City Council September 17, 2018 Item 16 AUTHORIZE UTILIZATION OF THE STRANDED INVESTMENT RESERVE TO OFFSET THE STRANDED COSTS ASSOCIATED WITH INTERMOUNTAIN POWER PLANT AND MAGNOLIA POWER PLANTS City Council September 17, 2018 Item 16

Recommendation Find that the utilization of the Stranded Investment Reserve (“SIR”) to offset the stranded costs associated with Intermountain Power Plant (“IPP”) and Magnolia Power Plant (“Magnolia”) projects is exempt from California Environmental Quality Act (“CEQA”) pursuant to State CEQA Guidelines Section 1506(b)(3)(General Rule). Authorize the withdrawal of $7 million per year beginning FY 2019 through FY 2022 from the SIR and the deposit of the funds into the Energy Services Charge Reserve to offset the stranded costs associated with the IPP and Magnolia projects.

Background Stranded Investment Reserve (SIR) Established in September 1996 Funded from 1996 to 2001 Mitigate future exposure of above market cost of energy from generation-related assets and contracted obligations Maintain PWP’s competitiveness Use of SIR limited to offsetting “Stranded Investment” (“SI”) associated with generation-related assets and contracted obligations

SIR Utilization Plan (Plan) The City Council approved the Plan in November 2006 Directed use of $145 million in SIR balance as follows: Direct Defeasance: $80 million to offset debt service requirements – IPP bonds from FY 2008 to FY 2023; Contingent Mitigation: retain $50 million in the SIR to mitigate future SI; and “Refund” Excess Funds: transfer $15 million from the SIR into the Energy Services Charge Reserve to offset potential energy rate increases in FY 2007 and FY 2008

Major Sources of Stranded Investment – Last 3 years IPP and Magnolia Projects FY 2015 FY 2016 FY 2017 Total IPP SI* ($5,889,380) ($9,746,325) ($6,165,481) ($21,801,186) Magnolia SI** ($2,500,685)  ($1,960,104) ($1,744,445) ($6,205,233)  Total ($8,390,064) ($11,706,429) ($7,909,926) ($28,006,419) *IPP project Stranded Investment is the market value of energy produced from IPP plus the market value of the capacity utilized to meet “Resource Adequacy” requirements plus defeasance credit received from IPA less the fixed and variable costs billed to PWP for its share of IPP **Magnolia Power Project (Magnolia) Stranded Investment is the market value of energy produced from Magnolia plus the market value of the capacity utilized to meet “Resource Adequacy” capacity requirements less the fixed and variable costs billed to PWP for its share of Magnolia

Proposed Withdrawals from the SIR Recommendation based on future estimated stranded investments for IPP and Magnolia Fiscal Year SIR Withdrawal SIR Balance Actual FY 2018 $0 $69,000,000 Proposed FY 2019 $7,000,000 $62,000,000 FY 2020 $55,310,000 FY 2021 $48,586,550 FY 2022 $41,829,630 Actual transfers may change depending on periodic review of generating assets and long term contacts vs. market conditions.

Retail Electric Rate Benefits of SIR Plan A typical residential customer using 500 KWh per month will avoid potential increase of about $3 per month between FY 2019 and 2022

MSC Actions On August 28, 2018, MSC approved staff recommendation and: Directed staff to present updates on the SIR to the Municipal Services Committee and the City Council on an annual basis or more frequently as may be necessary Requested that staff determine whether SIR funds could be used for the removal of decommissioned local generating plants Staff has determined that P.M.C. Section 13.04.175 does not allow for the use of SIR Funds for the removal of decommissioned local generating units such as Broadway units 1, 2 and 3

Recommendation Find that the utilization of the SIR to offset the stranded costs associated with the IPP and Magnolia projects is exempt from California Environmental Quality Act (“CEQA”) pursuant to State CEQA Guidelines Section 1506(b)(3)(General Rule) Authorize the withdrawal of $7 million per year beginning FY 2019 through FY 2022 from the SIR and the deposit of the funds into the Energy Services Charge Reserve to offset the stranded costs associated with the IPP and Magnolia projects

Projected PCA Balance

Plan Implementation January 2009 – Completed economic defeasance of $80 million of outstanding bonds related to IPP January 2008 – transferred $13 million (annual defeasance benefit for FY 2007 and FY 2008) to the Energy Services Charge Reserve PWP has received $66.3 million from IPA to date Additional $27.4 million projected through 2023 Retained $50 million in the SIR Offset future stranded costs and debt Transferred $15 million to the Energy Services Charge Reserve $10 million in February 2007 and $5 million in September 2007 Reduced energy rates by about 0.6 cents/KWh on average between January 2007 - June 2008 SIR Fund balance as of June 30, 2018 is $69 million

Projected SIR Fund Balance SIR Balance as of June 30, 2018 $ 69 million Plus: Estimated Interest Earnings and Unrealized Market Gain/Losses $ 1 million Less: Transfers Planned for FY 2019 through FY 2022 ($7 million per year for 4 years) $ 28 million Projected Balance – June 30, 2022 $ 42 million Staff is in the process of addressing and resolving all recommendations noted above. Summary responses to the recommendations and actions taken are covered on Slide #s 7 & 8

SIR Funding Sources Balance as of June 30, 2001 = Approx. 160.5 Million SIR Sources of Funding As of June 30, 2001