Wednesday, February 27, 2002
By BRIAN SKEAHAN
Recent events associated with the Goldendale combustion turbine, including Calpine's request that the PUD initiate condemnation against Goldendale Aluminum to complete the transmission line, has generated questions regarding the PUD's involvement in the project.
KPUD initially became involved in construction of a substation and transmission line for the Calpine/GEI combustion turbine (CT) project when the project was envisioned to be built by NESCO (the original developer), and the power sold to Goldendale Aluminum. KPUD was well aware of the importance of the aluminum plant to the local economy, and the need to have the Goldendale CT project be part of the aluminum plant's power supply solution.
A study performed by the Mid-Columbia Economic Development District indicated that the unemployment rate in Klickitat County could reach as high as 30 percent if the GAC plant closed its doors for good. Goldendale Aluminum and the then developer of the project, NESCO, were struggling to make the finances of the project allow an affordable power supply for Goldendale Aluminum. Through our ability to finance the substation portion of the project with tax-exempt bonds, the PUD could reduce interest cost and make the private financing of the generation facilities more feasible.
Reliability for KPUD customers also played a large part in our decision to go forward with this transmission project. We expanded the scope of the original project to provide KPUD with an alternate feed from BPA's HarvAlum Substation into the Goldendale area, which encompasses 66 percent of KPUD's service territory and 50 percent of our customers. With the completion of this project, KPUD would feed this area from a much more secure source. The substation and transmission line also fit in well with KPUD's plans to expand the H.W. Hill methane gas generation facility, accommodate growing electrical loads in the county, and provide infrastructure for potential future generation projects.
Our involvement also brings financial benefits to PUD customers. Under our contracts, GEI has agreed to pay costs associated with the transmission and substation facilities, including the direct principal and interest to pay the bonds issued, payment for operation and maintenance of the line, and an administrative overhead payment. It is this last payment that provides benefits to other PUD customers. Revenues from outside the PUD service territory are, to an extent, paying for costs that previously fell entirely on the PUD's traditional customers ...
When Calpine purchased the project, things began to change. Calpine asked the PUD if it was willing to opt out of the agreement between NESCO and the PUD which provided for the PUD's ownership of the substation and transmission line. The PUD declined this offer, believing the original agreement was in the best interest of the PUD customers. Calpine then asked to change the financial protections the PUD received in the original contract. Again, the PUD declined ...
As the transmission line neared completion, issues arose regarding the last property easement needed for connecting the transmission line to the HarvAlum Substation.
KPUD requested that Calpine and GAC enter into mediation on a good faith basis in an attempt to resolve these easement issues to complete the project. While GAC agreed to do so, Calpine refused the PUD's request to enter into mediation.
The PUD Board of Commissioners then began to take preliminary action toward condemnation of the property.
If I had to do this over again, there is no doubt I would still do the deal. Klickitat PUD's main objectives in our decision to move forward with the Calpine/GEI substation and transmission facilities was based largely on doing what we could to help secure an affordable power supply for what is overwhelmingly Klickitat County's largest employer, while at the same time improving infrastructure and power reliability for our other customers. We carefully considered the financial benefits and risks to our customers and made sure these were covered in a firm contract outlining GEI's financial responsibilities to KPUD ...
Is there a chance that if Calpine experiences financial difficulties they may not make the payments provided in the contract? I suppose so. Is there a chance that they may try to stop the bank from honoring the letter of credit? I suppose so ... I expect the easement matter will be worked out, the project will be completed by Calpine or another developer, and the power will be sold to Goldendale Aluminum, or another purchaser, and that everybody will abide by their agreements. But even if the whole deal collapses, worst case scenario, and we are somehow precluded from drawing on the letter of credit, and had to raise rates to pay the bonds used to build the substation and transmission line, the rate impact would be in the range of six to seven percent or so. Would that be good? No. But it's not that bad either. Our rates would still be pretty darn good.
I believe it is important that people understand that it is deals like this that have allowed us to keep our rate increase to 10 percent when most other utilities went up 25 percent, 35 percent or more during this time of energy price upheavals. Each of these projects has had their own set of unique risks. It has been our willingness to accept, and our ability to manage, these risks that have allowed us to keep our rate increase to 10 percent. The PUD can't deliver the benefits from these types of projects without accepting the associated risks.
The real question is, would the PUD Board, given what they know today, make the same decision? Based on my conversations with them, I believe they would.
Brian Skeahan is general manager of the Klickitat Public Utility District.