Friday, June 3, 2011

Council authorizes participation in proposed AMP Ohio natural gas fired power plant and settlement of expenses for cancelled AMPGS coal fired plant in Meigs County

Contract represents $52 to $62 million, 35-year take-or-pay power purchase contract for 60 MW share of a 675 MW natural gas combined cycle generation plant.


UPDATE -- June 20th, 2011 -- Council voted and approved the 60 MW share participation in the AMP Fremont Energy Center project.  The vote was 15 to 2 with Councilmen Michael Polensek and Jeffery Johnson voting against.  Council met for two additional hours this morning to discuss the project for the third time in hearings, and then a vote was held at 12:00 noon.

A major part of the deal also handles $12 million
 in stranded costs assigned to Cleveland Public Power (CPP) that is attributed to the failed AMP Generating Station (coal) project.  Of the total $12 million, $4 million is being eliminated or pick-ed-up by  non-AMP participants share in the AFEC project; $4 million will be paid as part of the power contract over a 15-year period, and $4 million will be paid out of CPP's operating expenses and will have an impact of increasing rates to CPP customers by $4.00 per year.  But, the 60 MW, 35-year power purchase contract will eventually replace existing short-term (1-2 year) contracts which are typically far higher in price that what the estimated price is for power under this new contract, and the net effect is anticipated to save rate payers money.

UPDATE -- June 16th, 2011 -- Cleveland City Council will be holding a Special Finance Committee & Public Utilities Committee meeting on Monday, June 20th, 9:00 am, 601 Lakeside Avenue, Room 217, immediately followed by a special City Council Meeting where a vote is expected on Ord. 680-11.

CPP & AMP have provided additional information that was requested by Council and more information will be reviewed tomorrow as well.  I'll try updating this post again over the weekend leading up to Monday's meeting and vote.  Overall, it's been disappointing to have received the legislation just a week prior to going into our legislative break.  The opportunity to participate in a natural gas power plant appears to have some great benefits, but the 60MW participation amount represents approximately 16-20% of CPP's total power purchases and I'm uncertain of the risks that come with entering into a 35 year contract for this one source of power.

Here is some of the additional information we received:


UPDATE -- June 6th, 2011 -- Cleveland City Council has decided not to hear or vote on the legislation today and American Public Power has confirmed their actions to seek an extension of the AMP Participants deadline to confirm inclusion in the AFEC (from June 15th to June 30th), as well as seek an extension for the closing of the Purchase Agreement with First Energy (from July 1st to July 15th).

PUBLIC NOTICE:  Cleveland City Council will hold a public hearing to discuss Ord. No. 680-11 on Monday, June 13th at 1:00 pm, Mercedes Cotner Committee Room 217, 601 Lakeside Avenue.

On Wednesday, June 1st Cleveland City Council’s Public Utilities Committee heard legislation that would authorize participation in the proposed AMP Ohio Fremont Energy Center (AFEC) natural gas combined cycle generation plant and settlement of expenses for the cancelled AMPGS coal fired plant in Meigs County.

The authorization would allow Cleveland Public Power (CPP) to enter into a 35 year contract to purchase power from the plant as well as allow CPP to pay and settle its’ share of development costs for the unsuccessful AMPGS coal fired plant.

The authorization represents a contract for a 60 Megawatt (MW) share of the total 675 MW project, or a relative percentage (8.75%) value of the cost of the purchase of the AFEC, which equals:  $675.1 million total project costs, for an amount of $150 million for the City of Cleveland’s share taking into account the 35-year power contract.  An additional 25% "step-up" provision could increase The City’s subscription (from 60 to 75 MW) and the cost exposure to $200 million.

The power purchase contract would also provide a discount to AMP participants that agree to a share in the new proposed gas fire plant.  The total stranded costs of the AMPGS coal fired plant have been reported as $119 million.  Cleveland’s share, according to AMP is $12.4 million. 

AMP’s Board approved applying $34 million of the total cost of development of the AMPGS project to the AFEC project.  The application of these fund balances has been stated to reflect development costs that can be applied to the new project based on work performed and related to the identified need and development of an intermediate and base load supply of power that was initially identified as a goal by AMP participants in 2002.

If Cleveland participates in the new project at a level of 60 MW, the $12.4 million stranded cost would be reduced to $7.5 million.  Of the $7.5 million balance, CPP would be able to apply half the amount. $3.75 million to a 15-year payment term for power purchased from the AFEC project and the remaining $3.75 million would be paid out of CPP’s operating fund.

Cleveland Public Power is an Enterprise Fund and a Division of the City of Cleveland that was created in 1906.  CPP serves approximately 77,000 customers in an area bounded by the Cleveland City limits and is the largest municipal electric system in Ohio and 37th largest in the U.S.

The City of Cleveland, through Cleveland Public Power is a member of American Municipal Power, Inc. (AMP).  AMP is a non-profit wholesale power supplier and services provider for 128 member municipal electric systems in six states (OH, PA, MI, VI, KY, WV) with a combined base of more than 570,000 customers.  AMP was formed in 1971 and is headquartered in Columbus, Ohio.  There are more than 240 employees at AMP headquarters and their generating facilities. A 19-member Board of Trustees, comprised of member communities, governs the organization.

STATUS --  At the conclusion of the Public Utilities Committee on Wednesday, June 1st, the legislation was held and will be heard in a Committee of the Whole of Council on Monday June 6th.  A vote is expected at the 7:00 pm Council meeting the same day.

Council's Public Utilities Committee developed a list of follow-up questions that are being responded to currently.  The list is provided below.

Major concerns regarding the legislation is first and foremost the short period of time Council has been provided to review and vote on the contract.  AMP entered into a purchase agreement with First Energy for the AFEC on March 11th.  The subscription period began on March 15th and is scheduled to end June 15th.  The current closing date for the agreement with First Energy is July 1st

There are discussions to request that AMP exercise an option within the agreement to extend the closing date to July 15th in which case Cleveland City Council would be able to deliberate for an additional three or more weeks and potentially engage an energy consultant to assist in a review of the proposed project. 

The agreement calls for an option of extending the closing date to September 30th, but there are provisions for $125,000 per-day penalty payments if the agreement is not reached and is terminated after the July 15th date.  AMP’s Board of Trustees must approve any closing date extension requests.

Other major issues that are being considered are the amount of the requested subscription (60 MW) and the 20% share this would represent of CPP’s energy portfolio.  Clearly a combined cycle natural gas power generating plant is generally recognized as preferable to coal technology, but there are concerns such as gas availability, price stability and the calculations to cost estimate the power over a 35-year contract. 

In addition, although the participation in the plant could assist CPP in gaining ground on its relative competitive pricing with First Energy, there are concerns for locking-in 20% of our power needs to natural gas when significant changes could occur over the length of the 35-year commitment.

Cleveland City Council’s Public Utilities Committee Questions and Concerns raised after the
June 1st 2011 Committee hearing –

1.        Provide the complete listing of all long-term contracts CPP has for the purchase of power.
2.        Provide information on other comparable natural gas power generation facilities to compare construction costs and cost of power, which CPP will be purchasing.
3.        Provide copy of or sufficient data of CPP consultants report assessing proposed contract with AMP (per Ordinance 680-11) as best choice for CPP purchase of long-term power.
4.        Provide copy of AMP Board approval or Resolution authorizing fee arrangement of “stranded” costs.
5.        Provide ordinance in which consultant contract was authorized for the review and assessment of the proposed AMP contract per Ordinance 680-11
6.        Provide copy of the Asset Purchase Agreement (see slide #26 from PowerPoint), as well as any other documentation pertaining to CPP/City of Cleveland's power purchase contract.

AMPGS - Stranded Costs

7.        Provide an accounting of the total $119 million stranded costs for AMPGS
8.        Did all participants take a percentage share of the costs based on shares of power?
9.        Provide a chart of accounts showing the participants and their shares of the stranded costs
10.    Provide the resolution and any documentation for the rational and decision by the AMPGS participants for the vote to add $34 million of the costs to the AFEC.
11.     What is the current interest rate on the APM line of credit for the $119 million?
12.     What will be the payment terms to the City of Cleveland for the $12,396,426 stranded costs if we do not participate in the AFEC.
13.     What are the legal position, or guarantees regarding the $119 million and the outcome of the litigation with Bechtel Power?  i.e., if there is a settlement, or a judgment what can the City of Cleveland/CPP expect to receive or possibly pay in addition to the $12,396,426 costs that have been identified?
14.     What other assets remain of the $119 million stranded costs?  Does the $119 million include land acquisition costs in Meigs County?  Any other significant assets?  What happens when the assets are disposed of, sold?  What is the estimated value of any such assets?

AMP Fremont Energy Center (AFEC)

15.     Provide a copy of the AMP/FirstEnergy Asset Purchase Agreement
16.     Provide a copy of the AMP Participant’s Subscription Package
17.     Request more time for due diligence on this project and seek the extension to July 15th.
18.     What would be required to seek additional time beyond July 15th?
19.     What contingencies, if any, are allowed if CPP would want to exit our participation from the AFEC at time during the 35-year take-or-pay contract?  Can we sell our share to another AMP Ohio participant?  To a non-AMP participant?
20.     Who would be operating the plant?  What are the anticipated O&M annual costs?
21.     It was stated by CPP that the power from this one source would make up approximately 20% of our share of power needs.  How does this percentage compare to our current ratio of fuel sources in our Integrated Resource Plan?
22.     What analysis has been done to confirm the value and negotiated purchase price of the AFEC?  What documentation and analysis does AMP have to justify the purchase price of $485 million, which represents an amount of $231 million above what FirstEnergy paid for the plant ($253.6 million) out Calpine Corp’s bankruptcy proceedings in January 2008.

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