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Paper Trail Exposes Conflict

PUD, Calpine engaged in high-stakes class over transmission line.

With last week's news that Calpine Corp. is slowing construction of the Goldendale Energy Center plant, it appears possible that the Klickitat Public Utility District could be exposed to a serious financial risk.

Last summer, the PUD signed a deal to build a transmission line and provide point-to-point transmission services from the Goldendale Energy plant (known as the E.E. Clouse Substation), to the Harvalum Substation near the Goldendale Aluminum plant and John Day Dam.

However, a series of letters between KPUD and Calpine shows there is a serious controversy over which party is responsible for getting the final easement -- across Goldendale Aluminum Co. land -- required to complete the transmission line.

Calpine owns the plant itself, which has an operating capacity of 248 megawatts and is designed to be fired by natural gas. The PUD owns the transmission line.

According to the PUD, the transmission line project potentially represents an $8.4 million risk for PUD ratepayers. However, PUD officials say a bank letter of credit from Calpine protects the PUD in the event of a default or breach of contract.

Calpine contends it is the PUD that has so far failed to do its part in getting the easement across property owned by Goldendale Aluminum.

PUD officials, on the other hand, state that Calpine is responsible to get the easement agreement.

The letters tell the tale:

July 27, 2001. From Brian Skeahan, general manager, Klickitat Public Utility District, to Peter Blood, director of marketing and transmission at Calpine: "I am writing to confirm the understanding of PUD No. 1 and the Calpine Corporation ... KPUD agreed to construct the E.E. Clouse Substation and the transmission line. On July 24, 2001, Mr. Robert Moore of Calpine asked KPUD to proceed with construction and award bids for procurement of materials and constriction services, notwithstanding two unresolved issues. The first issue is acquisition of the remaining easement necessary for the transmission line. This easement is currently planned to cross property controlled by Brett Wilcox, president of Goldendale Aluminum Co. Calpine and Goldendale Energy acquired all other easements necessary for the transmission line ... if KPUD attempts to take the easement by condemnation, its authority to do so might be challenged. A challenge to use of KPUD's condemnation authority could substantially delay completion's of the transmission line beyond Jan. 22, 2002, the date by which KPUD agreed to use its best efforts to complete the line ..."

Dec. 3, 2001. From Rob Lamkin, vice president, Goldendale Energy, Inc., to Brian Skeahan of KPUD: "By now, I'm certain you have heard about the financial troubles of Enron Corp. and its subsidiary, NEPCO (NEPCO is the general contractor for the Goldendale project) ... First and foremost, Calpine Corp. and our wholly-owned subsidiary Goldendale Energy, Inc., remain financially sound ... Calpine has no net exposure to Enron or its subsidiaries. Of particular interest to you and your constituents, I'm sure, is the future of the Goldendale Energy Center. Calpine remains committed to bringing the project on line this summer. We have terminated the construction contract with NEPCO, have assumed management of the project, and intend to move forward to complete construction ..."

Jan. 24, 2002. From KPUD's Brian Skeahan to Debra Olson, regional counsel for Calpine: "Public Utility District No. 1 of Klickitat County needs an easement across land owned by Goldendale Aluminum Co. to complete the transmission line between KPUD's E.E. Clouse Substation and BPA's Harvalum Substation. KPUD is aware that the easement has been the subject of discussions between GAC and Calpine, and KPUD understands that these discussions have not produced an agreement for the easement. KPUD urges GAC and Calpine to use a mediator to assist in resolving the remaining differences ... If the mediation is not successful, KPUD expects to consider condemnation proceedings to secure the easement ... In the event of a final, non-appealable decision that KPUD lacks authority to condemn the easement, 1) Calpine will be unable to operate its Goldendale energy facility; 2) KPUD will have fully complied with its obligations under the generation interconnection agreement and transmission agreement with Goldendale Energy, Inc.; 3) KPUD will be able to draw on the letter of credit for recovery of amounts owing under the transmission agreement ..."

Jan. 28, 2002. From Rob Lamkin of Goldendale Energy to Brian Skeahan: "We agree that the PUD has a contractual obligation both to complete construction of its transmission line and to provide transmission services to Goldendale Energy Inc. Therefore KPUD must obtain the easement from Goldendale Aluminum Co. to complete its transmission line. Notwithstanding the fact that KPUD has the ultimate responsibility to obtain that easement, GEI has over the past eight months attempted to assist KPUD in obtaining the easement through discussions with GAC. However, GAC continues to refuse GEI's attempts to obtain the remaining easement for KPUD. At this point, KPUD must proceed forward to obtain the easement which it needs to complete its transmission line ... Contrary to the statements in your letter, please be aware that if KPUD does not complete its transmission line and provide transmission services, KPUD will not have fulfilled its obligations under the generation interconnection agreement and the transmission agreement, and KPUD will neither be entitled to payment from GEI nor to draw on the letter of credit ..."

Feb. 2, 2002. Brian Skeahan to Rob Lamkin: "My letter of Jan. 24 urged GEI (or Calpine, if Calpine is responsible for the Goldendale Generating Facility) to engage in mediation ... with GAC. GAC did accept the offer of mediation ... However, Calpine's lack of willingness to do so gives credence to those who would suggest that Calpine has not made a sincere effort to reach an agreement with GAC. Your letter of Jan. 28 rejected the services of a mediator to resolve remaining differences between GEI and GAC ... KPUD recently learned that work on the Goldendale Generating Facility has been suspended, perhaps for at least one year. Please advise the KPUD Commissioners as to how and why such suspension should affect their consideration of a resolution to initiate eminent domain proceedings for the GAC easement. Please also advise as to why Calpine has requested KPUD to proceed with condemnation, while at the same time construction on the plant appears to have been suspended."

After reviewing the letters and other documentation, a former PUD employee said he believed the contract process the PUD followed was flawed.

Mike Wellman, who worked for the Klickitat Public Utility District as water-wastewater manager for four years in the late 1990s, said the PUD had taken a big risk.

"The Jan. 28 letter basically says, `you haven't completed the transmission line, so you won't get paid,'" Wellman said. "First you get the easements, and then you proceed. (PUD Commissioner) Randy Knowles told me if I had brought a project like this to him when I was water manager, he would have fired me."

Knowles said the contract snag was not necessarily a problem.

"There is some discrepancy of interpretation," Knowles said. "We're obligated to provide our best effort to secure the easement. They say we're required to provide the easement. If power prices were higher, these problems would go by the wayside."

Wellman said the contract did not protect the PUD.

"The PUD should have never indebted ratepayers based on potential goodwill from someone," Wellman said. "The deal was not properly tied down. Knowing they didn't have the (transmission line) easement, the PUD allowed Calpine to talk them into issuing construction contracts for transmission facilities, just hoping for the best. Sure, the PUD went in with the best intentions. But in order to be paid you have to do the work, just like with any contract."

"We have a number of options yet," Knowles responded. "Everybody fights, spits and stews, but at the end of the day the PUD owns the transmission line and the easement that is there, and the only way for them to get energy out of a plant worth between $300 million and $400 million is to use the transmission line. I like the position we're sitting in."

Knowles estimated the plant is between 60 percent and 70 percent complete.

"Somebody will pick up the plant. Whether they pick it up six months or a year from now, I'm not uncomfortable with us bearing the cost of that line," Knowles explained. "But even if the plant went away, the line would have some value. At this point, it's much ado about nothing. We sold bonds and there could be an impact to ratepayers, but the likelihood of the plant not being completed is small at this point. If it carried over for a number of years, it would probably have some impact. Today I'm not worried."

Wellman said he was concerned the power plant would never operate.

"Calpine can say they can't complete the project because the PUD hasn't provided infrastructure," Wellman pointed out. "The PUD is considering a condemnation procedure, but the problem is the PUD may not have the authority because it's a line for private use, not a public line. You can't necessarily condemn for private use even if a public utility owns it."

Knowles said the easement question was a legitimate one, but he expressed confidence the issue would be resolved soon with no negative impact to the PUD.

"I wish we didn't have exposure on the easement," Knowles said. "We (the PUD Board) frankly didn't think we had exposure. But these are complex agreements, and it's a matter of resolving the issue. There are lots of players and big dollars involved. It wasn't a matter of, gee, we were all in a hurry. There is never a perfect contract. Should this have been caught? Yes. But our attorney said this is what you agreed to. Just because they say we agreed to something else doesn't make it so."

Wellman said he talked about the project with Knowles.

"Randy was concerned," Wellman said. "He figured the PUD would be paid sooner or later, but it shouldn't be a guess. When you put out this much money, you should know exactly when you'll get paid. The time to get easements is before you indebt yourself. Anybody knows that. Here's what I question: Why did our utility indebt itself in this fashion to build this line for a private entity and put ratepayers at risk?"

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