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4.4. SR 08-17-1998ity of River TO: FROM: DATE: SUBJECT: Item #4.4. MEMORANDUM Mayor & City Council Pat Klaers, City Administrator August 17, 1998 Utilities Commission Update Councilmember John Dietz is our city representative on the Elk River Municipal Utilities Commission. At this August 17, 1998, City Council meeting, John is scheduled to provide the Council with an update on July and August Utilities activities. Attached for your review are the draft minutes from the August 11, 1998, Utilities Commission meeting. Also attached with these minutes is the background material for Item 5.2., the gas turbine project proposal. This partnership with UPA involves the city issuing municipal bonds for an approximately $15 million substation. A great deal of additional work is needed to determine the financial feasibility of the project. Additionally, this proposal requires legal consultation on some of the assumptions that have been made. This proposal may be the topic of a special joint meeting between the Commission and City Council. The next regular Commission meeting is scheduled for Tuesday, September 15, 1998, at 4:00 p.m. at the Utilities office. 13065 Orono Parkway · P.O. Box 490 · Elk River, MN 55330 · TDD & Phone: (612) 441-7420 · Fax: (612) 441-7425 ELK RIVER MUNICIPAL UTILITIES REGULAR MEETING OF THE ELK RIVER UTILITIES COMMISSION HELD AT THE ELK RIVER MUNICIPAL UTILITIES OFFICE August 11, 1998 Members Present: President, George Zabee; Vice Chair, James Tralle; Trustee, John Dietz Staff Present: Bryan Adams, General Manager; Glenn Sundeen, Line Superintendent; Robert McCartney, Water Superintendent; Patricia Hemza, Office Manager Others Present: Hank Duitsman, Mayor; Larry Lawson, North Star Die Casting 1. Call meeting to order at 4:00 P.M.. August 11. 1998 2. Consider Utilities Agenda Bryan Adams offered three additions to the 8-11-98 Agenda, to be discussed under other business, and to move 6.1 to the first discussion item. George Zabee offered one addition to the 8-11-98 Agenda, to be discussed under other business. James Tralle moved to approve the Utilities Agenda, with the additions to Other Business. John Dietz seconded the motion. Motion carried 3-0. 3. Consider Consent Aeenda After discussion of the Check Register and Financials, James Tralle moved to approve the Consent Agenda as follows: 7-14-98 Minutes July Check Register Financials John Dietz requested an analysis of health benefits to the employees of the ERMU. George Zabee requests the numbering of the financials. 6.1 Review Billing complaint with North Star Die Castinl~ Larry Lawson appeared before the Commission to request forgiveness of late payment penalties. The Commission reviewed the billing and payment history with Mr. Lawson and discussion followed. James Tralle moved to have the penalties remain on the account of North Star Die Casting. John Dietz seconded the motion. Motion carried 3-0. Staff is directed to mail future North Star Die Casting as Certified Mail. Page 2 Regular meeting of the Elk River Municipal Utilities Commission August 11, 1998 5.1 Review issues for UPA/AEC Power Supply Contract The history of our purchased power billings was discussed, with input from Hank Duitsman, who is a former ERMU Commissioner. The pros and cons of contracting with UPA, as a possible non-voting member, instead of contracting with Anoka Electric Coop were further discussed. It is the concensus of the ERMU Commission that becoming a non-voting member of United Power would be the most desirable option. Staff was directed to pursue negotiations with UPA/AEC. 5.2 Review Proposed Gas Turbine Project The Letter of Intent from UPA regarding the proposed gas turbine project was discussed, along with the ramifications of such a project. The amount of bonding is a concern, regarding the effect it might have on.the City bonding costs. Commission is in favor of pursuing the idea of the addition of electrical generation, and has directed Bryan Adams to go to the City Council, as a first step and secondly to sign the Letter of Intent with UPA. 5.3 Review and consider Final Contract for Landfill Gas Generation with Power Strategies The revised version of the Agreement for the Sale of Power between ERMU and RECO Ventures, has been reviewed by legal counsel and was presented to the Commission. James Tralle moved to execute the document, with any minor work revisions. John Dietz seconded the motion. Motion carried 3-0. 5.4 Review and consider information for Disinfecting Water Distribution System Statistical information regarding Water Distribution System from the Minnesota Department of Health, and an article from TIME magazine, titled "Anatomy of an Outbreak" were presented to the Commission. Discussion of the necessity of the program followed with attention to the details and timing of such a project. George Zabee continues to voice his disapproval of the venture. Recommendation for proceeding with the Disinfecting of the Water Distribution System at the time water and sewer is on line in the Eastern Area Development was given by Bryan Adams. Page 3 Regular meeting of the Elk River Municipal Utilities Commission August 11, 1998 James Tralle moved to proceed with Disinfecting the Water Distribution System when the Eastern Area Development comes on line. John Dietz seconded the motion. Motion carried 2-1. George Zabee voting nae for the reason, that he does not deem the project to be necessary. 5.5 Up-date Water projects and projected bond issue Cash flow for major capital projects in 1998 and 1999 for the Water Department were reviewed. The largest expenditures will be the Well #6 project and the Freeport Water Tower painting project. Budgetary planning indicates the financing of the Well #6 be done with bonds. James Tralle moved to bond for the entire Well #6 facility. John Dietz seconded the motion. Motion carried 3-0. 6.2 Review changes to Employee Handbook Up-dates regarding 27. EMPLOYEE CLOTHING, 15. SICK LEAVE and the addition of 30. REPORT OF PERSONNEL CHANGES were discussed. It is understood that the changes in no way reflect any action directed toward any individuals; it only clarifies policies that are in place. James Tralle moved to approve the changes to the Employee Handbook. John Dietz seconded the motion. Motion carried 3-0. Other Business George Zabee reported on a discussion he had with Joe Pallansch, who is a Contractual Engineer for the ERMU. Joe Pallansch has requested that he be allowed to speak at a future Utility meeting or to meet with each Commissioner at another time. The concensus was to allow Joe Pallansch ten minutes at the next Utility meeting. Bryan Adams and Robert McCartney up-dated the Commission on the progress being made regarding Well #6. The City of Monticello has contacted the ERMU regarding a possible purchase of a booster station. The station is situated in Lafayette Woods and is no longer being used. James Tralle moved to authorize Bryan Adams to pursue the possible sale of the booster station to the City of Monticello. John Dietz seconded the motion. Motion carried 3-0. Page 4 Regular meeting of the Elk River Municipal Utilities August 11, 1998 At the 5-19-97 ERMU meeting, a 40' wide side lot easement recommendation for water mains was adopted. At this time there has been requests to change the requirement to 20'. The dangers of this approval were weighed against the advantages to development. Bryan Adams reluctantly recommends a 20' easement be allowed if polyethylene pipe is used. James Tralle moved to allow 20' wide side lot easements, only if polyethylene pipe is used. John Dietz seconded the motion. Motion carried 3-0. With no other business to discuss, James Tralle moved to adjourn the August 11, 1998 meeting of the Elk River Utilities Commission. John Dietz seconded the motion. Motion carried 3-0. The August 11, 1998 regular meeting of the Elk River Utilities Commission adjourned at 5:55 P.M. The next scheduled meeting of the Elk River Municipal Utilities Commission will be September 15, 1998 at 4:00 P.M. The meeting date was changed from the second Tuesday, to allow the approval of Well #6 bids, which will be let on September 10, 1998. Respectfully submitted, Patricia Hemza Office Manager ELK RIVER MUNICIPAL UTILITIES 322 King Avenue Elk River, Minnesota 55330 Phone (612) 441-2020 Fax (612) 441-8099 To: Elk River Municipal Utilities Commission George Zabee John Dietz Jim Tralle July 28, 1998 From: Bryan C. Adams Subject: Electric Generation Capacity UPA is in the process of studying the addition of electric generation facilities in our area due to load growth and increased system reliability. I have suggested to UPA that ERMU build this generation in the form of more diesels at our power plant or a gas turbine at one of our substations. Staff is becoming increasingly concerned with generation and transmission capabilities in the MAPP area. In case of a system wide failure, it is desirable to have generation capabilities in Elk River large enough to carry Elk River's electric load. These items we discussed at our July 9, 1998 Commission meeting. The results of our July meeting was to proceed with upgrading our power plant substation and continue to pursue adding generation capacity with UPA. Attached for your review is a letter from UPA exploring our interest in participating in a gas turbine generation project. ERMU owns the land around our West Substation complex. See the attached map. This land is zoned light industrial and is sufficient in size to support this facility. Northern Natural Gas' transmission pipeline and UPA's 69 Kv transmission lines are both directly adjacent to this property, which is critical to a project of this nature. This proposed project has the potential of solving some of my concerns for ERMU. As staff has stated earlier, there is little question that we will experience an electric transmission/generation failure due to wholesale wheeling and lack of adequately sized transmission/generation facilities. Appropriately sized electric generation on our systems solves this issue. This proposed project gives ERMU the opportunity to resolve our 10 year rolling all requirements power purchase contract with AEC/UPA. This proposed project also allows us to make a small margin on the order of approximately $250,000~ year, (shared savings from Property Tax deletion). This will go a long way in helping to reduce our electric rates. The pros and cons for this type of project are as follows: PROS CONS 1) Secure source of Power in case of system failure 2) Opportunity for $250,000 ± annual margin 3) Opportunity to resolve AEC/UPA Power Contract 4) Good Cooperative effort between Coop and Municipal 5) No added personnel required 1) Large debt ($15,000,000 ± ) 2) ERMU responsible if UPA defaults (minimal risk) From my prospective, this appears to be a win-win situation. Both ERMU and UPA (soon to be Great River Energy) benefit. I have discussed this project with ERMU staff, City of Elk River staff, Ron Black (ERMU attorney), Bob McDiarmid (VVashington D.C. FERC attorney), David MacGillivary (City of Elk River bond advisor), and Minnegasco Gas supplier and there appears to be no concerns that cannot be overcome. We would desire to have this facility on line by next summer for the summer peak. Minnesota Pollution Control Agency (MPCA)will probably drive the schedule with the required air quality permit. With the information we currently have, I support this project. UPA in the meantime is drafting a letter of intent. There are a number of gas turbine generating facilities in the area we can visit, although, it is older technology. UPA is securing brochures and photos of recently built facilities. If you have any questions, please feel free to call. This will be on the September agenda. cc: Pat Hemza Glenn Sundeen Bob McCartney Pat Klaers II United Power Association P.O. 8ox800 · Elk River, MN55330-0800 . (612) 441-3121 July 16, 1998 Bryan Adams, P.E. General Manager Elk River Municipal Utilities 322 King Avenue Elk River, MN 55330 Dear Bryan: As we have discussed, United Power Association (UPA) is interested in exploring the construction of a combustion turbine (CT) peaking facility on a site owned by the City of Elk River. We have considered your suggestion of siting it at the Elk River Municipal Utility (ERMU) West Substation and have determined that our 69 kV transmission line can support 40 to 50 MW without major modifications to our line or your substation. Conceptually, we could install a 40-45 MW CT west of the substation on City land, run the generator leads to a 13.8 kV to 69 kV step-up transformer in the substation and then tap into the 69 kV line. This provides peaking capacity near load centers and provides ERMU with significantly greater system reliability. UPA would acquire the capacity and energy via a long- term lease with the City. UPA would also provide operations and maintenance services. With City ownership, the project would not be subject to personal property tax and could be financed with municipal bonds. Preliminary estimates indicate the total cost to install the plant on your site, including gas line, oil storage tank, transformer, and all auxiliary equipment, would be roughly $15 million. While this is substantially higher than the unit cost of the larger units we plan on installing elsewhere, the benefits of no property tax and Iow-cost financing could make this an economical peaking resource. If ,-c~**~, is still ,.,,~,-o~,.-.,4 in "'" ~-',',-~""'~"" ' " ~., ....... , .......... -u ..... ,.,,,~ a peaking facility, we request that the ¢-, t,, determine the annual debt service cost for municipal financing $15 million for a 20 to 30-year term. We could then get together to discuss the annual lease payments. We look forward to finding a means to make this work for both of us. Please call me at 241-2300 if you have any questions. Sincerely, ]~~CIATION Manager, Generation Development fc: Tony Rude Gordy Westerlind A Touchstone Energy' Partner DRAFT August 5, 1998 Bryan C. Adams, P.E. General Manager Elk River Municipal Utilities 322 King Avenue Elk River, MN 55330 Subject: Letter on Intent for Peaking Facility Dear Mr. Adams: This is intended to serve as a non-binding letter of intent between Elk River Municipal Utilities (City) and United Power Association (UPA) outlining our general agreement to jointly develop and operate a combustion turbine for peaking and reliability purposes within the City of Elk River. For agreement purposes, we are assuming that one gas turbine would be constructed which would have a firm capacity of approximately.35 to 45 megawatts. The estimated total construction cost is roughly $15 million. It is understood that the precise capacity, design and cost would be determined through the design development phase. The City has identified a site that it owns adjacent to the Elk River Municipal Substation near Proctor Road for location of this peaking plant. Based on these assumptions, the following outlines the key elements of the agreement: The City would be responsible for financing, owning and insuring the turbines and other related facilities. UPA would agree to enter into a guaranteed capacity lease agreement based on annual payments as set forth in Exhibit A. The annual lease payments shall be made in equal monthly installments with the first payment due 30 days following successful acceptance testing of the unit. The City and UPA would jointly develop the design and specifications the turbine facility and related elements, with each party having the right to review and approve the final plans. City of Elk River Peaking Project Page 2 o UPA would be designated by the City as its agent for the actual construction. The City would be responsible to reimburse UPA upon receipt of invoice for all project costs incurred. UPA at its expense would be responsible for and provide operations and maintenance, fuel, electric transmission service and accreditation through MAPP. 6. UPA at its expense would be responsible for providing dispatch services. The City reserves the right to use the turbine as emergency backup if the transmission system or substation is down. Further, the City would have the right to utilize the turbine when not in use by UPA. For hours utilized by the City, the City would be responsible for fuel and any transmission payments, if any, and its proportionate share of operation and maintenance costs. It is anticipated by the parties that, since the facility will be owned by the City, no property taxes would occur. If property tax laws change, the City would be responsible for all property taxes for the term of the lease. 10. It is anticipated that the facility will be operational on or before May 1, 2000. 11. UPA will take the lead in obtaining all required permits and the City will assist from a "lobbying" perspective or supporting role. Based on these general terms and conditions, the next step would be to proceed in the development of a full lease agreement. This agreement is intended to be a non-binding letter of intent that will be used by the parties as the basis of a formal agreement. Further it is understood that the final agreement will require the approvals of the UPA board of directors along with the Elk River Utilities Commission and the Elk River City Council. Elk River Municipal Utilities United Power Association Bryan Adams General Manager Tony Rude General Manager & Executive VP Enclosure: Exhibit A- Lease Payment Computation (later)