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4.1. ERMUSR 09-15-2010 Elk River Municipal Utilities 13069 Orono Parkway • P.O. Box 430 Elk River, MN 55330-0430 UTILITIES COMMISSION MEETING ~.i. Phone: 763.441.2020 Fax: 763.441.8099 TO: FROM: Elk River Municipal Utilities Commission Troy Adams, P.E. -Director of Operations John Dietz, Chair Jerry Gumphrey, Vice Chair Dar 1 Thom son, Trustee MEETING DATE: AGENDA ITEM NUMBER: Se tember 15, 2010 4.1 SUBJECT: Power Su ly O tions /Resource Plannin U date BACKGROUND: In September 2008, Connexus Energy terminated the 10-year rolling "all requirements" power contract with Elk River Municipal Utilities. In April 2010, the Utilities Commission authorized entering into "Phase 1" of a resource planning study with a coalition which includes Central Minnesota Municipal Power Agency (CMMPA) as a participant. DISCUSSION: Since the presentation of sensitivity assessment and portfolio options that CMMPA gave to the coalition participants on August 4`~' in Elk River, CMMPA staff has been working on some specifically requested sensitivity analysis and finalizing the Phase 1 analysis into an executive summary. Attached for your review is the hard copy of the power point presentation of the executive summary for Phase 1 that will be presented at the commission meeting. Phase 2 of the Resource Planning Coalition analysis is scheduled to begin September 16th and finish in mid April, 2011. This second phase covers the Request for Proposal (RFP) and the evaluations of the RFP submittals. For Elk River Municipal Utilities, the Phase 2 cost allocation would be $19,444.44. The results of Phase 2 may show a need for additional portfolio risk analysis prior to signing of any power contracts. This additional work would be defined as Phase 26. The need for Phase 26 would be determined by collective decision by the coalition committee. The projected allocation of Phase 2b costs for Elk River Municipal Utilities is $8,334. ACTION REQUESTED: Staff recommends approval to execute the Resource Planning Coalition Participation Agreement Attachment 2 -Phase 2 and proceeding into the RFP stage of the resource planning. DRAFT Attachment 2 To the Resource Planning Coalition Participation Agreement dated May 1, 2010 Phase 2 Proposed Scope, Time Schedule, Estimated Costs and Proposed Allocation of Costs Between the Participants Phase 2 - Reauest For Proposal (RFPI Phase Work Scope: Phase 2 will consist of the following four major work activities: Task 3: Prepare RFP Documents A. Description of Coalition Participants i. Type of utility, service and customer characteristics, projected load growth ii. Existing power supply (generating resources, purchase power contracts and future need) iii. Location of each Participant (geography, balancing authority, ISO, load zone/nodes) B. Description of Coalition future power supply need i. Quality of Base load/Intermediate/Peaking need (capacity and energy) ii. Desired form of service (generation unit, Utilities Plus, partial requirements service) iii. Desired term of service iv. Transmission and Balancing Authority service requirements v. Point(s) of delivery vi. Preferred contraM terms/arrangements C. Description of RFP minimum filing requirements and standard forms i. Minimum bidder qualifications ii. Request for Qualifications (RFQ) iii. Credit requirements and/or financial security requirements iv. Identify desired contract terms and conditions v. Standardized quantity and pricing submittal forms D. Formal evaluation manual Deliverables: RFP document and forms, logging system, evaluation manual (if required), credit risk assessment (if required). Page 1 of 10 Attachment 2 to the Resource Planning Coalition Participation Agreement dated May 1, 2010 Task 4: Issue RFP A. Notice and solicitation of bidder interest 8. Pre-bid meeting or conference call C. Response to bidder questions D. Monitor and document communications and bidder submittals Deliverables: Issue RFP, monitor submittals and respond to bidder questions Task 5: Evaluate Pricing of Existing Participant Power Supply Arrangements A. Projected quality and term of existing supply sources B. Projected incremental capital costs C. Projected variable production costs D. Adjustment for embedded Balancing Authority/transmission services in existing arrangement E. Compute and benchmark average demand and energy pricing for existing arrangements Deliverables: Projected Full Requirements/Partial Requirements pricing for existing suppliers Task 6: Evaluate RFP Submittals (Screening and Detailed RFP Evaluation) A. Log submittals and bidder correspondence B. Review submittals for minimum filing requirements C. Screen and rank for qualitative considerations D. Bus-bar economic screening analysis E. Identify short-listed proposals F. Select finalists for portfolio analysis G. Basic sensitivity analysis on short-list. It is intended to be complemented with a more rigorous Portfolio Risk Analvsis -Phase 2 B H. Evaluation of individual Participant portfolios I. Solicit final pricing and terms from short-listed bidders J. Comparison of Participant portfolio to current power supply arrangements Deliverables: Results of short screening, results of final proposals, results of Participant portfolio analysis and results of cost comparison to current power supply arrangements. Please see proposed Portfolio Risk Analysis details below. Time Schedule for Completion of Phase 2: Page 2 of 10 Attachment 2 to the Resource Planning Coalition Participation Agreement dated May 1, 2010 Assuming a September 15, 2010 start date, the completion date of Phase 2 is estimated to be April 15, 2011. Estimated Costs: Total cost, including both RW Beck's and CMMPA's labor, is estimated to be $250,000 with an approved Portfolio Risk Analysis (PRA), and $175,000 if a PRA does not prove necessary. Cost Allocation Method: Participants in Phase 2 agree to allocate costs as follows (pending the outcome of the initial screening): Allocation Participant Cost for Approval Cost for Budgeting Costs to ee Approved Later 1/9 th Elk River $19,444 $27,778 $8,334 1/9 th Dahlberg Companies $19,444 $27,778 $8,334 1/9 th Willmar $19,444 $27,778 $8,334 2/9 the UMMPA $38,889 $55,556 $16,667 2/9 the CMMPA $38,889 $55,556 $16,667 2/9 the Nashwauk $38,889 $55,556 $16,667 TOTAL $175,000 $250,000 $75,000 Note: Even though the Dahlberg Companies consists of three separate and distinct companies, they are treated as one group for the purpose of this Coalition. Phase 2 B -Portfolio Risk Analysis At this time, the coalition participants are only authorizing the Phase 2 effort. However, it is envisioned and expected that participants will consider a Portfolio Risk Analysis (PRA) to be a necessary part of the evaluation, and will budget accordingly. While a basic sensitivity analysis will in any case be part of Phase 2's portfolio evaluation, a PRA will provide a more rigorous, comprehensive, and clear answer regarding how to balance minimizing cost and minimizing risk in our RFP Recommendation portfolio. Page 3 of 10 Attachment 2 to the Resource Planning Coalition Participation Agreement dated May 1, 2010 A PRA would use probabilistic methods which allow for more detailed and complete analysis than simple sensitivities. It would use portfolio diversification strategies which balance the risk exposure to carbon, gas, and market price risk. A PRA would precisely determine what the cost premium should be to reduce exposure to high and extreme portfolio prices, as well as provide "tiebreakers' between portfolios that would appear closely comparable without a risk analysis. A PRA would provide market intelligence useful for evaluating all resources (including wind), updates to Phase I forecasts, and possibly could consider non-fuel and non-emissions risks such as capital cost risk. Non-physical means of risk reduction (such as changes to the structure of gas supply contracts) would also be analyzed, so that we might verify whether an apparently risky proposal had another means of reducing risk or cost. A possible PRA is being treated differently from the other stages because it may not prove to be necessary. That is, a qualitative screening of RFP responses may find a relatively limited number of viable candidate portfolio proposals. This outcome is not expected, so if a PRA is budgeted but not approved at the start of Phase 2 and it later is determined that it is not necessary, no funds will have changed hands and budgets may be reduced accordingly. Approval can be delayed until after a qualitative screening confirms that a PRA is necessary. This qualitative screening is expected to be complete on December 15, 2010. The referenced Phase 2 B -Portfolio Risk Analysis is therefore not approved as part of this agreement. It is intended that there will be a colleMive decision to approve Phase 2 B. An Attachment 2 B will be developed to define its scope, deliverables, and funding, and will be approved separately. Approval of the PRA and any change in the cost allocation will require consensus approval. The estimated additional cost for such an analysis is tentatively expected to be $75,000, and the group envisions that a cost allocation similar to Phase 1 and Phase 2 would be used in Phase 2 B. (Signatures to follow.] Page 4 of 10 Attachment 2 to the Resource Planning Coalition Participation Agreement dated May 1, 2010 Resource Planning Coalition Participant signature approving the Phase 2 terms identified in Attachment 2. Elk River Municipal Utilities (ERMU) By: Name Title: Troy Adams, P.E. Director of Operations Date: Page 5 of l0 Executive Summary of Phase I Results for Elk River Phase I was designed to plan for long-term uncertainty in the electric power sector, specifically variations in the price of natural gas and the state of carbon regulation. Portfolios were designed both to minimize wholesale cost and to minimize the risk associated with uncertain economic and policy variables. After each participant's overall needs were determined, each was given a unique outline as to how each portfolio should minimize cost, and then a basic idea of how to diversify to reduce their risks. Your main study findines were as follows: Build long-term plans around these ideas: (i) There will be carbon regulation in the long-run. It will most affect coal resources. (2) Carbon emissions will have a highly uncertain price attached to them. (3) Coal and diesel fuel costs should increase at roughly the rate of inflation. (4) Natural gas prices should increase slightly faster than inflation, but will also be very uncertain. (5) A future with wholesale costs over $100 in today's dollars is very possible with high gas and/or carbon prices. Reducing that risk is a priority. This means that your best portfolio should look something like this: (1) Base load: Keep your existing landfill gas resource for your use after 2022. (2) Bose load: Get about35 MW hydro. (3) Intermediate load: Get 30-40 MW of combined cycle capacity. (4) Peaking load: Get new CT (20 MW). (5) Peaking load: Keep existing diesels (10.6 MW), and consider adding new diesel capacity (20 MW). These can be arranged in various contract structures. Portfolio choice is very sensitive to assumptions for base and intermediate load. A $1 difference in gas prices or a $5 difference in carbon prices will completely change which type of base load resource is best for you and how much you should buy of it. Consider as an example our expected future: Gas costs $7/million btu, there is carbon regulation, and carbon costs $30/ton. What's our best choice of base load and intermediate load resources if the future's different? (1) If we're correct: See the above "best" portfolio. Hydro is a great option if you expect gas to cost $7 or more and carbon to cost $30 or more. (2) If gas is $1 cheaper: Choose 65 MW of combined cycle instead. Why? If you expect gas prices to be roughly $S or less, gas' fuel cost is low enough that your best option is to obtain all base load and intermediate needs from combined cycle resources. (3) If carbon is $10 cheaper: Choose 35 MW of coal and 35 MW of combined cycle capacity. Why? Coal is a good base load resource choice if you expect gas prices to be $7 or more and carbon prices to be low ($20 or less). This is why risk assessments are a necessary part of any rigorous analysis. Portfolios should consider mixing combined cycle, coal, and hydro purchases to offset the risks to base load of high carbon and gas prices. Hydro generation should be considered in particular for its ability to lessen the pain of combined high fuel and carbon prices. The same is true of nuclear. Economy energy is a good resource option for (1) Avoiding the fixed costs for some combined-cycle capacity, (2) Reducing expensive off-peak base load purchases; (3) Reducing the operation of expensive intermediate and peaking gas-fired resources. There will always be capacity and energy needs for local diesel generators, even if the EPA's NESHAP requirements require retrofits. Each commission should begin planning for the cost of these. satisfy your renewable standards by buying and selling all your wind energy needs (and obtaining reliable replacement energy) through the market. You should therefore not use wind for dependable energy and capacity needs like you would your usual sources (such as fossil fuels or hydro). This would also mean that the problem of how to meet renewable standards is separate from how to build our best portfolios of resources, and that issues associated with renewable energy can be handled either as a group or individually. Participant input is required to (1) Determine the degree of comfort with long-term risk; (2) Approve Phase 2 for an RFP and the choice of specific resource portfolio options.