Crown Hydro Response to FERC Termination Letter


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Crown Hydro Response to FERC Termination Letter

  1. 1. http://MillCityTimes.comL A W O F F I C E S O F 1500 K STREET, NW ♦ SUITE 330 ♦ WASHINGTON, DC 20005GKRSE 202.408.5400 ♦ F AX : 202.408.5406 ♦ W EBSITE : June 23, 2011Ms. Kimberly D. BoseSecretaryFederal Energy Regulatory Commission888 First Street, NEWashington, D.C. 20426 Re: Crown Hydro, LLC Crown Hydro Project, FERC Project No. 11175-024 Response to May 25, 2011 Show Cause LetterDear Ms. Bose: Crown Hydro, LLC, the holder of the above hydroelectric license, offers the followingproject update in response to your May 25, 2011 show cause letter. For the reasons set forthbelow, Crown Hydro respectfully requests that the Federal Energy Regulatory Commission notinitiate any license termination proceedings. Instead, Crown Hydro asks that the FERC continueto hold these proceedings in abeyance until such time as Crown Hydro reports back to the FERCin a period not to exceed 45 days following the close of the Minnesota Legislature’s specialsession this summer. As explained in this letter, Crown Hydro expects the Minnesota legislaturewill enact legislation this summer as part of its special session which will remove the historicalimpediment to this project from obtaining local site control and thereby allow the project tomove forward with final construction.2009 – 2011 As your letter indicates, Crown Hydro provided its last status updates by submittingcomprehensive progress reports in June and December, 2009. During 2010, Crown Hydrocontinued some work on securing site control, but spent much of its time exploring additionalfinancing opportunities and hiring new consultants to help move the project forward.The Current Proposal Beginning in 2011, Crown Hydro has once again spent significant time and resources inobtaining site control of the “third” powerhouse site referenced in the June 2009 update – i.e., asite just slightly up-river (approximately 150 feet) from the original project site but nonethelesswithin the project boundary as set forth in ordering paragraph (B)(2) of the March 19, 1999,FERC Order Issuing License. The new site has been substantially designed and engineered and
  2. 2. http://MillCityTimes.comMs. Kimberly D. BoseJune 23, 2011Page 2because it would be built entirely underground, the facility would have minimal impact to thepublic. Crown Hydro continues to own two 1700 mm AxialFlow Kaplan turbines along with two1575 kW Propencia synchromous generators, together with engineering and controlsmanufactured by Canadian Hydro Components, Ltd. The maximum capacity for the equipmentremains at 3.2 MW. The equipment is currently in professional storage and remains ready andcapable of being placed in service. The proposed current site requires the temporary use of a small parcel owned by theMinneapolis Parks & Recreation Board during project construction, an underground easementfor permanent placement of the facility, and the use of underground tunnels previously used forhydropower production by Minneapolis milling companies, which tunnels have now come underthe control by the Park Board by a grant of the City of Minneapolis. Beginning in March 2011, Crown Hydro once again initiated discussions with the ParkBoard about obtaining the Park Board’s consent for use of its property. On April 20, 2011,Crown Hydro presented to the Park Board’s Planning Committee, with the full Board present.At the end of that meeting, the Planning Committee directed the Park Board’s Chairman, assistedby the Park Board’s Executive Director, staff, and legal counsel, to work with Crown Hydro indeveloping the framework of an agreement under which the Park Board would provide access toand use of its property for the project. As in previous years, the Park Board’s primary concernwas ensuring minimum flow over the St. Anthony Falls spillway so as to ensure what certainmembers of the Park Board considered an acceptable aesthetic experience for the public. CrownHydro’s and the Park Board’s most recent efforts at reaching agreement are detailed below.The Minnesota Legislature’s Interest In Facilitating Qualifying Hydro Projects As the FERC is aware, Minnesota has one of the most aggressive renewable energyportfolio requirements in the nation. For its largest utility, Northern States Power Companyd/b/a Xcel Energy, Inc., 30% of its energy must come from eligible renewable energy sources bythe year 2020. Small hydroelectric facilities like the Crown Hydro project qualify as eligiblesources for the state’s RPS. Given the state’s paramount interest in renewable energy, and because of the ParkBoard’s historic reluctance to provide use of its property on reasonable terms, the MinnesotaLegislature is currently moving forward the adoption of legislation that would effectivelypreempt the Park Board and other similarly-situated political subdivisions with respect to therespective municipal governments’ need to grant any “permit, entitlement, license, authorizationor consent of any kind,” for small, eligible hydroelectric facilities. On May 2, 2012, theCommittee on Environment, Energy and Natural Resources Policy and Finance, MinnesotaHouse of Representatives, passed HF 1440, a copy of which along with its status summary isattached as Exhibit 1. HF 1440 is now on general orders and awaits passage by the full House. L AW OFFI C ES O F GKRSE
  3. 3. http://MillCityTimes.comMs. Kimberly D. BoseJune 23, 2011Page 3 The companion bill in the Minnesota Senate is SF 1190. SF 1190 was introduced andhad its first reading, and was referred to the Local Government and Elections Committee. Acopy of SF 1191 and its legislative status summary is attached as Exhibit 2. The Minnesota Legislature adjourned by its constitutional deadline on May 23, 2011without the Legislature and Governor agreeing on a state budget. While it appears that the stateis headed for a temporary shut-down of non-essential services, the Governor is expected to call aspecial session of the legislature some time in July so that a budget can be passed and allgovernmental services funded. Based on discussions with legislative leadership, includingauthors of the above bills, Crown Hydro expects the Legislature to pass legislation that closelyresembles HF 1440 during the special session. As a result, Crown Hydro expects that theLegislature will soon provide access and use of property necessary for the project that the ParkBoard has been unwilling to provide. Attached as Exhibits 3 and 4 are letters of support from key Minnesota legislators whowill be primarily responsible for enactment of the expected legislation. Exhibit No. 3 is a jointletter from Representatives Michael Beard and Denny McNamara. Representative Beard is themain author of HF 1440 and Representative McNamara is the Chair, Committee on Environment,Energy, and Natural Resources Policy and Finance. Exhibit 4 is from Senator Gen Olson, chiefauthor of the legislation in the Senate and the Senate’s President Pro Tempore. As can be seenby the letters, the Legislature is prepared to provide the necessary site control.Discussions With Park Board Even though the Legislature is poised to provide Crown Hydro and similarly-situatedfederally-approved projects the necessary land use and related authorizations through statelegislation, Crown Hydro has continued to work in good faith with the Park Board on finding alocal resolution. To that end, Crown Hydro representatives met with the Park Board’s ExecutiveDirector, staff and counsel regularly in April and May. The purpose of the meetings was, asdirected by the Park Board’s Planning Committee, to develop the framework for a mutualagreement under which the project could utilize Park Board property. The first framework agreement, structured under a letter of intent, contemplated astraightforward development and use agreement under which Crown Hydro was prepared to paythe Park Board (1) $500,000 upon the commercial operation date, and (2) a minimum annuallicense/use fee in the amount of $70,000, which amount could increase depending on the level ofthe project’s energy production. A copy of that draft letter of intent is attached as Exhibit 5. After Crown Hydro and Park Board staff reached agreement in principal with respect tothe “lessor/lessee” letter of intent (Exhibit 5), the Park Board, led by the board’s chairman JohnErwin, preferred instead that the Park Board be a joint owner of the project, but an owner withsomebody other than Crown Hydro, LLC’s current sole owner, William Hawks, a Minneapolisbusinessman. That is, the Park Board insisted that Crown Hydro’s use of Park Board propertywas conditioned on, among other matters, that Mr. Hawks no longer be directly or indirectlyinvolved with the project. In effect, the Park Board was forcing Mr. Hawks to sell his ownership L AW OFFI C ES O F GKRSE
  4. 4. http://MillCityTimes.comMs. Kimberly D. BoseJune 23, 2011Page 4in Crown Hydro to a third party acceptable to the Park Board. That the Park Board was inessence requiring Mr. Hawks to make a forced sale was disappointing to Mr. Hawks, particularlygiven his tireless commitment over the last decade and investment in the project of more than sixmillion dollars. In the end, however, it was because of his commitment to making sure thisproject could move forward that Mr. Hawks agreed to the Park Board’s forced sale, even thoughthe requirement would obviously diminish Mr. Hawk’s negotiating leverage in any third partysale. After much work, the parties reached agreement in principal on how a third party/ParkBoard joint venture project would work, and that agreement is reflected in the draft letter ofintent dated as of May 13, 2011, which LOI the Park Board’s Superintendent sent the Park Boardfor its adoption as part of an overall packet for the Park Board’s May 18, 2011 regularlyscheduled meeting. The May 13 LOI, along with full board packet, is attached as Exhibit 6. In both the lessor/lessee and joint venture letters of intent, the Park Board sought toassure minimum flows over the St. Anthony spillway to protect what certain members of thePark Board considered most important to them: the aesthetics of the falls. Article 404 of theCrown Hydro license establishes the minimum flows for the project. It provides that CrownHydro will operate the project so that some water always flows over St. Anthony Falls except asfollows: (a) during periods of very low flows when the project could not operate at 200 cfswithout drying up the falls, the project may only operate from nightfall to dawn; (b) betweenDecember 15 and March 15, the project will operate with whatever flows are available even if itdries up the falls; and (c) during low flows in July and August, the project may operate with upto 500 cfs during daylight hours even if it reduces flows over the spillway and up to 1,000 cfsfrom nightfall until dawn. In the May 13 LOI, Crown Hydro agreed to effectively shut down the project duringdaylight summer hours in order to satisfy a Park Board requirement that the project maintain aminimum of 2000 cfs over the falls, during the daylight hours of June 21 – September 21,generally regarded as the falls’ “prime viewing periods” a much more restrictive flow regimethan required by the 1999 License. While the restrictions would obviously impact project energyproduction, and therefore affect project gross revenues according to the power purchaseagreement with Northern States Power, discussed below, Crown Hydro was willing to agree todepart from the 1999 License’s flow requirements if necessary to satisfy the Park Board’s desireto control flow over St. Anthony Falls.1 The May 13 LOI represented an agreement in principal between Crown Hydro, the ParkBoard’s Chairman, its Executive Director and the Park Board’s counsel. Following the submittalof the May 13 LOI by the Park Board’s Superintendent to the full board, Crown Hydro1 It is important to note that while Crown Hydro was willing to relinquish some of its flowrights provided under the 1999 License as a compromise with the Park Board, Crown Hydro wasvery cognizant during its discussions with the Park Board, that only the FERC, and not CrownHydro or the Park Board can set flow restrictions for a hydroelectric project licensed on anavigable water of the United States. L AW OFFI C ES O F GKRSE
  5. 5. http://MillCityTimes.comMs. Kimberly D. BoseJune 23, 2011Page 5representatives met informally with the Park Board Chairman, along with another Park BoardCommissioner and Park Board counsel on Sunday, May 15. At that meeting, the Park BoardChairman and fellow Commissioners expressed confidence that the May 13 LOI would beapproved by the board on May 18. Following May 18, the parties would begin work ondefinitive agreements between Crown Hydro, the Park Board, and a new third-party investor. On the night of Monday, May 16, however, Crown Hydro representatives received anemail message from the Park Board’s primary counsel (the partner of the Park Board lawyer withwhom Crown Hydro had just spent the previous weeks in negotiations). In the email, the ParkBoard counsel announced that there were “revisions” to the letter of intent. As can be seen byExhibit 7, however, the unilateral “revisions” that the Park Board made to a previouslynegotiated document so completely changed the character of the document so as to make itwholly unworkable, both practically and financially. As can be seen from Exhibit 7, the single largest change (in addition to many others) wasthat instead of exercising some measure of control of water over the spillway so as to protect thespillway’s aesthetics during its prime viewing periods, the Park Board instead required that ithave “complete operating control” over the facility from June 15 to September 15, and for allother times of the year, the new third party owner would be required to maintain a minimumflow of 2000 cfs over St. Anthony Falls. Attached as Exhibit 8 is a letter from professionalengineer Mr. Joel Toso. As Mr. Toso states, a requirement under which the Park Board couldeffectively shut down the project at any time and for any reason from June 15 – September 15,combined with a requirement that the project maintain a minimum of 2000 cfs at all other timeseffectively destroy’s the project’s economics. Thus, as it turned out, the Park Board required asa condition of its consent that Mr. Hawks sell 100% of his interest in Crown Hydro, LLC, towhich Mr. Hawks agreed, only then for the Park Board to make it both economically andpractically impossible for him to do so.Status of Power Purchase Agreement On January 23, 2003, Crown Hydro executed a power purchase agreement with NorthernStates Power Company d/b/a Xcel Energy, Inc. under which NSP has agreed to purchase 100%of the project’s energy production for an initial term of 20 years. Because of the project’sinability to secure Park Board authorization, the project remains to this date in abeyance underthe PPA’s Force Majeure provision (pursuant to Article 14 whereby a “governmentalauthority’s” failure to act which “prevents or delays” project performance constitutes ForceMajeure). Crown Hydro remains in active discussions with NSP regarding the terms of the PPAand related matters.Status of Renewable Development Grant On January 17, 2002, Crown Hydro also executed a Renewable Development Fund GrantContract Terms and Conditions under which NSP granted the project a total of $5.1 million as L AW OFFI C ES O F GKRSE
  6. 6. http://MillCityTimes.comMs. Kimberly D. BoseJune 23, 2011Page 6part of NSP’s Renewable Development Fund administered under Minn. Stat. § 11C.779, ofwhich approximately $1.5 million has been expended to date. The RDF contract also remains inabeyance pending a determination on whether the project will be able to obtain local site control,and Crown Hydro also remains in discussions with NSP on this matter.Request for Further Abeyance Crown Hydro is fully aware that its failure to obtain local site control from the ParkBoard has caused its 1999 License to remain open and the project unconstructed for a longperiod of time. Nobody finds that more regrettable than Crown Hydro and Crown Hydro trulyappreciates the FERC’s patience and willingness to work with it as it finds a solution which haslong vexed it. Fortunately, as the letters from the Minnesota legislators attest, it appears that local sitecontrol will be in hand by the end of this summer. Crown Hydro respectfully requests that theFERC defer any action with respect to any termination proceedings until such time as the specialsession is over and it is known whether HF 1411 or something substantially similar has beenpassed into law. Within [30] days of the end of the special session, Crown Hydro will providethe FERC a supplemental update, at which time the FERC will have more information fromwhich to make any decisions affecting Crown Hydro and FERC License No. 11175-024. At thistime, Crown Hydro will also address and bring current (to the extent practicable) any overdueactivities, plans, and filings required by the 1999 License. In the interim, please do not hesitate to ask any questions or seek additional information. Respectfully Submitted Donald H. Clarke Law Offices of GKRSE 1500 K Street NW, Suite 330 Washington DC, 20005 Tel (202) 408-5400 Fax (202) 408-5406 L AW OFFI C ES O F GKRSE
  7. 7. http://MillCityTimes.comMs. Kimberly D. BoseJune 23, 2011Page 7 Counsel to Crown Hydro, LLCExhibits Exhibit 1: HF 1440 along with status summary Exhibit 2: SF 1191 along with status summary Exhibit 3: Joint Letter from Representatives Michael Beard and Denny McNamara Exhibit 4: Letter from Senator Gen Olson Exhibit 5: Lessor/lessee draft Letter of Intent Exhibit 6: May 13 Letter of Intent along with full board packet Exhibit 7: May 13 LOI as revised by Park Board Exhibit 8: Letter from Mr. Joel Tosocc: Minneapolis Parks & Recreation Board Bill Grant, Deputy Commissioner of Energy Barbara Johnson, President, Minneapolis City Council Senator Gen Olson Representative Michael Beard Representative Denny McNamara L AW OFFI C ES O F GKRSE
  8. 8. http://MillCityTimes.comEXHIBIT 1
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  88. 88. Wenck Associates, Inc. 1800 Pioneer Creek Center P.O. Box 249 Maple Plain, MN 55359-0249 (763) 479-4200 Fax (763) 479-4242 E-mail: wenckmp@wenck.comJune 22, 2011Mr. Todd GuerreroAttorneyFredrikson & Byron, P.A.200 South Sixth StreetSuite 4000Minneapolis, MN 55402Re: Crown Hydro Project Feasibility under Recent Minneapolis Park and Recreation Board Letter of IntentDear Todd:The purpose of this letter is to document our opinion of the Crown Hydro projectfeasibility under the May 16, 2011 Letter of Intent (LOI) with the Minneapolis Park andRecreation Board. As part of the Crown Hydro team, we worked with the Park Boardstaff on establishing minimum flow rates and operating procedures that would maintainproject viability. These were documented in the May 13th draft LOI. The LOI asmodified by the Park Board and dated May 16, 2011 requires that the Park Board has"complete operational control" from June 15 - September 15, therefore be able to shutdown the project at any time during that period. It further requires that the facilitymaintain a minimum 2000 cfs at all other times of the year. These significant changesmake the project economically unfeasible.Sincerely,WENCK ASSOCIATES, INC.Joel Toso, P.E.Principal Engineer
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