1980/02/1380-155
City Hall~ Anaheim~ California - COUNCIL MINUTES - February i3~ 1980~ 7:00 P.M.
The City Council of the City of Anaheim met in adjourned regular
session.
PRESENT:
ABSENT:
PRESENT:
ABSENT:
PRESENT:
COUNCIL MEMBERS: Overholt (entered 8:55 P.M.), Kaywood, Bay, Roth
and Seymour
COUNCIL MEMBERS: None
PUBLIC UTILITIES BOARD: Anderson, Townsend, Stanton, Haynie, White
and Kiefer
PUBLIC UTILITIES BOARD: Keesee
ASSISTANT CITY MANAGER: William T. Hopkins
CITY ATTORNEY: William P. Hopkins
CITY CLERK: Linda D. Roberts
PUBLIC UTILITIES GENERAL MANAGER: Gordon Hoyt
PUBLIC UTILITIES ASSISTANT GENERAL MANAGER: Edward G. Alario
Mayor Seymour called the adjourned regular meeting to order for
the purpose of meeting Jointly with the Public Utilities Board.
Acting Chairman Jim Townsend called the Public Utilities Board
to order, all members being present, with the exception of
Chairman Ken Keesee.
Mayor Seymour stated that it first would be appropriate to set the date and time
of the next meeting to discuss and subsequently finalize the language of the
question relative to participation in the Intermountain Power Project (IPP) as
it would appear on the ballot.
After a brief discussion between Council and staff, Tuesday, February 26, 1980,
at 7:30 P.M., was set as the date and time for the next joint meeting with the
Public Utilities Board to discuss ballot language regarding the IPP.
Public Utilities General Manager Gordon Hoyt outlined the agenda of the meeting
and named those who were present either to speak and/or to answer any questions:
Mr. Bob Ferdon, Mudge, Rose, Guthrie and Alexander, New York City Bond Counsel;
Mr. Frank Martin, Vice President, Goldman Sachs Company, financial consultant to
the Intermountain Power Agency; Mr. James H. Anthony, Project Engineer, Inter-
mountain Power Project, Department of Water and Power, Los Angeles; Mr. Winston H.
Peterson, Manager, Seattle office of R. W. Beck & Associates, Engineers and Con-
sultants; Mr. Ben Putnam, Vice President of Solomon Brothers, appointed as senior
underwriters to market the IPP bonds; Mr. Joe Fackrel, President of IPP and Chief
Executive Office of the Intermountain Power Agency (IPA); Mr. Reese Neilsen,
Chairman of the Board of Directors of IPA. Mr. Hoyt also introduced Mr. Dick
Singer, Electrical Engineer, Utilities Department, who was working on the project.
Mr. Hoyt then referred to the documents available for distribution: R.W. Beck
& Associates letter of January 31, 1980 with attachments Exhibit "A", page one
through five which was available at the last meeting; Retail Rate Comparison of
Electric Generating Utilities, Municipal versus Investor; Electric Rates, Elec-
tric Rate Comparison by M~nthly Bill, July 1978, 12 Southern California Cities
(two-sided); memorandum dated February 11, 1980 from Alan Watts, Special Counsel,
subject: Intermountain Power Project Contracts, giving firBt a brief background
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City Hmll~ Anaheim~ California - COUNCIL MINUTES - February 13, 1980, 7:00 P.M.
of the Project and then providing a short description of the contracts and other
documents involved, i.e., the Transfer Agreement, Power Sales Contract (PSC), Bond
Resolution, Construction Management and Operating Agreement--(all foregoing doc-
uments on file in the City Clerk's office).
Mr. Hoyt then introduced Mr. Ferdon whose presentation would be with regard to
the various Project Agreements (also see February 11, 1980 memorandum--Inter-
mountain Power Project Contracts from Alan Watts).
Mr. Bob Ferdon, Mudge, Rose, Guthrie and Alexander, New York City Bond Counsel,
spoke first on the main contract, the Power Sales Contract (PSC), which was the
object and purpose of the referendum and which contract would be signed by
Anaheim if the referendum was successful and if the Public Utilities Board
(PUB) and the Council approved the contract. He explained that the contract
would be between the City of Anaheim and the Intermountain Power Agency (IPA),
a political subdivision of the State of Utah, having the right and power to
issue bonds, the interest on which was tax exempt (see mintues January 1, 1980
and also Statement of Offer to Prospective Purchasers of Energy Output of IPP,
describing in detail the scope of the contract(s) - on file in the City Clerk's
office).
The IPA would have the responsibility under the PSC to build and finance the plant
by the issuance of tax exempt bonds, as well as to operate the plant. The PSC
provided that the Department of Water and Power of Los Angeles (DPWLA) be delegated
as Agent for purposes of the construction, management and operation of the plant.
The building and operating of the plant by IPA through its agent would be subject
to approval of budgets, contracts and other matters associated with the construction
and operation by a Coordinating Committee formed under the PSC. That committee
would be composed of representatives from the Utilities that would purchase
power from the plant. The committee would have weighted voting under the PSC
which he explained further. That weighted voting basically would be in accordance
with the participants generation entitlement shares and the plant. It would be
an 80% weighted vote.
Later in the meeting, Mayor Seymour asked Mr. Ferdon to elaborate on the 80% vote
of the Coordinating Committee required for action.
Mr. Ferdon first clarified that the committee was not a Board of Directors because
the IPA had such a board. It was more or less an operating committee and a
device to give the participants in the project who signed the take or pay contract
a certain voice in the concurrence of costs for the project and its operation.
The weighted voting reflected the varying interests and stakes that each one of
the participants had in the project, and the 80% was arrived at in the drafing of
the contract based on similar contracts in which utilities were joint owners of
a project. The idea was drawn from Joint ownership arrangements--that is, it
was a percentage felt to be adequate to assure that there was a great majority
in favor of an action to be taken by the committee.
Mayor Seymour asked then, with the percentage of interests by the various
utilities, did the 80% vote assure that a simple majority of the participants'
will would be expressed.
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City Hall~ Anaheim, California - COUNCIL MINUTES.- February 13~ 1980~ 7:00 P.M.
Mr. Ferdon answered, if there was only a simple majority of the participants
based on generation shares who were in favor of taking a certain action, that
action could not be approved by the coordinating committee. In other words,
if there was at least 50% of the participants in terms of generation shares
that were opposed, no action could be taken. There was one override in the
contract with regard to the actions that were required to be approved by the
Coordinating Committee. The IPA, so as to comply with the requirements of
law, permits and licenses having to do with the project and its bond covenants,
had the right to override actions taken or failed to be taken by the Coordinating
Committee which he then explained in more detail.
Mayor Seymour clarified his ques=ion further--he was interested to know, if 80%
represented a vote that could take an action, what was the numerical number of
participants to get to that 80%.
Mr. Ferdon explained that the Utah Municipal participants and the Utah Rural
Electric Cooperatives had a participation equal to 17%; therefore, that group
could not block action. The Utah Power and Light participation was 25%. Thus,
that vote could block. The California participants altogether had a participation
of 58% and obviously they could block an action. If they wanted to calculate a
combination among those, it could also be done that way. The motivation for all
participants, however, was to get power out at the lowest reasonable cost and since
that was the goal, there would be very few controversies.
Mr. Hoyt and Special Counsel Alan Watts then explained the make-up of the Coordin-
ating Committee; Mr. Ferdon also clarified further for the Mayor that the over-
riding provision could be used only if it was necessary so that the IPA could
comply with its bond covenants, conditions of license and permits of Utah law. i
They were not in a position to override for any frivolous reason. IPA had, as
its members, 23 municipalities in Utah. Each of those appointed a representative.
Representatives of IPA met once a year and elected a Board of Directors, for they
were staggered terms.
The Mayor then stated that, in essence, Utah controlled the Board of Directors;
Mr. Ferdon confirmed that the Utah cities controlled the Board of Directors.
Mr. Ferdon then continued that the bonds issued by the Agency to finance the
plant would be payable from the revenues derived from the PSC. They would be
issued by the IPA and would not constitute debts of any power purchaser. Anaheim
would be Just a power purchaser and not a principal or owner of the plant, and it
would not be viable for the bonds issued by the IPA to finance the plant.
The arrangement for the sale and purchase of the power was known as a participation-
type arrangement. The purchaser would be entitled to a certain percentage of the
electrical output of the power, for Anaheim, 10.225%. The purchaser would also be
entitled to a percentage use of the transmission system of the plant.
The commitment to pay for the power and transmission service would also be a
commitment that would be based on a percentage share of costs, which he explained.
There would also be a responsibility for cost sharing with regard to the trans-
mission system, dependent upon the entitlement. The payments for power were on
a cost-of-service basis only. There was no profit or mark-up involved.
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City Hall~ Anaheim, California - COUNCIL MINUTES - February 13~ 1980~ 7:00 P.M.
The payment of cost on a percentage share did not apply to the payment of energy
charges. The variable cost element was basically the cost of fuel. That cost
would be shared on the basis of the kw hours scheduled by the purchaser, as
opposed to those scheduled by all purchasers.
The billings that a purchaser would receive under the terms of the PSC would be
based on a budget prepared by the project agent, the Department of Water & Power
of Los Angeles, approved by the Coordinating Committee and incorporated by the
IPA in a budget which would also reflect the financing elements of the total cost.
Based on that budget, there would be billings of the percentage shares or the
fixed costs of the project. The energy cost would be billed on the basis of
actual fuel costs.
At the end of each year and as required under the PSC, an audit would be conducted
by a nationally recognized accounting firm. On the basis of that audit, actual
costs and actual usage, there would be a settlement of accounts between IPA
and each one of the purchasers which he explained further. At that time, there
would be an adjustment if necessary (i.e.--if there was an overpayment or under-
payment). The liability of each utility was a several liability and no utility
was liable for the faults of another utility. Payments under the contract were
required to be made by the purchasing utility whether or not power was available,
or whether service was disrupted for any reason.
The purchasing utility took the risk on the completion and operation of the plant,
rather than the bond buyers. That kind of contract with the take or pay provision
was a standard form of financing for projects of this type. The contract was so
designed in order to achieve the lowest borrowing rates with regard to the debt
provision of the project. The payments by the participants under the terms of
the Power Sales Contract would be made solely from electric revenues and payments
were restricted to the electric revenues of the City.
The contract contained a rate covenant. The City must agree to charge electric
rates for the services of its electric system sufficient to meet the payments
under the contract, as well as the underpayments and charges required to be paid
from its electric revenues.
The contract and the financing of the project were designed so as to avoid any
necessity for payments for power until service was received. Interest in the
bonds during the construction period would be capitalized, funded, set aside
and paid from the proceeds of the bonds. Ail operating costs and other costs
during the construction period would also be funded and paid from the proceeds
of the bonds.
The first payment of power costs under the Power Sales Contract was designed to
start when the first unit on the project commenced operation, presently assimilated
for 1986. The PSC provision dovetailed very closely with the project bond
resolutions adopted by the IPA. The debt service on the bonds would constitute
project costs--for purposes of payment of the power costs under the PSC, the debt
service of the generation plant, for instance, would be paid based on the gen-
eration entitlement share of 10.225% (Anaheim). That would be part of the cost
associated with the generation station---the same would apply to the transmission
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City Hall, Anaheim~ California - COUNCIL MINUTES - February 13, 1980, 7:00 P.M.
system. It was a closed-end bond resolution and nothing else was factored in.
The bonds would be issued as parity bonds.
The funds held under the bond resolution were held by a bond trustee, a large
bank. The construction funds were held by the bond trustee. The revenue funds
would be deposited directly into the fund held by the trustee. The debt service
funds were all held by the bond trustee and bonds would be net revenue bonds,
which he explained further. Any remaining revenues would be recirculated because
by definition, the revenues equaled cost. The rate covenant was a one-time rate
covenant. There were also special covenants under the bond resolution such as
limiting amendments to the PSC, because the PSC was the basic security for the
bonds. There were provisions requiring IPA to enforce all Power Sales Contracts
as well.
In concluding, Mr. Ferdon stated that the only other contract he had not covered
was the transfer contract which was merely an arrangement whereby the rights to
the project now held by IPP, the non-profit operation who conducted the studies
for the project, would be transferred to the LPA at the time of the first bond
issued. Out of the proceeds of the bonds, the IPA would reimburse IPP at cost
for expenditures thus far incurred by IPP in conducting the studies for the
project. At that time, all the rights and studies to the projects would be
required to be transferred to the IPA. IPP would then subsequently be liquidated,
the asset being the payments of cost for the studies which would then be reim-
bursed to the member, including Anaheim, who participated in the study effort.
Councilman Bay asked what risk bondholders would take.
Mr. Ferdon answered that the risk was associated primarily with non-payment by
a purchasing utility of its obligation under the PSC. If the purchasing utility
failed to pay, that could ultimately create a shortage in revenues which could
result in a non-payment of bonds. It was a rather remote condition because
there were reserves capitalized by the bond proceeds to which they would resort
to meet any deficiencies and the IPA was obligated to enforce the PSC.
Councilwoman Kaywood noted that Mr. Ferdon indicated take or pay contract was a
very successful vehicle. She wanted to know whether anyone had defaulted on
that type of contract.
Mr. Ferdon stated he was not aware that there had been any defaults, but he did
know there were cases pending in court presently where there was controversy
over the propriety of the charges, and the outcome of subject litigation could
affect the bondholder.
Mr. Jim Townsend, Public Utilities Board Member, asked, in the event one or more
of the purchasers were unable to meet their commitments, would that not affect
all other participants.
Mr. Ferdon answered, to some extent. As he explained, under the bond resolution,
there were reserves which would be funded originally from the proceeds of the
bond sale. The whole project was 100% debt, there was no equity involved and the
reserves compensated for that. In the event there was a shortage of revenues
80-160
City .Hal.l~ Anahei.m~ California - COUNCIL MINUTES - February 13~ 1980, 7:00 P.M.
if one of the utilities failed to pay, the first thing that would happen was that
the reserves would be pulled down to make up the payments. The bondholders and
the creditors would continue to be paid out of the reserves that had been funded
under the terms of the PSC. The deficiencies in those reserves had to be mare up as
a project cost. At the same time, IPA was required to take immediate steps to
enforce those payments, which he explained further, and the money would be
reimbursed when the amount was paid up. If the defaulting purchaser continued
in a prolonged default, there were provisions under the PSC whereby the power
and energy to which they would be entitled would be discontinued and sold by
the Project to others.
Mr. Ferdon then clarified for Mr. Wynn Anderson, Public Utilities Board Member,
that no interest needed to be paid during the period of construction since the
interest would be funded during construction under the bond resolution.
Mr. Joseph White, Public Utilities Board Member, referred to Section 8 of the
contract, Payment Obligations. He was interested in knowing who set the one
year date and when it was set, as well as when the payments were going to be
started on the bonds.
Mr. Ferdon stated that the PSC must start accumulating the money to make the first
principal payment one year in advance. That payment would be established under
the finance plan under the bond resolution for a year, which would be at least
two or thr=~ years beyond the estimated completion date of the project. The
design of the financing plan would be to assure as nearly as possible, based on
estimates, there would be no principal due on the debt until the project was in
full operation for at least a year.
Mr. Hoyt then announced that they had received a series of questions from one of
the Public Utilities Board Members, Richard Haynie, which he referred to Special
Counsel Alan Watts.
Mr. Alan Watts, Special Counsel answered each of the eleven questions as follows
prefacing some with explanations for purposes of clarification:
1. Q: Is Intermountain Power Agency the true onwer of the Project with only
Utah municipalities having representation in such Agency?
A: The IPA is the owner of the project and it is true that only Utah
municipalities have representation in that Agency.
2. Q:
Does exemption from the payment, in lieu of payment of ad valorem taxes
by Utah municipal utilities, result in higher payments in lieu of ad
valorem taxes in Anaheim?
A:
No. It would not result in a higher tax. Anaheim pays an in lieu fee
and the Utah municipalities do not. The fee is charged only to those
utilities who are not exempt.
Mayor Seymour excused himself from the meeting in order to attend another commit-
ment. He then left the Council Chamber and Acting Mayor Pro Tem Roth assumed
Chairmanship of the meeting. (8:15 P.M.)
80-161
City Hal.%,...Anaheim; California - COUNCIL MINUTES - February 13~ 1980, 7:00 P.M.
3. Q:
A:
4. Q:
A:
5. Q:
A:
6. Q:
&
10. Q:
A:
7. Q:
A:
Will the cost of any environmental discharge fines or penalties accrue
to Anaheim?
Yes. One way or another, Anaheim would pay its pro rata share of any
such fines levied against IPA concerning operation of the project.
Is the Project on track (schedule) for 100% of capacity sold by
January 1, 1981.
The schedule at the present time contemplated that Power Sales Contracts
would be executed for 100% of the output of the project no later than
some time this coming summer. In that sense, the Project is ahead of
schedule.
Does the Governor of Utah have authority under Utah law to direct all
the power from the Project in case of local power shortage?
In discussing the matter with a Utah lawyer, he has advised there is no
such authority in the Governor of the State of Utah.
Does Anaheim receive any capital return on the Project at end of the
Project life?
Is Anaheim responsible for a portion of decommissioning costs?
(Mr. Watts preferred to combine the answer to these two questions since
they were related.) What was contemplated at the end of the Power Sales
Contract in the year 2027, was that the facilities would belong to the
IPA so that Anaheim would have no capital facilities which they would
own at the end of the term of the contract and neither would any of the
purchasers. Relative to decommissioning costs, there was a provision
in the bond resolution for the creation of a replacement and retirement
fund. To the extent that it was contemplated by the purchasers that
at the end of the Power Sales Contracts the plant should be essentially
torn down or in some way decommissioned, there was a possibility of
creating a sinking fund to derive the money to do that. That was a
decision that would have to be made by all of the participants some
time during the life of the project.
Will the Integrated Operations Agreement protect Anaheim in case of total
or substantial loss of IPP power supply, such as loss of converter
facilities at Victorville?
Mr. Watts first explained that the Integrated Operations Agreement (IOA)
was between Anaheim and Southern California Edison (SCE) wherein both
the City and Edison agreed to operate their systems on a coordinated
basis. The reference to the converter facilities at Victorville was a
reference to the fact that it was contemplated at the time that a DC
transmission line would be built from the plant site to the approximate
vicinity of Victorville, and it was necessary at Victorville to build a
converter station to convert electricity from DC to AC.
The answer to the question was, yes, the IOA did provide a protection
to Anaheim since a provision of that agreement stipulated in the event
a resource was out for 70 consecutive days or 100 out of 180 non-consecutive
80-162
City .Hall~ AnabeiM~ California - COUNCIL MINUTES - February 13~ 1980~ 7:00 P.M.
days, SCE would still provide power from its system to Anaheim at no
additional cost for capacity. If during such an outage Anaheim had to
purchase Contract Energy from SCE, there could be additional cost for
the differential between the cost of energy at IPP and the cost of
Contract Energy. During and after those periods of time, which obvi-
ously would indicate a very serious disturbance on the system, the City
would be actively involved in getting the resource back in operation
or to find some replacement power to bring on-line at the end of those
periods of time.
e
Q:
Q:
Mr. Hoyt interjected, in order to amplify the explanation, that currently
the Utilities Department was negotiating agreements with most of the
public- and privately-owned facilities in the Western United States. For
instance, with the commencement of the first unit at San Onofre, they
would have in place agreements with entities such as the Nevada Power
Company. Thus, if they were in a situation, such as articulated by Mr.
Watts, they would already have completed contract negotiations and would
only need to find out where the power was available. The price would be
determined at the time they executed the transaction.
Are there any firm coal supply contracts to date?
There are no firm coal supply contracts as yet. Until such time as bonds
were issued by IPA, there were no funds with which to pay for such contracts.
However, negotiations had been commenced with substantial suppliers of
coal, and they foresaw no difficulty with respect to obtaining a coal
supply.
Will any provisions of the purchase agreement offer the City of Anaheim
and Board of Public Utilities to independently set fair and reasonable
rates for service?
A:
11. Q:
Insofar as the rates at which Anaheim would purchase from IPA, those
were simply based upon the cost, whatever that might be, and Anaheim's
pro rata share of those costs. The methods used by Anaheim to set rates
for energy to its consumers would involve methods no different than what
Anaheim was currently doing in the setting of those rates.
Mr. Hoyt felt the question was also trying to ascertain if there wer.e
any "strings" attached that would require Anaheim to do things to their
rates. He emphasized there were no "strings" attached, other than charging
rates sufficient to pay for the power purchased from IPA.
Is Anaheim potentially responsible for capacity charges even before the
project is used and useful?
A:
Yes--there was that potential. However, as Mr. Ferdon explained, they
felt that potential was not too great. Section 8 of the Power Sales
Contract discussed when the payment of principal would be due on the
bonds. In practice however, the only real possibility of Anaheim
paying for capacity before power was available from the project was in
the case where IPA could not issue additional bonds.
Acting Mayor Pro Tem Roth suggested that copies of the questions and answers be
made available to the Council, Public Utilities Board and public since they
would provide good information on which to base a decision at a later date. (by
copy of these minutes, the questions and answers are provided herein)
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City _Hall, Ana_h_eim, California - COUNCIL MINUTES - February 13~ 1980~ 7:00 P.M.
Mr. Hoyt then introduced Mr. Frank Martin, Financial Consultant to the IPP and IPA,
to speak on project financing.
Mr. Frank Martin, Goldman Sachs, an investment banking firm in New York, financial
advisor to the issuer, explained that theirs was an agent-type role. They would
not purchase the bonds, but simply advise and assist. The size of the financing
contemplated currently in 1980 dollars was approximately $3 billion. In 1986-89
dollars, the total dollar amount of financing was estimated to be between $5 and
$6 billion. In present 1980 dollars, the estimated cost of electrical power
for the project was 32 mills per kilowatt, and in 1986-89 dollars, approximately
50 mills. The current power cost was approximately 45 to 50 mills. He was
pointing out the immediate savings that would be realized based upon the
current costs. The initial bond issue contemplated was approximately $200
million which they wanted to bring to market in June of 1980 or, if not in June,
not too long thereafter.
Mr. Martin then announced the bankers recently selected to underwrite the initial
issue led by Solomon Brothers. Eighty-two percent of the credit for the financing
was rated AA by one of the two major credit rating organizations. While an AA
rating was in the realm of possibility, the realm of reality suggested that they
would be rated A to A1 primarily because of the policy of the rating services
and secondly, there was no agency that had issued bonds thus far rated AA.
The credit as it would be established would be a one time (iX) coverage, whereas
when issuing additional bonds for the cities on indenture, it would be necessary
to meet an additional bonds test coverage requirement of approximately one and
one-quarter times (I~X). In order to satisfy that, it was necessary to have
an additional revenue flow of at least 25% more than under the conditions the
Agency would be issuing bonds.
The estimated interest rate used in the studies thus far was 8% tax-exempt. He
then compared that with private utility financing that might be an alternative
when purchasing power. Their rate for a bond issue in the marketplace structured
for 25 years was 12 3/4%; for IPP, it would be a 30-year structure of approximately
8%. In trying to draw distinctions, the private utility did not rely totally on
fixed income instruments to raise its capital, but would issue preferred stock
that must also have a yield approximating the debt side, using an A rating. It
would also issue common stock. In order for a private utility to establish a
market for common stock, it must bring down a gross amount, pay taxes on that
amount and then declare a dividend. Mr. Martin also gave an overview of the
bond market.
Councilman Roth then asked what effect Jarvis 2, Proposition 9, would have on
the IPP if passed in the June 1980 election, since it had been indicated that
its passage would bring about a deteriorated bond market in California, resulting
in extremely high interest rates.
Mr. Martin prefaced his answer by first explaining the difference between an AA
and A rating in today's bond marketplace. At the conclusion of his explanation,
he stated that items such as airports, electric power, stadiums, etc., with self-
liquidated financing, the type of legislation contemplated under Proposition 9
would virtually have no effect. However, State, County or municipal-type issues
which had to rely on the tax base would be severely hurt. From the standpoint
of the municipal system, he concluded that buying power from Utah in a long-
term contract as an operating expense, such legislation would have no effect on
the municipal system or the credit of Anaheim, as it would have been evaluated
in the credit of the IPP bonds.
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City Hall~ ..Anaheim~ California - COUNCIL MINUTES - February 13~ 1980, 7:00 P.M.
Mr. Hoyt stated for purposes of clarification, with regard to Jarvis 2, Proposition
13, Proposition 4 and now Proposition 9, those basically would not affect the
electric or water utility because they did not depend on tax revenues to run
them. He reiterated, they were not tax supported and thus, such legislation
should have no effect on their bonds.
Mr. White asked if the bonds were going to be for 30 or 35 years; Mr. Martin
stated if he had his way it would be 30 years. He then relayed additional back-
ground information revolving around the bond market. In concluding, he stated
that they were going to be moving towards shorter maturities and within the next
five to eight years, they would see a signifcant trend in both the corporate and
municipal markets in order to trim the long-term maturities to help offset the
fear of the unknown of the fixed income item.
Mr. White then asked, since Anaheim's participation would mean participating in
better than $600 million in the project (10.225% of approximately $6 billion) he
wanted to know how that would affect the Utilities relative to participation in ~
other projects; how would that affect the bond market if they indicated they were
also going to participate in other projects.
Mr. Martin explained that the best posture going into the bond market was to have
a good credit rating and not much outstanding, meaning a good cash flow. If they
had another source of power cheaper than Intermountain, they would not be going
into the project. The City had one of two choices--come to the table with %ts
own money which was a much more expensive way to go, or come to the table as
proposed. There was an impact, but it was less of an impact in the final
analysis on the electric rate structure and it was necessary to see which impacted
that structure the soonest and more permanently. The answer would be that the
greatest impact would occur through the City issuing its own bonds. From that
standpoint, IPP was by far the better choice and made the best economic sense.
Mr. Hoyt then introduced Mr. Ben Putnam.
Mr. Ben Putnam, Vice President of Solomon Brothers, managing underwriter to market
the IPA bonds, stated that their basic role was to raise the money for the project.
Mr. Putnam also explained the situation in the national bond market and then gave
the background of Solomon Brothers who dealt with major institutional uses of
money. Considering their extensive background, he emphasized that in choosing
the firm that was going to have a commitment to raise the necessary $5 to $6
billion, Solomon Brothers was the firm to do so, since they had a strong commit-
ment to the marketplace. Their role was to assure the project and the partici-
pants that the money was going to be raised on a timely basis and at the most
efficient or lowest cost that they could pull out of the market.
Councilman Overholt entered the Council Chamber and requested Councilman Roth
to continue chairing the meeting. (8:55 P.M.)
Mr. Putnam's presentation was lengthy and informative, the highlights of which
pertinent to their role in IPP was as follows: their first function would be
to meet with the people who were present tonight who were intimately involved
with the project and to compile a prospective or an official statement which
80-165
city Hall~ Anaheim~ California - COUNCIL MINUTES - February 13~ 198,0~ 7,:00 P.M.
they would then prepare to inform not only the rating agencies, but also the
institutional investors in the retail sector of the bond market. He felt
confident that they were looking at probably the best credit rated joint action
agency in the country. They felt it was a very high credit security and their
purpose was to inform the major institutional buyer of that concept. Their
function was to take the market risk out of the transaction.
They also participated in the reinvestment of the funds because there was a
long construction time involved. He contended their biggest contribution was
to maintain an active and viable market in the secondary or after market in
those securities, and they would support those markets in good times and bad so
that the investor would know that he could always have a ready out for those
securities. That was an extremely important function of a negotiated sale.
Their continuing program was to inform those who had not seen fit to purchase
those securities in the past, find out where new pockets of money were, and
where they could expand the market for those securities.
Acting Mayor Pro Tem Roth then opened the floor to questions from the public
and/or the PUB.
Mr. Pete Nazarro, Anaheim resident, questioned what would happen if there was an
interruption of power for some significant time. As he understood, the City
would still have to pay and if that were the case, he envisioned the double
cost.
Mr. Bob Ferdon answered that the City would have to pay. He explained that
because of the take or pay nature of the Power Sales Contract, it would be
required for the City as a purchaser of power to continue to make payments of
fixed charges, its pro rata share, even though there was an outage of the project
itself. Anaheim would still require the power to service its electric system
and would have to buy backup or replacement power. That was a situation it
would have to face in any event.
Mr. Watts explained that a typical utility practice was to provide for reserves,
i.e., that the utility had more generating capacity than was necessary at any one
point in time to serve its load. That was done to provide power when a plant or
a particular resource was down. In Anaheim's case, the City had an agreement
with SCE wherein they provided that replacement power at no additional cost
under the terms of the Integrated Operations Agreement (on file in the City
Clerk's office).
Mr. Ian Skidmore referred to the escalation factors of construction and asked what
provisions were being made, if any, to allow the participants to "get out" should
the escalation go beyond the ability to pay for the cost of construction.
Mr. Hoyt stated there were basically no "off-ramps" after the execution of the
PSC by the participants. There were no unusual problems associated with the
construction of the project that had not been addressed in other projects. They
did not anticipate that inflation, even runaway inflation, would have any different
effect on the IPP as on similar projects.
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City Hall, Anaheim~ California - COUNCIL MINUTES - February 13; 1980, 7:00 P.M.
Mr. Dwight Carey, La Habra, representative of the Sierra Club, stated that the
had been involved in the IPP plan since 1975. He noted that the key questions
seemed to be cost and he asked how certain they were that the estimate of 32 mills
per kilowatt hour would actually be met and the probability that would be the
actual cost to the consumer.
Mr. Hoyt answered "zero"--if the plant were built and operating today and con-
structed at today's prices, 32 mills was the cost estimate. It would be more
than that depending on what inflation finally turned out to be in reality. Mr.
Anthony had explained at the last meeting (see minutes January 31, 1980) that
they were dealing with a conceptual cost estimate.
Councilman Bay interjected and asked for clarification that the 32 mills was
projected to provide a figure to compare with the 50 mills cost of present; Mr.
Hoyt answered affirmatively.
Mr. Jim Anthony, Project Engineer, Intermountain Power Agency, then clarified
additional questions posed by Mr. Carey relating to cost estimates and power
output involving Pacific Gas and Electric (PGE) Fossil I and II power plants
compared to estimates involved with IPP. He reported as he did at the meeting
of January 31, 1980, that they were Just completing a re-estimate of the Lynndyl
site and their previous estimate was for the Salt Wash site which was no longer
viable because of environmental considerations as Mr. Carey was aware. When the
new figures were finalized, they would have a more formal estimate. He pointed
out, however, that one of the big differences he saw in Fossil I and II and the
IPP units was that IPP was using what he considered to be the best available
control technology for air pollution control. He believed that PG&E was now
reassessing the viability of Fossil I and II as to whether or not they wanted to
proceed with that project, the main reason that they had given being, that such
stringent air qualities had been set that they could no longer afford the project.
Mr. Carey stated the only reason he raised the issue of cost was that he was
concerned that cost was the key criteria to most people. The Sierra Club was
concerned about alternatives to such power projects. Big projects were usually
big headaches with big impacts which meant that smaller projects or impacts
could be accomplished in less time and frequently with less money. He then
referred to what had been stipulated by the Energy Commission in their biannual
report where they recommended that Anaheim consciously and with great effort
look into alternative technologies and smaller facilities; however, in addition
to saying that, they should pursue a large project. That was what the Club was
concerned with. So as not to take up additional time, Mr. Carey stated that he
would like to speak with Mr. Hoyt prior to the next meeting.
Mr. White, Public Utilities Board Member, stated in the 10 years from 1980 to 1990
when Unit No. 4 would be completed, Anaheim would be going from Southern California
Edison's best customer to its worst. He asked what that would do to their rates
from SCE.
Mr. Hoyt answered in the Integrated Operations Agreement, as Mr. White would
recall, there were constraints as to when SCE could change the form of its rates.
They could change the level of the rates whenever it was necessary to recover
costs, but they could not do so, so as to render their decision to participate
80-]67
City Hall~ Anaheim~ California - COUNCIL MINUTES - February 13~ 1980~ 7:00 P.M.
in a project inadvisable or take away the financial advantage. It was probably
not going to make a great difference in the resale class of customers. At
such time as they were only drawing on Edison for perhaps some peak energy, it
would probably be advisable to relook at their rate schedule to be sure that
it would be fair and equitable to everybody.
Mr. White then asked who would buy the excess energy at off-peak hours in periods
of time as discussed on January 31, 1980. Mr. Hoyt first stated that they did
not have any contractual commitment for that energy. He stated, however, that SCE
would purchase that power. During a meeting with them, Edison had shown an
interest in acquiring power from the project from anyone who happened to have it.
Mr. Gerald Nissen, Anaheim resident, first asked if the estimates in the R.W. Beck
report dated January 31, 1980 were ideal projections with no problems foreseen.
Mr. Winston Peterson, Manager, Seattle office of R.W. Beck & Associates, answered
"yes" it contained very conservative oil costs and reasonably conservative capital
costs; Mr. Anthony added they had tried to be conservative so that they would not
end up with big surprises in the end. Mr. Nissen then stated as he understood,
if the plant was down, they were compensated by a built-in factor of what they
were paying; Mr. Hoyt answered that was correct.
Mr. Nissen then asked if they also took into consideration plant shutdowns,
because of union strikes or coal shortage supplies, etc. He wanted to know
what provisions had been made to insure those were kept to a minimum.
Mr. Hoyt stated that things could happen to shut down any kind of project and
presumably they would use management people to keep the plant in operation. He
also confirmed for Mr. Nissen that the plant would be designed so that it could
be operated with a minimal staff.
Mr. Anthony then assured Mr. Nissen that they had thoroughly researched coal
availability systems in order to prevent problems from occurring, which he
explained in detail. Situations that might occur relative to the probability
of labor disputes had also been taken into consideration.
Mr. Nissen stated as a result of the yearly audit, they could then either receive
credits or they would have to pay more. He wanted to know if the savings pro-
jected out took that situation into account. Mr. Hoyt answered that their
savings would be on a budgeted basis. They had projected the cost of coal,
the cost of operation, capital costs, availabilities. They tried to cost out
the energy to be generated from the plant with those factors taken into con-
sideration, and also the agreement they had with SCE with regard to replacement
capacity and replacement energy.
Mr. Nissen stated that realistically then they could see their bills go up as a
fact of higher operating costs; Mr. Hoyt stated that capital costs would be well
set in place. The main cost of the plant would be the fuel and as fuel costs
changed, the cost of power would change accordingly, and there could be a lesser
savings.
Councilwoman Kaywood interjected and asked that when talking about lesser savings,
as compared to buying from Edison, how that would work out.
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C%ty Hall~. Anaheim~ California - COUNCIL MINUTES - February 13...~ 1980~ 7:00 P.M.
Mr. Hoyt answered if costs were higher than forecasted, their savings, compared
to purchasing from Edison, would be less; and if the costs were lower, savings
compared to purchasing from Edison, would be higher.
Councilwoman Kaywood then emphasized, but in no event would the cost be higher
than if they purchased outright from Edison; Mr. Hoyt answered with an emphatic
"no" ·
In closing, Mr. Nissen stated he was hoping they would have been presented with
documentation broken down on a percentage basis, or at least a dollar figure,
for the home owners, so that they could relate those to their utility bills, as
requested at the last meeting.
Mr. Hoyt stated that they were going to provide such figures and, in fact, he had
those in front of him at present. However, since they were just given to him,
he wanted an opportunity to first review them and by the next meeting, they should
be prepared to discuss that data.
Mr. Wynn Anderson, Public Utilities Board Member, then read a prepared statement,
excerpts from which are as follows:
"Anaheim has for the past century been a leader of leaders in improving the quality
of life for its citizenry. This has not been done by accident, but rather by
careful foresight, concern, dedication and intelligence of its elected leaders.
Many years ago, elected leaders had enough foresight to bring water to this area.
Without it, we as a city would perhaps not even exist.
Electricity will be a necessity for our foreseeable future. We can continue to
buy that commodity from Edison for even higher and higher costs or we can partic-
ipate in some generating projects which will bring that precious commodity to
our citizenry at lower rates than Edison.
The City of Anaheim under Council direction has consistently maintained an electric
rate lower than that of Edison giving us the lowest rates in Orange County.
The cost of petroleum is skyrocketing steadily. This nation is dependent upon
foreign nations for that resource. However, this country does have a massive but
not unending supply of coal. We need to use that source until other means can
be developed and used without fear or danger to the populous.
We hope you will join the PUB in supporting the IPP and work for and explain its
necessity to the citizenry of Anaheim.
We believe with your support the citizens of Anaheim will approve this endeavor
that will be beneficial to friends, neighbors, children and grandchildren in the
years to come. Anaheim will continue to be a city of action and a leader of
leaders."
Mr. Michael Valenti, 751 North Zeyn, stated under the PSC and referring to the
payment obligation, when would be the earliest possible day Anaheim would be
obligated to pay without having power delivered.
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city Hall~ Anaheim~ California - COUNCIL MINUTES - February 13~ ,1980~ 7:00 P.M.
Mr. Bob Ferdon answered that since interest on the bonds would be capitalized
from bond proceeds, it was not expected that any payments would be made under
the PSC prior to power being delivered. The only way Anaheim could be required
to make payments under the PSC would be if there were to be a failure in IPA
in continuing the financing of the project.
Mr. Valenti stated under that contingency, if that would occur in 1986, for
example, conceivably the City could be paying more for electricity than it
would be paying to Edison.
Mr. Hoyt answered it certainly seemed that would be the case. If the project
"fell on its face" in midstream and they only had half a power plant, they'would
have some obligations with regard to whatever monies had been spent.
Mr. Watts explained that Mr. Ferdon indicated previously, what would be done in
that instance would be to commence principal payments, something in the vicinity
of two to three years after it was estimated that the unit or units would be
completed. If there was a disaster, there would be a problem, but they did not
go into such projects contemplating a disaster. He pointed out as a similar or
comparative matter, when the Convention Center was constructed and the various
additions added to it, the precise same thing was done.
Mr. Hoyt pointed out as well that they would normally carry construction insurance
during construction of the project.
Mr. Martin stated it would be no different than if they issued bonds for their
own plant. They were not assuming any higher degree of risk in either case, and
it was a business judgment. Whether bonds were issued to build a plant in Anaheim
and that plant did not operate all the time or it did not operate at all, the
bonds still had to be serviced.
Mr. Ferdon stated merely because the project was delayed or because of some kind
of disruption or disaster, did not mean payments would have to start prior to
the commercial operation of the plant. Those costs could be capitalized and
funded so it would not be necessary to start prior payments without receiving
the service. It would only happen if IPA no longer had access to the capital
markets during that period.
Acting Mayor Pro Tem Roth thanked those in attendance for being present at the
meeting to give their expert input and testimony, as well as staff, and also the
public for their input and questions.
ADJOURNMENT - PUBLIC UTILITIES BOARD: Board Member Anderson moved to adjourn.
Board Member Stanton seconded the motion. Chairman Keesee was absent. MOTION
CARRIED.
ADJOURNMENT - CITY COUNCIL: Councilwoman Kaywood moved to adjourn. Councilman
Bay seconded the motion. Councilm~n Seymour was absent. MOTION CARRIED.
Adjourned: 10:07 P.M.
LINDA D. ROBERTS, CITY CLERK