generation. This comparison indicates, that with conservative assumptions, approximately 3,350 MWh per year could have been sold to KPU from these facilities during the 1994 through 1999 period. If the sawmill had been closed during the 1994 - 1999 period, the MP&L electric system load would have been 14,385 MWh, which would have increased the availability of excess hydro energy by 4,074 MWh. The total available hydro energy would have been approximately 7,400 MWh. Without reservoir ice problems, excess available hydro energy would increase to approximately 10,660 MWh. XM2813_0300 ¥L00 Drarr R. W. Beck 11 -S1 ee ae woe eeenerees ene ~ Geneene i band . MAR-12-68 64:06 PM 04 TABLE 3 MP&L HYDROELECTRIC PRODUCTION ASSUMPTIONS ANNUAL NET GENERATION (MW) Chester Lake Plant Purple Lake Plant Toul Description (1.0 MW) (3.6 MW) (4.6 MW) Atlas Estimate 9,110 MWh 18,433 MWh 27,543 MWh Beck Estimate 8,160 MWh 16,885 MWh 25,045 MWh Beck Estimate with Ice 7,170 MWh 14,639 MWh 21,809 MWh Average 1994-1999 Period 4,731 MWh 13,728 MWh 18459 MWh Based on the information available to us, it appears that the Atlas study estimate is too high for reasons discussed below. The starting point is appropriate in that the methodology used by Atlas does cover the expected minimum of approximately 30 years to account for annual variations in hydrology. However, the operation model appears to have assumptions with which we disagree. 1. The availability factor and capacity factor for the existing Chester Lake Plant is greater that unity. This implies that the estimated energy production is greater than could be achieved with the rated capacity of the unit This could only be achieved if the unit rating were too low, which seems unlikely in this circumstance. 2. Although the machine efficiencies assumed in the Atlas study are commonly used for combined turbine-generator efficiencies, we believe they are too high for the overall project and exclude losses normally experienced in the tunnel and penstock. 3. Another issue is that we do not believe there is additional head available from Edgecombe Lake at the Chester Plant Similarly, we believe the Chester Lake drainage area includes Edgecombe Lake and that there is no additional flow available. To determine energy generation we used the flow data generated from the correlation of rainfall with the Purple Lake gage, and estimated the energy production of the Purple Lake Plant for the period October 1, 1942 through September 30, 1983. The flows were adjusted to account for the reduced drainage area between the gage and the dam outlet. Based on the historical operating data reviewed, the observed condition of the hydroelectric facilities, and our review of the operations and maintenance procedures and practices currently in place, we have estimated that these units are capable of achieving the following energy production in an average hydrologic year. It should be noted, however, that in any given year generation could be higher or lower depending on snowpack, rainfall and the resulting streamflow in the watershed where the units are located. XM2813_0300 3/00 Drart R. W. Beck 12 -S2 a .MAR-12-66 64:66 PM a) The Chester Plant is estimated to achieve an annual net energy production of 8,160 MWh (7,170 MWh when the effects of reservoir ice are considered). b) The Purple Lake Plant is estimated to achieve an annual net energy production of 16,885 MWh (14,639 MWh when reservoir ice is considered). OPERATING PROGRAMS AND PROCEDURES GENERAL We have reviewed with the operators the various operating and maintenance programs and procedures, including preventive maintenance program, operating procedures, administrative procedurcs, emergency and safety plans, training programs and performance monitoring systems. We did not review all aspects of these plans and procedures, but verified that the operators had in place all of the usual and necessary plans, procedures, and documentation normally required to operate facilities of this type. DAM SAFETY INSPECTIONS The Federal Energy Regulatory Commission (“FERC”) requires that all licensed hydroelectric projects have their dams inspected by a qualified independent consultant every five years. For dams that have a high hazard classification, annual inspections are required. The 5-year dam safety inspections include a physical inspection of each project and the associated facilities, an analysis of the spillway adequacy for the Probable Maximum Flood (“PMEF”), and an analysis of the stability of the dam and other critical structures under various possible loading conditions. As previously mentioned, MPé&l’s dams are not under Federal and State regulation and consequently are not required to be inspected, nor have they been reported to have been inspected as shown in the following table. We believe MP&L should put a dam safety inspection program in place for these facilities. TABLE 4 FERC DAM SAFETY INSPECTION REPORTS Hazard Visual © Spillway Dam Site Report Date Classification Condition Adequacy Stability Chester Lake None Prepared Unknown . Good Unknown Unknown Purple Lake None Prepared Unknown Poor Unknown Unknown OPERATING EXPENSES The historic operating expenses for the MP&L electric system are summarized in the Table 5. Other costs not shown in the table include depreciation and interest on XM2813_0300 100 Darr R, W. Beck 13 -Ss LS 2 Liens _ MAR-12-88 84:07 PM long-term debt. Because the system is within the Metlakatla Indian Reservation, there are no property taxes. Power production expenses include those operating and maintenance expenses associated with the hydro and diesel power plants, including major maintenance. On the second line of Table 5, the cost of purchased power is primary additional operating expenses associated with the diesel plant. The preliminary statement for 1999 will be available by about mid-March 2000. TABLE 5 HISTORICAL OPERATION AND MAINTENANCE EXPENSES 1994-1998 ($000) Item 1994 1995 1996 1997 1998 Average Electric System Power Production Expenses 645 624 642 512 470 579 Cost of Purchased Power 182 187 165 197 173 181 Distribution O&M 306 201 177 154 99 187 Customer Expenses 163 4 8 129 39 70 99 Administration and General 396 52 02 403383 408 Total Electric System 1692 158 1515 1305 41,195 1454 Production System Total Power Production Cost 827 811 807 709 643 759 Percent of A&G 253 335 291 317 303 300 Total 1,080 1,146 1,098 1,026 946 1,059 Net Energy Produced (MWh) 23,067 24,259 23,931 21,332 20,854 22,689 Cost of Energy (mulis/kWh)? 468 472 45.9 481 45.4 46.7 The “Total Power Production Cost” for the power plants indicates a general decrease in each succeeding year during the 1994-1998 period, which is due in part to the decreasing use of the diesel generator Although the “Cost of Energy” does not follow this trend, it does appear to have remained relatively constant throughout this 5-year period with an average cost of 46.7 mills per kWh. The cost of energy includes only operation and maintenance expenses and does not include depreciation or debt service on capital expenditures. Our assessment of the ongoing cost of energy is that there should be no appreciable change to the 46.7 mills experienced during the period 1994-1998, It is expected that with increased generation at the hydro facilities, little or no change in use of the diesel and with the expected closure of the Annette Hemlock Sawmill, future production costs should be reduced. ? Cost of Power does not include depreciation or debt service on long-term debt. XM2813_0300 400 Drarr R. W Beck 14 - 54 a | os bat Lone .MAR-12-668 64:6T PM FUTURE HYDROELECTRIC POTENTIAL OVERVIEW Annette Island is a federally recognized Indian Reservation inhabited and owned in its entirety by the Metlakatla Indian Community (“MIC”). Accordingly, any upgrades to existing hydroelectric projects or construction of new hydroelectric Projects is not subject to State or Federal regulations. Therefore, development of Projects can be expedited without being subject to the lengthy FERC review process. Several hydroelectric projects on Annette Island have been identified as possible options for KPU to supply its future power supply requirements assuming construction of the proposed Intertie. In order to compare the cost of these proposed projects to those previously identified in our 1996 Power Supply and Planning Study we have used similar assumptions. This has included similar assumptions regarding operating characteristics, construction costs and operating costs. Because the alternatives investigated have not been studied to the same level of detail that other hydro projects have been investigated on Revillagigedo Island, the degree of confidence in the cost estimates is less. To acknowledge this difference we have increased the contingency amounts to better reflect this difference. For each of the hydro alternatives, capital and operating costs have been estimated using 2000 cost levels, As necessary, inflation is applied in the future to these costs to reflect the year in which the cost actually occurs. Several hydroelectric projects on Annette Island were evaluated as part of this study. Some of these projects have been studied in the past to varying degrees of detail. Construction costs, annual operating costs and projected energy generation have been tabulated for the 2.4-MW Purple Lake Expansion Project and for the 5-MW Triangle Lake Hydroelectric Project. Some other potential hydroelectric projects have been identified herein, but have not been Investigated. Cost ESTIMATES Cost estimates have been included in this Reconnaissance Report for various categories, The following descriptions explain those estimates. The actual estimates for the projects reviewed can be found later in this section by the name of the project studied. Direct CONSTRUCTION COST ESTIMATE The Direct Construction Cost (“DCC”) includes all costs directly chargeable to a specific project, including costs for construction and equipment contracts. These costs exclude owner casts. XM2813_0300 3/100 Drart R. W Beck 15 -SsS tome ti) : r ert 3 ° 4 : ae F; Le .MAR-12-88 94:97 PM The estimated costs of the items included in the DCC for the construction elements of project components are based on conceptual layouts and preliminary dimensions of the project features. The estimates as presented identify bid quantities for construction and the applicable unit prices to obtain estimated construction costs based on price levels for January 2000. Cost data available to us from other projects were used to help establish unit pricing for bid items such as excavation, concrete work, road construction, transmission line construction and steel penstocks, Gates, cranes, valves, turbines, generators, and other equipment items were similarly priced based on data available using in-house cost data. For this reeonnaissance-level study, it was not possible to contact equipment suppliers to obtain quotes. TOTAL CONSTRUCTION Cost ESTIMATE The Total Construction Cost ("TCC”) includes the estimate of DCC plus engineering and contingencies. TCC is estimated to include escalation during the contractor’s construction period. TCC also does not include costs for owner activities or financing related costs. The engineering allowance includes costs of preliminary engineering work, project feasibility, field investigations, engineering design, and construction supervision and inspection. Environmental studies, processing of permits and FERC license application preparation were not inchuided in the cost estimate because they are not needed for hydroelectric development on Annette Island, which is a wholly-owned reservation of the MIC. An allowance for design engineering and construction supervision are based on Corps of Engineers unpublished data for about 70 projects constructed in the 1965-72 period. The data presents a cost relationship of the engineering categories as a percentage of the DCC. Construction supervision generally ranged from f tn 7 percent of the DCC for the cost range of the projects investigated. For the Purple Lake Hydroelectric Expansion Project, which is projected to be the least expensive to develop and construct, is assumed construction supervision and inspection costs would be 7 percent of the DCC. The Triangle Lake Hydroelectric Project is assumed to be 6 percent of the DCC because of a higher base cost for construction. Similarly, the design engineering costs, which include geotechnical investigations and feasibility studies, but not FERC licensing activities, range from 11 percent to 12 percent of the DCC depending on the magnitude of the DCC. FERC licensing costs were not considered for any hydroelectric development on Annette Island because of their location on Indian Reservation lands. The inclusion of a contingency allowance provides for unexpected costs. This allowance is calculated by multiplying the sum of the DCC and Engineering by the contingency percentage selected. For the Triangle Lake Hydroelectric Project, we 0M2813_0300 Y00 Drart R. W Beck 16 -56 4 k by : : ote 5 Became Unen coun -MAR-12-66 64:68 PM have assumed a contingency of 25 percent for dam construction, 20 percent for other dvil works and 15 percent for the turbine and generator equipment. The higher contingency values is warranted because of the lack of geologic data. ANNUAL COSTS The annual cost of each project consists of the debt service necessary to repay its capital cost over a specified number of years plus all the other operating expenses, which include the following items: = Operation and Maintenance (“O&M”) a Administration and General = Insurance = Interim Replacements Based on experience with similar sized projects, together with historical cost data developed by FERC, the basis for the annual cost estimates shown in Table 6 were developed. TABLE 6 ASSUMPTIONS USED IN ESTIMATING ANNUAL COSTS On-Line Dates: Triangle Lake Hydro January 2003 (2-year construction period) Purple Lake Hydro January 2002 (1-year construction period) Revenue Bond Financing 30 Years at 6.5% Interest Interest During Construction 6.5% During Construction Period Cash Flow Annual Escalation Rate 2.2% (Blue Chip Indicators) Reserve Fund 1 Year’s Debt Service Financing Costs 3% of Gross Financing Requirements Reinvestment Rate 6.5% Variable Annual Costs Operation and Maintenance 0.25% of the TIC (pipeline and other civil works) 0.05% of the TIC (tunnels and dams) Interim Replacements 0.20% of the TIC (pipeline and other civil works) 0.05% of the TIC (tunnels and dams) The assumptions used in estimating the operation and maintenance costs and interim replacements vary for each feature of the hydroelectric project. For dams, water conveyance structures, and roadways, the operation and maintenance costs and interim replacements are assumed to be a function of the Total Investment Cost (“TIC”). The TIC is the sum of the TCC plus Interest During Construction. X0M2813 0300 3/1/00 Drart R. W. Beck 17 -S7 eee eer) ee - MAR—12-86 64:68 PM The operating expenses for each project (civil, mechanical, and electrical features) is based on industry-wide historical data developed by the FERC and analyzed by Ontario Hydro*. The annual expenses for maintenance cost, operating cost, and interim replacements for the hydro plants show a cost-age relationship, However, we have only shown what the project would cost in the first year of operation. The Administrative and General costs are estimated to be 40 percent of the O&M costs. Insurance is assumed to be 0.2 percent of the TIC. GENERATION ESTIMATES Generation estimates for the additional hydroelectric projects have generally been developed at a reconnaissance level. The three options explored in this study include the expansions at Chester Lake and Purple Lake, and a new hydro facility at Triangle Lake. The generation estimates rely on USGS hydrologic data and preliminary size estimates of project components. It was asstimed that all of the potential generation would be useable within the KPU system. Transmission losses have not been subtracted from the available energy. For the projects that indicate economic viability, additional feasibility-level hydrology and power studies should be performed. Based on the information available, the preliminary values for the parameter needed to estimate the energy production were selected as shown in Table 7. TABLE 7 SUMMARY OF EX!STING HYDRAULIC/HYDROLOGY DATA Average Turbine Storage Area Basin Normal Tailwater Full Gate Volume Basin (sq. mi.) Flow Max. Pool Elevation (cfs) (acre feet) Chester Lake 1.56 22.0 cfs El. 850 El. 10 16.8 1,150 Purple Lake 6.23 88.5 cfs El. 325 E10.0 142.0 25,000 Triangle Lake 5.50 77.9 cfs EL 400 E1 0.0 154.0 7,990 Using the assumptions and analysis techniques discussed above, the following projects were looked at as potential generating facilities for KPU. CHESTER LAKE HYDRO EXPANSION PROJECT DESCRIPTION Future hydro expansion at Chester Lake is expected to occur when the US Army Corps of Engineers (“Corps”), Alaska District, relocates the Chester Power Plant as part of the new highway construction project from Metlakatla to Walden Point. The 3 Wong, Charles T., Determining O&M Costs Over the Life of a Hydro Station, HYDRO REVIEW, December 1990. Pp. 52-62. XM2813_0300 3/1/00 Drart R. W Beck 18 -58 » MAR-—12-66 64:68 PM powerhouse presently is located in the alignment of the new highway. The Corps has prepared preliminary design drawings (dated January 28, 1999) for replacing the 20-inch penstock with a 36-inch penstock The existing powerhouse would be enlarged to incorporate a new 3.0-MW Pelton-type turbine-generating unit and additional switchgear and controls would be added. The existing power transformer would be replaced with a new 4 MVA transformer The Metlakatla water supply would be routed to the tailrace of the powerhouse to utilize approximately 3 cfs, which was previously unavailable for generation. CONSTRUCTION COST ESTIMATE MP&L has indicated that the Alaska District Corps has agreed to pay for the’ powerhouse relocation, which will include an upgrade in installed capacity, at no cost to MP&L. However, presently, it is uncertain when and if the upgrade will occur; although the powerhouse site and penstock alignment have been cleared of timber. [We have not yet had the opportunity to talk with the Corp regarding this project upgrade.] POWER GENERATION With a drainage area of 1.56 square miles, the inflow to Chester Lake was estimated to be 22.0 cfs, which corresponds to the minoff of 193 inches over the watershed. The maximum normal water level in Chester Lake will be at El 850, with an estimated average water level at El 841.5 under the proposed project operation. The site is assumed to have no instream flow downstream of the embankment dam. With an average net head of 811 feet and an allowance of 5% for outages, the estimated annual generation at the Chester Lake Plant would increase by about 3,211 MWh with the addition of a 3.0-MW unit. The low delta increase over the existing 1.0-MW hydro plant at Chester Lake is due to the water limitation of the watershed. PURPLE LAKE HYDRO EXPANSION PROJECT DESCRIPTION Additional hydro potential at Purple Lake may be achievable without a large capital investment. Previous investigations have reportedly been performed to add additional capacity. A rubber dam could be incorporated into the existing spillway structure that would increase normal maximum pool elevation of Purple Lake by 4 feet. This would increase active storage by about 4,000 acre-feet. The hydraulic capacity of the Purple Lake penstock could be increased without modification. The velocity through the steel pipe penstock is about 5.5 fps and through the tunnel only 2.6 fps. With a 10-fps maximum velocity limit on the penstuck, the hydraulic capacity would be 235 cfs. XM2813_0300 00 Drarr R. W Beck 19 -5s9 foeciend Sensoans tod 1. .MAR-22-68 64:69 PM CONSTRUCTION COST ESTIMATE A summary of the cost estimate for the 24-MW Purple Lake Hydro Expansion Project is presented in Table 8. Unit pricing for the rubber dam construction was adjusting upwards by 40 percent to account for the remote site location on Annette Island. Power plant costs were derived by empirical cost formula to provide for a consistency of comparison with the other hydro alternatives. TABLE 8 PurPLE LAKE HYDROELECTRIC EXPANSION CONSTRUCTION Cost ESTIMATE SUMMARY FERC Account 2.4 MW Unit Rubber Dam Code Description Amount Amount 60 MOBILIZATION $ 45,000 $ 20,000 330 LAND AND LAND RIGHTS $ -- §$ oo 331 STRUCTURES AND IMPROVEMENTS $ 400,000 $ == 331.1 Powerhouse 350,000 331.2 Site Work (Included in Acct Code 336) 50,000 332 RESERVOIRS, DAMS AND WATERWAYS $ 500,000 $ 400,000 332.1 Reservoir 50,000 50,000 332.2 Dam 50,000 350,000 332.3. Waterways (Penstock) 100,000 333. TURBINES AND GENERATORS $ 1,300,000 334. ACCESSORY ELECTRICAL EQUIPMENT $ 630,000 335 MISCELLANEOUS POWERPLANT EQUIPMENT $ 150,000 $ ad 335.1 Powerhouse Mechanical Systems : 100,000 335.2 Hoisting Equipment 50,000 336 ROADS, RAILROADS AND BRIDGES $ -- $ -- 353. STATION EQUIPMENT & STRUCTURES 355 TRANSMISSION LINE POLES & FIXTURES 356 TRANSMISSION LINE CONDUCTOR & DEVICES DIRECT CONSTRUCTION COST (2000 $'s) $ 3,025,000 $ 420,000 R. W Beck 20 XM2813_0300 1/00 Draft ~68 . MAR>12-80 84:89 PM TABLE 8 (CONTINUED) - PURPLE LAKE HYDROELECTRIC EXPANSION 4 CONSTRUCTION Cost ESTIMATE SUMMARY FERC Account 2.4 MW Unit Rubber Dam Code Description Amount Amount ARETE E88 RA RON A AT SE SE SE SSeS 2h eSNG! ENGINEERING: $ 540,000 $ 80,000 Design Engineering . 330,000 50,000 Geotechnical, Borings & Seismic Surveys -- — FERC Licensing and Other Permits == o- Construction Management 210,000 30,000 Subtotal (rounded) $ 3,570,000 $ 500,000 ; CONTINGENCY: $ 610,000 $ 120,000 Equipment (Acts. 333, 334, 335, 353, 356) 340,000 bn Dams & Waterways (Acct 332) 150,000 120,000 1 Other Civil (Acts, 330, 331, 336, 352) 120,000 -- Interest During Construction $ 150,000 $ 20,000 TOTAL INVESTMENT COST (2001 $'s) $ 4,330,000 $ 640,000 Escalation 100,000 10,000 | TOTAL INVESTMENT COST (2002 $'s) $ 4,430,000 $ 650,000 INSTALLED PLANT CAPACITY (kW) 2,400 N/A | COST PER kW INSTALLED $ 1,850 N/A 30M2813_0300 YO Drart R. W Beck 21 Lent Uenend Lanna ~~ Li . MAR>12-60 o4:09 PM TABLE 9 PURPLE LAKE HYDROELECTRIC EXPANSION ESTIMATE OF ANNUAL OPERATING COSTS 2.4Mw Unit Rubber Dam Capital Costs Amount Amount Total Investment Cost (2001 $'s) $ 4,430,000 $ 650,000 Reserve Account 380,000 60,000 Cost of Issuance 150,000 20,000 Gross Financing Requirement $ 4,960,000 $ 730,000 Annual Costs (6.5% Financing) Amortization of Debt: Annual Debt Service 380,000 60,000 less Interest Credit on Reserve (20,000) = Net Debt Service $ 360,000 $ 60,000 Operating Costs: Operation and Maintenance 18,000 2,000 Administration and General 7,000 1,000 Insurance 4,000 1,000 Interim Replacement 18,000 2,000 Total Operating Costs $ 47,000 $ 6,000 TOTAL ANNUAL COST (2001 $'s) $ 407,000 $ 66,000 Annual Generation (MWh) 360 179 First Year Cost of Energy (mills/kWh) 1,130 370 Given the cost of the Purple Lake expansion, there are likely other alternatives available to KPU for meeting its energy loads. Additional study would be necessary to determine whether this resource fits in some other way to meet the goals and objectives of KPU. POWER GENERATION With a drainage area of 6.23 square miles, the inflow to Purple Lake was estimated to be 88.5 cfs, which corresponds to the runoff of 193 inches over the watershed. The maximum normal water level in Purple Lake will be at El 325, with an estimated average water level at El 322.5 under the proposed project operation. The site Is assumed to have no instream flow downstream of the embankment dam. With an average net head of 306 feet and an allowance of 5% for outages, the 0¥2813_0300 1/00 Drart R. W. Beck 22 -62 = ttl nee ©6—CLC ..MAR-12-88 o4:1@ PM estimated annual generation would be approximately 360,000 MWh from the 2.4- MW unit. The low delta increase over the existing 3.6-MW hydro plant at Purple Lake is due to the water limitation of the watershed. If the rubber dam was installed without additional hydroelectric capacity, the Purple Lake Plant would increase its generation from 16,885 MWh to 17,064 MWh, or a net increase of 179 MWh. TRIANGLE LAKE HYDRO PROJECT DESCRIPTION Future hydro potential is promising at Triangle Lake, and could be developed immediately since this project is close to the Base Camp for the Dash Point Road Project and is close to the proposed route of the Metlakatla-Ketchikan Intertie. The project would be comprised of a small embankment dam at the outlet of Triangle Lake, a 1.3-mile long penstock, and a powerhouse containing a single horizontal Francis turbine-generating unit. The dam would raise the normal maximum pool elevation from 383 feet to 400 feet, msl, and allowing for up to 7 percent headlosses, a 4.0-MW unit could be installed (380 feet; 150 cfs). Project access to the proposed powerhouse site would be via a new 2.7-mile extension from a logging road that connects the Base Camp with the Dash Point Road staging area, located on the west side of Annette Island. An additional 1.3-mile access road would be needed along the penstock route to the dam site. The transmission line from the powerhouse switching station would be about 2.7 miles long and would operate at 34.5 kV. CONSTRUCTION COST ESTIMATE A summary of the cost estimate for the 4.0-MW Triangle Lake I Iydroelectric Project is presented in Table 10. Unit pricing for pipeline construction was developed then adjusted upwards by 40 percent to account for the remote Annette Island site location. Power plant costs were derived by empirical cost formula to provide for a consistency of comparison with the other hydro alternatives. Because the dam site topographic mapping was not available we relied on approximate dimensions based on visual observations obtained during a visit to the potential dam site. For purposes of preparing a cost estimate it was assumed that the dam would be constructed to Fl. 395 and would be 300 feet long at its crest and 50 feet wide at its base. Crest width would be 12 feet with rockfill embankment slopes of approximately 34 degrees. The dam would have an impervious clay core. Excavation of foundation material was assumed to average 10 feet. A50-foot wide spillway would be excavated from one of the abutments and would have an un-gated concrete crest. In developing the cost estimate, a construction engineer, familiar with construction in Alaska, provided an independent cost estimate of the dam, penstock and access road. His estimate was also based on the assumptions mentioned above. However XM2813_0300 ¥100 Drast R. W. Beck 23 -63 a un .MAR-12-80 04:16 PM his cost estimating approach differed in that he first estimated the necessary crew size for construction of each feature. The second step was to develop production tates which incorporated the design assumptions above and lastly he estimated material costs. In aggregate the two approaches provided comparable cost estimates for the civil features. TABLE 10 TRIANGLE LAKE HYDROELECTRIC PROJECT CONSTRUCTION Cost ESTIMATE SUMMARY FERC Account i 4.0 MW Plant Code Description Amount 60 MOBILIZATION $ 100,000 61 _ CONSTRUCTION CAMP $ 750,000 330 LAND AND LAND RIGHTS $ ee 331 STRUCTURES AND IMPROVEMENTS $ 850,000 331.1 Powerhouse 800,000 331.2 Site Work (Induded in Acct Code 336) 50,000 332 RESERVOIRS, DAMS AND WATERWAYS $ 2,840,000 332.1 Reservoir 40,000 332.2 Dam 900,000 332.3. Waterways (54" Penstock) 1,900,000 333. TURBINES AND GENERATORS $ 1,740,000 334 ACCESSORY ELECTRICAL EQUIPMENT $ 800,000 335 MISCELLANEOUS POWER PLANT EQUIPMENT $ 200,000 335.1 _ Powerhouse Mechanical Systems 120,000 335.2 Hoisting Equipment 80,000 336 ROADS, RAILROADS AND BRIDGES $ 1,200,000 336.1 Roads 1,000,000 336.2 Bridges , 200,000 353. STATION EQUIPMENT & STRUCTURES $ 150,000 355 TRANSMISSION LINE POLES & FIXTURES $ 235,000 356 TRANSMISSION LINE CONDUCTOR & DEVICES Indl. In 355 %0vi2813_0300 U00 Drart R. W. Beck 24 ~64 MAR-12-e08 o4:10 PM Taste 10 (CONTINUED) TRIANGLE LAKE HYDROELECTRIC PROJECT 3 CONSTRUCTION COST ESTIMATE SUMMARY FERC Account 4.0 MW Plant Code © Description Amount ESTIMATED DIRECT CONSTRUCTION COST $ 8,865,000 (2000 $'s) ENGINEERING $ 1,596,000 Design Engineering 798,000 Geotechnical, Borings & Seismic Surveys 266,000 FERC Licensing and Other Permits ote Construction Management 532,000 SUBTOTAL (RoundedO $ 10,460,000 | CONTINGENCY: $ 2,150,000 ! Equipment (Accts, 333, 334, 335, 353, 356) 490,000 Dam and Waterways (Acct 332) 1,010,000 Other Civil (Acts. 330, 331, 336, 352) 650,000 Interest During Construction $ 900,000 | TOTAL INVESTMENT COST (2002) $ 13,510,000 Escalation 300,000 TOTAL INVESTMENT COAST (2003 $s) $ 13,810,000 | INSTALLED PLANT CAPACITY (kW) 4,000 j COST PER kW INSTALLED $ 3,450 XM2813_0300 U0 Drart R. W. Beck 25 ..MAR=12-98 64:16 PM Taste 11 TRIANGLE LAKE HYDROELECTRIC PROJECT ESTIMATE OF ANNUAL OPERATING COSTS 4.0 Mw Plant Capital Costs Amount Total Investment Cost (2003 $'s) $ 13,810,000 Reserve Account 1,180,000 Cost of Issuance 460,000 Gross Financing Requirement $ 15,450,000 ANNUAL COSTS (6.5% Financing) Amortization of Debt: Annual Debt Service 1,180,000 less Interest Credit on Reserve (80,000) Net Debt Service $ 1,100,000 Operating Costs: Operation and Maintenance 36,000 Administration and General 14,000 Insurance 14,000 Interim Replacement 35,000 ' Tatal Operating Casts s 99,000 TOTAL ANNUAL COST (2003 §'s) $ 1,199,000 Annual Generation (MWh) 17,324 First Year Cost of Energy (mills/kWh) 69 POWER GENERATION With a drainage area of 5.50 square miles, the inflow to Triangle Lake was estimated to be 77.9 cfs, which corresponds to an average annual runoff of 193 inches over the watershed. The maximum normal water level in Triangle Lake will be at El 395, with an estimated avernge water level at El 390 under the proposed project operation. The site is assumed to have no instream flow downstream of the embankment dam. With an average net head of 370 feet and an allowance of 5% for outages, the estimated annual generation would be 17,324 MWh from the 4MW unit. XM2813_0300 100 Drart R. W. Beck 26 -66 ta fe : ; ea = ~ «MAR-12-66 64:11 PM SUMMARY Based on historical USGS data reviewed, our conceptual designs, our reconnaissance-level cost estimates, our review of MP&L’s operations and maintenance procedures and practices, and other assumptions contained herein, we have estimated the following cost of energy at Chester Lake, Purple Lake and Triangle Lake in an average hydrologic year. However, in any given year, cost of energy could be higher or lower depending on snowpack and rainfall levels and the resulting stream flow in the watershed where the power plants are located. No determination has been made as to whether all of the energy could be used tn meeting loads of MP&L or KPU. = At Chester Lake, the 3.0-MW Expansion is estimated to achieve an annual net energy production of 3,211 MWh at no capital cost to KPU. The operating cost is estimated to be 16 mills per KWh. = At Purple Lake, the 2.4.MW Expansion, which includes a pool raise of 4 feet, is estimated to achieve an annual net energy production of 360 MWh at a cost of 1,130 mills per KWh. m At Triangle Lake, a new 4.0-MW Hydro Project is estimated to achieve an annual net energy production of 17,324 MWh at a cost of 69 mills per KWh. The information developed, supporting our above finding, is summarized in Table 12. The costs shown below are at the individual projects. For purposes of meeting the loads of KPU, transmission losses and costs of developing the Intertie should also be considered. TABLE 12 HYDRO POTENTIAL OF CHESTER LAKE AND PURPLE LAKE EXPANSIONS AND NEw Hypro AT TRIANGLE LAKE IN ANNETTE ISLAND Description Chester Lake Purple Lake Triangle Lake Capacity 3.0 MW 2.4MW 40 MW Energy 3,211 MWh 360 MWh 17,324 MWh Capital Cost To be paid by Others $4,960,000 $15,460,000 Cast/kW Unknown $1,850 $ 3,450 Annual Cost $50,000 $407,000 $ 1,199,000 Cost of Energy 16 millsy¥KWh 1,130 mills/KWh 69 millyKWh Location Annette Island Annette Island Annette Island Schedule Unknown 2 years 3 years Permitting Small Effort Small Effort Small Effort XM2813_0300 100 Drart R. W Beck 27 -67 inated ened ames eds SOD MAR-12-88 84:11 PM If KPU is interested in pursuing the Metlakata-Ketchikan Intertie Project, then the following steps should be considered: a. Perform a feasibility study, which includes topographic land and geotechnical surveys, additional optimization studies of the 34.5-kV Intertie and the Triangle Lake Hydroelectric Projects. b. Update KPU’s system operation model to include MP&L's system load and estimate future useable energy from MP&l’s hydro facilities, including new hydro projects at Triangle Lake and possibly at other locations on Annette Island. OTHER HYDRO POTENTIAL Other hydroelectric potential is possible at Lower Todd Lake (El 210) and Melanson Lake (El. 175). An estimate of the potential capacity and energy that could come from hydro developments at these lakes based on the ratio of drainage areas with Purple Lake is shown in Table 13. TABLE 13 OTHER HYDROELECTRIC POTENTIAL ON ANNETTE ISLAND Item Purple Lake Todd Lake Melanson Lake Drainage Area (sq. mi.) 6.23 7.12 2.00 Gross Head (feet) 321 220 185 Potential Capacity (MW) 3.6 2.8 0,7 Potential Energy (MWh) 16,885 13,200 3,200 Atlas had indicated that a 1.0-MW hydro plant at Tamgas Lake may be promising. However, with a lake elevation of 90 feet, msl, and with a fish hatchery that uses about 20 cfs of water for its operation, a hydro plant at Tamgas Lake would likely provide more expensive power than at the other sites indicated above. PROPOSED METLAKATLA-KETCHIKAN INTERTIE PROPOSED INTERCONNECTION The proposed 17-mile Intertie project would consist of three components. The line would originate at KPU’s Mountain Substation, which is expected to need upgrading to allow for the transmission line connection. The second and principal component of the line would be the transmission line, including underwater cable for the approximate one-mile crossing to Annette Island. The third component would be a new substation to be located within the MP&L system at Mountain Point. 3042813_0300 3.00 Derr R. W Beck 28 -68 .MAR-22-88 o4:11 PM Others have previously investigated two alternative alignments, with one following the Corps of Engineer’s proposed road alignment to Walden Point The other alternative alignment utilizes a route along the Upper and Lower Todd Lakes, which decreases the aerial transmission length by approximately 3 miles. It is this latter alignment that was previously estimated by others to be $6,535,000 (1996 dollars) and is the alignment used for this report. The proposed alignment selected for the transnussion line includes a 16-mile aerial section between Metlakatla and Race Point and a one-mile, 3-conductor submarine cable between Race Point and Mountain Point. CONSTRUCTION ACT TIVITIES Although the Walden Point Road alignment ts not used for purposes of this study, the current status is included for informational purposes and because of the implications for the new facilities at Chester Lake Dam. Construction of the Walden Point Road commenced in 1998. When completed, the road will be approximately 14.8 miles long and extend along the western side of Annette Island from the village of Metlakatla to the proposed site of the new ferry terminal at Annette Bay (see Fig. 1). The road is significant in that it opens up the Island for additional potential hydroelectric development by providing good access. More significantly, because the Army is constructing the road, they have been reported to be willing to provide funds for a hydro upgrade at the Chester Lake Dam and for providing transmission line pole material for the proposed Intertie Project along the proposed aligrunent. The Metlakatla Indian Community (“MIC”) originally conceived the Walden Point Road Project (also referred to as the Metlakatla-Ketchikan Transportation Corridor (“MKTC”), for the purposes of improving tourism and encouraging new businesses to locate to the Town of Metlakatla. The road will allow open access through the winter months and considerably improve access. In conjunction with completion of the road, ferry service is also expected to be improved to daily service year-round. The MIC requested and is receiving military support for this project under the provisions of the Innovative Readiness Training ("IRT”) Program specified in Title 10 USC, Section 2012. The Assistant Secretary of Defense for Reserve Affairs has approved military support for this project because of opportunities for war-fighting training. Work completed to date on the Walden Point Road includes a 37-building base camp at Annette Bay to house a construction workforce of approximately 250-300 people and construction equipment. A logging road is used to transport equipment and workers to the staging area near Hemlock Bay, where a maintenance building has also been constructed. About 2.5 miles of road is completed. The Army has indicated through a press release dated July 10, 1999, that the Walden Point Road Project is a seven year IRT program, which would indicate that road construction would not be completed until about 2005. i ED XM12813_0300 LOO Drarr R. W. Beck 29 -69 & . eee ‘ al m ——) . MAR=12-68 94:12 PM TRANSMISSION DESCRIPTION In our review of the design, we sized the transmission line for delivery of 8 MW of power, consisting of 4 MW from Triangle Lake and 4 MW from Metlakatla. A 35 kV system is appropriate for this power level and can accommodate higher power levels as loads grow, The interconnection will be comprised primarily of 35 kV, 3-wire overhead, wood-pole construction, using 4/0 Penguin/AW conductor. For 8 MW of power delivery, voltage drop and losses are estimated to be under 5% each using this conductor There would be an approximate one-mile submarine crossing of Revillagigedo Channel using a 3/c, 35 kV, /0 AWG Cu, double-armored cable. INTERTIE CONSTRUCTION COST MP&L has indicated that the Corps of Engineers will help pay for the transmission line by supplying materials for pole construction (a $150,000 savings). We assumed significant helicopter assistance in transmission route sections where no toads exist, ie., out of Metlakatla to Hemlock Bay and north of the Army’s Base Camp along Revillagigedo Channel. We assumed no requirement to remove any timber from cleared right-of-way. We estimated a nominal amount for special foundation stabilization in muskeg soils for 125% of structures. Many other assumptions are built into the cost estimate itself. Our estimate of construction costs does not include any road construction, permitting, credit for timber sales on cleared land, right-of-way or easement costs. The estimate is based on very limited preliminary engineering and reconnaissance. Engineering is assumed to be 40% of the DCC and includes line, substation and cable design, construction management and inspection, owner administration cnst It also includes a full bathymetric survey for the submarine crossing, and topographic and geophysical surveys. The 40 percent contingency included covers uncertainties about design and site conditions, pricing changes, and possible omissions fom the estimates. The estimated cost of the transmission line between Metlakatla and Race Point using the Todd Lakes Route is summarized below in Table 14, No costs were included for any upgrade of the KPU grid to handle an additional 8 MW at the interconnection point, XM2813_0300 3/U00 Deart R. W. Beck 30 -78 2 ; ae a | = j - one ne sone _MAR-12-98 94:12 PM * TABLE 14 METLAKATLA TO RACE POINT TRANSMISSION LINE ESTIMATED CONSTRUCTION COSTS Previous Estimate Revised Estimate Item (1996 Dollars) (2000 Dollars) Overhead Component Right of Way Clearing $ 92,000 $ 92,000 Overhead Line Materials and Labor 1,918,000 406,000 Helicopter 198,000 390,000 Engineering and Administration 486,000 355,000 Contingencies 539,000 497,000 Subtotal - Overhead Component $3,233,000 $1,740,000 Submarine Cable Material and Installation $1,685,000 $1,044,000 Engineering and Administration 371,000 418,000 Contingencies 411,000 585,000 Subtotal - Submarine Cable $2,467,000 $2,047,000 Submarine Terminations $835,000 Incl. Above Total Transmission Line Cost $6,535,000 $3,787,000 Our cost estimate represents a reduction of over 40 percent over the previous estimate. There could be any number of reasons for this, including issues such as wood pole design and assumptions regarding the existence of access roads along the transmission line route. For example, the logging road between Hemlock Bay and the Army’s Base camp was probably only recently improved by the Army in preparation for constructing the Dash Point Road Project. Based upon our on very limited preliminary engineering and reconnaissance of the proposed transmission line route from Metlakatla to the Mountain Point Substation on Revillagigedo Island, we have estimated the Total Construction Cost of the 34.5-kV, 17-mile transmission line to be approximately $3,800,000. If KPU is interested in pursuing the construction of the Intertie, then we recommend that additional feasibility and design work be addressed. For planning purposes we estimate that construction of the Intertle could be completed within an 18-month period, depending on MP&L having the necessary permits and minimum construction during winter months. XM2313_0300 00 Drart R. W Beck 31 a ne ee fee ees Ey ee AR-12-86 @4:12 PM INTERCONNECTION We did not develop any details for the substation interconnection in Metlakatla, the substation at Triangle Lake or the KPU interconnection. However, interconnection costs should be nominal with the line voltage being 34.5 kV at Triangle Lake for the Intertie and at the Mount Point Substation. The DCC for any one interconnection would probably be in the range of $25,000 to $50,000. PRINCIPAL CONSIDERATIONS AND ASSUMPTIONS In the preparation of this report and the opinions that follow, we have made certain assumptions with respect to conditions, which may exist, or events, which may occur in the future. While we believe these assumptions to be reasonable for the purpose of this report, they are dependent upon future events, and actual conditions may differ from those assumed. In addition, we have used and relied upon certain information provided to us by sources, which we believe to be reliable. While we believe the use of such information and assumptions to be reasonable for the Purposes of this report, we can offer no other assurances thereto, and some assumptions may vary significantly due to unanticipated events and circumstances. To the extent that future conditions differ from those assumed herein or provided to us by others, the actual results will vary from those projected herein. This report summarizes our work up to the date of the report’ Thus, changed conditions occurring or becoming known after such date could affect the material presented based upon the extent of such changes. The principal considerations and assumptions made by us in developing our opinions and the principal information provided to us by others include the following: 1. We have not investigated any of the contractual arrangements that may influence development of the proposed projects discussed herein and made no determination as to the assignability, validity, and enforceability of any contract, agreement, rule, or regulation applicable to the Existing Facilities and their Operations. 2, MP&L, as operator of the Existing Facilities, will operate the Existing Facilities In accordance with existing policies and procedures as reviewed during the Facilities site visit. 3. MP&L, as operator of the Existing Facilities, will maintain the Existing Facilities in accordance with generally accepted engineering practices, make all required and recommended renewals and replacements in a timely manner, and will not operate the equipment to cause it to exceed the equipment manufacturer’s recommended maximum ratings. 0vi2813_0300 VV00 Drarr R. W. Beck 32 = oe - «MAR-—12-66 64:15 PM 4. MP&L, as operator of the Existing Facilities, will employ qualified and competent personnel who will properly operate and maintain the Existing Facilities in accordance with the manufacturers’ recommendations and generally accepted engineering practice and will generally operate the Existing Facilities in a sound and businesslike manner 5. All material permits and approvals, and permit modifications necessary to operate the Facilities have been obtained and any changes in required permits and approvals will not require reduced operation of, or increased costs to, the Facilities and will be obtainable as part of the normal course of business. 6. The information contained in this report will be used for preliminary planning work and will not be used as the basis for proceeding with any of the projects discussed herein. 7. MP&L electric system loads for calendar year 2000 can be assumed to be equivalent to the average 1994 ~ 1999 energy generated less the loads from the Annette Hemlock Sawmill. SUMMARY Set forth below are the prindpal findings we have reached after our review of the Existing Facilities and the proposed projects. For a complete understanding of the estimates, assumptions, and calculations upon which these s are based, this report should be read in its entirety. 1. The Existing Facilities employ conventional technology for the design and operation of hydroelectric facilities. 2. Provided that MP&L operates the existing hydroelectric facilities consistent with prudent utility practice and equipment vendor recommendations, including timely renewals and replacements, the existing hydroelectric facilities should have a useful life of 20 years or more. 3. Based on historical operating data reviewed, the observed condition of the facilities, and our review of the operations and maintenance procedures and practices, we have estimated the following energy production in an average hydrologic year; Howeves, in any given ycar generation could be higher or lower depending on snowpack and rainfall levels and the resulting stream flow in the watershed where the Power Plants are located and until the units are fully loaded, the energy generation will be less. «The 1.0-MW Chester Lake Plant is estimated of achieving an annual net energy production of 8,160 MWh (7,170 MWh when the effects of reservoir ice are considered). XM2813_0300 V1/00 DRAFT R. W Beck 33 -7S oo) ee Nae ened eon wen Le: bere — ens baw >12813_¢300 300 Drarr «MAR-12-88 64:15 PM «| The 3.6-MW Purple Lake Plant is estimated of achieving an annual net | energy production of 16,885 MWh (14,639 MWh when the effects of | reservoir are considered). . Assuming all available excess MP&L hydro energy could be used by KPU, we have estimated that 7,400 to 10,660 MWh could be made available to KPU in an average hydrologic year . With the exception of the lack of dam safety inspections, the operation and tenance procedures and practices used at the Facilities, which are currently in place, are consistent with generally accepted utility practices and are comparable to those used at other facilities using similar technology. ; Based on historical USGS data reviewed, our conceptual designs, our teconnaissance-level cost estimates, our review of MP&Ls operations and maintenance procedures and practices, and other assumptions contained in the reconnaissance report, we have estimated the following cost of energy production in an average hydrologic year for new hydro plants or expansions at Chester Lake, Purple Lake and Triangle Lake. However, in any given year, cost of energy cotld be higher or lower depending on snowpack and rainfall levels and the! resulting stream flow in the watershed where the Power Plants are located as “st as loadings placed on the units. | At Chester Lake, the 3.0-MW Expansion is estimated of achieving an annual | net energy production of 3,211 MWh ata cost of 16 mills per KWh. . At Purple Lake, the 2.4.MW Expansion, which includes a pool raise of 4 feet, is estimated to achieve an annual net energy production of 360 MWh, at a | cost of 1130 mills per KWh. At Triangle Lake, a new 4.0-MW Hydro Project is estimated of achieving an | annual net energy production of 17,324 MWh, at a cost of 69 mills per KWh. E Based on a very limited preliminary engineering and reconnaissance of the proposed transmission line route from Metlakatla to the Mountain Point Substation on Revillagigedo Island, we have estimated the total construction cost of the 34.5 kV, 17-mile transmission line to be approximately $3,800,000. ! I Respectively submitted, RW Beck, Inc R. W Beck 34 -T4 a eel «uMAR-§ 2-90 04:14 PM 1 i —— oe) SSF i R.W Beck A-1 2Mi2813_0300 i | I i | Appendix A REFERENCES . Hydropower Analysis Report for Chester Lake Hydroelectric Facility in Support of the Annette Island Project, by Power Branch (CENWD-NP-ET-WP) MCX for Hydropower System—Economic Evaluation, North Pacific Region, Northwestern Division, US Army Corps of Engineers; September 10, 1998, prepared for Federal Highway Administration Western Federal Lands Highway Division. . Metlakatla Power & Light financial and statistical reports for the periods ending December 31, 1994 through 1999. . Metlakatla Power & Light generation reports for the periods ending December 31, 1994 through 1999. . Metlakatla Power & Light Resolution 98-4 authorizing the Federal Highway Administration, Western Federal Lands Highway - Division to relocate and add a +-MW hydro unit, addition to the Chester Powerhouse at no cost to MP&L, as part of the Annette Island Project. . Acompleted Application for Department of Army Permit (33 CFR 325) for the construction of a 34.5 kV transmission line from Walden Point area to Race Point, and submarine Cable across Revillagigedo Channel to Mountain Point Substation (includes a completed Alaska Coastal Management Program Coastal Project Questionnaire); prepared by Metlakatla Power and Light dated October 30, 1997. . Meeting Agenda and Notes for the Walden Point Road Closeout Meeting dated November 4, 1999 (includes budget for fiscal year 2000 and map of proposed road alignment). . R. W Beck, Inc, Draft Report Section of Metlakatla/KPU Transmission Interconnection Analysis, dated February 7, 1997 . Metlakatla Indian Community’s Purple Lake Project, Contract No. 1, Tunnel, Headworks, Surge Chamber, Tramway, Access Road Etc.; by Hubbell & Waller Engineering Corp. dated July 20, 1953 -~76 cos A : 7 ve = wMAR-g§ 2-88 04:15 PM P.T? Appendix A REFERENCES ee ep 9. Alaska Power Authority, Chester Lake Dam and Penstock, Annette Island, Operation and Maintenance Manual; July 1988 10. Metlakatla Power & Light Outage Reports for 1998 and 1999 Af 30i2813_0300 R.WBeck A-2 ~"AR-g2-88 04:21 PM P.o3 Appendix B SITE PHOTOGRAPHS Photo 10053 Substation located at Diesel Plant. ed Sioned oe Bm ramee Photo 10054 Clearing of right-of-way for new Chester Lake penstock. V—_—_—_—_—_—_————— XM2813_0300 R. W Beck B-3