Form revised December 9, 2004

FISCAL NOTE FOR NON-CAPITAL PROJECTS

Department:	Contact Person/Phone:	DOF Analyst/Phone:
City Light	Cindy Wright/386-4533	Thomas Dunlap/386-9120

Legislation Title:  AN ORDINANCE relating to the City Light Department; authorizing execution of the Tailwater Encroachment Losses Compensation Delivery Agreement, the 2005 Memorandum of Agreement, and the Boundary Transformer Agreement, which together will provide for cost-effective transmission service for the City of Seattle in the Boundary Project area and enhanced electric grid reliability.

· Summary of the Legislation:  The proposed legislation will provide for the Superintendent of the City Light Department (“City”) to enter into three agreements, entitled:  (1) Tailwater Encroachment Losses Compensation Delivery Agreement, (2) 2005 Memorandum of Agreement, and (3) Boundary Transformer Agreement.  The Tailwater Encroachment Losses Compensation Delivery Agreement provides for computation and delivery of the encroachment compensation owed to the Public Utility District No. 1 of Pend Oreille County (the “District”) by the City pursuant to Article 48 of the City’s Federal Energy Regulatory Commission (“FERC”) license for the Boundary Project. 

The 2005 Memorandum of Agreement provides for an interpretive clarification of Article 49 of the Boundary FERC license as requested by the District; renewal of the District’s obligation to schedule a minimum of 60 percent of its Article 49 Power during all hours of the day; and several other provisions related to the cost-sharing and cooperative operation of the future Boundary transformer. 

The Boundary Transformer Agreement provides for cooperative planning, acquisition, installation, and operation of a transformer and breaker at Boundary Substation and shared use of the interconnected transmission path, which will provide for cost-effective transmission of encroachment compensation and Article 49 Power, as well as enhanced electric grid reliability for the Bonneville Power Administration (“Bonneville”), the City, and the District in the Boundary area.

· Background: The District owns and operates a hydroelectric project, known as the Box Canyon Project, located on the Pend Oreille River upstream of the City’s Boundary Project.  The operation of the Boundary Project can result in losses to Box Canyon Project capacity, power, and energy production, when the Boundary Project reservoir encroaches into the Box Canyon Project tailwater.  Article 48 of the City’s Boundary license requires that the City compensate the District for such encroachment.

Article 49 of the City’s Boundary license requires that the City assign up to 48 megawatts (MW) from the Boundary Project to the District (“Article 49 Power”) through the term of the initial Boundary license term.  On July 5, 2000, the City and the District entered into the Memorandum of Agreement under which the Parties agreed, among other things, that the City would seek a continuation of Article 49 in the new Boundary Project license, including the removal of the constraint on the sale of Article 49 Power outside Pend Oreille County, and the District would support and assist the City’s relicensing of the Boundary Project.

In 2003, the District requested that the City clarify the interpretation of Article 49 with respect to the District’s sale of surplus energy after August 1, 2005, and until FERC issues a new Boundary Project license.  City Light has decided to provide this clarification in consideration of the District’s agreement to certain other terms that will guarantee that the City can control its future transmission costs for Boundary Project power and encroachment compensation.

Bonneville, the City, and the District have negotiated the Boundary Transformer Agreement, which provides for installation and operation of a transformer and breaker in the Boundary Substation to allow for the cost-effective delivery of Article 49 Power and tailwater encroachment compensation from the Boundary Project to the District via the City’s Boundary Tap Line and Bonneville’s Box Canyon Tap Line.

The Boundary Transformer Agreement requires that the City and the District provide a transformer and breaker for the Boundary Substation, and the City and the District agree that the District should pay the acquisition costs for this equipment in recognition of the greater benefits that the District will receive from transmission savings resulting from the District’s use of the future Boundary transmission path.

On February 14, 1999, the parties entered into the Energy Delivery and Exchange Agreement, and this agreement, requiring the District to schedule a minimum of 60 percent of its maximum Article 49 Power entitlement in all hours, expires on July 31, 2005.  The City wants the District to continue scheduling a minimum of 60 percent of its maximum Article 49 Power entitlement, effective August 1, 2005, to enable the City to reduce Boundary Project demand on the regional transmission grid.  The District has agreed to this and other considerations in the 2005 Memorandum of Agreement in exchange for the City’s written clarification of Article 49.

· Please check one of the following:

__X__ This legislation has financial implications.

Notes:  City Light’s share of the transformer/breaker costs (a $135,000 capacity payment in 2005, plus $6,800 [estimated] for CIP-related labor and travel costs during 2005) required pursuant to the Boundary Transformer Agreement and 2005 Memorandum of Agreement are already included in City Light’s 2005 CIP.   A restriction on spending funds for this Boundary transformer project within the City Light Generation CIP Budget Control Level appropriation was lifted pursuant to Ordinance No. 122764, passed in March 2005.  Subsequent negotiations between the City, District, and Bonneville have resulted in a substantial reduction in the funding requirements that were approved via Ordinance 122764, but have delayed installation of the transformer by several years while negotiations were in progress.  The parties are currently expecting the transformer to become energized in the third quarter of 2009.  Between 2006 and 2009, City Light staff will be involved in reviewing Bonneville’s project plan and design specifications and coordinating with the District and Bonneville on the project schedule.  During construction in 2009, City Light staff will also be involved in on-site inspections to ensure proper installation and interconnection to the City’s Boundary Tap Line. 

Under the agreement reached with the District, between August 2005 and the date of energization of the transformer in 2009, City Light will financially settle its encroachment compensation obligation to the District by paying the District the market-equivalent value of the encroachment compensation energy.  These monthly settlements will be funded from the adopted Purchased Power budget and will save City Light the (unbudgeted) transmission expense it would otherwise incur by wheeling energy from the Seattle system to the District via Bonneville.  After 2009, City Light will have no further responsibility for material or operation and maintenance costs related to the Boundary transformer, nor will the City be required to pay for the use of the transmission path provided by the transformer installation.  Together the three Boundary agreements are expected to save City Light a substantial amount in its future transmission costs at Boundary.

· What is the financial cost of not implementing the legislation?  Should the City Council choose not to authorize execution of these agreements, City Light will be required to arrange other means to compute and deliver encroachment compensation and wheel Boundary Project output in excess of 1023 MW.  Overall, a decision not to pass would be expected to cost the Utility about $4.2 million (NPV 2005 – 2036; 2005 dollars; 3% discount rate).  In contrast, the execution of these three agreements by City Light is expected to yield a positive NPV of about $4.4 million (NPV 2005 – 2036; 2005 dollars; 3% discount rate).

· What are the possible alternatives to the legislation that could achieve the same or similar objectives?

1.   Negotiate and sign an alternative encroachment delivery agreement.  City Light has an ongoing, long-term obligation to compensate the District for Boundary Project’s encroachment on the Box Canyon Dam.  If City Light does not execute the Tailwater Encroachment Compensation Delivery Agreement, it will need to negotiate an alternative arrangement for computation and delivery of encroachment compensation.  The alternative agreement may be similar to the proposed Exhibit A, but may not include all of the same provisions favorable to City Light.  For example, the District may not agree to a simplified method for calculating the encroachment compensation, which is expected to provide administrative savings to City Light by eliminating the need for maintenance of a FORTRAN program and collection and storage of several complex data variables required by the 1970 methodology.

2.   Don’t sign the Boundary Transformer Agreement and make other transmission arrangements for encroachment. Due to significant benefits that would be created as a result of the Boundary Transformer development (transmission cost savings and enhanced system reliability), the District and Bonneville will likely proceed with the installation even if the City declines to participate.  If City Light does not execute the Boundary Transformer Agreement, then City Light will have no right to use the Boundary transformer or the transmission path to the District’s system that is created by installation of this transformer.  City Light would most likely need to use Bonneville’s transmission grid to wheel encroachment compensation to the District at a cost of about $181,000 per year (including losses).  City Light would also miss out on opportunities to make incremental power sales to the PUD via the transmission path created by the Boundary transformer installation.  Using the Boundary transformer transmission path, new power sales opportunities with the District are thought to be likely where a transmission cost component can be avoided.  Power Management staff has estimated the value of such new power sales to the District at about $570,000 over the term of a new Boundary license (NPV 2005 – 2036; 2005 dollars; 3% discount rate).

3.   Don’t sign the 2005 Memorandum of Agreement and make other arrangement to wheel Boundary power in excess of 1023 MW.  Without the 2005 Memorandum of Agreement, City Light will need to buy additional transmission capacity when Boundary project output exceeds 1023 MW, which is the limit of City Light’s transmission demand at Boundary Substation under its current Point-to-Point Service Agreement with Bonneville.  Power Management staff has estimated the cost of this incremental (non-firm) transmission at about $23,000 per year.  Also, without providing the District the Article 49 interpretation clarification that it requested, City Light may incur some legal costs, since the District could be expected to refer the issue to the FERC for resolution.  The City’s legal costs associated with a case at FERC regarding this issue have been estimated at $20,000 annually through 2011 (the earliest date that we could expect the next license for Boundary Project to be issued). 

· Is the legislation subject to public hearing requirements:  No, but the legislation will be discussed in public session of the Energy and Environmental Policy Committee.

· Other Issues:  None