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HomeMy WebLinkAboutAppendix 2 - TA 335-8June 23, 2011 Subject: Tariff Advice Letter 335-8 Regulatory Commission of Alaska 701 West Eighth Avenue, Suite 300 Anchorage, Alaska 99501-3469 Dear Commissioners: I C IIUC POWENNG ALASKA`$ FUTURE ELECTRCNICALLYFLLED IVITHRCA RECEIVED By the Regulatory Commission of Alaska on Jun 23, 2011 TA335-8 Chugach Electric Association, Inc. ("Chugach") hereby submits the following tariff filing that includes a new power purchase agreement in compliance with the Alaska Public Utilities Regulatory Act and 3 AAC 48.200 — 3 AAC 48.430. TARIFF SHEET NUMMER CANCELS SHEET NUMBER SCHEDULE OR ORIGINAL REVISED ORIGINAL REVISED RULE NUMBER 94.05 1 e Revision 94.05 9" Revision Fuel & Purchased 95.05 10a' Revision 95.05 9`h Revision Power Adjustment 95.5 36" Revision 95.5 3P Revision Factors APPROVALS REQUESTED Pursuant to 3 AAC 52.470(e), Chugach requests Commission approval of a new power purchase agreement between Chugach and Fire Island Wind, LLC ("FIW"j, a special purpose entity wholly -owned by Cook Inlet Region, Inc. ("CIRI"), dated June 21, 2011 ("FIW-Chugach PPA" or "PPA"), attached hereto as Appendix A, the terms of which are summarized in Appendix B. In compliance with 3 AAC 52.504(c), Chugach also requests authorization from the Commission to recover the costs of all energy purchases under the PPA through its retail Quarterly Fuel and Purchased Power Adjustment factor at the time the project becomes commercially operational, which is currently expected to occur before January 1, 2013. Proposed Tariff Sheets 94.05, 95.05 and 95.5 are attached hereto as Appendix C. Pursuant to the Commission's regulations (3 AAC 48.270-.300) and on behalf of FIW, Chugach respectfully requests a Commission ruling no later than September 15, 2011, and provides the demonstration of good cause in the section Request for Expedited Consideration below. In short, FIW needs to start construction of the Fire Island Wind Project ("Project") by October 2011 to qualify for federal ($18.7 million) and state grants ($25 million) that are critical to the Chugach Electric Association, Inc. 5601 Electron Drive, PO Box 19630Q Anchorage, Alaska 99519.6300 • (907) 563-7494 Fox 1007 J 562-0027 • (800) 478-7494 www.chtgochelectric coin • info@chtgachelectric.com Commissioners June 23, 2011 Tariff Advice No. 334 Page 2 of 24 development and cost of the Project. The effectiveness of the PPA, however, is conditioned upon Commission approval. On June 15, 2011, the Chugach Board of Directors approved a motion authorizing Chugach management to execute the PPA. Given the need for relatively prompt approval, Chugach is interested in actively working with the Commission to set a schedule for this matter and otherwise assist the Commission as necessary to accommodate Chugach's request for prompt approval. As described below, the PPA diversifies Chugach's generation resources to meet the load requirements for existing and future retail services. The PPA does not conflict with any other schedule or rate and does not adversely affect customers on the system. Energy purchases from the Project will impact approximately 81,000 retail metered locations within Chugach's service area. Energy purchases under the PPA will not impact the wholesale power rates of Homer Electric Association, Inc., Matanuska Electric Association, Inc. or Seward Electric System.. The initial impact of the PPA on Chugach retail bill levels is expected to be an increase of 1.7 percent, 2.0 percent, and 2.2 percent on a typical residential, small general and large general service customer bill, respectively. Appendix D contains projected annual customer bill impacts for each major Chugach retail rate class over the 25-year contractual period of the PPA. BACKGROUND Chugach currently depends on natural gas to produce about 90 percent of the power needed to serve its retail and wholesale member -customers, with the remaining requirements met through hydroelectric generation. At present, Chugach uses 24 Bcf of natural gas per year in its power stations. All gas that Chugach purchases for its fuel requirements is sourced from Cook Inlet gas fields.l In December 2009, the State of Alaska, Department of Natural resources ("ADNR % Division of Oil and Gas and Division of Geological & Geophysical Surveys released a report entitled "Preliminary Engineering and Geological Evaluation of Remaining Cook Inlet Gas Reserves" ("ADNR Gas Reserves Report").The technical report documents the extent of the gas production decline in Cook Inlet as well as price and investment needed to meet regional gas ` For more than twenty years, Chugach has obtained its gas requirements under a series of long-term gas contracts. The volumes available under these existing long-term contracts ran out in 2011. Chugach spent a significant amount of time and effort working to obtain replacement gas supplies for the period from 2011 through 2014, including the Base Contract for Sale and Purchase of Natural Gas, dated May 12, 2009 ("Chugach -COP Gas Contract"), which the Commission approved in Letter Order #L0900456 and the Base Contract for Sale and Purchase of Natural Gas, dated March 31, 2010 ("Chugach -MAP Gas Contract"), which the Commission approved in Letter Order #LO1000175. z Hartz, Jack D., et al., State of Alaska Department of Natural Resources, Division of Oil and Gas and Division of Geological & Geophysical Surveys, Preliminary Engineering and Geological Evaluation of Remaining Cook Inlet Gas Reserves (Decker, Paul L., ed. December 2009). Commissioners June 23, 2011 Tariff Advice No. 334 Page 3 of 24 needs. In his cover memorandum to the ADNR Gas Reserves Report, Kevin Banks, ADNR Director, summed up the findings and stated the situation facing Alaska's consumers: Consumers relying upon Cook Inlet natural gas to meet their energy needs should know that while there is no need to panic, there is also no time to waste. Although it is apparent that sufficient reserves remain to provide for Railbelt needs for the coming decade or more, the cost of providing energy to these same consumers is likely to rise. The low -hanging fuit in the Cook Inlet has largely beer. picked and as such one thing seems clear — the basin is not running out of gas but it could well be running out of cheap gas.3 In view of this, Chugach has recognized the need to continue diversifying its electric power supply options to help mitigate reliance on natural gas. The construction of the Southcentral Power Project will provide significant fuel savings through improvements in overall efficiency. In the long -run, however, Chugach has a goal to increase the proportion of its power supply provided by renewable energy resources, such as hydroelectric, wind, geothermal and biomass generation resources. Indeed, Chugach has outlined the 90/10 to 10/90 vision to reverse the utility's current resource mix of 90 percent fossil fuel and 10 percent renewable energy. See Chugach Board of Directors Resolution In Support of Alternative Energy in Alaska, February 2, 2010, attached hereto as Appendix E. In 2010, the Alaska State Legislature enacted House Bill 306 declaring its intent that the State obtain 50 percent of its electric generation from renewable and alternative energy sources by 2025. Within this policy, the Legislature recognized that the worldwide supply and demand for fossil fuels and concerns about global climate change will affect the price of fossil fuels consumed by Alaskans. The Legislature also recognized that the state's economic prosperity is dependent on available, reliable and affordable energy. Accordingly, the Act encouraged the development of renewable and alternative energy resources, including wind.4 The FIW Project represents an additional small, but significant step towards diversifying Chugach's generation portfolio away from its dependence on natural gas fired generation. The FIW Project will be the first of a kind project in Alaska: utility scale, intermittent wind resource project interconnected and integrated into the Railbelt transmission and generation system. This first step, however, is not a rash, unconsidered decision- Chugach began investigating wind generation opportunities in Alaska in 1998. Based on wind resource studies, Chugach identified Fire Island as the best overall site based on wind characteristics, location, and the ability to connect and transmit the energy into the Chugach system. Chugach received a $750,000 Denali Commission grant, with a performance period from January 2004 through June 2006, that paid 3 Memorandum entitled "Cook Inlet Gas Reserves Study" from Kevin Banks, Director, State of Alaska Department of Natural Resources, Division of Oil and Gas, Department of Natural Resources to Tom Irwin, Commissioner, State of Alaska Department of Natural Resources (December 21, 2009), at 2. 4 AS 44.99.115(2)(A). Commissioners Tariff Advice No. 334 June 23, 2011 Page 4 of 24 for major studies at the Project, including meteorological, environmental studies (avian, view - shed, noise, and archeological), interconnection, civil infrastructure, wind turbine construction and O&M, and cost analyses. In 2004, Chugach, Anchorage Municipal Light & Power and Golden Valley Electric Association, Inc. signed an MOU to jointly work on a wind project at Fire Island. Due to the need to focus its efforts on developing new baseload generation (which ultimately became the Southcentral Power Plant), however, Chugach decided against developing the project itself in 2007 and recommended that CIRI take over the development of wind generation on Fire Island. CHU, the landowner of Fire Island, and EnXCo, an experienced wind developer, then took over development of the wind generation project on Fire Island, and ultimately CIRI replaced EnXCo with Summit Power Group ("Summit"), another experienced wind developer. In 2008, the Alaska Legislature appropriated $25 million as a grant to help pay for the transmission line interconnection between a wind project on Fire Island and Chugach's transmission system near Anchorage International Airport. In 2010, CIRI proposed a 52.8 MW wind project on Fire Island, commissioned an interconnection study with Chugach, and began commercial discussions with Chugach and the other Railbelt utilities. With help from the National Renewable Energy Laboratory, Hawaii Electric Company (HECO), the largest Hawaiian utility with experience in integrating wind into an islanded utility system, and other experts, Chugach led an integration discussion to ascertain the feasibility and cost of using Chugach's generation resources to integrate the output of the whole 52.8 MW wind project- Chugach concluded that based on its limited hydroelectric generation resources and operational limitations on its fleet of gas generation, Chugach could not integrate the entire project by itself in a cost effective manner and that each utility purchasing the output of the wind project would have to integrate its share. Thereafter, CIRI was unable to gain commitments from utilities for the total energy output of the 52.8 MW wind project. Chugach proposed to buy the output of a smaller scale project that was sized in a manner that Chugach alone could purchase and integrate the wind energy using its existing and planned resources. In response, CIRI then developed the present 17.6 MW FIW Project, which is described in Exhibit A to the PPA (attached hereto as Appendix A). After about four months of negotiation, the focused effort between Chugach and CIRI resulted in the PPA, as described below. While Chugach has been investigating wind as an alternative generation resource for twelve years, the timing of Chugach's decision to proceed with the PPA at this time (and the need for expedited Commission approval) is driven by a federal grant that will not be available to the development of the Project if construction does not start in 2011. Specifically, $18.7 million from a federal grant from the US Treasury under the American Recovery and Reinvestment Act of 2009 will significantly reduce the cost (and most importantly to Chugach and its customers -- 5 Sec. 13, Chp. 29 SLA 2008. Commissioners June 23, 2011 Tariff Advice No. 334 Page 5 of 24 the price) of power from the FIW Project and unlock an additional $25 million grant from the State of Alaska to build the transmission line. Without these grants, Chugach would not likely be buying the output of the FIW Project at this or at any time in the near future. RECOVERY OF WIND GENERATION POWER COSTS Alaska Administrative Code 3AAC 52.502(a) permits utilities to add cost elements for recovery through the Quarterly Fuel and Purchased Power Adjustment factor mechanism outside a general rate case process provided: 1) the cost element is subject to change at a rate that would cause financial harm to the utility if the costs were recovered exclusively in base rates; 2) these costs are beyond the control of the utility; and 3) these costs are easily verifiable. The surcharge process incorporates a balancing account that allows for the precise recovery of the cost incurred, no more or no less. With this filing, Chugach requests Commission approval to have all purchased power costs incurred under the FIW PPA recovered through the surcharge process. Chugach will record the transaction as a purchased power expense in the same month that wind energy is purchased and, in this manner, the purchased power expense will be treated as a direct cost recovered through the surcharge process with no attendant impact on margins. If these costs were not recovered through the surcharge process, the changes in cost and the corresponding delay, even under the Simplified Rate Filing ("SRF") process, could have a direct negative impact on current year operating margins. The extent of the impact would depend on the amount of wind energy purchased during any given period. Under Chugach's semi-annual SRF process which utilizes a June and December test year, Chugach is only able to recover about 20 percent of the incremental costs that are incurred between January and June in the current year due the normal lag in adjusting rates to recover costs. The remaining non -recovered balance reduces current year margins. For costs incurred between July and December, no costs are recovered in the current year and margins would be impacted on a dollar -for -dollar basis. The changes in costs will be recognized in the following period through subsequent SRF filings. However, current year margins and achieved Times Interest Earned Ratio (TIER) will be positively or negatively impacted and there will be a mismatch in corresponding cost incurrence and recovery. Chugach system production, transmission and distribution margins total about $6 million per year. Chugach's current authorized TIER for production -related activity is 1.10, which provides about $0.7 million of margins associated with the production function. This is based on Chugach's December 2010 test year Simplified Rate Filing that was filed in March 2011. The expected variability of wind generation on a purchased power cost basis could total upwards of $0.5 million annually, which represents about 70 percent of authorized production margins. Failure to recognize these costs through the surcharge process will have a direct adverse impact on margin levels due to both the variability and delay between when the cost is incurred and when the cost element is recovered in electric rates. Commissioners June 23, 2011 Tariff Advice No. 334 Page 6 of 24 While the contract price of wind power is established on a MWh basis (at fixed price per MWh throughout the term of the PPA), the actual monthly total cost will vary based on the output of the wind turbines, which is primarily a function of the wind resource in that month. Accordingly, the actual monthly total cost is not within Chugach's control. Total monthly purchases made under the PPA are easily verified and supporting invoices validating the expenditures will be included with each quarterly surcharge filing. At the time this expenditure is actually expensed on Chugach's accounting system, Chugach will provide the final billed cost with its quarterly filing. At this time, Chugach is proposing that both the energy and corresponding purchased power costs under the PPA be associated with Chugach retail customer load requirements only. The costs and corresponding energy purchases will not be included in the determination of the electric rates of Homer Electric Association, Inc., Matanuska Electric Association, Inc. and Seward Electric System. In addition, Pursuant to Docket U-99-106(12), Chugach will make the necessary modifications to the G&T loss factor calculation to ensure impacts on system losses continue to be properly quantified. Chugach has included Fire Island Wind as a purchased power expense on the enclosed Tariff Sheet Nos. 94.05, 95.05 and 95.5 contained in Appendix C. Pursuant to 3 AAC 52.470(e), the balance of this letter provides the Commission with: (1) A review of Chugach's current load forecast and electric supply situation; (2) A description of the key features of the FIW-Chugach PPA; and (3) A review of Chugach's other electric supply options. CHUGACH'S ELECTRIC SUPPLY SITUATION Consideration of the FIW-Chugach PPA starts with an identification of Chugach's present and forecasted electric power requirements. Chart 1 shows Chugach's electric load requirements necessary to meet its customers' needs from 2011 through 2032. It also shows that Chugach's electric load requirements will decrease in 2014 and 2015 due to expiration of its commitments to serve two wholesale customers: Homer Electric Association, Inc. on January 1, 2014 and Matanuska Electric Association, Inc. on December 31, 2014. (Note that the data supporting Chart 1 and most of the other charts in the letter are presented in tables in Appendix F.) Commissioners Tariff Advice No. 334 3.000 MO zM 1.^500 1.000 so0 June 23, 2011 Page 7 of 24 Chart 1— Electric Load Forecast Retail a SES R iEA :. HEA 68T Losses p� N pM ep 1A tpp0 N N W N N N N N N PI PI l�l N N N LY N N Source: Chugach 2011 Long -Term Load Forecast While Chugach's total electric load is expected to increase only modestly (<1 percent per year), the generation resources that Chugach will use to meet such load requirements will change significantly in the future. Chart 2 shows Chugach's existing and planned generation resources by type of generation without the FIW Project. As mentioned above, Chugach is dependent on natural gas generation. After the Southcentral Power Plant ("SPP") is completed in 2013, Chugach will rely on SPP and its gas -fired generation plants, all of which are dependent on increasingly costly Cook Inlet gas supplies (with attendant price and volatility risk) and its hydroelectric plants. Commissioners June 23, 2011 Tariff Advice No. 334 Page 8 of 24 Chart 2 — Generation Resources by Type aExistlngThennalUnits-Gas aSouthosntralPower Project- Gas 9Exisl•ngHydro 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0 V a m P. O w O r ep * b m 1 W O r N q 1p tr e- r r r r r r N N a N N N N N N a ' i 0 to a O O O O p O O O O O O O O O A N N N N N N N N N N N N N N N N N N N N N N N N Source: Chugach, June 2011 Chart 2 demonstrates that Chugach is dependent on gas -fired generation. While the new SPP will help Chugach's situation by being a much more efficient gas -fired resource, it will not fully mitigate the increasingly constrained gas supply and deliverability situation in Southcentral Alaska. As a result of the gas situation, gas storage is currently being developed and other supply and deliverability options, such as imported liquefied natural gas (LNG), are being evaluated to offset the decline of the Cook Inlet gas basin. In addition to the decline in low cost gas supplies and increasing deliverability issues, Cook Inlet gas prices are expected to rise. The Alaska Energy Authority's 2010 Railbelt Integrated Resource Plan (RIRP) gas price projection was developed by Black & Veatch using Monte Carlo simulation that considered a variety of supply side possibilities that could be supported quantitatively with the necessary degree of mathematical precision. The purpose of the model was to run and consider "what if' types of scenarios to provide information about the aggregate supplies of gas in a specified year. The main gas sources included production from the Cook Inlet basin, importation of LNG from outside Alaska, and delivery of gas from the Alaska North Slope to the Railbelt by means of an in -state pipeline. The primary supply side assumptions for the expected (or base case) RIRP gas price projections were: Commissioners Tariff Advice No. 334 June 23, 2011 Page 9 of 24 Expanded Cook Inlet production, beginning in 2012, matches demand but with decline toward a supply -demand deficit beginning in 2017 and with end of production as of 2039 • LNG imports begin in 2013, and ramped -up to annualized equivalent of 41 MMcf/d, before ending in 2018 (when the in -state pipeline appeared) In -state pipeline begins in 2018, with ramp -up to maximum capacity of 350 MMcf/d by 2022. and continued operation thereafter.' The impacts of the above assumptions are shown in the RIRP gas price projections in Chart 3 below. In the past 18 months since the RIRP was released, Chugach and others have been assessing resource and supply alternatives to meet natural gas requirements. Through this piocess, Chugach has gained a better understanding of the cost of the alternatives, including the importation of LNG. Based on that new information, Chugach has adjusted the RIRP gas price projections upward as shown in Chart 3. This adjustment represents a reasonable assumption of long-term natural gas prices that may be observed in Cook Inlet. $20 $18 $16 $14 $12 $10 $8 $6 $2 $0 Chart 3 — Gas Price Projections From RIRP —Chugach-adjusted RIRP Gas Price Projection —RIRP Gas Price Projection V. a ti m W O r N M a a fO Ir N Q► M W. r r r r r N N N NpN N Np pN N N cr p p p a a a a 8 a a a N N a N N a N a a N a N a N N a Source: RIRP, February 2010 6 RIRP, at p. 7-7 (Included in Appendix G at page 19 of 60). Commissioners June 23, 2011 Tariff Advice No. 334 Page 10 of 24 Chart 4 shows Chugach's existing and planned generation resource mix by type of generation with the addition of Chugach-FIW PPA. Energy purchased under the FIW-Chugach PPA will provide 48,000 MWh of electric energy -- about 4 percent of Chugach's total electric energy needs. When combined with hydroelectric generation, about 20 percent of Chugach's generation needs will be met with wind and hydro until Chugach adds additional renewable resources. Chart 4 — Generation Resources by Type — With FIW PPA ■ Existing Thermal Units -Gas Southoentral Power Project- Gas a Existing Hydro — Fire Island Wind 100% 90% 80% 70% 60% 90% 40% 30% 20% 10% 0% � r � � tti N N N NON N N M M M M O O O O O O o O O O O O NO N N N N N N N N N N N N N N N N N N N N iV N N N O Source: Chugach, June 2011 The FIW Project is the first viable opportunity for Chugach to integrate'a utility -scale, non - hydro, non -thermal resource into its power supply portfolio that will provide a small, but meaningful reduction in the natural gas consumed to generate electricity. In fact, Chugach estimates that the FIW Project will replace approximately 48,000 MWh of gas -fired generation per year, which equates to 300,000 Mcf per year. Using the gas price projections in Chart 3, Chart 5 shows the value of the fuel savings — or volume of gas that can be saved by Chugach for use at other times. Commissioners June 23, 2011 Tariff Advice No. 334 Page 11 of 24 $7.0 $6.0 Chart 5 — Annual Fuel Savings Doe to FIW Project Energy N N N N N V t"tl N tV N tV �V N � N N N N N N N N N N N Source: Chugach, June 2011 In addition to the avoided fuel cost, the FIW Project decreases Chuach's carbon emissions. While decreasing carbon emissions has intrinsic and social value, it also has a benefit that could be measured in terms of a carbon tax. Chart 6 shows a forecast of carbon dioxide price published by Synapse Energy Economics, Inc. The steeply increasing values reflect the assumption that over time carbon dioxide will become regulated in the United States during the next 25 years. (Of course, Chugach has no knowledge of the future, so it has used a middle case scenario published by a reputable study as a reasonable assumption for its analysis.) Chart 7 shows the value of the avoided carbon dioxide based on the assumed prices of carbon dioxide (set forth in Chart 6) and the fact that the FIW Project will enable Chugach to avoid emitting 21,607 tons of carbon dioxide per year (based on assumed FIW energy deliveries and Chugach's assumed gas usage to create the same amount of energy from its gas generation resources). Commissioners Tariff Advice No. 334 Chart 6 — Carbon Dioxide Price Forecast SIGs $90 $00 $7O ., $60 0 U V $5O C O ti M June 23, 2011 Page 12 of 24 $1O pM Y byp ,T�S, p~o �po p�o [ppV spy Np pN eN pN N N N N (� M M eN) � bM 1pAq Source: Synapse Energy Economics, 2011 Carbon Dioxide Price Forecast, February 11, 2011 0 r r Chart 7 — Value of Avoided Carbon Dioxide Emissions $2 5 S" 51.5 $0.5 � tN`�I N N tV N Source: Chugach, June 2011 (using Chart 6 data and Chugach's calculation of avoided gas consumption). Commissioners June 23, 2011 Tariff Advice No. 334 Pane 13 of 24 KEY FEATURES OF THE FIW - CHUGACH PPA The most significant provisions of the FIW-Chugach PPA can be summarized as follows: 1. Form of Agreement and Counterparty In order to acquire the output of the Fire Island Wind Project, Chugach has negotiated a renewable energy power purchase agreement with a nonregulated vendor, Fire Island Wind, LLC, the special purpose entity formed by CIRI to develop the wind project and sell the energy output 7 While CM1 is definitely the primary party -in -interest behind the FIW Project, CHU anticipates project financing for the FIW Project, rather than balance sheet financing. Accordingly, the use of the special purpose entity — as CIRI has proposed — is required for project financing and is typical for wind and other renewable projects. Because the FIW-Chugach PPA is a first of its kind utility -scale wind generation off -take contract in Alaska, Chugach and CIRI both retained legal counsel experienced in negotiating power purchase agreements for intermittent renewable generation projects. 2. Overview of FIW Project A key issue in the development of the FIW Project and marketing the energy output was finding purchasers who could take delivery of intermittent power without sacrificing system operating efficiency. While CIRI originally envisioned and planned a 52.8 MW project, it was eventually down -sized to the currently planned 17.6 MW because this is a size that Chugach can electrically manage and integrate into its existing system and no other Railbelt utilities were willing to commit to purchase and integrate FIW Project output. 7 In 2010, the Legislature amended AS 42.05.711 by adding a new subsection to read: (q) A plant or facility that generates electricity entirely from renewable energy resources, as that term is defined in AS 42.45.045, is exempt from regulation under this chapter if (1) the plant or facility (A) is first placed into commercial operation on or after the effective date of this subsection and before January 1, 2016; and (B) does not generate more than 65 megawatts of electricity; (2) the electricity generated by the plant or facility is sold only to one or more electric utilities that are regulated by the commission; and (3) the person that constructs, owns, acquires, or operates the plant or facility has not received from the state (A) a grant that was used to generate the electricity from the rerewable energy resources; or (B) a tax credit related to the generation of electricity from the renewable energy resources. Accordingly, Chugach submits this Agreement to the Commission under subsection (e) of 3 AAC 52.470 as a contract with a nonregulated vendor. Commissioners June 23, 2011 Tariff Advice No. 334 Page 14 of 24 As set forth in greater detail in Exhibit A of the PPA (Appendix A hereto), the FIW Project will consist of: a. eleven (11) General Electric 1.6xle wind turbine generators (or a comparable successor model), with a total nameplate output capability of 17.6 MW to be built on real property leased by CIRI to F1W on the southern part of Fire Island, Alaska; b. the Project turbines shall include the following GE -provided packages: (a) Cold Weather Extreme; (b) Seismic towers (c) Inertia Control; (d) WindCONTROL; (e) WindRide- THRU; (f) Voltage Control; and (g) Ramp rate control; and c. associated facilities, including roads, crane pads, foundations, meteorological towers, transformers, feeder lines, communications cables, collection lines, interconnection facilities, and an O&M Building. The Project shall be interconnected with Chugach's transmission system at the high side of the Project collector 34.5 kV bus at a new substation to be built by FIW (to Chugach's specifications) on Fire Island, Alaska= FIW shall request, and Chugach shall seek to provide, station service for FIW at Project Site. 3. Development and Operation of the Project As detailed in Article 4 of the PPA, unlike utility -owned and developed projects like SPP, the non -utility developer (FIW) bears all risk associated with development of the FIW Project= FIW is required to site, develop, obtain permits, finance, and construct the Project without any recourse to Chugach for cost overruns or delays. Indeed, FIW guarantees the Project will reach commercial operation (as such term is defined in the PPA) by December 31, 2012. The Project commercial operation date will be achieved when at least nine (9) of the Project turbines have achieved "commercial operation" (according to the definitions and process set forth in the PPA); if not placed in service by such date, the FIW shall have the right to place the remaining two (2) Project turbines into service prior to October 1, 2013. As set forth in Article 2, certain conditions precedent control the effectiveness of the PPA: 1. Approval without material condition by Regulatory Commission of Alaska by not later than September 15, 2011; 2. FIW determines that it is likely to receive ARRA section 1603 cash grant in lieu of ITC (approximately $18.7 million); and 3. FIW shall obtain a commitment from a Lender (which is reasonably acceptable) to finance the Project under the terms contained herein. Commissioners June 23, 2011 Tariff Advice No. 334 Pace 15 of 24 4. Product/Quantity/Production Guaranty Under Section 5.1, FIW is committed to sell, and Chugach is committed to buy, the full Project output, which is expected to be 48,565 MWh per year based on CIRI's preliminary wind assessment at a P50 production level.8 The Project output will be updated in accordance with the final wind assessment prior to Project Commercial Operation Date. If the full Project output at a P50 production level is expected to vary by 5 percent or more, the Parties shall meet and confer. The PPA Contract Price includes capacity credits (if any) and the environmental attributes, including Renewable Energy Credits ("RECs")9 or Green House Gas reduction benefits (such as carbon credits) (collectively "Green Attributes"), for each unit of energy produced by the Project and sold to Chugach, except that FIW will retain Green Attributes associated with the Project that solely relate to renewable energy projects sited on native lands, unless the retention of such Green Attributes would result in an inability to transfer at least 1 Green Attribute per MWh of energy delivered to Chugach under the PPA. Renewable energy credits or "green tags" are earned at the rate of one green tag per 1 MWh of renewable energy produced. Thus, Chugach will receive an estimated 48,565 green tags per year that will be available to (1) retain for the benefit of its members, (2) sell to willing customers through a Green Power Program or sales in the green tag market, or (3) use to meet legal requirements in the event that Alaska or federal law implements a Renewable Portfolio Standard ("RPS"). FIW shall at its expense take all commercially reasonable steps necessary to ensure that the Project's output qualifies as a renewable resource under such RPS. Pursuant to Section 5.13, FIW guarantees that it will deliver 150 percent of the P50 annual expected output over any consecutive 24-month period, which shall be adjusted to account for curtailment and force majeure events as further defined in the PPA. If F1W fails to produce sufficient energy to meet the production guaranty, FIW will have one year to address the problem or face default, contract termination, and the obligation to pay damages to Chugach. 8 P50 is an energy yield prediction in which the probability of reaching a higher or lower annual energy production is 50:50. 9 When a renewable energy facility operates, it creates electricity and attributes that is delivered to a series of buyers. The renewable electricity generation has two separable parts: the electrical energy produced by generator and the renewable "attributes" of that generation, which include the tons of greenhouse gas that were avoided by generating electricity from renewable resources instead of conventional fuels. These renewable attributes are sold separately as renewable energy certificates (RECs). One REC is issued for each megawatt -hour (MWh) unit of renewable electricity produced. The electricity that was split from the REC is no longer considered "renewable" and is cannot be counted as renewable or zero -emissions by whoever buys it. Commissioners June 23, 2011 Tariff Advice No. 334 Page 16 of 24 5. Price and Term Throughout the term of the PPA, Chugach shall pay a fixed price $107.85 per MWh of Product (including Test and Excess Power) during the Term, which includes all Project operations and maintenance (O&M) and system integration. As detailed below, FIW shall pay a System Integration Charge equal to $10.85 per MWh to Chugach as Transmission Owner pursuant to an Interconnection and Integration Agreement that will be negotiated in the next few months. Accordingly, the net price to Chugach is fixed at $97.00 per MWh for the energy, capacity credits (if any) and Green Attributes for 25 years. As with most energy purchase contracts, the most contentiously negotiated term in the FIW- Chugach PPA was the price that Chugach will pay for the energy output (and associated credits). CHU started with a cost -based model of Project to derive price, while Chugach started and remained focused on a value -based approach to the price. Ultimately, the parties arrived at a price that Chugach views as within the zone of reasonableness for a pioneering wind project of this type in Alaska and is confident that the rate impact to consumers is just and reasonable.10 In comparison to using energy from Chugach's existing resources, the FIW-Chugach PPA Contract Price is on par with Chugach's existing resources after considering and making reasonable assumptions about fuel costs, fuel availability, carbon cost/risk, value of the Green Attributes, and similar factors. Of particular importance in arriving at the price for energy in the FIW- Chugach PPA is the value to its member -customer; of diversifying away from increasingly - costly natural gas supplies and extending the life of the known supplies of natural gas in Cook Inlet. It is simply no longer reasonable to assume that future natural gas will be routinely available at historic prices. The FIW-Chugach PPA energy price reflects this change in perspective, and, when viewed in light of all the circumstances, is just and reasonable. Chugach also sees significant value in locking in a contract price for 25 years, reducing cost variability and resulting rate fluctuations. In order to lock in such a price, the early years of the price valuation are necessary higher in order to have a lower price in the future. With the flat price for wind power over the term of the PPA, it can be seen from Chart 8, that the expected increase in natural gas prices (as shown in the RIRP gas price projection) will result in significant savings to our consumers, with the propensity to achieve greater savings in the long - run (based on the Chugach -adjusted RIRP gas price projection). !0 "The standard for approval of a power sales contract is that the rates are just and reasonable, that the load forecasts justify the need for the contract, and that the contract is the most feasible means of meeting the forecasted load." Staff Report in Docket U-97-191. In the Matter of th A lic tion of G t Lake Hvdro,,12 APIJC 285 (1992) (citing AS 42.05.381 and AS 42.05.431(b)). Commissioners June 23, 2011 Tariff Advice No. 334 Page 17 of 24 Chars 8 — Annual (Cost)Benefit (in millions of nominal S) $4.0 $3A M e $$2.0 E 0 e 0 a $1.0 e $0.0 0 C —Annual (Cost)/BenefltBased on the Chugach -adjusted RIRP Gas Price Projection e i32A) —Annual (Cost)IBenefitbased onthe RIRP Gas Price Projection 03A) r � � pr p�p � ippA pNp N Nop QQN tpaV pNp pNp � pNp oN M � J pM /p�p pMO M pM p~J Source: Chugach, June 2011 Appendix G shows Chugach's detailed deterministic and probabilistic analyses of the value of output of the F1W Project. Chugach developed an economic model to evaluate FIW pricing. The chart shows that while economic benefits of the wind purchase are not overwhelming, there is reasonable value and it makes economic sense to begin incorporating renewable wind energy into Chugach's power supply portfolio. Overall, F1W appears to be one of the most viable and economic renewable energy projects in Southcentral Alaska that can be financed, constructed, and interconnected in the near term with significant leverage from exceptional federal and state grants. The gas situation in the Coop Inlet is challenging and this is a small, but significant opportunity to bring a renewable energy resource on-line that mitigates the rising gas supply costs and deliverability issues. CIRI is a known entity with the resources to deliver the project as expected. The federal grant in lieu of tax credits and state transmission grant will provide a total of $43.7 million capital to support to the Project's viability and affordability. FIW is the first renewable energy project that Chugach has evaluated, negotiated PPA terms and brought to the Commission for approval. There will likely be many others in coming years as Commissioners June 23, 2011 Tariff Advice No. 334 Page 18 of 24 other new generation resources such as hydro, geothermal, biomass and other wind projects are currently being actively planned and developed. Chugach expects that the process of evaluating, negotiating and securing approval of the FIW PPA and integrating wind operationally into the electric grid will benefit these other projects when they are ready in the future. 6. Delivery/Interconnection As mentioned above, the delivery point of the power to Chugach will be at the point of interconnection with the transmission system at the high side of the Project collector 34.5 kV bus on Fire Island, Alaska. FIW shall request- and Chugach shall seek to provide, station service for FIW at the Project Site. Chugach, as Transmission Owner, will be the interconnecting utility for the Project. Pursuant to an Interconnection and Integration Agreement to be negotiated in the next few months, Transmission Owner and FIW will separately agree to terms and conditions relating to the interconnection of the generation from the Project in accordance with a Fire Island Wind Farm System Impact Study that Chugach has already completed and defines the facilities necessary for interconnection and requires no network upgrades. FIW shall be responsible for all applicable transmission charges, electrical losses, integration and any other transmission -related charges attributable to or assessed for energy delivered to Chugach before the point of delivery. Chugach shall be responsible for all applicable transmission charges, electrical losses, integration and any other transmission -related charges attributable to or assessed for energy delivered to Chugach at and after the point of delivery. Pursuant to the Interconnection and Integration Agreement, the Parties also agree that all future generation projects seeking to interconnect on Fire Island shall request and attain a separate interconnection agreement from Transmission Owner and shall not interfere with the Project's interconnection and delivery of Project's output. Pursuant to the Interconnection and Integration Agreement, FIW shall construct to Chugach's standards a two circuit sub -sea and a two circuit land based 34.5kV transmission line linking the Project Delivery Point to Chugach's International Substation. Chugach shall be the owner of the transmission line after its completion and shall pay for all ongoing operations and maintenance of transmission line and interconnection facilities on Chugach's side of the Delivery Point after Commercial Operation. FIW and Chugach will cooperate on the arrangements necessary to use the State of Alaska grant to pay for the transmission line. If FIW's Engineer's Pre -construction Estimate of cost to construct the transmission line and interconnection facilities exceeds the State of Alaska grant for $25 million (and any additional grants) or if actual construction costs (including CIRI project management cost) are expected to exceed the State of Alaska $25 million grant, the FIW and Chugach shall further make reasonable commercial efforts in (1) revising the technical specifications for the transmission line and interconnection facilities to bring the costs into line with the State of Alaska grant(s), and (2) to the extent necessary, any additional efforts necessary to obtain additional grants to cover any costs of the transmission line and interconnection costs that are not covered by the initial grant. After such efforts are exhausted, CIRI shall be responsible for all remaining cost overruns for transmission line and related interconnection facilities. Commissioners Tariff Advice No. 334 7. Scheduling/Integration June 23, 2011 Paee 19 of 24 Pursuant to Section 5.12 of the PPA, FIW will provide non -binding yearly, monthly, daily and day ahead hourly forecasts of Project availability consistent with prudent wind industry practices. Chugach shall act as scheduling coordinator (dispatcher) for the Project output. There will be challenges associated with integrating and regulating a wind resource so that it does not impede the operating efficiency of the existing generation system. The PPA provides the tool to do so with a ramp rate restriction and the ability to curtail power purchases. FIW shall use commercially reasonable efforts to observe a ramp rate restriction of 2.5 MW per minute (the rate at which the wind project energy production increases or decreases), which will allow Chugach's operations to integrate and deal with the variability of the wind generation. Additionally, pursuant to an Interconnection and Integration Agreement, FIW shall pay a System Integration Charge equal to $10.85 per MWh of Product purchased by Chugach (including curtailed Product) to Chugach as Transmission Owner. This charge is a negotiated payment amount towards the costs of integration, regulation and related services. As part of the integration services, Chugach, in its role as buyer and as Transmission Owner, shall have the right to curtail the Project for operational reasons and in an emergency conditions to (i) preserve public health and safety, (ii) preserve the reliability or security of, and avoid adverse impacts to, the Transmission System or Interconnection Facilities, (iii) limit or prevent damage, and (iv) expedite restoration of service. As part of the System Integration Services, in the event that FIW is required to curtail energy deliveries from the Project in response to a Emergency Condition, declared by the Transmission Owner that is consistent with prudent utility practices and the ASCC (or successor) Planning and Operating Guidelinesll (including the transmission function of Chugach), Chugach shall pay for such curtailed Product at Contract Price and FIW shall suffer no liability and FIW shall receive credit for such lost energy production. against FIW's Output Guaranty. Chugach will continue to investigate alternative methods, practice, and equipment, such as batteries and flexible fuel supplies, which will improve the ability to manage the FIW Project output and future intermittent energy supplies. 8. Operational Rise Pursuant to Section 4.4, 4.5 and other PPA provisions, F1W shall operate the Project in accordance with Prudent Wind Generation Industry Practices12 and the ASCC Planning and u Alaska Systems Coordinating Council Planning Guidelines and Operating Standards, dated 1992, as such may he amended, modified, and replaced from time to time. 12 In Section 1.1 of the PPA "Prudent Wind Generation Industry Practices" is defined to mean "the practices, methods, and acts engaged in or approved by a signif_cant portion of the wind energy generation industry for wind facilities similar to the Project and in a similar location and with wind characteristics similar to the Project that, at a particular time, in the exercise of reasonable judgment in light of the facts known or that should reasonably have Commissioners June 23, 2011 Tariff Advice No. 334 Page 20 of 24 Operating Guidelines and shall maintain a reasonable inventory of spare parts and have a heavy duty, high lift crane available for deployment as needed, which high lift crane may be located on or off the Premises. FIW shall be responsible to perform all maintenance and operation of the Project consistent with prudent wind industry practices for a project with similar site and wind conditions. The Contract Price includes the costs associated with operation and maintenance of the Project. FIW shall provide Chugach with a planned outage/scheduled maintenance schedule on a yearly basis no later than October 1 of the preceding year. FIW shall make commercially reasonable efforts to avoid any planned outages during the months of October through April unless agreed to in writing in advance by Chugach. Article 10 contains typical provisions relating to Force Majeure. Complete failure of the transmission line shall be a Force Majeure event pursuant to Section 10.1 of the PPA. 9. Other Notable Provisions Pursuant to Section 5.10, except as otherwise agreed, Governmental charges and taxes, including real and personal property taxes, assessments, and payments in lieu of taxes on the Project or the real or personal property underlying the Project, shall be considered an operation and maintenance expense of the Project. Except as otherwise agreed, Chugach shall be responsible for any Governmental charges and taxes imposed or levied on the sale or receipt of Product, if any. Pursuant to Article 9 of the PPA, Chugach shall be allowed to assign the rights to a portion of up to 18 percent of the Product from Project to another electric utility purchaser subject to FIW's consent to electric utility purchaser's creditworthiness, which shall not be unreasonably withheld, conditioned, or delayed. COMPARISON TO OTHER OPTIONS In April 2009, Chugach's Board of Directors approved the following policy based on recommendations of Chugach's Renewable Energy Committee: To ensure that a cost-effective electric power supply will increasingly rely upon renewable and alternative energy sources and that all technology alternatives be compared on a fair and equal basis, the Association shall assess and evaluate economic been known at the time a decision was made, would have been expected to accomplish the desired result in a manner consistent with Law, codes, standards, equipment manufacturers' recommendations, reliability, safety, environmental protection, economy, and expedition. With respect to the Project, Prudent Wind Generation Industry PracticeE is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather to be a spectrum of possible practices, methods or acts.' Commissioners June 23, 2011 Tariff Advice No. 334 Page 21 of 24 values for power supply options that include but are not limited to the following: a. The value of power supply security achieved from fuel type and generation technology diversification; b. The value of power supplies with level and non-volatile pricing compared to market -based pricing, e.g., mitigating fuel price volatility; C. Employ life -cycle cost -to -benefit economic analysis including the cost of decommissioning; d. The cost of government actions, including carbon emissions taxes and carbon credit sales; e. The value of other environmental attributes; f. The statistical value of capacity from non -firm power supplies; and g. Demand side programs including energy efficiency and energy conservation. Chugach's Board Policy 126 -- Business Planning and Financial Management, Section II, Content, B Operations and Budgets (BP 126), first passed on April 22, 2009. Consistent with BP 126 and the Board's Resolution In Support of Alternative Energy in Alaska (Appendix D), Chugach has been investigating and evaluating known, feasible renewable projects that could be reasonably interconnected to Chugach's system while it has considered a PPA for output from the FIW Project. In addition to the values set forth in BP 126, Chugach has used the following criteria in evaluating such projects (arid PPA opportunities): project viability; developer experience and qualifications; counterparty/credit risk; proposed construction schedule and commercial operation date; price; transmission viability, cost, and risk; interconnection and integration requirements; conditions precedent; licensing, permitting and environmental issues; site and location of the generation; technology/equipment type and viability; size; generation profile/availability factor, project design, proposed business arrangements, mode of operation, fuel supply (if any), and financing sources. In October 2010, Chugach issued a request for information from all known project develop-crs and published its interest in project opportunities on its website. Based on the information received, Chugach is aware of potential projects including two wind projects, four hydroelectric projects, one geothermal project, two tidal projects and one waste -to -energy facility. These potential projects were evaluated based on the criteria above and the FIW project was considered to be economic and the most viable, especially with the federal and state grants. CHU is a financially sound partner, had retained experienced project development assistance, and was Commissioners June 23, 2011 Tariff Advice No. 334 Page 22 of 24 actively moving the FIW project forward to take advantage of grant opportunities. Chugach has negotiated reasonable terms with FIW and considers this project the best currently -available renewable energy opportunity. As other developers further develop their projects, Chugach will be interested in reviewing those opportunities that can provide reasonably priced energy from viable and timely renewable energy projects. NOTICES Chugach's address for receiving notice related to this tariff filing is: Lee Thibert Senior Vice President, Strategic Planning and Corporate Affairs Chugach Electric Association, Inc. 5601 Electron Drive Anchorage, AK 99518 907-762-4514 lee_thibert@chugachelectric.com REQUEST FOR EXPEDITED CONSIDERATION Pursuant to the Commission's regulations (3 AAC 48.270-300) and based on information provided by F1W, Chugach respectfully requests a Commission ruling no later than September 15, 2011, and provides the following demonstration of good cause provided by FIW. The price of energy set forth in the FIW-Chugach PPA is based on an assumption that FIW will qualify for approximately $18.7 million in cash grant in lieu of investment tax credit under Section 1603 of the American Recovery and Reinvestment Act (the "ITC cash grant"). In order to qualify for the ITC cash grant, FIW must meet certain development deadlines. As detailed below, a Commission ruling by not later than September 15, 2011 is critical for FIW to be able to meet the deadlines required for the receipt of the ITC cash grant. First, the financing of the Project cannot occur until after the expiration of the 30-day period during which an appeal or request for reconsideration can be made, and the Project financing must be complete in October 2011 to preserve FIW's schedule for development of the Project. 1. FIW has already advanced over $10 million to maintain the Project schedule to date. 2. The interval required to manufacture and deliver critical Project components such as submarine cable, collector switchyard breakers and transformers, and the Wind Turbine Generators will require that firm orders for these items be placed in late 2011. 3. Substantial initial order deposits (multiple millions of dollars) will be required to secure the orders for the long lead time equipment described above. FIW will be unable to fund such deposits in the absence of the proceeds of financing the Project. Commissioners June 23, 2011 Tariff Advice No. 334 Page 23 of 24 4. The construction of the Project and the transmission line from Fire Island to International Substation will require tasks to be completed over two years, beginning in 2011. FIW cannot reasonably fund substantial construction activity in 2011 without a ruling from tte Commission, which will, as mentioned above, enable financing of the Project. Second, preserving FIW's schedule for the development of the Project is required for FIW to meet the ITC cash grant deadlines, and the receipt of the ITC cash grant is critical to the viability of the PPA. In order to qualify for the 1a C cash grant, the Project must demonstrate the start of continuous construction before December 31, 2011, or must prove (contract for) over 5 percent of total cost of the Project has been expended on critical tasks and components relating to the Project. 2. Further, once construction is started in 2011 or minimum contracted expenditures are made, the Project must achieve Commercial Operation before December 31, 2012, the expiration date of the ITC cash grant. In the specific case of the FIW Project, construction must be completed sooner - before the onset of winter conditions which is expected by late October 2012. Last, if the Project cannot obtain the ITC cash grant, then the PPA as currently written becomes no longer viable. 1. An amended PPA to account for loss of the ITC cash grant would include pricing at least 25 percent higher than the pricing set forth in the PPA Chugach is seeking approval of pursuant to this letter. 2. The price increase in the PPA contemplated in #3 above would likely cause the price of the energy from FIW to exceed the maximum price that Chugach can afford to pay. In summary, FIW and CIRI intend to take prudent steps to qualify the Project to receive the ITC cash grant. If successful in qualifying for the ITC cash grant, substantial benefit to the PPA price and therefore to the customers of Chugach will accrue. In order to qualify for the ITC cash grant FIW must take the following steps before the end of 2011: • Order long lead time equipment; • Secure orders with large deposits; • Execute contracts for Wind Turbine Generators, balance of plant construction and Project operation and maintenance services; and • Start construction. Commissioners Tariff Advice No. 334 June 23, 2011 Page 24 of 24 The foregoing will require substantial sums of money to complete, and therefore will be dependent upon closing construction financing. The construction financing in turn, will be directly dependent upon receiving a final and non -appealable ruling from the Commission. SUMMARY Chugach respectfully requests that the Commission: 1. Approve the PPA between Chugach and Fire Island Wind, LLC. 2. Approve the tariff sheets that will allow power purchased from the FIW Project to be recovered in rates through Chugach's fuel and purchased power cost adjustment factor. 3. Notice and review the PPA and tariff filing on an expedited basis so that it can be approved by September 15, 2011. Sincerely, CHUGACH ELECTRIC ASSOCIATION, INC. Bradley W. E s Chief Executive fficer Appendices: A FIW - Chugach PPA B Summary of PPA Terms C Proposed Tariff Sheets D Projected Customer Bill Impacts E Chugach Board of Directors Resolution In Support of Alternative Energy in Alaska, February 2, 2010 F Backup Data for Charts G FIW Project Evaluation Documents cc: Brad Janorschke, General Manager, Homer Electric Association, Inc. Evan J. Griffith, General Manager, Matanuska Electric Association, Inc. John Foutz, Utility Manager, City of Seward