HomeMy WebLinkAbout09/03/1991, C-11 - PURCHASE OF HYDROELECTRIC FACILITY AT THE CITY'S WATER TREATMENT PLANT IIIN�IgIII�uIIIIIIIII II'=ullllulll MEETING DATE:
cityof san tins QgIspQ September 3, 199
COUNCIL AGENDA REPORT ITEM NUMB �/
FROM: William T. Hetland
Utilities Director
SUBJECT: Purchase of Hydroelectric Facility at the City's Water Treatment Plant
CAO RECOMMENDATION:
By motion, authorize staff to negotiate an agreement with Energy Partners in
the amount of $168,000 for the purchase of the 130 KW hydroelectric facility;
and approve the transfer of previously appropriated funds in the amount of
$168,000 from Groundwater Development Phase III to fund the purchase.
BACKGROUND
Staff recommends the purchase of the 130KW hydroelectric facilities at the Water
Treatment Plant for the price of $168,000, the amount negotiated to include the costs
of the City's contractual obligation, the value of the physical hydro plant and
settlement of any claims. This amount is consistent with the independent value
analysis performed by Black and Veatch, the City's Engineering Consultant.
In April 1985, the City entered into a contract with Energy Partners Corporation for
installation of a small 130 kw hydroelectric facility located at our Water Treatment
Plant. The contract allows Energy Partners to run City water from the Salinas and
Whale Rock Reservoirs through their hydroelectric plant. The power generated is
sold to P.G. & E. The City receives a small percentage of the payment as royalty.
This facility has been operational off and on since 1986. The plant has been
marginally successful in generating power and meeting the financial requirements of
the developer. Over the past years, the drought has contributed to reduced revenues.
Energy Partners will have to refinance the hydro facilities on August 31, 1991 and are
very interested in selling the facilities to the City.
The Energy Partner's contract has given the operations staff some difficulty in
coordinating the maintenance and operational needs of the Water Treatment Plant.
These problems were compounded when the City would switch from taking water
from the Salinas Reservoir to the Whale Rock Reservoir. City staff bypassed the
hydroelectric unit because it was causing the City to pump at higher pressures to get
the water into the treatment plant, resulting in increased electrical costs.
Subsequently, a claim was filed by Energy Partners for lost revenues when the City
shut down the Salinas Reservoir and refused to run Whale Rock water through the
turbine. Energy Partner's claim was for $34,000. The City's consultant estimated it
would have cost over $80,000 in increased electric costs to pump water through the
hydroelectric unit. The original claim was rejected because it was not submitted
within the required time limits.
city of San - IIS OBISPO
COUNCIL AGENDA REPORT
Purchase of Hydroelectric Facility
Page 2
The City's proposed expansion of the Water Treatment Plant will significantly revise
the current piping and, therefore, bypass the hydroelectric facility. When the
hydroelectric agreement was written, this expansion was not anticipated. As a result,
the contract terms do not allow the City to unilaterally terminate the contract.
Therefore, the City has been negotiating with Energy Partners to purchase the hydro
facility and relieve the City of its contractual obligation to Energy Partners. Our
consultants have estimated the value of the contract based on the potential return to
the contract over the life of the contract. This analysis determined the value of the
remaining life of the contract could be from $130,000, if electrical costs are assumed
to be 3.5 cents per kilowatt, to $260,000, if electrical costs are assumed to be 7.0
cents per kilowatt.
The salvage value of the hydroelectric facilities is currently estimated at $30,000.
After a series of meetings, Energy Partners and the City have agreed to a price of
$168,000 to settle all issues with the hydroelectric unit.
FISCAL IMPACT
The purchase price of $168,000 will be taken from the Groundwater Development
Phase III project fund (050-9744-092-570). There is currently $2,262,700 in that
project account. Staff has not fully identified all of the costs of activities required in
the testing and treatment of the groundwater program, but based on the current
activities, it is believed we could allocate $168,000 from this program without
negatively impacting the program.
Until construction of the treatment plant expansion begins, the unit will generate a
small, undetermined amount of revenue.
CONCURRENCES
The City Attorney and Finance Director have reviewed this report and concur with
the recommendation.
ALTERNATIVES
The following are potential alternatives:
1. Direct staff to return to the negotiation table in an effort to obtain a better
price.
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COUNCIL AGENDA REPORT
Purchase of Hydroelectric Facility
Page 3
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2. Reject purchasing the hydroelectric unit, continue the contract and operation of
the facilities until such time as the City needs to remove the facilities for
construction of the treatment plant expansion.
Because of the reasons stated previously, staff does not feel these alternatives are
viable.
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