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Home My WebLink AboutPower Intergration Project, Phase I Unalaska-Dutch Harbor, Ak 2 of 2 2000POWER INTEGRATION PROJECT, PHASE I UNALASKA/DUTCH HARBOR, ALASKA April 2000 Prepared for City of Unalaska Unalaska, Alaska Prepared by Steigers Corporation Englewood, Colorado Karen Blue, P.E. coeur eet Acting Director of Public Utilities a City of Unalaska P.O. Box 610 Unalaska, AK 99685-0610 Subject: Request for Funds Unalaska Power Integration Project Dear Ms. Blue: Thank you for your letter of May 15, 2000, regarding the City of Unalaska’s power integration proposal. The recent report by Steigers Corporation suggests that significant long-term benefits could be realized by all participants if a single electric utility operator were established to provide reliable power to the public and to the industrial generators over an integrated distribution system. Based on our limited understanding of your community’s electrical situation this supposition certainly appears reasonable. Your letter describes Phase II of the power integration project and asks whether the Alaska Industrial Development and Export Authority (AIDEA) could contribute to its estimated $220,000 cost. The specific objective of Phase II is to develop formal agreements between the City and interested industrial generators that will enable the integration of power systems to occur. AIDEA itself does not have any grant programs nor are our various lending programs designed to finance studies and the development of agreements. The Alaska Energy Authority (AEA), whose programs are administered by AIDEA staff, does issue grants although none are available for this purpose either now or in the FY 2001 budget. Finally, although funds are available in AEA’s Power Project Fund loan program to finance feasibility studies of power projects, the specific objective described in your letter — the development of MOUs and power sales agreements — does not fit within the program's statutory definition of , “feasibility study” or “power project.” Although there does do appear to be,part for the Authority at this time, there could be, depending upon a number of factors, a role for the Authority following the completion of Phase II. If the City and industrial generators are able to work out the agreements described in Steigers Corporation report, AIDEA / AEA may be able to provide financing assistance to implement system integration. As such, we would appreciate being kept abreast of any new developments in the electric service situation in your community. The idea appears to have considerable promise and | hope you are successful in advancing it. Sincerely, 771) Maat J Oe sate LLL CITY OF UNALASKA P.O. BOX 610 UNALASKA, ALASKA 99685-0610 < (907) 581-1260 FAX (907) 581-2187 . | eee UNALASKA, ALASKA May 15, 2000 E : David Germer G fe | V E | Alaska Industrial Development = MAY 17 2000 and Export Authority 7 480 W. Tudor Alaska Industrial Development Anchorage, AK 99503 and Export Authority Subject: Unalaska Power Integration Project Proposal Dear Mr. Germer, Included for your review is a summary update of the City of Unalaska’s Power Integration Project. The City has completed Phase | of the project and is putting together a work plan for the next phase. As the project moves forward, additional funding sources will be required. The City will be seeking support from the local participating industrial generators, however the City is anticipating that additional funding will still be necessary. Therefore, this letter also serves as a proposal for funding consideration by AIDEA and the Denali Commission. Project Purpose and Need. In 1998, the City hired the Financial Engineering Company to assess the adequacy of the City’s generating capacity given the community’s growth potential and the potential for local industrial generators and new businesses to require additional power. Based on the assessment, it was concluded that the City faces the following challenges: * With a 1 percent load growth, the City’s reserve margins become inadequate by the year 2005. = With a 2 percent load growth reserve margins would become inadequate by 2002/2003 and demand could not be met as early as 2010. Since the completion of the study, the City has added several significant loads to its electric distribution system including a new library, new museum, new Public Works/Public Utilities facility and a new wastewater treatment plant that disinfects with electrically produced ultra-violet light. Within the next two years, the City also plans to add a new elementary school and there have been inquiries regarding private cold storage facilities. Therefore, the power supply issue is more critical than anticipated. The Financial Engineering Company Study concluded that the City could address the shortage, in part, by adding the generating resources of Unalaska’s Industrial Generators to the City’s and bringing the private generators on as customers. Therefore, in 1999, the City hired Steigers Corporation to: 1. Ascertain interest in and opportunity for the integration of currently isolated electric generation systems. 2. Develop a business framework within which such integration might be accomplished. Among other recommendations, the Power Integration Project Phase | report recommended that the City initiate discussions with Industrial Generators to definitively establish terms, conditions, and specific form of transfer of individual Industrial Generator’s generation facilities. Phase Il of the Power Integration Project is intended to address this recommendation. Aside from addressing the power shortage issue in the short term, this project could also lead to construction of a centralized production facility. This would address air quality concerns in Unalaska and save money through more efficient production and economies of scale. Project Description. Phase || of the Unalaska Power Integration Project builds on the work and recommendations brought forward in Phase | of the Project. A copy of the Phase | report was provided to you and members of the Denali Commission. The primary purpose of the project is to develop a solution to Unalaska’s short and long term power supply issues. The specific objective of Phase II of the project will be to craft Memorandums of Understanding and Power Sales Agreements between the City and interested local Industrial Generators. This process will need to be facilitated by a knowledgeable outside party that will: = Outline the process " Solicit the specific intentions of each party =" Conduct necessary research = Interview knowledgeable advisors = Keep the project on track = Draft necessary documents = Solicit and secure grant funding Funding is being requested to hire a qualified firm to complete the tasks outlined above. Development Plan and Status. As noted above, Phase II of the Power Integration Project would build on Phase | of the Project and the Financial Engineering Company Power Supply Study. An estimate of $220,000 has been developed for Phase II of the Project and the City has tentatively budgeted $60,000 for the Project that would become available July 1, 2000. In addition, some of the Industrial Generators have expressed an interest in helping fund Phase II. Cost and Financing Data. Phase || of the Power Integration project has a total cost estimate of $220,000. As noted above, the City’s draft FY 2001 budget includes $60,000 for the project and some of the Industrial Generators have expressed an interest in participating financially in Phase II. The City is seeking funding from the Denali Commission for the balance of the project. If you have any questions regarding the information presented in this letter or the Phase | report, please do not hesitate to contact me at 907-581-1260. Sincerely, Vora Karen Blue, P.E. Acting Director of Public Utilities cc: Scott Seabury, City Manager 99302 a-4 ara AR STEIGERS GORPORATLON ENVIRONMENTAL CONSULTING & PROJECT MANAGEMENT is | DE GE HY Mr. David Germer ~~ | Rebruary 24, 2000 Business Development Manager MAR 0 2 2000 .N. 142 WP 3, 2b Alaska Industrial Development — Alaska |, hn te Letter No. 142-048 and Export Authority and Bx siti Development 480 W. Tudor Authority Anchorage, AK 99503 Subject: Draft Report, Power Integration Project - Phase I Unalaska/Dutch Harbor, Alaska Dear Dave, Steigers Corporation has completed preparation of the Draft Report for Phase I of the Power Integration Project. This document discusses the project’s background, origin, and goals; describes the activities, methods, and findings; and offers four recommendations for consideration and action by members of the Unalaska/Dutch Harbor community. Steigers Corporation will be presenting the findings and recommendations of the project to the City of Unalaska’s City Council during their normal work session the evening of March 21, 2000: Steigers Corporation will finalize the project report after that presentation. If you have any questions or comments concerning the project or this document, you may contact me at (303) 799-3633. Alternatively, you may also contact Mike Golat, Director of the City of Unalaska Department of Public Utilities, at (907) 581-1260. “Steigers Project Manager (ee Mike Golat, City of Unalaska 1/0 Enclosure JAS/cjw 6551 SouTH REVERE PARKWAY, SUITE 250 « ENGLEWOOD, COLORADO 80111-6411 TELEPHONE: (303) 799-3633 + Fax: (303) 799-6015 POWER INTEGRATION PROJECT, PHASE I TABLE OF CONTENTS EXECUTIVE SUMMARY .....eescescsssesesessesesesesesescaescsesnenesenenescseseacacacscsesesssusnessscsnsneneseaeeeenenes ES-1 I. INTRODUCTION ......ececssesesecesscscsesesesessscseseseenescsesescscscsesesssssesssseseasscsesesecacassessnsacscsceeeeees 1 II. PROJECT DESCRIPTION 0.00... cscs essesesesesessescscseseeeesesescsesesescssscscseseseeeeessseeseseeesessesesesesesenes 4 TH. = METHODS wee eeeeeeeeeeseseeeseeeseseseeeeesesesescscscscscscseseuescsescseseeacscsesesscscscseseseseseseseseanenseseeeseaeees 6 TV. OBSERVATIONS. ........cccccccsssescesssesesesesesescscsesesesesecsescscseseesesesesessesessscseaseeseessesesaenseaeeeseaeees 7 Energy VS. Capacity scccsecssverevessveswesvavessousosnsnsssseeasnscesserasasssssnssensastarsennpeavenenccvesssexeussasssonaases 7 Industrial Generator Load Characteristics Current System Development.. Air Quality Permitting «0.0.00... .10 Purchases by the Blectric) Biter prise ..ccscsesc.0;csecersessesnsusssessansenserensusesay-otesenresenseestensevoseesens 10 V. FINDINGS 0.0... eeeeeceseeseeseseccsecscesccseeseescescscsecsecseesecseesecseeeeeseseeseeseessesesesscseesecseeesssenaenaee 11 VI. RECOMMENDATIONS .......ccecesceseeseeseeeeecseeseeseeseeaecaecsessecseeaeeseeaeeacecsecsesaetaeeaseeseesereene 14 Recommendation #1 - Expand Scope of Current System Improvement Initiatives .. 14 Recommendation #2 - Restructure the Electric Enterprise ..........cccsceeeeeeeeeeee 15 Introduction ssscscsassesscccasecsssussscrsetscsdesssrevestesteesanis ld Proposed Organizational Structure ..........cccccsesceseseseseseesesesesesesescseseseseseseseseseeeseas 17 Mvp eran ra eat OU scar ess one sews css seeasncen sessed cess cnn see sevens sevetensensuesssteseseasesesen 18 Recommendation #3 - Recommended Integration Business Framework. Ttroduction........cceceeeseeseeseeeesceecesceccsecscesceseescesecsecsecsecsaceseecssesecseescessesseseeseeaeeaes Evaluation of Integration Business Frameworks ...........ccccceseesesseeeseseeseseeeeeeseeeeee Recommended Integration Business Framework . TitiplemCMtations «sss sscsscsesscsscesssiscsssusssonsssenesssacvsstessscesionansonvezstosearessnensevsstoevesncssssoua Recommendation #4 - Acquire Icicle as Non-Firm Customer ...........:c:cccccseseseessseseseeseeee 25 WET, CL OSTING in icesssesensssssnspecntstzcssscizessstesesssespsssacsteoseseseescessssosessessecensovesnsiseeassesepiesssbioe canines 26 WVTUT, REBEL REN CES eo sce sass en scezcenseesssgicetsasqentesseseyss-ateosuecsusecaseseocusesocecececsesucusessucecussestnbeperhdzsell 27 Power Integration Project, Phase I Steigers Corporation April 2000 FIGURES Figure 1 Electrical Distribution System and Industrial Generator Locations ..............:ecseeeeeeee TABLES Table 1 Permitted Capacity of Unalaska/Dutch Harbor Generating Facilities 0.0.0.0... APPENDICES Appendix A Outline of Principles for a Power Sales Agreement Appendix B Comment Letters Power Integration Project, Phase I ii Steigers Corporation April 2000 EXECUTIVE SUMMARY The existing electric generation and distribution systems of the Unalaska/Dutch Harbor, Alaska, community developed in a fragmented fashion with very few effective interconnections. The City of Unalaska Electric Enterprise provides electric service to the residential and light commercial customers of the community, as well as to a small portion of the available industrial load. Most of the industrial load in the community, however, is served by generating facilities within the individual industrial facilities, which are electrically isolated from the Electric Enterprise’s system. This situation has created a number of operating and management difficulties that could be addressed by the integration of one or more of the separate systems into one larger system. Furthermore, integration would likely lead to further benefits to the Electric Enterprise, the operators of the separate systems, and the Unalaska/Dutch Harbor community as a whole. A number of difficult barriers exist, however, which have heretofore discouraged efforts to integrate the systems. In June 1999, the City of Unalaska engaged Steigers Corporation to initiate a multi-phased Power Integration Project. The first phase of the Project was to ascertain interest in and opportunity for the integration of these currently isolated electric generation systems and then to develop a business framework within which such integration might be accomplished. The second phase of the Power Integration Project would establish the contractual obligations by which the physical integration would be accomplished. Steigers Corporation examined a variety of air permit-related documents, energy studies, and development proposals that were available in the public record. A roster of potential participants and other parties with interests in the process was compiled. In addition to the City of Unalaska Electric Enterprise, this roster included the Unalaska/Dutch Harbor facilities of UniSea, Inc., Westward Seafoods, Inc., Alyeska Seafoods, Inc., Icicle Seafoods, Inc., American President Lines, Ltd., CSX Lines, L.L.C. (formerly Sea-Land Services, Inc.), and Offshore Systems, Inc. (the Industrial Generators). Ounalashka Corporation was identified as being an additional interested party. Each of the parties was contacted, and a series of meetings, consultations, and site visits were conducted to ascertain and develop interest in the Power Integration Project’s process and goals, gather information, solicit ideas, and identify potential issues. Further contact was made with a variety of state agencies, private and public utilities, and private energy project developers to gather additional information, insights, and ideas. Additionally, a limited electric generation cost-of-production analysis was made of the Electric Enterprise and selected Industrial Generators in order to make meaningful comparisons among the operations and to suggest possible economies available to an integrated system. Because much of the data on which the analysis was conducted are proprietary and were obtained under the protection of Confidentiality/Non-Disclosure Agreements, these data and the analysis results have been deliberately withheld from any possible improper disclosure, either direct or indirect. UniSea, Inc., Westward Seafoods, Inc., Icicle Seafoods, Inc., and American President Lines, Ltd. actively supported and participated in the Power Integration Project Phase I activities. Alyeska Seafoods, Inc., CSX Lines, L.L.C., and Offshore Systems, Inc. expressed a lower level of interest and participated less actively but should remain under consideration as viable candidates for integration. Power Integration Project, Phase I Steigers Corporation ES-1 April 2000 Phase I of the Power Integration Project made a number of key observations, and the conclusions that significantly influenced the project’s recommendations are summarized here. e The electrical integration of one or more of the Industrial Generator electrical generation and distribution systems with that of the Electrical Enterprise is operationally and technically feasible. Furthermore, such integration would create substantial direct benefits for both the Electrical Enterprise and the Industrial Generators participating in the integration. e A conceptual business framework and underlying principles was developed, within which, if they are properly applied, one or more of the Industrial Generator’s electrical generation and distribution systems might be integrated with that of the Electric Enterprise. The framework, however, will require a sustained spirit of cooperation among all members of the community and the recognition that the more substantial benefits of participation in the process may be realized only some years after the process begins. e All seven of the Industrial Generators express negative perceptions of the City of Unalaska Electric Enterprise’s historical performance as an issue of significant concern. It is important to emphasize here that the validity of these perceptions is not the issue of concern, but the perception itself is the significant issue. e The Industrial Generators express no particular desire to be in the energy production business but do regard it as a necessary part of currently doing business in Unalaska/Dutch Harbor. e In Steigers Corporation’s best judgement, the Electric Enterprise and each of the Industrial Generators that were closely examined all operate their respective generating facilities in a prudent, efficient manner consistent with sound industry practices. Thus, addressing inefficient practices is not an available means of providing immediate substantial economies to an integrated system. Certain near-term incremental economies are likely available, however, in the coordination of operations and maintenance and in fuel purchasing. e The many socioeconomic factors that created and contributed to the current difficult electric service situation and issues in the Unalaska/Dutch Harbor community remain fully present and active. e In building and operating their respective energy production facilities, the Industrial Generators have, in essence, negotiated and executed Power Sales Agreements with themselves to provide energy services. Their energy production facilities, however, must be regarded as sunk costs that are likely fully depreciated and have, at best, only nominal salvage value. The facilities’ only significant value is that they are in place, staffed, and permitted and that they have a load that must be served. e A properly designed and sited central, base-loaded generating facility to serve the Unalaska/Dutch Harbor community’s residential and commercial loads, as well as the non- Power Integration Project, Phase I Steigers Corporation ES-2 April 2000 processing “hotel loads” of the Industrial Generators, would create substantial benefits in reduced energy production costs and lower overall air emissions. Based on the above-cited investigations, observations, and conclusions, Phase I of the Power Integration Project makes four recommendations for consideration and action by the Unalaska/Dutch Harbor community. Recommendation #1 - Continue with and expand the scope of the current initiatives to improve and enhance the operability and reliability of the Electric Enterprise’s electric generation and distribution system. Recommendation #2 - Initiate a process within the City of Unalaska organization and the Unalaska/Dutch Harbor community to restructure the Electric Enterprise into a significantly more autonomous form. The recommended form would be an independent Utility Operator operating under the direction and authority of a new Utility Board. Recommendation #3 - Initiate discussions with Industrial Generators to definitively establish the terms, conditions, and specific form of transfer of individual Industrial Generator’s generation facilities and assumption of the obligation-to-serve by the Utility Operator. Recommendation #4 — Acquire Icicle Seafoods as a non-firm industrial electric customer. Such an acquisition appears technically and economically feasible, and both parties would likely derive substantial benefits from such a transaction. Recommendations #1 and #2 should proceed on their own merits, irrespective of the status and progress of integration. The successful implementation of these two initiatives would, however, likely bear heavily on the viability of any integration effort. Recommendation #3 is the recommended business framework within which integration would be accomplished. Recommendation #4, while it does not bear directly on integration represents an opportunity with substantial potential benefit that should be considered for implementation. There is no question that the current electric service situation in the Unalaska/Dutch Harbor is very difficult in many respects, with little to indicate that the future will be any different if current practices are continued. The integration business framework and other recommendations in this report would set the community onto a different, better path. Taking such a step will require strong public support, visionary leadership, and an open, equitable sharing of risk and benefit within the community. The tasks presented herein are formidable, and the obstacles are many, but the benefits for the Unalaska/Dutch Harbor community are substantial and are entirely worthy of commitment and pursuit. Power Integration Project, Phase I Steigers Corporation ES-3 April 2000 I. INTRODUCTION Over the community’s modern history, the electrical generation and distribution systems in Unalaska/Dutch Harbor, Alaska, have developed in a somewhat fragmented manner. The community assumed custody of a system largely designed and built by the United States military during the war years of the early 1940s, a system that, for a variety of reasons, could not readily accommodate expansion. This, as well as other factors, created circumstances under which it was not possible to serve the energy requirements of the very rapid expansion of the local seafood processing and shipping industries in the last two decades. As a consequence, these industrial interests found it expedient to construct and operate their own energy production facilities to serve their individual requirements. The current situation has the City of Unalaska’s Electric Enterprise (Electric Enterprise) serving the local residential, light commercial, public, and some industrial loads with most of the major industrial facilities generating all their internal energy requirements. The Electric Enterprise has an underground distribution system operating at three industry- standard distribution voltages: 34.5, 12.47, and 4.16 kilovolts (kV). The 34.5 kV and portions of the 12.47 kV distribution system are shown on an area map of the community (Figure 1). The relatively confined service territory and the community’s modest electrical energy requirements do not warrant the use of transmission-level voltages (60 kV and higher). The Electric Enterprise serves approximately 625 residential, 190 general/commercial, and 17 industrial customers. The overall service territory of somewhat less than 15 square miles, covering portions of Unalaska and Amaknak Islands in the Fox Islands of the Aleutian Chain, is characterized by steep, rocky terrain separated by substantial bodies of water. A generation facility housing eight diesel-fueled reciprocating internal combustion engine-generator sets, the Dutch Harbor Power Plant, is located on Amaknak Island. A single engine-generator set, similar to the eight but in a portable housing sited in Unalaska Valley (Unalaska Valley Power Module), is intended to support the distribution system under some contingency conditions. With an installed capacity of 7,600 kilowatts (kW), the Electric Enterprise is Unalaska/Dutch Harbor’s largest electric generator by annual energy production at about 30,500 megawatt-hours (MWh). Of the annual energy production, 14 percent is distributed to residential, 36 percent to general/commercial, and 42 percent to industrial class customers. The remaining 8 percent of production is attributable to system losses and internal use by the Electric Enterprise. There are seven industrial or commercial facilities in the Unalaska/Dutch Harbor community that routinely operate electrical generation and distribution systems (referred to in this report as the Industrial Generators). Of the Industrial Generators, UniSea, Inc. (UniSea), Westward Seafoods, Inc. (Westward), Alyeska Seafoods, Inc. (Alyeska), and Icicle Seafoods, Inc. (Icicle) are seafood processing operations. American President Lines, Ltd. (APL) and CSX Lines, L.L.C. (CSX, formerly Sea-Land Services, Inc.) operate ocean freight shipping facilities. Offshore Systems, Inc. (OSI) provides support services to the regional maritime/fishing industries. The location of each of the Industrial Generators relative to the City of Unalaska’s Electric Enterprise Power Integration Project, Phase I 1 Steigers Corporation April 2000 1650,, Mount Ballyhoo PROJECT LOCATION ‘* ezV¥y \ Attu Island \ , ° R f " .,,, Unalaska ONE Le a eB N \ POWER PLANT yg WW. E [| AND SUBSTATION 73:8 5 CSX Lines 5 ij MARGARET a / SWITCH ( / American Landfill President Ggtehouse Lines \ 2) EAST POINT UNISEA ‘ SUBSTATION SWITCH > _5971,000mN | > j | 41021 . Unalaska . h, RSS x . she A JN a és are ; ra C& . a 5,970,000 m N } ; SUBSTATION : - Gy, y eg oe Westward LESEND Seafoods 34.5 KV 12.470 KV (Not Shown) 4,160 KV x 628 ELEVATION IN FEET (NGVD29) UNALASKA ISLAND Ocean \ x 2165,, Pyramid Systems, Inc. | HI Peak fot s . CITY OF UNALASKA POWER INTEGRATION PROJECT 1000 Figure 1 Feet UNALASKA / DUTCH HARBOR Map Source: U.S.G.S. quadrangle, provisional edition, ELECTRICAL DISTRIBUTION SYSTEM Aerial Photos; 1983, Map Edited1990 Unalaska (C-2) ‘Alaska Zone 10, UTM Zone 3 AND INDUSTRIAL GENERATOR LOCATIONS Prepared By 397,000 mE 398,000 mE system is shown in Figure 1. The current individual permitted capacities of the Industrial Generators and the Electric Enterprise are shown in Table 1. Because the Industrial Generators’ facilities vary widely in physical configuration and in the specific application of their respective generators, not all of the listed generation capabilities would necessarily be available or suitable for incorporating into any integration solution. Table 1 Permitted Capacity of Unalaska/Dutch Harbor Generating Facilities. Facility Permitted Capacity UniSea 12,432 kW (16,936 kW installed) Westward 6,660 kW Alyeska 5,900 kw Icicle 1,950 kW APL 6,213 kW CSX 1,300 kW OSI 1,090 kW Electric Enterprise 7,600 kW Total 43,145 kW The current state of the Unalaska/Dutch Harbor community electrical systems contributes to a number of recognized challenges in system stability and operating flexibility. However, the Electric Enterprise has made tremendous progress in recent years in systematically identifying and addressing shortcomings of its system. Two efforts undertaken in recent years are particularly encouraging. One is the installation of a looped 34.5 kV distribution “backbone” and switching devices that provide redundancy, some operating flexibility, and enhanced energy transfer capabilities to the distribution system. The second, currently being implemented, is the upgrade and coordination of key system protection and monitoring devices that will enable the system to minimize impacts on the whole system as it responds to electrical faults and other system disruptions. These efforts, while sound and prudent, are incremental in nature and do not address a fundamental aspect of the present situation. Specifically, the current Electrical Enterprise generation and distribution system is simply too small to fully realize the stabilizing influence and the economies that could be seen by a larger system. Because the potential for growth in the customer segments served by the Electric Enterprise is limited, the possibility of effectively expanding the system by integrating the Industrial Generators into the Electric Enterprise was examined and found to have merit. The benefits of a properly integrated system would be manifold. Its enhanced flexibility and diversity would result in levels of reliability greater than achieved by any of the systems independently. Furthermore, a larger system would be able to make generation resource acquisitions beyond the current reach of the community, thereby achieving substantial economies in energy production costs. A number of difficult barriers exist, however, which have heretofore discouraged efforts to integrate the systems. Power Integration Project, Phase I 3 Steigers Corporation April 2000 Steigers Corporation of Englewood, Colorado, has had an established relationship with the Unalaska/Dutch Harbor community for some years. Steigers Corporation has assisted and continues to successfully assist the City of Unalaska and six of the seven Industrial Generators with air quality permitting through the Alaska Department of Environmental Conservation (ADEC). A number of these permit applications were prepared simultaneously for competing interests, a situation that required Steigers Corporation to coordinate the efforts of and equitably represent the best interests of each of the applicants while at the same time preserving the integrity of their sensitive operating information. The one Industrial Generator with whom Steigers Corporation has not had the opportunity to work closely is OSI because it has been exempt from the more complex permitting requirements due to the relatively small size of its generating resources. Thus, Steigers Corporation, an outsider to the Unalaska/Dutch Harbor community in some respects, is in the unique position of having both a long-standing involvement in the energy- related issues the community faces and an established working relationship with nearly all of the industrial and public interests in the community. In early 1999, Steigers Corporation and the City of Unalaska recognized that an opportunity might exist to address the fragmented state of the community’s electric systems by pursuing the integration of those systems. The City of Unalaska engaged Steigers Corporation, by virtue of its unique qualifications and standing with the community, to launch an initiative to ascertain if such an opportunity for integration exists and, if so, to craft a conceptual business framework acceptable to the community within which such integration might be accomplished. The Power Integration Project, Phase I is the result of those efforts. Il. PROJECT DESCRIPTION Phase I of the Power Integration Project, a multi-phased initiative by the City of Unalaska, has two primary objectives. The first objective is to definitively explore and assess the feasibility of integrating two or more of the multiple electric generation and distribution systems now operating in the Unalaska/Dutch Harbor community into a single coordinated system. The second objective is to develop a workable conceptual business framework and underlying principles that may, subject to the City Council’s endorsement and authorization to proceed, be utilized to support further exploratory discussions and, ultimately, substantive negotiations between the Electric Enterprise and interested Industrial Generators. The ultimate goal of these negotiations would be the physical integration of systems within a contractual/business framework from which the Industrial Generators individually and the community as a whole would derive benefit (Phase II). Steigers Corporation conducted a detailed examination of air permit applications, air permits, and associated data reports and other documentation that are a matter of public record. Studies and other documents relating to energy issues that had been previously prepared by or for the City of Unalaska and proposals made to the City of Unalaska by other parties were also examined. Documentation gathered by Steigers Corporation from the individual Industrial Generators incidental to past and on-going air permitting work was not accessed or utilized for the Power Power Integration Project, Phase I 4 Steigers Corporation April 2000 Integration Project unless permission to do so was expressly granted by the Industrial Generators themselves. A roster of those parties in the Unalaska/Dutch Harbor community whose interests or circumstances suggested that they may be potential participants was compiled. Steigers Corporation initiated contact with these parties to introduce the Power Integration Project, to ascertain interest in the process and goals, to gather information and ideas, and to identify potential issues. A Confidentiality/Non-Disclosure Agreement (NDA) form was developed to formally address the handling of sensitive business information that may be collected by Steigers Corporation from the Industrial Generators or others participating in the Power Integration Project. Phase I of the Power Integration Project developed a variety of conceptual business frameworks within which integration of the power systems might take place. The frameworks were further evaluated in consultation with City of Unalaska staff and representatives of the Industrial Generators. The Power Integration Project also consulted with others as necessary and appropriate to gather information, to solicit ideas and feedback, and to assist in the evaluation of the business frameworks. Based on detailed operating and financial information obtained from the City of Unalaska Electric Enterprise and those Industrial Generators willing to provide it, a limited analysis was made of each entity’s electric energy costs-of-production. The intent of the analysis was to facilitate a meaningful “apples to apples” comparison of electric energy production costs. The comparisons assisted in the evaluation of business frameworks and identified potential operating economies that may be available to an integrated system. Because of the potentially sensitive information involved, the base information itself, the analyses, and the comparisons have been and remain strictly confined to only those Steigers Corporation personnel engaged in the Power Integration Project. Furthermore, the information and analyses have been stored separately from Steigers Corporation’s project files to avoid any unintentional use. Any references made to the analyses are deliberately indirect and are never made in such a way that comparisons may be made between or among the Industrial Generators. Phase I of the Power Integration Project also solicited information, ideas, and feedback from a variety of outside sources. These sources included state agencies, such as the Alaska Energy Authority and Alaska Industrial Development and Export Authority (AIDEA), authorities on legal and regulatory issues, contacts in both publicly and privately held electric utilities, and private energy project developers. The hoped-for end product of this initial phase of the Power Integration Project was to set the stage, to the extent it may be possible, for substantive negotiations between the City of Unalaska Electric Enterprise and one or more of the Industrial Generators. The purpose of this report is to document the results of the Power Integration Project’s Phase I efforts and to set forth the case supporting the recommendations for further action under Phase II. Power Integration Project, Phase I 5 Steigers Corporation April 2000 Il. METHODS The existing documentation examined by Phase I of the Power Integration Project included two recent studies commissioned by the City of Unalaska Electric Enterprise. These two studies, the Power Supply Study (PSS 1998) and the Electrical System Studies (ESS 1998), were not only very informative sources of background information but were also found to touch on issues particularly relevant to the Power Integration Project. The intended objectives of the PSS included quantitative modeling of the City of Unalaska’s electric production capabilities (its capacity) relative to the current and projected electrical load requirements of its existing customers (PSS 1998 page 1-2). The study’s scope also included an assessment of the feasibility of serving the electrical loads of certain existing Industrial Generators (UniSea, APL, and CSX) plus a new industrial load being proposed at that time (a cold storage facility). The modeling included multiple scenarios of load growth and load acquisition (blocks of load currently served by certain Industrial Generators), as well as acquisition of various generation resources. The PSS came to a number of conclusions that are relevant to the Power Integration Project. First, the City of Unalaska’s current generation production capabilities are adequate to support its current obligations only so long as no significant load growth occurs. Even as little as 1 percent annual growth in its served load will result in the Electric Enterprise having to operate with insufficient reserve margins at times, thereby risking a loss of service to some of its customers under contingency conditions by year 2006 (PSS 1998 page VII-1 items 1 and 2). Second, if the City of Unalaska and UniSea were to integrate their respective systems under certain conditions, both parties could realize benefits from doing so (PSS 1998 page VII-1 item 9). The ESS was more tightly focused than the PSS in that it was conducted to assess the need for improvements to the Electric Enterprise’s generation and distribution systems and associated protective relaying and to evaluate the benefits of such improvements. There are two items among the study’s recommendations that are of interest to the Power Integration Project. Both recommendations relate to making improvements to support increased effective energy transfers across the UniSea interconnection (ESS 1998 page 3). Specifically, the recommended changes were to replace the current 1.5 MVA (megavolt-amp) transformer that connects the two systems with a larger 5.0 MVA transformer and to upgrade and coordinate the associated protective relaying devices. All of the seven Industrial Generators (UniSea, Westward, Alyeska, Icicle, APL, CSX, and OSI) were identified as being potential participants in the Power Integration Project. Each of these parties was subsequently contacted to introduce the project and its objectives. In addition, in recognition of its widespread interests in the community, Ounalashka Corporation was identified as an interested party and was also contacted. Steigers Corporation met with representatives of Westward, UniSea, and Icicle in early September 1999. In early October 1999, Steigers Corporation also met in Unalaska/Dutch Power Integration Project, Phase I 6 Steigers Corporation April 2000 Harbor with representatives of UniSea, Icicle’s processing vessels P/V Arctic Star and P/V Bering Star, Westward, Alyeska, APL, and the Electric Enterprise. Tours of the respective facilities were also taken. Additionally, meetings were held with City of Unalaska staff members and a representative of Ounalashka Corporation. UniSea, Westward, Icicle, and APL each expressed strong interest in participating in the Power Integration Project, at least to the extent of providing information about their Unalaska/Dutch Harbor energy production facilities and freely discussing relevant aspects of their business operations. These businesses continue to demonstrate a keen interest in the progress of the project. Although CSX did not express strong interest in the Power Integration Project due to a corporate transition, it should still be considered as a potential participant because it currently obtains a large portion of its electrical requirements from the Electric Enterprise and has in the past expressed an interest in becoming a full-service customer (PSS 1998 page 1-3). Alyeska and OSI also did not express strong interest in the Power Integration Project at this time but should also continue to be considered viable candidates for integration as the initiative progresses. Icicle’s Unalaska/Dutch Harbor operations are somewhat unique relative to the other processors. Icicle’s processing facilities consist of two self-contained processing vessels, the P/V Bering Star and P/V Arctic Star, only one of which is generally at its Dutch Harbor berth at any time. These vessels are seasonally moved to locations elsewhere as the fisheries and processing opportunities present themselves. Since neither of the two vessels is based at Dutch Harbor year-round, it was initially felt that Icicle would not be a good fit in a permanent integration arrangement. However, discussions with Icicle suggest that there may be an opportunity to provide electric service to the vessels on an interruptible (non-firm) basis, particularly during periods of no processing activity. This potential opportunity is addressed in this document as Recommendation #4. UniSea, Westward, Icicle, and APL each executed an NDA with Steigers Corporation. UniSea, Westward, and the Electric Enterprise subsequently provided detailed operating, maintenance, and financial information relating to their respective energy production facilities. APL is currently engaged in an internal assessment of the energy production capabilities of its Dutch Harbor facility and has committed to sharing the information and results under its NDA with Steigers Corporation as that process nears completion, which is anticipated to be in the first quarter of 2000. IV. OBSERVATIONS Energy vs. Capacity An electric utility is expected to provide its customers with a number of basic services. Included in those services are two distinct products: energy and capacity. Energy is the commodity, usually measured in kilowatt-hours (kWh), that is expended and consumed by the customer in the performance of useful work such as lighting, heating, or operating motorized devices such as refrigerators. Capacity is a service, measured in kW or megawatts (MW), which is simply the Power Integration Project, Phase I 7 Steigers Corporation April 2000 maximum rate at which the customer may (as dictated by either contractual terms or equipment rating) draw energy from the utility. Thus, capacity is a function of either the limitations of the equipment the utility uses to serve the customer, the availability of the utility’s generation resources, or the customer’s service equipment limitations, whichever is the most limiting. Service for residential and most light commercial loads generally makes no distinction between the two products because it is rarely cost-effective to provide the necessary metering to separately track both services. For heavier commercial and industrial customers, however, the products are often measured and billed separately. In designing and building its system to provide service to a heavy commercial or industrial customer, a utility must specify equipment to serve the capacity, not the energy, needs of the customer. For example, consider two prospective industrial customers each expected to consume 1,000,000 kWh of energy annually. If Customer A consumes the energy steadily 24 hours per day, 365 days per year, its capacity requirements would be 114 kW (consuming 114 kWh each hour) and could be easily served with a 130 kVA transformer and equipment. [Note, a kilovolt-amp (kVA) or a megavolt-amp (MVA) is an expression of the capabilities of electrical equipment and systems and, for the purposes of this discussion, may be considered equivalent to a kW or MW, respectively. As a point of reference, 15 to 25 kVA transformers are typically required for a residential service.] If Customer B consumes energy at the rate of only 10 kWh per hour (10 kW) for 11 months and then, in a period of intense activity, consumes the balance in the remaining month, its capacity requirements would be 1,277 kW. Thus, in order to serve customer B the utility would need to provide a transformer and equipment sized, based on that one month’s requirements, for at least 1,300 kVA, i.e., a capacity ten times larger than that required by Customer A. Thus, the costs and impacts to the utility of serving Customer B are substantially greater than those of serving Customer A even though there is no difference in their energy consumption over the course of a year. Therefore, it may be seen that separate billing of the energy and capacity products is essential for the utility to distinguish the differences so that it may equitably recover the true costs of providing service to the two customers. Industrial Generator Load Characteristics The point of the preceding discussion is that, from the perspective of an electric utility, the electrical service requirements of the Industrial Generators would be very difficult to serve economically. The seafood processors, UniSea, Westward, Alyeska, and Icicle, spend substantial portions of a typical year somewhat idle. During those times when little or no seafood is arriving for processing, the facilities themselves are largely shut down at standby or “hotel load” level, and, furthermore, there is not a large workforce present to be housed and fed. Accordingly, the seafood processors’ electrical requirements are minimal during those times. During processing, however, electrical energy requirements can easily increase five-fold as the processing facilities are put into full operation, refrigeration system requirements increase, and a full complement of labor must be supported. Due to the nature of the fisheries that provide the industry with its raw materials, the processors are often in production simultaneously, and, consequently, their peak electrical requirements tend to be coincidental. Power Integration Project, Phase I 8 Steigers Corporation April 2000 APL and CSX, as ocean freight operations supporting the seafood processors, exhibit load profiles similar to those of the processors due primarily to the number of refrigerated containers they must support in their terminal facilities during and immediately subsequent to the seafood processing periods. These containers are often self-contained refrigeration units that require electrical service to operate. Current System Development Reciprocating internal combustion engines fueled by diesel are rugged, reliable, and fuel- efficient prime movers (the source of a generation unit’s mechanical energy) for use in the smaller classes of electrical generating equipment, particularly in the less than 3 MW capacity range. By and large, they are reasonably priced, utilize a mature technology, have excellent repair and spare parts support, are relatively straightforward to site and permit, and may be readily procured from a variety of manufacturers on relatively short notice. For these reasons, they heavily dominate the electric generation markets in isolated small communities and rural areas. In Unalaska/Dutch Harbor, diesel-fueled engines are currently the exclusive prime movers, although small hydroelectric and wind projects are being discussed. On the other hand, diesel engines also tend to be relatively heavy emitters of pollutants (particularly of nitrogen oxides (NO,)), tend to be operationally and maintenance labor intensive, and are entirely dependent on the relatively volatile fuel (petroleum) markets. The Industrial Generators have tended to add generation resources (exclusively diesel engine- generators) on an incremental basis only, i.e., new resources are not acquired until dictated by business requirements. This is a prudent practice on the part of the Industrial Generators, which operate within a resource-extraction based industry whose business operating environment tends to be highly dynamic and subject to the uncertain influences of numerous environmental, economic, and political factors. Successful businesses operating in this type of environment tend to be very reluctant to commit capital resources unless they see very high rates of return in the short term. Accordingly, they find that higher operating costs are often less objectionable than any longer-term commitment of capital. It follows, then, that this environment strongly discourages serious consideration of acquiring or committing to relatively large generation resources, even if substantial savings in production costs could be realized. The larger resources tend to have relatively high capital costs and are more difficult to site and permit, requiring long- term commitments to justify. The Electric Enterprise itself, serving a community whose economy is heavily based on the same resource-extraction industry of the Industrial Generators, is obliged to take a similar view in its acquisition of generation resources. There are no foreseeable events or outside social, economic, or regulatory forces with sufficient influence to divert the Unalaska/Dutch Harbor community’s electric utility situation from its current path. Due to its physical isolation, outside forces such as market pressures from adjacent utilities are not present. So long as the fishery resources and seafood markets do not stabilize for a substantial period, the Industrial Generators will likely continue to be very reluctant to make anything other than incremental changes to their respective generation facilities, and then only when absolutely necessary. Similarly, so long as the City of Unalaska Electric Enterprise is obliged to serve only about a third of the Unalaska/Dutch Harbor community’s total energy Power Integration Project, Phase I 9 Steigers Corporation April 2000 requirements, it will continue to find it economically prohibitive to acquire larger, more cost- effective generation facilities. With all the electric generation driven by a single type of prime mover with essentially identical fuel supplies, there is little basis for any substantive differences in electric energy production costs among the Industrial Generators themselves and the Electric Enterprise. Thus, no operators of generation in Unalaska/Dutch Harbor will ever gain sufficient economic advantage to improve their circumstances within the current situation. Air Quality Permitting Both the Industrial Generators and the Electric Enterprise have or are in the process of obtaining regulatory air quality permits under which their respective generation resources are operated. By their nature and intent, these permits impose constraints on all generating operations. For thermal electric generating operations (those based on the combustion of fuels), the air quality permits are often the most limiting factor in the operation. Permits are held in the name of the facility’s operator and would be transferred to any new operator. The regulatory process for the application for and administration of air quality permits does not lend itself to crafting beneficial relationships among permit holders in a community. However, it is Steigers Corporation’s best judgement that a functionally integrated system holding operational control of multiple permits could represent the Unalaska/Dutch Harbor community interests to regulatory authorities much more effectively than could any individual entity, whether private or public. If the community was in a position to speak with a politically unified voice, one could reasonably expect that regulatory agencies would give serious consideration to requests for flexibility in permit conditions. There are a number of regulatory concessions of considerable potential value that may be pursued by the operator of an integrated power system with a reasonable expectation of success. These concessions may include, for example, relaxing the limiting aspects of certain permits to gain operating flexibility, allowing a shift in emission allowances from one facility to another at need, and allowing an emission increment to be shared between an efficient, centralized, base- loaded generation facility and multiple smaller facilities operating only on a reserve or contingency basis. In the latter example, a central generation facility with more cost-effective production would operate continuously, and multiple diesel-engine units serving in a backup role would operate only when the central facility was not available. Since the central and the reserve units would operate simultaneously only during a switchover transition, for emission permitting purposes they would be regarded as offsetting emission sources under common control and dispatch. Purchases by the Electric Enterprise Currently, energy purchases are occasionally made by the Electric Enterprise on an as-available (non-firm or interruptible) basis from UniSea and could potentially be made from Westward. The Electric Enterprise, however, cannot consider these purchases a firm resource because neither UniSea nor Westward is able to warrant the availability of the energy purchases. Furthermore, the current peak electrical energy requirements of most of the Industrial Generators are at or near the permitted or physical capabilities of their respective generation facilities. Power Integration Project, Phase 1 10 Steigers Corporation April 2000 While it is true that their capacity is often substantially underutilized during periods of low seafood processing activity, the nature of their respective industries and their in-house requirements preclude the possibility of making substantial firm capacity available to others in the community during peak periods even if they were so inclined. V. FINDINGS With respect to the objectives of the Power Integration Project, Phase I, Steigers Corporation concluded that the electrical integration of one or more of the Industrial Generator electrical generation and distribution systems with that of the Electric Enterprise is operationally and technically feasible. Furthermore, such integration would create substantial direct benefits for both the Electric Enterprise and the integrated Industrial Generators. These benefits take the form, in the short term, of operating and maintenance economies and levels of system stability and reliability greater than those currently seen by any of the individual systems. In the long term, both parties would likely realize reductions in electrical energy production costs over what would otherwise be expected. Individually, the Industrial Generators benefit by the creation of a viable opportunity to be substantially relieved of the current necessity of being in the electrical generation business. The Electric Enterprise and the Unalaska/Dutch Harbor community as a whole benefit in the long term by greatly increasing the energy sales over which fixed costs are applied, expanding the choices and economic viability of a lower-cost, large, central generating facility, and enhancing the promotion of the community for further economic development by stabilizing electric utility services. As to the second objective, Steigers Corporation has developed a workable conceptual business framework and underlying principles within which, if they are properly applied, an integration of systems could be accomplished. The framework, however, will require a sustained spirit of cooperation among all members of the community and the recognition that the more substantial benefits of participation in the process may be realized only some years after the process begins. Steigers Corporation has made a number of additional observations and conclusions that directly influence and shape the recommendations of Phase I of the Power Integration Project, as follows. While discussing potential issues relating to the prospect of some form of integration with the Electric Enterprise, all seven of the Industrial Generators cited the historical performance of the Electric Enterprise itself as being an issue of significant concern to them. Their perceptions are that the City of Unalaska’s management of the Electric Enterprise is inappropriately politicized, that poor operating and maintenance practices are a root cause of service reliability and quality problems, and that management is unable to respond to challenges and service concerns in a timely and effective manner. It is very important to emphasize here that the validity of these perceptions is immaterial to the real issue of their significance. The fact remains, these perceptions seem to be solidly held through multiple levels of the Industrial Generators’ respective organizations and constitute a substantial barrier to the Industrial Generators’ participation in any integration framework. This is a difficult and potentially emotional issue that almost certainly will not be effectively resolved by any debate on the merits of the perceptions. Power Integration Project, Phase I a 1 Steigers Corporation April 2000 The Industrial Generators uniformly expressed no particular desire to be in the electric energy generation business, energy generation having simply been an unavoidable aspect of conducting their business in Unalaska/Dutch Harbor. Self-generation has been seen as the only manner in which to adequately address their business requirements. It would follow that any prospective provider of electric service seeking to serve the Industrial Generators would need to consider and adequately address those requirements. The Industrial Generators’ requirements may be summarized as follows. First, the cost of electric service must be appropriate to the economics of their business. Second, the electric energy supply must be highly reliable because their business operations are very intolerant of service disruptions, particularly during periods of seafood processing. Third, the electric service must be provided by an entity perceived as economically sound, politically stable, and committed to equitable treatment of its customers. Phase I of the Power Integration Project examined the generation facilities of each of the Industrial Generators, as well as those of the Electrical Enterprise. Furthermore, detailed operational and financial information for the Electrical Enterprise and the two largest (in generation capacity) Industrial Generators, UniSea and Westward, was obtained and evaluated. In Steigers Corporation’s judgement, the electrical energy production facilities of these two Industrial Generators and the Electric Enterprise are generally operated efficiently, consistent with sound industry practices, and are staffed at an appropriate functional level. Inevitable differences in maintenance and operational practices, age and condition of equipment, and efficiencies of supporting equipment exist. While both the Industrial Generators and the Electric Enterprise occasionally experience disruptions of varying severity and duration in their generation and distribution systems, it should be pointed out that only the Electrical Enterprise has a distribution system spread out over a relatively large area. This difference alone introduces substantially greater vulnerability to disruptions and hampers the operator’s ability to quickly identify, isolate, and recover from such disruptions. Since the various generation operations are similar in so many respects, there are no apparent substantial differences in their operations and maintenance costs that could be beneficially exploited by integration. There are, however, incremental economies that would likely be available to an integrated system, particularly during periods of low energy requirements. A common and prudent practice among the Industrial Generators is to operate more generation capacity than is actually needed for their facilities’ loads in order to provide for a “spinning reserve.” A spinning reserve is intended to accommodate an unexpected increase in load or the loss of generation resources within their system with minimal disruption. With each of the Industrial Generators and the Electric Enterprise operating these spinning reserves at any given time, the cumulative effect is that a substantial amount of essentially idle generation is operating in the community. A properly integrated system would not require these redundant reserves, and significant savings in fuel, maintenance, and air emissions would be realized. Differences in fuel costs exist between the Industrial Generators and the Electric Enterprise. The Industrial Generators are subject to the State of Alaska Motor Fuel Tax of $0.02 per gallon, net, which is assessed on fuel utilized in their electric generating facilities. Furthermore, the Industrial Generators are assessed a 3.0 percent Sales Tax by the City of Unalaska on their fuel purchases. The gross value of these two taxes paid by the Industrial Generators is estimated at a Power Integration Project, Phase I 12 Steigers Corporation April 2000 total of $250,000 to $300,000 annually. The Electric Enterprise is exempt from the Motor Fuel Tax based on its status as a utility serving the public and from the Sales Tax based on its status as a municipal corporation. Thus, if the fuel for Industrial Operators’ generating facilities were purchased by the Electric Enterprise or another similarly exempt entity, a reduction in fuel costs would be realized. In addition, the operator of an integrated system might well realize further reductions in fuel costs by virtue of being able to make bulk fuel purchases on a scale beyond the reach of the individual operators. The multiple economic and political factors that contributed to the current electrical supply situation remain present and active. Furthermore, the substantial financial, business, and human investments that have been made to date cannot be casually dismissed. A relatively large investment would be required to make any substantial changes to the current situation in the near term — an investment level that is likely far beyond the capacity of those inside or outside the community. The solution must initially take the form of small but crucial steps that will re-order the economic character of the community’s electrical utility so that subsequent decisions will lead the community, over time, to a far better situation. A key observation is that, as the current situation has developed over the past few decades, each individual Industrial Generator has, in essence, worked out an electric power sales contract with itself. Each has made very substantial investments in constructing an electric generation facility with all the associated support infrastructure, permitting, and operator training costs. Each has a reasonable expectation that this “contract” with itself will provide specific energy services to its business at some cost for some period of time. These specific energy services have known, and presumably acceptable, attributes of voltage, frequency, and capacity with some level of reliability. From a purely business perspective, so long as the “contracted” services are provided at an acceptable cost, the Industrial Generator likely regards the identity or affiliation of the party providing the services contemplated by the “contract” as of secondary consequence to the actual performance of the services. The capital investments that have been made by the Industrial Generators are, for all practical purposes, sunk costs. Additionally, most of the Industrial Generators’ generation facilities have been in place long enough to have been fully depreciated. The salvage value of each facility, the total of its components, at any time within its functional lifetime will be nominal at best. The only significant value of the Industrial Generators’ electric generation facilities is that they are in place and functional, are fully staffed by trained operators, are properly permitted, and provide an acceptable level of energy services to the respective Industrial Generator’s overall operation at an acceptable cost. If a central generating facility were to be justified and subsequently acquired by the Unalaska/Dutch Harbor community, a number of substantial benefits would be derived. There are a number of mature, reliable, and efficient generation technologies suitable to a scale appropriate for Unalaska/Dutch Harbor that have been previously examined in some detail (PSS 1998 Appendix C), as well as during the course of this initial phase of the Power Integration Project. The cost of production for a base-loaded facility (fully utilizing its production capacity) would be considerably below that of any other generation facility in the community. Power Integration Project, Phase I 13 Steigers Corporation April 2000 Furthermore, depending on the type of facility and the fuels it is designed to utilize, other economies and benefits to the community could be realized. VI. RECOMMENDATIONS Based on the above-described investigations and findings and on extensive consultation with many parties interested in the Power Integration Project, four recommendations have been developed for further consideration and action. Recommendations #1, #2, and #4 may and should proceed irrespective of the status or progress of efforts toward integration of the Unalaska/Dutch Harbor electric systems. Recommendation #3, the recommended conceptual business framework within which integration may be achieved, may and should proceed concurrent with the other three but may not achieve meaningful results in the absence of substantial progress with Recommendation #2. Recommendation #4, while not directly impacting the issue of integration, may well be an opportunity for both parties to derive benefit and, on that basis, is included here. Recommendation #1 - Expand Scope of Current System Improvement Initiatives Continue with and expand the scope of current initiatives to improve and enhance the operability and reliability of the Electric Enterprise’s electric generation and distribution system. Recommendation #1 should proceed on its own merits irrespective of the status or progress of systems integration. As described above, the Electric Enterprise has in recent years commissioned two timely, well- conceived, and well-executed studies. The PSS examined potential capacity shortfalls in the Electric Enterprise system, impacts of load growth, and the costs and applicability of several generation technologies to the Unalaska/Dutch Harbor community. The ESS focused on certain aspects of the state of the Electric Enterprise system and identified technical improvements to address service problems and system protection. The current level of complexity and the scope of the Electric Enterprise generation and distribution system warrant further efforts along these lines. Additional well-chosen enhancements to the automated and coordinated protective and switching devices and further strengthening of the distribution system would enhance reliability and operational flexibility. The Unalaska/Dutch Harbor climate presents a somewhat difficult operating environment for an electric utility, and such enhancements would reduce the system’s vulnerability to system disruptions and speed recovery from disruptions that inevitably occur. Additional study is needed to devise an overall long-term plan for the Electric Enterprise system, particularly its distribution aspects. A long-term plan is needed that will build on the strengths of Unalaska/Dutch Harbor’s circumstances and minimize the impacts of its challenges. As changes are contemplated and made to the system, there should be a high-level reference to guide the decision-making process. The goals of additional study should be, first, to confirm the suitability of the 34.5 kV distribution “backbone” of the system and identify future expansion and reinforcement scenarios to ensure that the system is adequately robust to accommodate necessary energy transfers for any Power Integration Project, Phase I 14 Steigers Corporation April 2000 reasonable combination of load requirements and generation availability. Such an analysis is also needed to identify any issues relating to the possible integration of the relatively large generating resources and load requirements of the Industrial Generators while also accommodating the addition of a central generating facility to the current system. Second, the study should develop and establish technical standards necessary to accommodate growth and change in the system. Specifically, it should establish energy quality standards (for delivered power factor, voltage, frequency, and transient harmonics), system protective device sizing and performance requirements, standardized power transformer wiring configurations, and remote monitoring and control protocols. Finally, the additional study is necessary to develop a comprehensive protection and system stability plan. The implementation of Recommendation #1 will require defining its scope, including the determination of which Industrial Generators are to be considered full integration candidates. At a minimum, it would be advisable to include UniSea, Westward, and Alyeska, irrespective of their stated intentions. The magnitude and character of the loads and generation capabilities of these three are such that, if any were to initially choose not to participate and, therefore, be excluded from study but were to subsequently reverse that position as the integration process proceeds, it might not be possible to accommodate their integration without undue difficulty and expense. In addition to the initial study, the request for proposals to accomplish Recommendation #1 should also provide for ongoing engineering services to the operator of the integrated utility to facilitate the resolution of issues encountered as system enhancement and integration proceed. Upon acceptance and approval of the study’s methods and results, the defined tasks should be prioritized and then periodically reexamined and updated as circumstances dictate. There will likely not be large funding sources available, so the pace of accomplishment will be dictated by the availability of funding. Additionally, system repairs and refurbishment occasioned by other work will present opportunities to install infrastructure, such as conduit and vaults or upgraded conductors, that will support future requirements. Recommendation #2 - Restructure the Electric Enterprise Initiate a process within City of Unalaska organization and the Unalaska/Dutch Harbor community to restructure the Electric Enterprise into a significantly more autonomous form. Recommendation #2 should proceed on its own merits irrespective of the status or progress of systems integration. Introduction The Electric Enterprise is currently a municipal corporation formed to hold, manage, and operate the electric generation and distribution assets of the City of Unalaska. It operates as the Department of Public Utilities within the City of Unalaska governmental organization and reports through the City Manager to the City Council. While this organizational structure, on the surface, is suitable for the size of the current Electric Enterprise, it labors under the very adverse perception of most of the Industrial Generators, and that perception will raise obstacles to Power Integration Project, Phase I 15 Steigers Corporation April 2000 integration. Furthermore, irrespective of the Industrial Generators’ perceptions and the prospects for the implementation of any integration framework, the increasingly complex economic and technical issues faced by an electric utility of the current size of the Electric Enterprise warrant transition to a more autonomous structure. A number of different models were considered in the course of Phase I of the Power Integration Project. Some initial judgements and determinations were made based on what may be acceptable and practical for the community. First, the process by which to accomplish a transition from the current Electric Enterprise to a restructured independent Utility Operator should be largely transparent at the working level. The existing line and production personnel levels are well suited for the scope of the current operation and would require few if any changes. Second, the current practice of the City of Unalaska providing office space and support services to the Electric Enterprise such as human resources/personnel, accounting, billing and collections, purchasing and contracting, and vehicle maintenance provides for efficient use of community resources. There is no compelling reason to create duplicate capabilities and thereby increase costs when to do so would add little or no value. Third, a “for-profit” Utility Operator would very likely not be acceptable to the Unalaska/Dutch Harbor community. The transfer of publicly owned assets to a for-profit entity is problematic, to name just one of many potential difficulties. Fourth, the Unalaska/Dutch Harbor community would likely want to retain full local control of the Utility Operator rather than pass management control to an entity outside the community. Consultation with representatives of publicly owned utilities, as well as legal advisors, confirmed that there are numerous possible legal forms the Utility Operator could assume. These possibilities range from simply remaining as an associated municipal corporation, but with increased organizational and financial autonomy, to forming a local cooperative or electric association under applicable state or federal law. Each of the possible forms has strengths and weaknesses, and each could be crafted to function adequately. The relevant issues to consider include eligibility for and access to low-cost subsidized funding sources and financing mechanisms, rate-making (the setting of tariffs) processes and approvals, and tax-exemption status. In the final analysis, Phase I of the Power Integration Project concludes that a municipal corporation, created under the authority of the City Council but with its own reporting structure and increased level of autonomy, is the recommended organizational model. This would likely simplify the segregation of assets and obligations and the transfer of operating certification. It would also facilitate continued mutual support and resource sharing between the Utility Operator and the City of Unalaska organizations. Consideration of the various options by the City of Unalaska, including consultation with legal counsel and other advisors, will reveal the optimal solution. The significance of the legal form of the Utility Operator, at this juncture, is secondary to its functional organization. Power Integration Project, Phase I 16 Steigers Corporation April 2000 Proposed Organizational Structure The Utility Operator would be governed by a Utility Board composed of three or five voting members who would be responsible for fiscal management of Utility Operator assets, policy direction, and approval of major expenditures and contractual commitments and, very importantly, would serve as the final authority for setting tariffs. A Utility Board would have the advantage of being able to focus its attention within the scope of its mandate, becoming familiar with the challenges and dynamic forces effecting change within the energy-related industries. Consequently, when presented with opportunities and challenges, a Utility Board would be able to respond more quickly to the benefit of the entire community. The Board members would be elected from the community for staggered terms. The Utility Board itself would elect one of its members to serve as its Chair. Some level of participation in electric industry management associations would be necessary and expected to establish working relationships with peers and to build a knowledge base within the Board. The bylaws governing the formation and conduct of such Boards are well established in practice and are readily available. A General Manager would run the Utility Operator, responsible for all aspects of the day-to-day operation of the utility. The General Manager would advise and be accountable to the Utility Board for carrying out its policies and directives. The General Manager would also be the Utility Operator’s primary representative to the residents and to commercial and industrial interests of the Unalaska/Dutch Harbor community and would be its lead negotiator. This is a key position in the Utility Operator organization and should, with the Utility Board, serve as the heart of its commitment to service and beneficial change. As a side note, the other community utility services (municipal water, solid waste, and waste water treatment) that are currently managed by the Director of Public Utilities may not warrant a separate organization and could, for purely economy-of-scale considerations, also be placed under the management of the Utility Board. From a management viewpoint, certain efficiencies and synergies may be gained by doing so but it is not a key aspect of the recommended restructuring. The Utility Operator’s organizational structure below the General Manager could take many forms and still achieve the goals of the recommended restructuring. One of those forms would be to have three working supervisors reporting to the General Manager. A Production Supervisor would have responsibility for all generation assets and associated production and maintenance personnel and environmental permitting and reporting. An Operations Supervisor would oversee (distribution) line operations, maintenance, and construction, as well as overall organizational safety. If municipal water, solid waste, and wastewater treatment were also placed under the Utility Board, the Operations Supervisor would manage those utility services as well. An Office Supervisor would manage administrative, technical, financial, and clerical support functions and would serve as an assistant to the Utility Board and General Manager. The Office Supervisor would be the primary liaison with the City of Unalaska to coordinate mutual support services and inter-organizational communications. If the workload warrants, the Production and Operations Supervisor positions could initially be combined. It should be noted that, as integration and system growth proceeds, the current system operator/dispatch function would be expanded under the Utility Operator to accommodate system needs. Power Integration Project, Phase I 17 Steigers Corporation April 2000 As may be observed, the only significant departure of the above-described organization from the existing organization is that it would report to a Utility Board rather than to the City Council. Implementation To initiate the transition process, one member from each side of the likely organizational split would be named by the City Council to refine the specific division of assets and obligations and to more completely define the new organizational structure. This transition team should be provided the mandate to obtain services from the City of Unalaska organization, legal counsel, and other outside resources to accomplish its task. The team’s goal would be to draft a resolution including its proposed Utility Operator organization and bylaws, transition resource and funding requirements, and timelines for City Council consideration and public comment. Recommendation #3 — Recommended Integration Business Framework Initiate discussions with willing Industrial Generators to definitively establish the terms, conditions, and specific form of a transfer of the individual Industrial Generator’s generation facility and an assumption of the obligation-to-serve by the Utility Operator. Introduction Phase I of the Power Integration Project has confirmed a widely held perception that there are no “easy” solutions to the Unalaska/Dutch Harbor community’s electric utility situation. No conceptual business framework that would provide substantial immediate financial or operating benefits to any of the parties was found or developed by the Project. The community has been proceeding down a path dictated by powerful socioeconomic realities, and those realities remain fully in effect to this day. At this time, however, it has also been concluded there is a window of opportunity where the community may change its course to one in which the community would be served by a single unified entity reliably providing electric service at a reduced cost. This change would also allow the Industrial Generators to obtain a significant portion of their energy requirements at that reduced cost and have a viable option for future avoidance of the management and risk of the energy production aspects of their current business operations. Initiation of these changes will require some faith on the part of all participants. The Industrial Generators must be willing to accept a nominal risk where an essential aspect of their business operations, electric energy service, is not entirely under their direct control but is placed in the hands of another. While some benefits to a participating Industrial Generator will be realized in relatively short order as the physical integration proceeds, when the support of a robust and inherently stable external system provides a safety net to their in-house generation facilities. Substantial financial and operational benefits will be realized only after some years when a central generating facility eventually displaces the need to continuously staff and operate in- house facilities and allows the Industrial Generator to postpone or eliminate the otherwise inevitable capital risks of replacement or expansion of an in-house facility. While entirely capable now, its new obligations will require that the current Electric Enterprise restructure and grow into its role as an increasingly efficient, trustworthy Utility Operator, seen by its customers Power Integration Project, Phase 1 18 Steigers Corporation April 2000 as possessing an unwavering commitment and ability to achieve standards of performance and service excellence worthy of the trust to be placed in them. Recognizing that no immediate substantial benefits are available to any party, the conceptual business framework recommended here is crafted to present a level of risk to the potential participants that is commensurate with the short-term (2 to 5 years) benefits that will be realized through participation and integration. Additional, more-subjective, benefits may also be realized. Any substantive movement on a new path will be taken very positively by others outside the community. Opportunities for further economic development and diversification will be enhanced as community members are seen to be effectively, positively, and cooperatively addressing a difficult issue among themselves. Furthermore, opportunities for tangible outside support and acceleration of the process may be created as others with political and economic interests in the Unalaska/Dutch Harbor community wish to be seen as part of a bold, visionary, and innovative solution to a heretofore intractable situation. Evaluation of Integration Business Frameworks Phase I of the Power Integration Project examined and evaluated several business frameworks within which integration of the electric systems could be accomplished. It was concluded that a business framework for system integration acceptable to the Industrial Generators, the City of Unalaska, and the Unalaska/Dutch Harbor community as a whole would embody certain desirable attributes, as follows. First, the integration framework must be perceived as and in fact be, reasonably equitable for all the members of the community participating in its implementation. The potential participants include the Electric Enterprise (representing the legitimate interests of its current customers), the Industrial Generators, and others who choose to participate. Second, the integration framework should be structured and implemented so as to not unduly penalize Industrial Generators who might choose to participate at a later date. Realistically, however, it should be recognized that it is likely that not all the potential economic and operating benefits of integration would be available in the same degree to later participants. Third, as previously stated, the Unalaska/Dutch Harbor community as a whole enjoys a very high degree of local control and influence over its energy services, and compromising that autonomy to any substantial degree would likely be unacceptable to the community. Most of the integration business frameworks considered by Phase I of the Power Integration Project were rejected based on their patent inapplicability to the somewhat unique circumstances of the Unalaska/Dutch Harbor community. Others were discarded because there were no apparent benefits, in either the short or long term, available to one or more of the participants sufficient to encourage their participation. Rather than detail the specific elements of each integration business framework and all their multiple variants, we focus here on the only framework judged to be achievable and suitable for recommendation. Power Integration Project, Phase I 19 Steigers Corporation April 2000 Recommended Integration Business Framework In order for an orderly transition to be made from the current situation to that of an efficient, cost-effective, integrated electric utility, the first step must be cooperatively taken by the Electric Enterprise/Utility Operator and the Industrial Generators. The Electric Enterprise/Utility Operator must assume both the obligation-to-serve for one or more of the Industrial Generators and the dispatch control over its (their) corresponding generating facilities by means of an contractual Power Sales Agreement. As used here, the “obligation-to-serve” is the assumption by the Utility Operator of the responsibility to provide electric energy services to its customer, including the risks entailed in doing so. “Dispatch control” is the right of the Utility Operator to direct the operation and loading or shutdown of generation (the diesel engine-generators) in the customer’s facility as it sees fit in order to accommodate the needs of its system and customers, including the host Industrial Generator. In all cases, the Utility Operator may not divert or dedicate the generating facility capabilities to any party other than the host Industrial Generator unless the full requirements of that host Industrial Generator are satisfactorily met, even in emergency or contingency conditions. This does not, however, preclude the Industrial Generator from agreeing to allow such diversion or dedication of capabilities under some circumstances that it, solely, may determine to be acceptable. The Utility Operator and the host Industrial Generator would negotiate and execute a transfer of the host Industrial Generator’s electric generation facility. This transfer may take the form of a lease, a purchase of services, an outright transfer of ownership, or some other mutually acceptable mechanism. Whatever the form, the crucial features of the transfer are that the Utility Operator must both gain dispatch control of the generation facility and assume the obligation to provide electric service to the host Industrial Generator. This obligation will be specifically defined as to its term, capacity, energy, and rate structure and will be based strictly on the subject generating facility’s current capabilities, cost-of-production, and, to a lesser extent, its expected economic lifetime. The terms of the transfer must be on a nearly no-cost basis for both parties since, as a practical matter, there are insufficient immediate tangible benefits to either party to support the risk of such a transaction. Any net revenues realized by the Utility Operator from the transaction will be reinvested in the integration of the host Industrial Generator and in the supporting distribution system infrastructure. It was not possible within the resources available to Phase I of the Power Integration Project, nor is it necessary, to definitively ascertain to what degree it would be possible or even desirable for the Utility Operator to take over the generation assets of any particular Industrial Generator. The recommended business framework presented here is structured such that its implementation may cover a range of specific terms within which the functional goal of integration may be accomplished. A more comprehensive transfer, while potentially more complex, may well be the desirable goal of the parties. One of the favorable attributes of this business framework is that the degree of transfer may be different for each Industrial Generator and still not appreciably impact the viability of the integration. Two scenarios are presented below, varying in degree of transfer yet still accomplishing the intent of the business framework. Both contemplate the Utility Operator making the fuel purchases to operate the Industrial Generator’s generation facility. Power Integration Project, Phase I 20 Steigers Corporation April 2000 Under Scenario 1, the Utility Operator would lease the generating facility of the Industrial Generator. The Utility Operator would assume all permitting and reporting activities, cover incremental operations and maintenance expenses, and reimburse excess operation/maintenance labor costs. The Industrial Operator would provide ordinary support services and infrastructure to the facility. If the Industrial Generator utilizes waste heat recovery from the generators, that service would be provided at no cost to the Industrial Generator so long as the engines are running. In practice, one or more engines in the facility would likely be running most of the time, but the Utility Operator would not be required to run engines it otherwise would not operate just for thermal heat recovery. Since the Industrial Operator would be in a position to ensure that its current maintenance and operations standards were adhered to, and since the payments made under the lease by the Utility Operator would be structured on incremental costs, the lease would not materially impact the functionality of the facility. Scenario 2 would be a minimal transfer of the facility. The Utility Operator would purchase generation services from the Industrial Generator on a strictly incremental cost-of-production basis. Excepting fuel purchases, the Industrial Generator would remain fully responsible for permitting, maintenance, and operation of the generating facility. Under either scenario, any transfer would initially be structured as an economic and operational “wash” for both the Industrial Generator and the Utility Operator. The only immediate potential savings, a reduction in fuel expense, would be reinvested in physically integrating the Industrial Generator into the Utility Operator’s system. Once integration has progressed to the point that substantial energy transfers may reliably be made between the systems, both the Industrial Generator and Utility Operator would realize further economic benefits. Since the host Industrial Generator’s current generation asset is what the Utility Operator must rely upon to serve its new obligation, the terms of that obligation must be based on the current permitted capabilities of the subject generating facility. These capabilities are the facility’s capacity, total energy production, and its expected functional lifetime. The transaction’s firm capacity must remain based on the physical capabilities of the generation facility for the term of the transaction. However, so long as the transaction is structured such that the host Industrial Generator’s facility is not at increased risk of equipment failure, the Industrial Generator incurs no additional risk over its current prospects. In fact, the consequences of major equipment failure would be reduced because any excess generation assets elsewhere in the integrated system would be placed in service to mitigate the effects of any such failure. The rates to be paid to the Utility Operator by each Industrial Generator must be based at or near their respective current costs. While remaining a negotiable item, those rates would be driven primarily by the degree to which the host Industrial Generator’s generation facilities are to be transferred. It should be recognized though, that the Utility Operator must generate sufficient net revenues from the transaction to reinvest in the physical system integration of the Industrial Generators. The Industrial Generators should recognize that they must consciously “leave money on the table” in the negotiations so that the framework may succeed. The net proceeds and the efficiencies it may derive from integration are all the Utility Operator can rely upon to fund ongoing and future integration efforts. Power Integration Project, Phase I 21 Steigers Corporation April 2000 The term of the transfer may be based either on an assessment of the host Industrial Generator’s generation facility’s reasonable economic lifetime or a fixed period of time. Both have merit, and the outcome at the end of either such term would be equivalent. The choice between the two would be made in the negotiations between the Industrial Generator and the Utility Operator. Basing the term on the economic lifetime of the generation facility recognizes that there are differences in the condition and level of operability among the facilities of individual Industrial Generators. It does, however, raise the specter of the negotiators having to arrive at a mutually acceptable determination of the asset’s economic lifetime, a task that can be daunting even in an internal assessment. To structure the term based on a fixed period of time may substantially reduce the complexity of an agreement and would address the potential issue of each participating Industrial Generator being treated equitably. Furthermore, the expected value of the agreement’s long-term outcome will far outweigh the relatively minor differences between the two approaches. This recommended integration business framework, aside from accomplishing the overall goal of system integration, is structured so that all participants may reasonably realize sufficient tangible benefits to offset the perceived risks of entering into the agreement. A number of other desirable features and aspects of the recommended framework need to be noted. A risk to the Utility Operator, or to any utility facing similar circumstances, would be that investments could be made into generation resources and infrastructure to serve a load that, for whatever reason, is lost or fails to materialize. In that circumstance, the repayment of the “stranded” investment must be loaded into the rates paid by the remaining customers and/or borne as a loss in value to stockholders if the Utility Operator is investor-owned. “Stranded,” in this context, describes a situation in which the revenue streams intended to recover the investment are lost but the obligation to repay the debt remains. In a larger utility, the loss of an industrial load of similar size to the Industrial Generators is rarely a threatening event and, under some circumstances, can even work out to be beneficial to remaining customers. In the Unalaska/Dutch Harbor community, however, where certain Industrial Generator’s capacity and energy requirements are on the same order of magnitude as all the remaining load combined, the consequences of stranding a sizable investment would likely be disastrous and, therefore, is an unacceptable risk. The recommended integration business framework does not require an up-front investment by the Utility Operator because a key feature of the transaction is that the obligation-to-serve is accompanied by the necessary generation resources to do so. If the served Industrial Generator ceases its operations or withdraws completely from Unalaska/Dutch Harbor, both parties will remain substantially whole and, in fact, may improve their circumstances compared to the same eventuality had no integration occurred. If the idled facility is to be sold intact and functional, it still requires sufficient energy to serve hotel loads to maintain its condition, and the Utility Operator, in the interim, would have access to its excess capacity. If the idled facility is to be dismantled, an opportunity may present itself to the participants whereby the Utility Operator may acquire a permitted, operational generation asset at a reduced cost and to the Industrial Generator would receive considerably more than the salvage value of its individual components. Power Integration Project, Phase I 22 Steigers Corporation April 2000 Alternatively, one or the other party may opt out of the agreement entirely with no harm to the other. A reasonable question, given that there are few near-term benefits to the Industrial Generator, would be: what would prompt the Industrial Generator to enter into such an agreement with the Utility Operator? The answer is that, first, the restructured Utility Operator would be willing and able to credibly provide the electrical requirements of the Industrial Generator. Second, the Utility Operator would have the mandate, the organizational will, and the financial and technical means to fully integrate any Industrial Generator willing to participate into a robust, heavily redundant distribution network. Third, the Utility Operator, now with the obligation-to-serve a considerably larger and more diverse base of customers, would be in an excellent position to install a centralized generation facility sized in the range of 5 to perhaps as high as 12 MW within the next 5 years. The Industrial Generator’s existing generation asset would then, depending on its condition and strategic value, be retained in service, relegated to reserve and/or peaking service, or retired. The Industrial Generator would realize the benefits of drawing on a much less costly source of energy for much of its requirements and running the in-house generation only for peaking or contingencies (if at all) and would gain the stability and reliability of a strong connection to a much larger system. Furthermore, incorporated into the terms of the transaction, the Industrial Generator would have the opportunity to negotiate for additional firm or non-firm capacity or energy from the Utility Operator as it may become available from time to time. While the Utility Operator would not be allowed to compromise its obligations to its other customers, the economies and efficiencies that may be realized from even integrating the current community resources should create excess capabilities on a scale not available to any of the current individual systems. As the initial integration transaction nears its term, the Industrial Generator and the Utility Operator could negotiate a more conventional power sales agreement based, to a substantial degree, on the availability of the considerably less-costly production of the “new” centralized facility. The Industrial Generator may thereby be relieved of the necessity to expand its generating facility to support its business initiatives and/or be able to avoid the substantial capital risk entailed in replacing or refurbishing its generation facility at the end of its economic life. Another dimension of the acquisition of a central generating facility is that one or more of the Industrial Generators, and public interests as well, would be in a position to secure a steam purchase agreement from the Utility Operator for its process and space heating requirements. The Unalaska/Dutch Harbor community, with its relatively high density of thermal energy- intense industrial facilities and cool climate, is an excellent candidate for thermal energy/process steam sales. Production of process steam as a secondary product of a larger generation facility, i.e., extraction from a steam-driven turbine-generator, is considerably more cost-effective than steam production from dedicated boilers currently operated for that purpose. The integration of electric systems that this conceptual business framework will facilitate and encourage will be a relatively straightforward endeavor. Given the system development guidelines and technical standards that would be set by the engineering study of Power Integration Project, Phase I 23 Steigers Corporation April 2000 Recommendation #1, the tasks by which physical integration would be accomplished should be addressed in order of a resource cost vs. benefit-based prioritization as funding and opportunities present themselves. It is common industry practice that the step-down transformers and associated switching and protective devices serving a customer be owned and maintained by the utility for all but the very largest industrial customers, a characterization that is not applicable to any of the Industrial Generators. Equipment within the Industrial Generators’ facilities should remain under the control of whomever is operating and maintaining it, as dictated by the terms of the transfer transaction. Procurement, installation, and maintenance of remote monitoring, control, and communications systems to facilitate the integration of the generating facility would be based on the Utility Operator’s technical standards and, thus, should be its obligation. Implementation The successful implementation of the conceptual business framework of Recommendation #3 will require considerable focused commitment on the part of the participants, an investment of time and effort, and at least a modest commitment of financial resources. As can be seen, the issues are complex, and the principles discussed above require further consideration and endorsement by participants to become a basis for negotiations and meaningful business relationships. Upon endorsement and approval by the City Council (and the Utility Board if that transition has proceeded to that point) an implementation and negotiation team of at least two City of Unalaska senior staff members should be named. The team would be granted resources and, if necessary, at least partial relief from their routine duties to support their efforts and to obtain outside resources as necessary. The team’s first task would be to prepare a more definitive set of principles and goals for City Council/Utility Board consideration and approval. While not necessarily a negotiator on the team, knowledgeable legal counsel for the City of Unalaska/Utility Operator should be available for close consultation and advice throughout the process. Based on the approved principles, a draft Memorandum of Understanding (MOU) would be prepared under direction of the team. A formal proposal outlining the goals and principles of the contemplated business relationship (which would ultimately take the form of a Power Sales Agreement (PSA)) and a description of a proposed process, its timeline, and forum for discussions would be delivered to each Industrial Generator. During the initial meeting between the Utility Operator and an interested Industrial Generator, the parties would discuss the draft MOU, which would ultimately be finalized and executed. The timeline for developing and executing the PSA should be set in the MOU at no more than 12 months. If an Industrial Generator requires the restructuring of the Electric Enterprise to Utility Operator under Recommendation #2 to have proceeded to some acceptable degree, progress on the PSA may hinge on that issue alone. The MOU should also include a mechanism by which the costs of the negotiation process, as well as previously accomplished work, would be equitably borne by the participants, particularly if substantial outside resources are found to be needed to facilitate development of the PSA. It may be necessary for negotiations with multiple Industrial Generators to be engaged in simultaneously because a sequential effort could unduly delay the Power Integration Project, Phase I 24 Steigers Corporation April 2000 process and would not likely serve successful framework implementation. As a guide, Appendix A of this document briefly outlines issues likely to require resolution within a workable PSA. The working implementation of the PSAs as contemplated in this integration business framework will likely be relatively complex and will require periodic adjustment, sharing of information, and resolution of unanticipated operational issues. The PSA for each of the participating Industrial Generators would provide for an integration coordination group composed of the Utility Operator’s General Manager, representatives of the participating Industrial Generators, and other parties that may hold a valid interest in the proceedings. Periodic meetings of the group would facilitate exchange of necessary operating data and statistics and would give the Utility Operator’s General Manager an opportunity to regularly brief the group as to the Utility Operator’s activities and initiatives relating to the group, coordinate planning of operating and maintenance periods, and resolve any incidental operational issues of general interest. Recommendation #4 - Acquire Icicle Seafoods as Non-Firm Customer The Electric Enterprise/Utility Operator should acquire Icicle Seafoods as a non-firm industrial electric customer. Recommendation #4 should proceed on its own merits irrespective of the status or progress of the other recommendations made by Phase I of the Power Integration Project. Icicle’s two seafood processing vessels, P/V Arctic Star and P/V Bering Star, routinely berth and operate at the northern end of Dutch Harbor. They are mobile and are relocated as fisheries and processing opportunities in Alaska and elsewhere present themselves. Generally one or the other, or occasionally both, spend a substantial part of the year idle at Dutch Harbor. Each vessel has just under 2,000 kW of onboard electric generating capacity, at least a portion of which must operate to provide “hotel load” whether or not seafood processing is occurring. Each vessel’s hotel load requirements are approximately 200 to 400 kW at 480 volts, three phase. It may very well be to the benefit of both Icicle and the Electric Enterprise to examine the possibility of providing non-firm electrical service to at least one or both of the vessels. The service would likely be on a non-firm basis because the Electric Enterprise/Utility Operator must address the needs of its firm customers first, and the unpredictable nature of the vessels’ schedules makes it difficult to economically justify the commitment of resources to serve such loads. However, it is true that the Electric Enterprise very often holds substantial underutilized capacity within its current system that could be better utilized to generate additional net revenues. The Electric Enterprise/Utility Operator, in utilizing its excess capacity to serve non- firm loads, would benefit by improving the loading profiles for its diesel engine-generators and increasing gross energy sales, thereby lowering its overall cost-of-production. A suitably configured service equipment package would also add the capacity of Icicle itself, on a short- term contingency basis, to provide generation support to the Electric Enterprise/Utility Operator. Icicle could benefit by being able to shut down its electrical energy generation operations during times of little load. Power Integration Project, Phase I 25 Steigers Corporation April 2000 The implementation of Recommendation #4 would be relatively straightforward. The Electric Enterprise/Utility Operator should initiate contractual discussions and conduct the necessary economic/technical assessment for providing Icicle with interruptible electric service. The service would likely require a 3-phase, 34.5 kV/480 volt transformer, a 400-amp load break service switch, and suitable protective and safety interlock devices. The Electric Enterprise has a 34.5 kV distribution feed running immediately adjacent to Icicle’s vessel berth. A determination of technical and economic feasibility is straightforward and well within the current routine of the Electric Enterprise’s operations. Mutually acceptable terms, whether under the existing rate structure or a special contract, should be readily achievable. The terms would require a statement of maximum capacity that may be taken under the service. A minimum annual “take” or monthly fee paid by Icicle would likely be necessary to cover the investment in the service equipment package and installation/maintenance. Procedures relating to minimum interruption notification by the Electric Enterprise/Utility Operator under both routine and emergency conditions should be established. Upon agreement to mutually acceptable terms, the Electric Enterprise/Utility Operator would provide and install a suitably rated and protected step-down transformer, metering, and weatherproof connection enclosure. Icicle would provide the cables feeding the vessel(s) and any additional switching and protective devices needed onboard the vessel. An option for the Electric Enterprise/Utility Operator would be to package the transformer, metering, and connection enclosure on a skid or trailer so that the package could be readily transported and applied as a temporary or emergency service or integration interface elsewhere in its system, as needed. VII. CLOSING The processes by which to accomplish a transition from the current Electric Enterprise to a restructured independent Utility Operator and to negotiate workable PSAs with the Industrial Generators are likely to be difficult and time consuming for all concerned. Steigers Corporation would be available, at the pleasure of the Unalaska/Dutch Harbor community, to serve as a third- party facilitator of these processes. Services would include conducting further research on issues as negotiations proceed, assisting the parties in working through difficult negotiation issues, managing the preparation and review of documents, and generally ensuring that progress is made and goals are achieved. Steigers Corporation could also pursue, on behalf of the parties, grant funding from state or federal agencies that would facilitate implementation of agreements. There is no question that the current Unalaska/Dutch Harbor electric service situation is very difficult in many respects. The conceptual integration business framework and other recommendations made here can do little more than direct the community onto a different, better path than it is on now. Taking such a step will require strong, visionary leadership and an equitable sharing of risk and benefit within the community that only very rarely occurs on this scale. The challenges presented herein are formidable and the obstacles many, but the benefits for the Unalaska/Dutch Harbor community and its members are substantial and are entirely worthy of commitment and pursuit. Power Integration Project, Phase I 26 Steigers Corporation April 2000 A Preliminary Draft Report on this first phase of the Power Integration Project was provided to the City of Unalaska, selected Industrial Generators (UniSea, Westward, Alyeska, Icicle, and APL), and Ounalashka Corporation during January 2000. Appendix B of this report contains letters from UniSea, Icicle, Westward, APL, and Ounalashka Corporation, each providing comments on the observations, findings, and recommendations made in the Preliminary Draft Power Integration Project Report, Phase I. Steigers Corporation and the City of Unalaska wish to express their appreciation for the assistance and cooperation of the many organizations and individuals without whom the success of the Phase I of the Power Integration Project would not have been possible. VIII. REFERENCES PSS (Financial Engineering Company). 1998. Power Supply Study. Prepared for the City of Unalaska, Alaska. ESS (Electric Power Systems, Inc.). 1998. Electrical System Study. Prepared for the City of Unalaska, Alaska. Power Integration Project, Phase I 27 Steigers Corporation April 2000 APPENDIX A OUTLINE OF PRINCIPLES FOR A POWER SALES AGREEMENT APPENDIX A Outline of Principles for a Power Sales Agreement The following outline includes items typically found in a Power Sales Agreement (PSA), as well as items that may be applicable to the somewhat unique relationship contemplated by the Power Integration Project’s recommended conceptual business framework. This outline is not intended to be comprehensive nor a dictation of terms or negotiating positions, but rather a listing of “talking points” that may aid in the parties’ preparations for and conduct of actual negotiations. e Preamble 1. Listing of the parties to the PSA 2. Citation of authority(ies) by which the PSA may be entered into 3. Statement of the parties’ intentions that are to be accomplished by the PSA e Effective date and term of the PSA 1. Evergreen clause 2. Conditions for early release Irrecoverable physical damage to balance of Industrial Generator’s facility By mutual agreement e Termination of previous agreements and disposition of obligations, if applicable e Electric service obligation-to-serve assumed by the Utility Operator 1. Commitment by Utility Operator to best reasonable efforts 2. Maximum delivered capacity [kVA] Based on operability of associated generating facility Minimum notification requirements with respect to changes in capacity Burden of any low power factor issue placed on Industrial Generator 3. Maximum energy to be delivered (annual, monthly, or daily basis) Based on fuel, energy, or permitting limits, if any Delivered voltage and acceptable voltage range Delivered frequency and acceptable frequency range Point of delivery Electrical metering requirements Obligation to provide metering Industrial Generator consumption (balance-of-plant) Demand period and method, energy use, and recording criteria Electric generation production Obligation to maintain and prove (accuracy certification) metering Rights of reasonable access for Utility Operator personnel and representatives 9. Parties’ obligations under emergency/contingency conditions NAS ad Power Integration Project, Phase I A-l Steigers Corporation April 2000 e Terms of generating facility transfer between parties Rights and obligations Industrial Generator’s firm rights to capacity of subject generating facility Disposition and terms for waste heat utilization, if applicable Support services to be provided by Industrial Generator Generating facility-specific engine fuel specifications Dictated by permits and operating considerations Engine fuel metering requirements Location(s) of metering installation Obligation to provide metering Obligation to maintain and prove (accuracy certification) metering Procedural and physical controls for fuel security and accounting 7. Procedures for the routine transfer of information between parties Operational statistics Maintenance actions, results, and expenditures Fuel consumption and testing certifications Information missions and discharges Ae Sie a e Fees, tariff rates, and compensation 1. Energy based, not capacity 2. Basis and calculation of charges Sample calculations, if warranted 3. Periodic review and adjustments 4. Fuel cost adjustments 5. Standard commercial billing and collection provisions e Dispatch notification and communication procedures Industrial Generator load requirements Utility Operator production requirements e Contractual mechanism for Industrial Generator’s purchase of additional resources 1. Firm or non-firm capacity from Utility Operator 2. Terms of delivery, term, and conditions 3. Industrial Generator’s direct participation in central operating facility e Contractual mechanism for Utility Operator’s purchase of generating facility 1. Ifthe balance of Industrial Generator’s facility is shut down and dismantled 2. If mutually agreeable, no obligations e Dispute resolution procedures e Parties’ designation of authorized representatives and alternates e Mutual indemnification and risk allocation Power Integration Project, Phase I A-2 Steigers Corporation April 2000 e Successors/assigns to parties e Creation of formal Operating Board Hosted by Utility Operator For conducting routine business, airing issues, and sharing information Held periodically as agreeable, quarterly at minimum Industrial Generators, City of Unalaska, and other interested parties to participate Held in local forum Weyer Power Integration Project, Phase I A-3 Steigers Corporation April 2000 APPENDIX B COMMENT LETTERS WJ UniSea January 29, 2000 VIA ELECTRONIC MAIL TO: John A Steigers, Project Manager Steigers Corporation 6551 South Revere Parkway Suite 250 Englewood, CO 80111-6411 RE: PRELIMINARY DRAFT REPORT, POWER INTEGRATION PROJECT — PHASE I Dear John, UniSea Inc. has received and carefully reviewed the above-mentioned report. On behalf of our president, Mr. Terry Shaff, we compliment you on the thoroughness of this report; and what was clearly a process of well thought-out, carefully constructed concepts and recommendations. UniSea concurs with all of the recommendations contained in the report; and would be highly interested, and supportive of, exploring in more detail the concepts you have outlined. We believe the Unalaska/Dutch Harbor community would be well served to continue along the lines you have recommended. We look forward to working with you in the future. Sincerely, UNISEA, INC. J wane Director of Quality Assurance cc: Mr. Terry Shaff Mr. Al Spencer UniSea inc. 15400 Northeast 90” Street, P.O. Box 97019, Redmond, WA 98073-9719 (425)-881-8181 FAX (425)-882-1660 February 3, 2000 John Steigers - Project Manager Steigers Corporation 6551 South Revere Parkway, Suite 250 Englewood, CO 80111-6411 Mr. John Steigers: I read the Power Integration Project proposal and wanted you to know that Icicle Seafoods will support the continued development of the project. I’d be happy to discuss any questions or comments and can be reached at (206) 281-0313. Yours Alo. Michael Clutter cc: John Woodruff ICICLE SEAFOODS, INC. 4019-21st Avenue West « Seattie. WA 98199 ?O. Box 79003 « Seattie,WA 98119 e Tel: 206-282-0988 © Fax: 206-282-7222 1113 SAD AVE.. Su'TE 2250 P.O. BOX 920608 SEATTLE. WASHINGTON 98101 DUTCH HARBOR, AK 99692 (206) 682-5949 =X (206) 682-7325 (907) 581-1660 FAX (907) 581-1293 23 February, 2000 Steigers Corporation Englewood, Colorado Attentioa: Mr. John Steigers Subject: Preliminary Draft, Power Integration Project, Phase I, Unulaska/Dutch Harbor, Alaska Dear Sir. Westward Seefoods has reviewed the Preliminary Draft. Power Integration Project, Phase J. Unalaska Durch Harbor, Alaska, and welcomes the opportunity to provide comment to the Draft. AAS indicated m the Draft, Westward Seafoods, Inc., is a major Industrial Generator in the Unalaska area. and produces sufficient power to meet both its industrial and hotel demands year-around. independent of other power sources. Nonetheless, Westward recognizes that potential benefits that might be afforded the community of Unalaska, and its electrical generators. with the mstallation and operation of an integrated power distribution system. Wesnward has participated as a community member in previous City of Unalaska examinations of alternative power sources, and continues to support the concept of an integrated power distribution system. As indicated in the Project Description (page 4, paragraph 3), the ultimate goal of the Project is "the physical integration of (generating) systems within a contracmual/business framework from which the Industrial Generators individually and the community as a whole would derive benefit”. The Draft recognizes that initiating development of an integrated system for the Unaleska area requires resolution of very difficult issues, the most critical of which is the potential jeopardy to its own economies and activities that an industrial generator risks as 2 contributor to an integrated distribution system. The Draft thoroughly explores this issue and offers, in its discussion of an Integration Business Framework, very sound mechanisms mitigating that risk. The Draft also provides with its recommendations a very well considered plan of progressive actions that does not require an immediate commitment by all the Industrial Generators to accomplish the project goals. Rather, it provides for incremental accession of power generating facilities into a structured framework, allowing continuous examination of the suitabiliry of the power integration plan to community benefit. Westward Seafoods believes the Power Integration Project may provide very worthwhile and substantial benefits to whole community of Unalaska. While issues identified in the Draft report are complex. sound mechanisms resolving these issues are also identified, and Westward strongly supports comcioued examination of feasibility of an integrated power distribution system for Unaizskz. Sincerely, David W. Boisseau Mer., Env. Compliance Dutch Harbor Facility NOL GROUP February 2. 2000 Mr. John A. Steigers. Project Manager Steigers Corporation Suite 250 6551 South Revere Parkway Englewood, Colorado 80111-6411 Dear John: There 1s no doubt in my mind that for the community to maintain and to solidify its position as the Nation’s “Number One Fishing Port.” economical power generation and effective distribution are going to have to be addressed. This is not to take away from the other goods and services that are or will be provided for now or in the future to support Unalaska’s current status. but electricity will certainly be a key resource for future expansions. [concur with your observations that Recommendations | & 2 should go forward whether integration occurs or not. Recommendation 3, the economics of integration. can be the key to individual company and community long-term growth and health. Therefore, from APL’s viewpoint, this is the key issue: Philosophically, APL is not the electrical generation business: it should be done by a third party. Using that as the cornerstone. these are the some of pertinent issues: 1. Can the integrated rate be low enough to permanently encourage APL to get out of the business of making electricity? 2. Can the integrated system supply power for normal growth in APL’s core business? 3. If APL were to entertain projects or services that would expand its service base beyond it current generator capacity, can the integrated producer supply the needed power? Having established the philosophy and those three items above as the main drivers to entertain power integration, here are my comments on specific assumptions, conclusions or recommendations you put forth in your study. 1. Current producers should not be penalized if they decide to enter into the integrated program on some future date. 2. A Power Sales Agreement would be necessary to delineate responsibilities and expectations of both entities. 3. There is value associated with the existing equipment at each location: it should not be transferred to the utility operator ata fully depreciated value. If anything, the transferred value can be viewed as contributed capital to the new entity. I mention this, John, because we are going to have to address the residual values each of us current producers have on our respective generai ledgers. P.O. Box 920425 1125 East Point Road Nureh Harhor AK 99697-0425 LISA +. The newly formed enuty should be responsible for ail state and federal permitting and reporting requirements that are mandated for compliance by those government agencres. 5. APL wouid preter an autonomous board to direct the affairs of the operator. It should be separate trom the City’s political affairs and influences as much as possible. APL wouid like to participate in the discussions of such a structure as it would play a role in its long-term commitment to the process. 6. A single-source producer should be able to attract various government funded projects that would enhance the overall community. These programs would probably not exist for APL as a stand-alone producer at this time. 7. We agree. a financial contribution would be necessary from APL once the decision was made to proceed with the program. There are many more comments that I could put forth on your study, but the key issue, in my opinion, is the cost of long-term growth and flexibility for APL as electricity plays a vital role in our business. By having an integrated system, the benefits of buying large amounts of power from a utility operator on a demand basis should be a less than the capital costs APL would have to spend under its present system to receive the same benefit. To confirm that assumption, I am in the process of analyzing the current costs for APL to generate power and plan on sharing these calculations and assumptions with you so that items are not overlooked. However, it will be difficult to assign a value to the flexibility offered by a single-sourced operator. but it has to be somehow built into the equation. APL acknowledges the value of an integrate power system on the island if the economics are there and is committed to cautiously moving forward. Sincerely, AMERICAN PRESIDENT LINES, LTD. SD Vk E.R. (Gene) Makarin Alaska Manager cc: Mike Golat, City of Unalaska OUN © G.2 + GO 2 4 T 1 Cow ~~ Februzry 9, 2000 John Steigers Project Manager Steigers Corporation 6551 S. Revere Parkway, Ste. 250 Englewood, CO 80111-6411 Dear John, ‘Thank you for sharing a preliminary draft report om Phase I of the Power Integration Project. The report is excellent and very undexstandabis for somsons like myself, who is not an electrical engineer. The recommendations provided were weil thought out and provide good direction to the City and the industrial generators. While I had hoped that more substantial short-term economic benciits would be realized in adding the imdustrial generators to the distribution system, I do believe strongly that bringing all parties to the table would result in substantial long-term bencfits to the entire community. 1 support all the recommendations proposed in the study, Please contact ms if I can be of foxther assistance in yoor cfforts. OHA Richard L. is, Ir. Chief Executive Officer ce: file Mike Gola, City of Unalaska A Gaal Estate and Development Company (907) 531-1276 - PAX (907) 581-1496 P.O. Ben 149 - Unalasica AK 99685-0149 seperate eee STEIGERS) EYED = CORPORATION (a |W le | ENVIRONMENTAL CONSULTING & PROJECT MANAGEMENT : CVA pop 17 onnn Ark 1 ¢ cUUU Alaska Industrial Development and Export Authority ru Mr. David Germer April 13, 2000 Business Development Manager J.O.N. 142 WP 3, 2b Alaska Industrial Development Letter No. 142-073 and Export Authority 480 W. Tudor Anchorage, AK 99503 Subject: Final Report, Power Integration Project - Phase I Unalaska/Dutch Harbor, Alaska Dear Dave, Steigers Corporation has recently completed Phase I of the Power Integration Project for the City of Unalaska. A copy of the Project’s Final Report is enclosed for your reference and files. If you have any questions or comments concerning the Project or this document, you may contact me at (303) 799-3633. Alternatively, you may also contact Mike Golat, Director of the City of Unalaska Department of Public Utilities, at (907) 581-1260. Sincerely, w~—— John A. Steigers Project Manager cc: Mike Golat, City of Unalaska 1/0 Enclosure JAS/dwm 6551 SOUTH REVERE PARKWAY, SUITE 250 « ENGLEWOOD, COLORADO 80111-6411 TELEPHONE: (303) 799-3633 + Fax: (303) 799-6015