BPU recommends new pact with Energy Dept.

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County > Electric coordination agreement passes by 3-2 vote

By Arin McKenna

After more than five years of contentious negotiations, the Department of Public Utilities and the Department of Energy have reached consensus on renewing the Electric Coordination Agreement. The current contract ends June 30, 2015.
County negotiators were unable to budge DOE on the key change they were asking for: the ability to earn a profit on county assets.
Since the agreement was first signed in 1985, it has been a cost-sharing arrangement, with DOE using approximately 80 percent of the energy and paying that percentage of the costs. Debt service for county-owned generating facilities has been included in those costs.
The county’s goal was to begin charging a fee to recover the remaining value of its assets when the debt on those assets is paid off on June 30, 2015. Los Alamos National Laboratory would still have realized significant savings, since debt service payments have averaged $6 million a year and the proposed fee would have been $2 million a year, the amount of profit DPU believes it can get on the open market.
An agreement to that effect was reached in 2010, but National Nuclear Safety Administration (NNSA) procurement ruled that profit could not be allowed in a reimbursement type contract.
The county has been negotiating ever since to find a mechanism that would allow it to recover the economic value of its assets, such as including a management fee. NNSA refused every alternative option.
“We think there are any number of provisions that could have been included in the contract that would have allowed us to get where we wanted to go. I think they just did not want to pay more than cost,” DPU Manager John Arrowsmith said.
Comments from DOE and the lab were unavailable at press time.
One of NNSA’s arguments was that because the payments on the debt service have been included in their share of the costs, they should have use of those resources.
“And our position’s been is that it’s more like you’ve been paying rent for 30 years. It doesn’t mean you get to own the apartment,” Arrowsmith said.
Negotiations became so gridlocked that in the Fall of 2013 the parties discussed allowing the contract to expire. DPU heard that DOE was considering going out to bid for power through the Western Area Power Administration.
The county could then have bid for the contract (a profit margin would be acceptable in that arrangement), or sought out other entities to sell its excess power to. The county has, in fact, been researching other options for sale of that power output.
The agreement finally reached makes one change in favor of the county. It allows the county, with 18 months notice, to remove a county-owned asset from the pool. The county must provide replacement power for LANL, but the cost of that is part of the pool and shared pro-rata.
“The reason we think it’s an OK deal to do is because it provides the security of having 80-percent of the costs paid while we market these facilities to someone who would be willing to pay us a profit,” Arrowsmith said.
“And there might be the potential for us to do a win/win, where we could market some of these resources and diversify the power that the laboratory has. So if we can sell some of the coal resources to another utility, we could potentially replace it with gas resource for the laboratory. And that reduces the carbon footprint for both our community and the laboratory.”
Deputy Utilities Manager for Finance and Administration Robert Westervelt is unhappy with one provision, which he will be working to change. The contract is for five years, with an option for five one-year renewals. Either party can opt out of those extended renewals with just 90-days notice.
“That’s a standard clause in DOE contracts for standard off-the-shelf products. It’s not really appropriate for large power production facilities,” Westervelt said.
“That clause is unpalatable to the DOE as well. If we told them 90 days before the end of the contract that we weren’t going to give them power anymore, they would have a very hard time operating the lab without a source for their power.”
The Board of Public Utilities was not happy with the agreement in general.
“If I had to give this contract a grade, I guess I would give it a ‘C,’” Chair Timothy Neal said.
Westervelt defended the agreement, saying, “In three and a half years of negotiating we have not reached consensus at all until we came up with this concept and this path forward. And I think it’s a good path forward.”
Vice Chair Chris Ortega asked if it would not be better to let the agreement end and join the competitive bidding.
“In my opinion, the risk there is that we are then obligated to provide them power whether we have units to produce it with or not. And I just think it’s a larger risk than is acceptable for a community of this size, with a rate-base of this size, to have that obligation to provide them power at a set fee that we would have to establish,” said Westervelt.
According to Westervelt, it is extremely difficult to project future prices, and the county would be at risk if the costs of providing power rose above the rate established in the contract. And unless a contract could be negotiated on a “unit contingent” basis, there would also be a risk if one of the county’s generating sources failed to produce, for example, if hydro power production decreased due to drought conditions.
Under the current agreement, DOE pays a share of whatever the costs of production are.
Arrowsmith also noted that the power market is poor right now, due to the slow economy and the low cost of natural gas.
However, he does believe that DPU can be competitive in the power market, since the county’s costs of producing power will be below market rate once the debt is paid off.
Ortega was also concerned about the need to provide replacement power for LANL if the county sold its assets elsewhere.
“That could roll over to our ratepayers at a higher cost. We don’t want to use up our perceived profit by buying more expensive power to replace it,” Ortega said. “We want the profit to benefit the county and the county ratepayers. We don’t want it to benefit them.”
Arrowsmith believes that since the DOE would be paying nearly 80 percent of any additional cost, the county should be able to negotiate agreements to sell power to other entities that would net a profit.
The board voted to recommend the agreement by a 3−2 vote, with Ortega and Neal voting against the motion.
The Electric Coordination Agreement comes to council for approval on April 4.