PUBLIC UTILITY COMMISSION
Harrisburg, PA 17105-3265
Public Meeting held December 16, 2010
Commissioners Present:
James H. Cawley, Chairman
Tyrone J. Christy, Vice Chairman
John F. Coleman, Jr.
Wayne E. Gardner
Robert F. Powelson
Petition of Trigen-Philadelphia Energy Corporation Under 52 Pa. Code § 5.41 for Approval of Economic Development and Load Stabilization Rider Agreement and Related Operations and Maintenance Agreement / Docket No. P-2010-2185173
ORDER
BY THE COMMISSION:
On June 29, 2010, Trigen-Philadelphia Energy Corporation (“Trigen” or “the Company”) filed the above-captioned Petition pursuant to 52 Pa. Code § 5.41 and its Economic Development and Load Stabilization Rider (“Rider LS”) of its Tariff Heating and Cooling – PA P.U.C. No. 4. By its Petition, Trigen seeks approval of an Amended and Restated Steam Service Agreement (“Amended Agreement”) and a related Operations and Maintenance Agreement (“O&M Agreement”) between Trigen and The Trustees of the University of Pennsylvania, which entity includes The Hospital at the University of Pennsylvania (collectively, “Penn”). By separate Application, filed on June29, 2010, Trigen is also seeking approval of a related Lease of Steam Lines and Related Facilities Agreement between Trigen and Penn (“Lease”).[1]
Through the implementation of the proposed Amended Agreement, O&M Agreement, and Lease (collectively, “the Agreements”), Trigen is seeking to ensure that Penn—Trigen’s largest customer—will continue to purchase a significant portion of its steam energy requirements from Trigen for an extended term in order to maintain Trigen’s economic viability for the benefit of its other customers and its shareholders. For its part, Penn is seeking to obtain lower energy costs, improve the quality of its steam service, establish new standards for the reliability of its steam service, and assist in maintaining the economic viability of Trigen for the benefit of other customers located within the City of Philadelphia. Thus, Trigen is requesting all necessary Commission approvals to permit implementation of the Amended Agreement and the O&M Agreement, as well as Commission recognition of the eligibility for rate recovery of certain aspects of the transactions contemplated by the Agreements as they are implemented.
Trigen served its Petition on the Commission’s Office of Trial Staff, the Office of Consumer Advocate, and the Office of Small Business Advocate. Trigen also published notice of the filing in a newspaper of general circulation in its service area, and filed proof of such publication with the Commission. No answers to the Petition were filed, however, on July 29, 2010, Thomas Jefferson University and Thomas Jefferson University Hospitals (collectively, “TJU”) filed a Petition to Intervene in this proceeding. TJU is located on a thirteen-acre site in Center City, Philadelphia, and is Trigen’s second largest customer. Trigen supplies chilled water and steam to TJU under the terms of a Master Combined Chilled Water and Steam Agreement. TJU filed its Petition to Intervene in order to ensure that the Commission’s disposition of these proceedings does not impact the rates TJU pays for the service it receives from Trigen, or otherwise affect the obligations of Trigen under its agreement with TJU. However, on August 5, 2010, TJU filed to withdraw its Petition to Intervene, and to request the Secretary of the Commission to strike the pleading from the record of these proceedings.[2]
Background
Trigen is a public utility certificated by the Commission at Docket Nos.A-130375 and A-130375, F.5, to provide steam service and chilled water service to the public in portions of Center City, Philadelphia and West Philadelphia, Pennsylvania. Penn is an institution of higher education, located primarily in West Philadelphia. Penn currently purchases in excess of 1,401,000 Mlbs. of steam annually (excluding its Presbyterian Hospital and Pennsylvania Hospital facilities), representing more than 40% of Trigen’s steam sales, and is Trigen’s largest customer. Trigen states that since its acquisition of the steam system in 1987, the retention of Penn as a customer has been a priority of the highest importance.
In February, 1990, Penn notified Trigen that it was planning to construct its own energy system on its campus and would cease to be a customer of Trigen. Trigen continued to work to retain Penn through the offering of a long-term discount agreement, and the construction and operation of the Grays Ferry Cogeneration Project, which added significant capacity to Trigen’s system, and offered Penn and other customers the security of an enhanced, updated, and more efficient source of steam production. By Orders entered at Docket Nos. P-00920566 and A-130375F002 on December 18, 1992, and at Docket Nos. P-00930729 and A-130375F0003 on February 18, 1994, the Commission approved the Grays Ferry construct.
In 1994, following Penn’s issuance of a Request for Proposals seeking alternative approaches to meeting its energy needs, Trigen and Penn entered into a steam purchase agreement (“the 1994 Agreement”) whereby Penn would continue to purchase steam from Trigen for a term of 20 years, in exchange for Trigen providing steam to Penn at a rate less than Rate S, Trigen’s general rate classification, but with certain operational commitments by Trigen and minimum take guarantees by Penn. The Commission approved the 1994 Agreement by order entered September 16, 1994, at Docket No.P-00940829. The 1994 Agreement remains in effect to date. [3] By Order entered September 9, 2005 at Docket No. R-00050781, the Commission approved Trigen’s RiderLS, which allows Trigen to enter into individually negotiated contracts with customers who have multiple energy options or alternative supply capabilities.
As the 1994 Agreement nears its end, Penn is again considering departure from Trigen’s steam system, and on June 25, 2009, issued a Request for Qualification seeking alternatives to the current arraignment between Trigen and Penn. Trigen and various competitors submitted bids, and based on Trigen’s presentation and ongoing discussions between Penn and Trigen since at least 2005, Penn and Trigen entered into the Agreements that are the subject of the instant Petition and related Application.
The Amended and Restated Steam Service Agreement
The Amended Agreement, which will replace the existing 20-year 1994 Agreement, is a 20-year agreement providing for Penn to purchase from Trigen certain minimum quantities of steam at specified rates, and at certain minimum pressures and qualities. As discussed more fully below, the Amended Agreement and the reliability standards it adopts are premised upon the installation of certain rapid-fire boilers designed to decrease fuel consumption and lower CO2 emissions.
Minimum Takes
The Amended Agreement provides that Penn will continue to purchase steam from Trigen, and must use or pay for at least 1,120,000 Mlbs. annually (subject to certain force majeure events). This commitment by Penn is 40% greater than the take-or-pay obligation under the 1994 Agreement. Beyond those commitments, Trigen will have the opportunity to sell additional steam to Penn as its demand for steam increases over time. An additional provision included in the Amended Agreement will require Penn to purchase 90% of its current average summer steam load (June, July and August) served by Trigen on a take-or-pay basis. Trigen states that these summer steam sales will benefit the Company by providing a market for steam produced during non-peak periods of the year, and help offset some of Trigen’s fixed costs.
Reliability and Efficiency
Since the execution of the 1994 Agreement, because of its unique service needs, Penn has conditioned its agreement to a long term contract upon Trigen’s meeting certain reliability standards which exceed the minimum standards otherwise applicable under Trigen’s tariff. The Amended Agreement contains the following two significant modifications to the standards set forth in the 1994 Agreement relating to service interruptions and the maintenance of minimum steam pressures:
1. Service Interruptions
Compared to the 1994 Agreement, the Amended Agreement provides for a greater allowance for pressure reductions lasting no longer than 30minutes. This somewhat relaxed standard for pressure reductions is conditioned upon the installation of two 250,000 pound per hour, saturated steam, 265 PSI, rapid-start O-Type package boilers (“rapid-fire boilers”) designed to meet Penn’s reliability requirements. These rapid-fire boilers will burn natural gas, and can be brought online in half the time as the currently operating oil-fired burners, which can take up to a full hour to bring up to the necessary steam production level, and which Trigen must often keep in a hot standby mode. Trigen states that utilizing these rapid-fire boilers will result in a reduction in the number of hours that the oil-fired backup steam-generating equipment will need to be operated, allowing the Company to shed some of its fuel and operating expenses. Trigen asserts that this will benefit not only the Company and Penn, but also Trigen’s other customers who bear their share of the costs of keeping the existing back-up boilers in hot standby mode. In addition, Trigen states that installation of the rapid-fire boilers will reduce CO2 emissions compared to the current method of operation since the rapid-fire units will burn natural gas, which is cleaner burning than the #6 fuel oil burned by the older units.
As set forth in affiliated interest filings which Trigen made with the Commission subsequent to the filing of the instant Petition[4], Veolia Energy Efficiency (PA), LLC (“VEEPA”), an entity affiliated with Trigen, will own the rapid-fire boilers, and intends to invest approximately $28 million for their purchase and installation. Trigen and VEEPA will enter into a Steam Supply Agreement pursuant to which Trigen will pay inter-company capacity and steam production charges, which Trigen proposes to include in its steam cost rate in the same manner as other purchased steam is treated.
One of the provisions of the Amended Agreement provides that if Penn terminates the Amended Agreement without cause prior to the first 10years of operation, it must repay Trigen a portion of the capital costs of the rapid-fire boilers, which would then be passed through to VEEPA. Trigen and VEEPA have agreed that, to the extent VEEPA does receive these capital reimbursement payments from Penn, they will be deducted from the capital costs charged to Trigen pursuant to the affiliated interest agreement, thereby relieving Trigen and its ratepayers of a significant portion of the capital cost charges for the rapid-fire boilers. Trigen asserts that by meeting its commitments to take-or-pay for certain quantities of steam, or to pay Trigen what amounts to an early exit fee, Penn is thereby helping to insure that Trigen and its other ratepayers will not be unfairly burdened with a disproportionate share of the cost of new equipment, and in the event of an early termination of the Amended Agreement, Trigen and its ratepayers are not unduly burdened with the cost of the additional equipment.
2. Pressure Minimums
Currently, Trigen is required to deliver steam to Penn at the principal metering points (referred to as the “Main Meter”) at a minimum pressure of 125psig. Under the Amended Agreement, this minimum pressure requirement can be relaxed if bottlenecks at three existing points in the Penn campus distribution system can be resolved, and a reliable delivery pressure of at least 60psig at the delivery points to Penn’s buildings can be maintained. Trigen asserts that this provision benefits all of its customers by placing less stress on the steam-producing equipment and reducing fuel and other operating costs.
Discounted Steam Rates
Under the Amended Agreement, Trigen will provide service to Penn at a discount to the rates that Penn received under the 1994 Agreement, while continuing to recover its fuel costs and defray some of its fixed overhead. Specifically, the rate will consist of three components: 1) non-fuel variable charges, 2) fuel variable charges, and 3) a fixed charge.
1. Non-fuel Variable Charges
The non-fuel variable charges are intended to reflect indexed costs for electricity, water and sewer, and water treatment. These costs are valued on a unitary basis and then adjusted monthly, based on changes in the specific indices.
2. Fuel Variable Charges
The fuel variable charges are based on a Fuel Price, which is then multiplied by Calculated Mlbs. of steam delivered to Penn, and then multiplied by a Fuel Efficiency Factor. The Calculated Mlbs. of steam will be determined according to a formula set forth in the Amended Agreement. The Fuel Efficiency Factor will be based on a schedule set forth in the Amended Agreement, and will be progressively reduced over time, thereby lowering Trigen’s fuel cost recovery from Penn as Trigen is able to improve overall system efficiency from steam production to reduction in line losses. The Fuel Price will be calculated using one of two alternative methods set forth in the Amended Agreement. The first method, referred to as the “Non-Hedge Method,” bases the fuel price on the price of natural gas delivered in the Transco Zone 6 non-NY area, the PGW price for local gas transportation, and a factor to account for lost and unaccounted for gas across the PGW system. The second method for calculating the Fuel Price, referred to as the “Hedge Method,” offers Penn an option to base its Fuel Price on the natural gas basis price incurred by Grays Ferry Cogeneration Partnership under its current or future contracts. This method is derived from the weighted average price of natural gas delivered through the Texas Eastern Transmission Corp. pipeline from the East Louisiana zone.
3. Fixed Charge
The third component of the discounted rate is a fixed charge based on coincident peak demand of up to 550,000 lbs./hr. of steam (the “Current Demand”), a portion of which will be escalated annually based on the cumulative percent change in the Consumer Price index. To the extent that Penn’s coincident annual peak demand may exceed its Current Demand (the “Incremental Demand”), Trigen will have the opportunity to submit a proposal to serve that Incremental Demand. Although Penn reserves the right to select an alternative source of supply to meet the Incremental Demand, given Penn’s history of expanding its campus, Trigen views this opportunity to add additional load as a significant potential benefit.
Trigen asserts that, taken as a whole, the new rates will deliver to Penn a much more transparent rate structure that is also more reflective of what Penn could have accomplished by building its own steam productions plant. However, Trigen argues that this discounted rate approach serves its regular tariff customers by avoiding the severe impact on their rates that would ensue if Penn were to leave Trigen’s steam system.