Crown Hydro Response to FERC Termination Letter

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GKRSE 202.408.5400 ♦ F AX : 202.408.5406 ♦ W EBSITE : www.gkrse-law.com

June 23, 2011

Ms. Kimberly D. Bose
Secretary
Federal Energy Regulatory Commission
888 First Street, NE
Washington, D.C. 20426

Re: Crown Hydro, LLC
Crown Hydro Project, FERC Project No. 11175-024
Response to May 25, 2011 Show Cause Letter

Dear Ms. Bose:

Crown Hydro, LLC, the holder of the above hydroelectric license, offers the following
project update in response to your May 25, 2011 show cause letter. For the reasons set forth
below, Crown Hydro respectfully requests that the Federal Energy Regulatory Commission not
initiate any license termination proceedings. Instead, Crown Hydro asks that the FERC continue
to hold these proceedings in abeyance until such time as Crown Hydro reports back to the FERC
in a period not to exceed 45 days following the close of the Minnesota Legislature’s special
session this summer. As explained in this letter, Crown Hydro expects the Minnesota legislature
will enact legislation this summer as part of its special session which will remove the historical
impediment to this project from obtaining local site control and thereby allow the project to
move forward with final construction.

2009 – 2011

As your letter indicates, Crown Hydro provided its last status updates by submitting
comprehensive progress reports in June and December, 2009. During 2010, Crown Hydro
continued some work on securing site control, but spent much of its time exploring additional
financing 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 in
obtaining site control of the “third” powerhouse site referenced in the June 2009 update – i.e., a
site just slightly up-river (approximately 150 feet) from the original project site but nonetheless
within 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


June 23, 2011
Page 2

because it would be built entirely underground, the facility would have minimal impact to the
public.

Crown Hydro continues to own two 1700 mm AxialFlow Kaplan turbines along with two
1575 kW Propencia synchromous generators, together with engineering and controls
manufactured by Canadian Hydro Components, Ltd. The maximum capacity for the equipment
remains at 3.2 MW. The equipment is currently in professional storage and remains ready and
capable of being placed in service.

The proposed current site requires the temporary use of a small parcel owned by the
Minneapolis Parks & Recreation Board during project construction, an underground easement
for permanent placement of the facility, and the use of underground tunnels previously used for
hydropower production by Minneapolis milling companies, which tunnels have now come under
the 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 Park
Board 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, assisted
by the Park Board’s Executive Director, staff, and legal counsel, to work with Crown Hydro in
developing the framework of an agreement under which the Park Board would provide access to
and use of its property for the project. As in previous years, the Park Board’s primary concern
was ensuring minimum flow over the St. Anthony Falls spillway so as to ensure what certain
members of the Park Board considered an acceptable aesthetic experience for the public. Crown
Hydro’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 energy
portfolio requirements in the nation. For its largest utility, Northern States Power Company
d/b/a Xcel Energy, Inc., 30% of its energy must come from eligible renewable energy sources by
the year 2020. Small hydroelectric facilities like the Crown Hydro project qualify as eligible
sources for the state’s RPS.

Given the state’s paramount interest in renewable energy, and because of the Park
Board’s historic reluctance to provide use of its property on reasonable terms, the Minnesota
Legislature is currently moving forward the adoption of legislation that would effectively
preempt the Park Board and other similarly-situated political subdivisions with respect to the
respective municipal governments’ need to grant any “permit, entitlement, license, authorization
or consent of any kind,” for small, eligible hydroelectric facilities. On May 2, 2012, the
Committee on Environment, Energy and Natural Resources Policy and Finance, Minnesota
House of Representatives, passed HF 1440, a copy of which along with its status summary is
attached as Exhibit 1. HF 1440 is now on general orders and awaits passage by the full House.

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June 23, 2011
Page 3

The companion bill in the Minnesota Senate is SF 1190. SF 1190 was introduced and
had its first reading, and was referred to the Local Government and Elections Committee. A
copy of SF 1191 and its legislative status summary is attached as Exhibit 2.

The Minnesota Legislature adjourned by its constitutional deadline on May 23, 2011
without the Legislature and Governor agreeing on a state budget. While it appears that the state
is headed for a temporary shut-down of non-essential services, the Governor is expected to call a
special session of the legislature some time in July so that a budget can be passed and all
governmental services funded. Based on discussions with legislative leadership, including
authors of the above bills, Crown Hydro expects the Legislature to pass legislation that closely
resembles HF 1440 during the special session. As a result, Crown Hydro expects that the
Legislature will soon provide access and use of property necessary for the project that the Park
Board has been unwilling to provide.

Attached as Exhibits 3 and 4 are letters of support from key Minnesota legislators who
will be primarily responsible for enactment of the expected legislation. Exhibit No. 3 is a joint
letter from Representatives Michael Beard and Denny McNamara. Representative Beard is the
main 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, chief
author of the legislation in the Senate and the Senate’s President Pro Tempore. As can be seen
by 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-situated
federally-approved projects the necessary land use and related authorizations through state
legislation, Crown Hydro has continued to work in good faith with the Park Board on finding a
local resolution. To that end, Crown Hydro representatives met with the Park Board’s Executive
Director, staff and counsel regularly in April and May. The purpose of the meetings was, as
directed by the Park Board’s Planning Committee, to develop the framework for a mutual
agreement under which the project could utilize Park Board property.

The first framework agreement, structured under a letter of intent, contemplated a
straightforward development and use agreement under which Crown Hydro was prepared to pay
the Park Board (1) $500,000 upon the commercial operation date, and (2) a minimum annual
license/use fee in the amount of $70,000, which amount could increase depending on the level of
the 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 to
the “lessor/lessee” letter of intent (Exhibit 5), the Park Board, led by the board’s chairman John
Erwin, preferred instead that the Park Board be a joint owner of the project, but an owner with
somebody other than Crown Hydro, LLC’s current sole owner, William Hawks, a Minneapolis
businessman. That is, the Park Board insisted that Crown Hydro’s use of Park Board property
was conditioned on, among other matters, that Mr. Hawks no longer be directly or indirectly
involved with the project. In effect, the Park Board was forcing Mr. Hawks to sell his ownership

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June 23, 2011
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in Crown Hydro to a third party acceptable to the Park Board. That the Park Board was in
essence requiring Mr. Hawks to make a forced sale was disappointing to Mr. Hawks, particularly
given his tireless commitment over the last decade and investment in the project of more than six
million dollars. In the end, however, it was because of his commitment to making sure this
project could move forward that Mr. Hawks agreed to the Park Board’s forced sale, even though
the requirement would obviously diminish Mr. Hawk’s negotiating leverage in any third party
sale.

After much work, the parties reached agreement in principal on how a third party/Park
Board joint venture project would work, and that agreement is reflected in the draft letter of
intent dated as of May 13, 2011, which LOI the Park Board’s Superintendent sent the Park Board
for its adoption as part of an overall packet for the Park Board’s May 18, 2011 regularly
scheduled 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 to
assure minimum flows over the St. Anthony spillway to protect what certain members of the
Park Board considered most important to them: the aesthetics of the falls. Article 404 of the
Crown Hydro license establishes the minimum flows for the project. It provides that Crown
Hydro will operate the project so that some water always flows over St. Anthony Falls except as
follows: (a) during periods of very low flows when the project could not operate at 200 cfs
without drying up the falls, the project may only operate from nightfall to dawn; (b) between
December 15 and March 15, the project will operate with whatever flows are available even if it
dries up the falls; and (c) during low flows in July and August, the project may operate with up
to 500 cfs during daylight hours even if it reduces flows over the spillway and up to 1,000 cfs
from nightfall until dawn.

In the May 13 LOI, Crown Hydro agreed to effectively shut down the project during
daylight summer hours in order to satisfy a Park Board requirement that the project maintain a
minimum 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 regime
than required by the 1999 License. While the restrictions would obviously impact project energy
production, and therefore affect project gross revenues according to the power purchase
agreement with Northern States Power, discussed below, Crown Hydro was willing to agree to
depart from the 1999 License’s flow requirements if necessary to satisfy the Park Board’s desire
to control flow over St. Anthony Falls.1

The May 13 LOI represented an agreement in principal between Crown Hydro, the Park
Board’s Chairman, its Executive Director and the Park Board’s counsel. Following the submittal
of the May 13 LOI by the Park Board’s Superintendent to the full board, Crown Hydro

1
It is important to note that while Crown Hydro was willing to relinquish some of its flow
rights provided under the 1999 License as a compromise with the Park Board, Crown Hydro was
very cognizant during its discussions with the Park Board, that only the FERC, and not Crown
Hydro or the Park Board can set flow restrictions for a hydroelectric project licensed on a
navigable water of the United States.
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June 23, 2011
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representatives met informally with the Park Board Chairman, along with another Park Board
Commissioner and Park Board counsel on Sunday, May 15. At that meeting, the Park Board
Chairman and fellow Commissioners expressed confidence that the May 13 LOI would be
approved by the board on May 18. Following May 18, the parties would begin work on
definitive 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 an
email message from the Park Board’s primary counsel (the partner of the Park Board lawyer with
whom Crown Hydro had just spent the previous weeks in negotiations). In the email, the Park
Board counsel announced that there were “revisions” to the letter of intent. As can be seen by
Exhibit 7, however, the unilateral “revisions” that the Park Board made to a previously
negotiated document so completely changed the character of the document so as to make it
wholly unworkable, both practically and financially.

As can be seen from Exhibit 7, the single largest change (in addition to many others) was
that instead of exercising some measure of control of water over the spillway so as to protect the
spillway’s aesthetics during its prime viewing periods, the Park Board instead required that it
have “complete operating control” over the facility from June 15 to September 15, and for all
other times of the year, the new third party owner would be required to maintain a minimum
flow of 2000 cfs over St. Anthony Falls. Attached as Exhibit 8 is a letter from professional
engineer Mr. Joel Toso. As Mr. Toso states, a requirement under which the Park Board could
effectively 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 times
effectively destroy’s the project’s economics. Thus, as it turned out, the Park Board required as
a condition of its consent that Mr. Hawks sell 100% of his interest in Crown Hydro, LLC, to
which Mr. Hawks agreed, only then for the Park Board to make it both economically and
practically impossible for him to do so.

Status of Power Purchase Agreement

On January 23, 2003, Crown Hydro executed a power purchase agreement with Northern
States 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’s
inability to secure Park Board authorization, the project remains to this date in abeyance under
the PPA’s Force Majeure provision (pursuant to Article 14 whereby a “governmental
authority’s” failure to act which “prevents or delays” project performance constitutes Force
Majeure). Crown Hydro remains in active discussions with NSP regarding the terms of the PPA
and related matters.

Status of Renewable Development Grant

On January 17, 2002, Crown Hydro also executed a Renewable Development Fund Grant
Contract Terms and Conditions under which NSP granted the project a total of $5.1 million as

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June 23, 2011
Page 6

part of NSP’s Renewable Development Fund administered under Minn. Stat. § 11C.779, of
which approximately $1.5 million has been expended to date. The RDF contract also remains in
abeyance 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 Park
Board has caused its 1999 License to remain open and the project unconstructed for a long
period of time. Nobody finds that more regrettable than Crown Hydro and Crown Hydro truly
appreciates the FERC’s patience and willingness to work with it as it finds a solution which has
long vexed it.

Fortunately, as the letters from the Minnesota legislators attest, it appears that local site
control will be in hand by the end of this summer. Crown Hydro respectfully requests that the
FERC defer any action with respect to any termination proceedings until such time as the special
session is over and it is known whether HF 1411 or something substantially similar has been
passed into law. Within [30] days of the end of the special session, Crown Hydro will provide
the FERC a supplemental update, at which time the FERC will have more information from
which to make any decisions affecting Crown Hydro and FERC License No. 11175-024. At this
time, Crown Hydro will also address and bring current (to the extent practicable) any overdue
activities, 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
dhclarke@gkrse-law.com

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June 23, 2011
Page 7

Counsel to Crown Hydro, LLC

Exhibits

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 Toso

cc: 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

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EXHIBIT 1



EXHIBIT 2



EXHIBIT 3



EXHIBIT 4



EXHIBIT 5



EXHIBIT 6



EXHIBIT 7



EXHIBIT 8


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.com

June 22, 2011

Mr. Todd Guerrero
Attorney
Fredrikson & Byron, P.A.
200 South Sixth Street
Suite 4000
Minneapolis, MN 55402

Re: Crown Hydro Project Feasibility under Recent Minneapolis Park and Recreation
Board Letter of Intent

Dear Todd:

The purpose of this letter is to document our opinion of the Crown Hydro project
feasibility under the May 16, 2011 Letter of Intent (LOI) with the Minneapolis Park and
Recreation Board. As part of the Crown Hydro team, we worked with the Park Board
staff on establishing minimum flow rates and operating procedures that would maintain
project viability. These were documented in the May 13th draft LOI. The LOI as
modified 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 shut
down the project at any time during that period. It further requires that the facility
maintain a minimum 2000 cfs at all other times of the year. These significant changes
make the project economically unfeasible.

Sincerely,
WENCK ASSOCIATES, INC.

Joel Toso, P.E.
Principal Engineer


Crown Hydro Response to FERC Termination Letter

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