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HomeMy WebLinkAboutLetter of Understanding-Petro Star, CVEA, Chugach 1995LETTER OF UNDERSTANDING August 30, 1995 PURPOSE This Letter of Understanding (LOU) is to memorialize the understanding between Chugach Electric Association, Inc. (Chugach) and Copper Valley Electric Association, Inc. (CVEA) relative to the purchase by Petro Star and the sale by CVEA of the electric power requirement of Petro Star’s Valdez oil refinery. PARTIES PETRO STAR Petro Star owns and operates a 30,000 barrel per day oil refinery located on Dayville Road near Valdez, Alaska. Petro Star is owned by Arctic Slope Regional Corporation and Harbor Enterprises, a.k.a. Petro Marine Services. CVEA CVEA is a member-owned electric cooperative that provides central station electric service to the Valdez and Copper Basin areas of the state of Alaska. CVEA is the power supplier for all of Petro Star’s requirements in accordance with a five-year power sales agreement executed May 2, 1992. The effective date of the five year term began on January 1, 1993, and will expire December 31, 1997. CH H Chugach is a member-owned electric cooperative headquartered in Anchorage, Alaska. Chugach is Alaska’s largest Generation, Transmission (G&T), and Distribution utility. Chugach is the prospective future power supplier to CVEA subsequent to the construction of the proposed Sutton to Glennallen 138 kv Transmission Line (SGL) which will interconnect CVEA’s isolated system to the integrated Railbelt G&T system. HISTORICAL SUMMARY CVEA is proposing to construct a 138 kv transmission line from Sutton to Glennallen to provide for its supplementary power requirement to the Solomon Gulch Hydroelectric project. The Alaska Legislature, 1993, authorized and appropriated, subject to an independent feasibility study to be conducted by the State’s Energy Authority, $35 million from the Railbelt energy reserve fund to be used as a 50 year, zero interest loan to CVEA as partial funding for the project. Letter of Understanding August 30, 1995 Page 2 The Legislature also authorized the Alaska Industrial Development and Export Authority (AIDEA) to issue up to $25 million of bonds to provide for the balance of the funding. The Department of Community and Regional Affairs’ (DCRA) Division of Energy (DOE), successor to the Alaska Energy Authority, completed the feasibility study in April of 1994. In July 1994 the Commissioner of DCRA found the project could be financed and was economically feasible. Petro Star and CVEA entered into a power sales/purchase agreement on May 2, 1992, that provides Petro Star will purchase all of its electric power requirements from CVEA for a period of five years. The five-year period would begin on the date of full-time refinery operation. To date, Petro Star’s monthly peak demand has varied from 1600 kw to 1920 kw. Petro Star is currently planning an expansion to approximately 50,000 barrels per day. The schedule for the expansion is uncertain at this time. Subsequent to the expansion Petro Star’s peak demand is expected to be at least 2500 kw. In November of 1994 Petro Star notified CVEA that is was considering the installation of one and possibly two 3.9 mw combustion turbines to generate its own power and wanted to discuss the possibility of selling the excess to CVEA to displace its existing diesel generation. By utilizing the exhaust gas in the crude heater, Petro Star believes it could substantially reduce the Refinery’s cost of power. Petro Star has essentially completed the necessary engineering studies for the project but has delayed the final decision, pending further internal review and the results of discussions between Petro Star and CVEA relative to an effort to identify a method to reduce Petro Star’s rates in the interim period until the transmission line is completed. If a method can be identified and implemented to lower Petro Star’s rate to approximately 8 cents kwh, it would displace Petro Star’s need to install the turbine or turbines. In May of 1995 Governor Tony Knowles appointed an Interagency Review Panel (IRP) to review the SGL feasibility study. The panel is chaired by and consists of the Commissioner of DCRA, the Executive Director of AIDEA, and the Commissioner of the Department of Natural Resources (DNR). The IRP retained CH2M Hill to perform the review to assist in making their determination whether or not the project is still feasible. The review process is in the final stage of completion. There has been considerable discussion between the parties relative to the significance of Petro Star’s final decision and whether or not their load would remain on CVEA’s system. Since late 1993 Chugach and CVEA have had ongoing discussions of a participatory agreement embodied in a power sales/purchase agreement that would involve Chugach in the ownership and operation of the SGL. Such an agreement would include Chugach delivering power to CVEA’s Pump Station 11 substation at or near the same price for capacity and energy that Chugach charges its other wholesale customers. Those discussions have resulted in the July 1995 decisions of both the Chugach and CVEA Boards of Directors to pass strong companion resolutions authorizing their management staffs to enter into substantive negotiations. Chugach Letter of Understanding August 30, 1995 Page 3 and CVEA are currently negotiating the terms and conditions of a contemplated power sales/purchase agreement that would initially provide for all of CVEA’s power requirements supplemental to the production capability of the State-owned Solomon Gulch Hydroelectric project. Chugach has recently proposed an outline to establish basic principles and provisions of a contractual agreement under which 80% of the net cost to the utility of owning and operating the SGL would be included in Chugach’s overall G&T system costs. Chugach’s other wholesale customers would have the choice of opting in or opting out of their share of the benefits and burdens of the CVEA sale. CVEA would be responsible for the 20% balance of the costs. Preliminary calculations indicate such an arrangement could deliver benefits to both CVEA and Chugach over a period of years. Petro Star’s final decision could impact this conceptual arrangement. UNDERSTANDING CVEA and Petro Star currently have a contract under which CVEA is obligated to sell and Petro Star is obligated to buy, power to meet Petro Star’s electric power load requirements. That contract expires in 1997. Petro Star is investigating whether to install its own generation equipment to meet its load requirements, and potentially to produce excess power for sale to others, after that date. Under proposals that CVEA and Chugach have recently made to Petro Star, however, if the SGL is built it might be less expensive for Petro Star to purchase from CVEA electric power generated by Chugach and transmitted to Petro star’s facilities over the SGL and CVEA’s system. Alternatively, if Petro Star ultimately decided to install its own generation, construction of the SGL could still potentially benefit Petro Star by allowing Petro Star to have access to the entire Railbelt energy market for purposes of selling any excess power. Because construction of the SGL may produce these potential power purchase and power sales benefits, Petro Star may conclude that, so long as construction of the SGL remains viable, Petro Star should defer making any irrevocable commitment to install its own generation. In return for assurance that Petro Star would defer such a commitment, Chugach and CVEA have stated their willingness to make rates for power delivered to Petro Star over the SGL, in accordance with the alternatives that Chugach and CVEA have presented to Petro Star (or other mutually acceptable alternatives that reduce Petro Star’s power costs). CVEA and Chugach have also agreed that if the SGL is under construction but not completed by January 1, 1998, and if Petro Star has not committed itself to install its own generation by that time, then, in return for Petro Star’s continuing to await completion of the SGL rather than installing its own generation, the two utilities and Petro Star will negotiate in good faith in an effort to agree upon reasonable “co-generation deferral” payments by one or both of the utilities to Petro Star to help cover any net excess of Petro Star’s power costs over the co-generation Letter of Understanding August 30, 1995 Page 4 alternative during the period between January 1, 1998, and the date of completion of the SGL. COST ACCOUNTING To ensure a fair and equitable comparison of costs to effect the project’s generation termination when power is available from CVEA via the intertie that is competitive with the project’s cost, it would be imperative that the accounting methods used by Petro Star for the calculation of the cost of generation for the cogeneration project be compatible with standard utility accounting procedures in order to assure that such an equitable comparison can be achieved, the parties will agree, prior to the construction of the Petro Star cogeneration project, to the accounting method or system to be applied. AGREEMENT It is agreed by the parties that by signing this letter, there is an agreement that an understanding is established as set out in the preceding paragraphs. If CVEA decides not to construct the SGL, Petro Star would be notified at the earliest practical date and would be released from the provisions of the agreement. COPPER VALLEY ELECTRIC ASSOCIATION, INC. Y ITs CHUGACH ELECTRIC ASSOCIATION, INC. Y OA hee Ss