City Council Agenda Report
Meeting Date: June 18, 2024
From: Todd Dusenberry, General Manager of Public Utilities Department: Public Utilities
Submitted by: Adriana Ramos, Management Analyst
Subject
VPU Capacity Reservation Agreement Template
Recommendation
A. Approve the VPU Capacity Reservation Agreement template, in substantially the same form as submitted, for use with eligible Vernon Public Utilities customers; B. Authorize the City Administrator or the City Administrator’s designee, to execute the VPU Capacity Reservation Agreements; and
C. Approve and authorize the General Manager of Public Utilities or the General Manager of Public Utilities’ designee to make project-specific modifications to the VPU Capacity Reservation Agreement template and/or the Capacity Reservation Charge, if such modifications are needed in response to unforeseen business or economic conditions.
Background
As Vernon Public Utilities (VPU) staff works to support the business and economic development of significant power users (defined as power users between 3.5 and 99 megawatts (MW)), VPU has learned that project developers seeking prospective tenants for a project to occupy a developer’s project are being asked to provide more specific electric reliability and electric capacity guarantees beyond VPU’s traditional “Will Serve” letter. VPU’s “Will Serve” letter is substantially similar to those issued by most publicly-owned and investor-owned utilities; it states that the service address and project site fall within the utility’s service territory and that the utility can provide electric, water, natural gas, and fiber services. However, electricity-dependent types of project developments, such as data centers, clean hydrogen, and electric charging depots, have had past experiences with utilities nationwide where the local utility provided a “Will Serve” letter but was unable to actually deliver the requested electric capacity upon the project’s completion. Such inability to deliver power after providing a “Will Serve” letter has resulted in project developers putting at risk millions of dollars invested in developing such sites.
To reduce this risk, developers are seeking a legally binding agreement to provide over to their financial committees, potential investors, and prospective tenants with an assurance that VPU’s electric capacity is not only available but can be delivered on the agreed-upon date and terms and dedicated to a specific project site.
To meet the need for a legally binding agreement, VPU has developed a contractual mechanism by which VPU will commit to dedicate a certain amount of electric capacity to the developer’s specific project site, in exchange for a per-MW Capacity Reservation Charge. Such a contract will be offered on a voluntary basis to those project developers that meet certain criteria, find they need more assurance of electric capacity than VPU’s “Will Serve” letter, and are willing to pay for such additional assurance.
Specifically, the VPU Capacity Reservation Agreement, once executed, provides that VPU will guarantee, for one year (which reservation can be renewed on an annual basis for up to a total of three (3) or up to a total of five (5) years, depending on the number of MW to be reserved), the availability of the requested MWs of electrical capacity to serve the developer’s project in exchange for payment of a Capacity Reservation Charge by the owner/developer.
To determine the appropriate per-MW Capacity Reservation Charge, VPU engaged the services of NewGen Strategies & Solutions, LLC (NewGen). NewGen has a comprehensive understanding of VPU’s electric load, revenue requirements, and cost structure, as well as access to the same financial and operational information on surrounding publicly-owned and investor-owned utilities. On April 4, 2023, the City Council approved a Services Agreement with NewGen to conduct a new Electric Cost of Service Analysis and Rate Design Study (Study). This analysis was deemed the best strategic approach to determine the appropriate rates and services to address stakeholder needs and ensure that only the costs to operate the utility are built into VPU’s rates. Conducting this type of Study is an industry best practice. The per-MW Capacity Reservation Charge was established by categorizing VPU’s costs based on production, transmission, distribution, and customer functions. Once costs were functionalized according to these categories, they were classified as fixed or variable costs. Production and transmission fixed costs, along with summary electric demand were then used to calculate a per-MW Capacity Reservation Charge.
Under the VPU Capacity Reservation Agreement template, a developer can “reserve” a certain amount of capacity (in MW) per year for up to three years for projects requiring 3.5MW to 10MW of electric capacity, and up to five years for projects requiring from 11MW to 99MW of electric capacity. The per-MW Capacity Reservation Charge to be used in the VPU Capacity Reservation Agreement template will be reviewed by VPU at least annually to determine if a modification to the per-MW Capacity Reservation Charge would be appropriate; however, a VPU customer who has executed a VPU Capacity Reservation Agreement will be assessed the per-MW Capacity Reservation Charge set forth in their specific contract, including for any authorized renewals.
Staff recommends that the City Council approve the VPU Capacity Reservation Agreement template for use with eligible VPU customers and authorize the General Manager of Public Utilities or the General Manager of Public Utilities’ designee, to execute the VPU Capacity Reservation Agreements and grant authority to make project-specific modifications to the Capacity Reservation Agreement template, if such modifications are needed in response to unforeseen business or economic conditions.
The VPU Capacity Reservation Agreement template has been reviewed and approved as to form by the City Attorney's Office, and any future modifications of the template would be subject to City Attorney approval as to form.
Fiscal Impact
There is no fiscal impact associated with this report.
Attachments
1. VPU Capacity Reservation Agreement Template