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2011/03/22 Item 11
TY COU NCI L STATEMENT ~~;, ci>1r of cHU~AVisrA March 22, 2011, Item ITEM TITLE: REPORT ON RECENT HISTORY AND STATUS OF CITY INVOLVEMENT WITH THE SOUTH BAY POWER PLANT DECOMMISSIONING, DEMOLITION AND REMEDIATION PROCESS WITH AN OPPORTUNITY FOR PUBLIC INPUT AND CITY COUNCIL DIRECTION TO STAFF REGARDING FUTURE CITY INVOLVEMENT SUBMITTED BY: CITY MANAGER ~- S ~ CITY ATTORNEY--~L~_..-- 4/STHS VOTE: YES ^ NO SUMMARY The purpose of this report is to provide the City Council-and the public-a description of recent City involvement with the South Bay Power Plant ("SBPP"), and an update on recent events and issues related to SBPP decommissioning, demolition and remediation. As the result of the concerted efforts-of many individuals and groups-including City officials- in October of 2010 the California ISO ("Cal ISO) terminated "run must run" ("RMR") status for the SBPP effective December 31, 2010. (A copy of the Cal ISO determination is attached hereto as Exhibit A.) Since this determination City staff has been analyzing various City options to expedite power plant demolition and site remediation. One of these options has been a proposal that the City assume Dynegy's demolition and remediation responsibilities under its operating agreements with the Port in exchange for cash and other considerations. This deal concept was formulated by David Malcolm and Steve Peace. The premise was that the City is the stakeholder most motivated to tear down the plant and to remediate the site in an expeditious and responsible manner. If there were money left over, the City could use it to fund Bayfront infrastructure. Because of the complex nature of this project, and its significant inherent risks, staff recommended, and the City Council authorized, the use of special legal counsel to assist with project analysis and negotiations. In December, for a variety of reasons, these negotiations bogged down. Recent negotiations have focused on the City's threshold requirement that Dynegy provide its detailed project cost estimates and hazardous materials reports, and that Dynegy fund the cost of the City's review and analysis thereof. Staff will provide Council more details on the status of these negotiations in closed session on March 22"d 11-1 3/22/11, Item l1 Page 2 of 11 On a parallel track, City staff has also been working directly with Port District staff to structure and implement a coordinated process for removal of the power plant. This joint City/Port planning effort has been formalized in a "Team Charter" agreement recently signed by the City Manager and the District President. (A copy of the Team Charter is attached hereto as Exhibit B.) The current focus of this joint effort is to expedite the demolition and removal of the "vertical" power block components of the SBPP. Both the District Board and the City Council have endorsed this approach, with Port Commissioner Moore acting as a strong advocate. Laura Hunter from the EHC has also publicly stated her support for the "demolition first" approach, and recent discussions with Dynegy suggest they too are likely to be supportive. On March 8th Port staff updated its Board on SBPP issues. At this same meeting the District Board approved an amendment to its lease with Dynegy. The amendment settled the amount of rent owed the Port for the previous year of operations ($6 million), and provided for additional rent payments going forward in the amount of $2 million per year for 4 years ($8 million in aggregate). Commissioner Moore suggested that this money should be dedicated to improvements on the Chula Vista Bayfront since Chula Vista residents had suffered the impacts of so many years of plant operation; however, this discussion was tabled for future consideration as part of the Port's upcoming fiscal year budget process. Port staffs presentation of the joint planning approach was generally well received, however Commissioners Burdick and Valdarrama openly objected to City negotiations with Dynegy and called for their termination. Port staff's accompanying written report from this meeting is attached hereto as Exhibit C. ENVIRONMENTAL REVIEW Staff has reviewed the presentation of this report for compliance with CEQA and has determined that the activity is not a "Project" as defined under Section 15378 of the State CEQA Guidelines. Therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines, no environmental review of this report is required. The status of determining the appropriate CEQA process for the actual demolition and remediation of the SBPP is presented in the body of this report, below. RECOMMENDATION Staff recommends that the City Council accept staff's report and provide direction to staff regarding future actions, as appropriate. BOARDS/COMMISSION RECOMMENDATION Not applicable DISCUSSION In 1960 San Diego Gas & Electric ("SDG&E") constructed the SBPP on the Chula Vista Bayfront and began operations. In the decades to follow the SBPP served reliably as a major supplier of electrical energy to the San Diego region. Over time the SBPP became outdated and it was determined that its negative impacts on the environment would soon outweigh its benefits. In 1999 the Port acquired the SBPP from SDG&E in order to wind down its operations and facilitate its removal from the Chula Vista Bayfront. Concurrent with the acquisition, the District entered into a lease agreement with Duke Energy South Bay, LLC (Duke). The District subsequently consented to two lease assignments, and currently has a lease with Dynegy to operate the SBPP. As other regional power sources came on line, the need for power from the SBPP dwindled. In October of 2009 Cal ISO terminated RMR status for two of the four power 11-2 3/22/11, Item__~ L__ Page 3 of 11 generating units at the SBPP. On October 15, 2010 the Cal ISO determined that the operation of the SBPP was no longer necessary to service the electrical energy needs of the San Diego region and terminated RMR status for the remaining two units effective December 31, 2010. Accordingly, on December 31, 2010 Dynegy ceased operations of the SBPP and proceeded to disconnect the SBPP from the regional power grid. Since November of 2010 City staff has been in discussions with Dynegy regarding a possible framework for direct City participation in the demolition and remediation of the SBPP. More recently, and on a parallel track, City staff has been working collaboratively with Port staff on an analysis and approach to facilitate the SBPP demolition process. In order to improve public awareness of City involvement with the SBPP and the pending "end of term" obligations, the first section of this report presents a "bullet point" chronology of key recent events involving the City and the SBPP. This basic chronology is followed by more detailed discussions of specific issues and concerns that have been raised by City Councilmembers regarding this project. A. Chronology of Key Recent Events. October 2009 Cal ISO removed the RMR designation from two of the four operating units at the SBPP effective December 31, 2009. November 19, 2009. The Port's lease with Duke/Dynegy has aten-year term set to expire on this date. However, other lease language suggests that the term will be extended for so long as the facility is under a "run must run" contract ("RMR") with Cal ISO. November 20, 2009. Councilmember Castaneda files a motion to intervene as City Councilmember in the FERC RMR Rate Schedule action involving Dynegy, the ISO, and SDG&E. Among other things, this proceeding relates to rate adjustments requested by Dynegy on its RMR involving payment for future rent to the Port and adjustments for future decommission/remediation obligations. January 4, 2010. The City of Chula Vista files its motion to intervene in the FERC RMR Rate Schedule action involving Dynegy, CAISO, and SDG&E. June 9, 2010. Port Commissioner Padilla requests that Port staff provide a legal analysis regarding the Port's ability to terminate the Dynegy lease after December 31, 2010. June 14, 2010 Dynegy submits its application to the Regional Water Quality Control Board ("RWQCB") fora 5-year renewal of its NPDES water discharge permit ("Discharge Permit") through December 2016. July 13, 2010 Councilmembers Castaneda and Bensoussan, with others, sign a letter to the RWQCB opposing the proposed five-year extension of the Discharge Permit. July 22, 2010 The Port District General Counsel provides a written legal opinion to Port Commissioner Padilla that concludes the Port District does not have any legal authority to unilaterally terminate Dynegy lease or to remove RMR status. 11-3 3/22/11, Item ~ Page 4 of 11 August 3, 2010 The Council directs the City Attorney to perform City's own legal analysis and authorizes engagement of specialized outside attorneys and consultants to analyze the Port's rights and City options to expedite the legal termination of power plant operations and removal of the plant. August 11, 2010 Dynegy, Cal ISO, and SDG&E entered a Settlement Agreement concerning the FERC action involving the RMR Rate Schedule Revisions to Dynegy's RMR Service Agreement. Among other things, this settlement determines amounts Dynegy can collect from ratepayers through its RMR contract related to its future decommissioning, demolition and remediation obligations. September 8, 2010 City Attorney selects Procopio attorney John Lorman to advise the City on the Port lease and related environmental issues and Lorman begins analysis of SBPP documents. Lorman is chosen because of his familiarity with the SBPP and his expertise in environmental law. September 29, 2010 Cal ISO issues an extension of the RMR status of the SBPP to Dynegy through the year 2013. October 1, 2010 Attorney Lorman concludes his legal technical memorandum concerning the Port's lease termination and RMR termination. October 7-10, 2010 City Staff is apprised of discussions between David Malcolm, Port Commissioner Padilla and Dynegy regarding possible agreement to terminate Port/Dynegy SBPP lease based on City's lease termination analysis. October 1~, 2010 CAISO rescinds its earlier position and removes the RMR status for the SBPP beginning on December 31, 2010. October 18, 2010 Port Commissioner Padilla conferences on this date with key officials from the Port including the Port CEO and Port Attorney to discuss the Cal ISO decision and next steps to implement lease termination and "end of term" demolition and remediation obligations. October 22, 2010 (approximately) David Malcolm outlines a proposal for direct City involvement with demolition and remediation of the SBPP after discussions he initiates with Dynegy. City staff meets with Malcolm and a formal draft "letter of intent" ("LOI") outlining possible terms for this type of agreement is prepared. October 29, 2010 City management and legal staff jointly meet with Port CEO, Port Attorney, and Port management staff on this date to discuss City LOI concepts, risks, benefits and coordination for future decommission and remediation. November 2, 2010 The Council is advised in closed session regarding the status of the RMR and of negotiations with Dynegy and authorizes the continued use of outside counsel to evaluate litigation exposure, risk and benefits of decommission and remediation of SBPP toward completion of LOI with the parties involved. 11-4 3/22/11, Item Page 5 of 11 November 15, 2010 The City Executive team had a telephone conference with Randy Hickok, Managing Director of Dynegy, confirming Dynegy's understanding of the proposed LOI deal points. December 10, 2010 The proposed LOI terms are completed and forwarded to Dynegy for approval. The City is informed that Dynegy's Executive Management team should approve the LOI within the next week. December 17, 2010 Council is advised in closed session regarding the status of negotiations and the direction of the City staff to continue negotiations and to secure Dynegy's formal commitment to cover out of pocket costs for City due diligence. December 27, 2010 City and Dynegy enter into a Confidentiality Agreement to allow City access to Dynegy demolition bids and hazardous materials studies. (No such reports have been released by Dynegy.) January 12, 2011 The Executive teams of the City and Dynegy meet face to face and agree to move forward on two step process with first a MOU between the parties concerning the scope of due diligence review and payment by Dynegy to City. Thereafter the parties would enter into a LOI with a due diligence period before final agreement documents would be executed. February 4, 2011 The City advises Dynegy of its demand to pay current analysis costs working toward the proposed LOI. February 8, 2011 The Council is advised in closed session of currant status of negotiations with Dynegy and the Port. February 16, 2010 All hands meeting with Port to finalize terms for the Team Charter joint planning agreement and a confidentiality agreement to facilitate the exchange of confidential information. March 1, 2011 The City Manager gives a verbal report on the recent history and status of City involvement with the SBPP project. City Council declares its official support for the expedited demolition of the SBPP as a top priority and authorizes and directs City staff to continue to work cooperatively with the Port staff to encourage an expedited demolition process by the responsible parties. Some City City Council members expressed concerns about the lack of public knowledge about such matters and agendizes a public discussion for the March 22, 2011 Council meeting. March 8, 2010 Mayor and senior staff present at the Port District Board meeting in support of the Team Charter and expedited demolition of the SBPP. The Board endorses the team concept and approves a rent settlement with Dynegy for $6 million plus $2 million per year for 4 years going forward. The Board defers action on Commissioner Moore's proposal to dedicate rent income to the Chula Vista Bayfront. 11-5 3/22/11, Item Page 6 of 11 B. Port Lease Termination Analysis and RMR Removal On August 3, 2010 the City Council authorized the engagement of outside counsel and consultants to perform a legal analysis concerning the SBPP. The scope of work was focused on analysis of the extensive and complicated agreements between the Port and Dynegy in order to identify the rights the Port or the City, might have to terminate the power plant operations lease notwithstanding continued RMR status. The Port's own analysis on this issue that the City obtained in late July was very conservative and did not expressly identify a full range of options. The Port analysis concluded it had no good option to terminate its lease with Dynegy as long as RMR status wasin place. Pursuant to authorization from Council, City Staff on September 8, 2010 began working with outside specialized legal counsel, John Lorman. Mr. Lorman is an expert in the field of environmental and regulatory land use law. Mr. Lorman is also very familiar with the history of the South Bay Power Plant. The review of the Port's lease agreement was a very complicated and difficult task. The obligations and rights under the lease are intertwined with volumes of related agreements and amendments over the past decade. A small portion of the analysis required an understanding of numerous significant agreements including the Relocation Agreement, the Lease Guaranty, the Lease Assignment Agreement, the Operation and Maintenance Agreement, the RMR Contract, the Facilities Service Agreement, the Environmental Remediation Agreement, the Cooperation Agreement, and the Asset Sale Agreement. (Note: A partial list of the Agreements reviewed is attached hereto as Exhibit D. A CD with actual copies of the listed agreements is also included with this packet. In early October, 2010 after a lengthy legal review and analysis of the connected agreements, regulations and agencies involved, the City's legal consultants issued their technical findings. It was concluded that certain rights and obligations of the parties might allow for termination of the Lease between the Port and Dynegy despite the insistence by Cal ISO under the RMR that the plant must continue to operate. Although the connection is not clear, the City's analysis appears to have had some influence on Cal ISO. On September 29, 2010 the Cal ISO had issued its decision that the RMR designation for the SBPP needed to stay in place through the end of 2013. Just two weeks later, after the conclusions of the City's analysis regarding the Port's lease termination options were known, the RMR status was terminated by a new decision of Cal ISO dated October 15, 2010. C. The Dvne~v "LOI" Deal Concert 1. In General. The removal of the RMR designation cleared the way for some form of imminent lease termination, but it did not necessarily guarantee the timely demolition of the SBPP or remediation of the site. After discussions he initiated with Dynegy, David Malcolm presented City officials and staff with a proposal to address this concern. The proposal contemplated that the Port and/or the City would enter into anon-binding letter of intent (or "LOI") with Dynegy whereby, in exchange for $50 million, the Port and/or City would assume Dynegy's "end of term" obligations to demolish the plant and remediate the site. The assuming 11-6 3/22/11, Item ~ Page 7 of 11 party would also have access to the $22 million (approximately) held in a First Union National Bank escrow account set aside for this purpose. Before any final commitment, the party considering assuming such obligations would have a 120 "due diligence" period, to evaluate estimated costs, determine hazardous materials site conditions, identify available insurance, applicable regulatory processes, and clean up standards, and to analyze any other cost/benefit factors deemed relevant. The cost for this process would be reimbursed by Dynegy. In return, for its $50 million payment Dynegy would be released from its "end of term" obligations. Staff was concerned about the risks involved in such a transaction. However, if such risks could be adequately mitigated, the proposal could be highly attractive. The City would be highly motivated to prioritize and expedite the demolition and remediation process, whereas, facing competing priorities, the Port and/or Dynegy may not be so motivated. Furthermore, if the money available for demolition and remediation exceeded the cost, the City could use any surplus funds to contribute towards what was expected to be the very high cost (approaching $300 million) of required Bayfront Master Plan infrastructure. The risk, of course, among others, was that the money available might not be adequate. This was the purpose of the 120 day "due diligence" period to allow the City to evaluate such risks. 2. Pattern of Negotiations and Status. The LOI proposal was presented to the City Council in closed session on November 2, 2010. City Council authorized staff to continue the use of outside counsel to evaluate the litigation exposure, risk and benefits of entering into such a transaction. Unfortunately, shortly thereafter the Port Attorney advised the City that in his view Mr. Lorman had a conflict of interest based on previous representation of the Port in related matters. As a result, the City was required to terminate Mr. Lorman's representation and expand the role of its special legal counsel representatives at the firm of Luce, Forward, Hamilton and Scripps. Staff s first direct contact and negotiations with Dynegy occurred on November 15tH Throughout the remainder of the year and into January, 2011 the negotiations with Dynegy were slowed down, in part due to the holidays, and in part due to Dynegy corporate restructuring and takeover distractions. In addition, the City consistently insisted that any agreement to begin performing the due diligence necessary to analyze the future risks and scope of the demolition/remediation be funded by Dynegy. Negotiations related to this funding issue and other threshold issues have not been resolved. Confidential details of these negotiations have previously been provided to the City Council in closed sessions on December 17, and February 8th. An updated briefing will be provided in the closed session scheduled for March 22°d 3. David Malcolm's Involvement. One particularly controversial aspect of recent City dealings with the SBPP has been the involvement of David Malcolm. Staff's understanding is that Mr. Malcolm brought the LOI proposal to the City on his own initiative. City staff has never hired Mr. Malcolm, nor designated him, formally or informally as the City's representative or agent in any discussions or negotiations with any party. Mr. Malcolm has also expressly stated to staff that he represents no other involved party and that he is receiving no compensation from anyone in connection with his involvement . He has indicated that he is acting purely as a volunteer. Mr. Malcolm has extensive knowledge regarding the history of the Port's involvement with the SBPP, power plant operations, corporate finance deal structure, and hazardous maintenance issues. Accordingly, his LOI proposal and input has been given due consideration in staff's analysis of city risks and opportunities in this matter. 1 1-7 3/22/11, Item Page 8 of 11 4. Attorney's Fees. The cost of the project work to date are significant. The total costs for Mr. Lorman on the project are $134,662.93. Legal fees from Luce, Forward are in the amount of $82,151.50. A substantial portion of the fees incurred by Luce, Forward were required due to the removal of Mr. Lorman based upon the Port conflict action. However, as a result of the hard work of everyone involved tremendous progress has been made in a relatively short time frame. Just five months ago it appeared that the SBPP operations would be in place for a long time based upon Dynegy's application to the Regional Water Quality Control Board for a five year extension of its discharge permit, and the requirement of the CAISO that the RMR would be in place until the beginning of the year 2014. Today all four of the powers generating units at the SBPP have been permanently shut down. The transmission lines from those units have been severed. Plans and discussions regarding actual demolition of the SBPP structures to occur in the near future are well under way. As we move toward a deliberate but expeditious removal and remediation of the SBPP most of the work already accomplished by the City legal consultants would have been required at some time in the future. The initial up front work has poised the City to be in the best possible position as we move forward in assisting with the significant task of demolition and remediation. D. The "Demolition First" Approach 1. In General. The District and the City are now considering an approach that would implement the demolition and removal of the above ground SBPP facilities, as a stand alone project. The removal of subsurface infrastructure elements and site remediation would follow, with a separate application, and careful scrutiny by the governing regulatory agencies, once the project description for these elements is finalized. The "demolition first" approach has emerged over the last two months as a result of discussions among City and Port staff and officials. The simple and practical thinking behind this approach is that no matter what party ends up responsible for what aspects of the environmental remediation that will be required at the site by the existing remediation agreements, regulatory agencies, and maybe courts, the plant needs to and should come down as soon as possible. The positive effects of this will be manifold: (1) the visual blight of the plant will be removed from the Chula Vista Bayfront and interior skyline; (2) plant security risks will be mitigated; (3) hazardous materials within the plant itself will be removed; (4) access to the foundation, soils and groundwater beneath the plant for required hazardous materials testing and assessment will be improved; and (5) any remaining disagreements between the Port and Dynegy over project scoping could be resolved or deferred and need not slow down the demolition process. 2. Required Permits. Port and City staff are currently working together and with Dynegy to solidify the details of this process. The Port demolition approval process involves compliance with or waiver of the Port's "tenant improvement" policy (Port Policy No. 357). Port staff will be presenting a plan for the resolution of this process to their Board at their next District Board meeting scheduled for April 5th. The City's approval process will involve a ministerial demolition permit issued pursuant to Chula Vista Municipal Code (CVMC) section 15.44.050. The permit would address requirements for asbestos and other hazardous material 11-8 3/22/11, Item ~ ~ Page 9 of 11 removal, utility disconnections, securing of remaining structures, waste management, stormwater management, safety and building code compliance. Because the SBPP lies in a coastal zone, Coastal Act compliance will also be required. Port and City staff have commenced working with Coastal staff in order to clarify and implement these requirements. 3. CEQA Analysis. City and Port staff, including staff from the City and Port Attorney's offices, as well as outside environmental counsel, have been in discussion to determine what will constitute the project(s) and at what stage environmental review will have to be undertaken to ultimately remove the SBPP. Removal of the SBPP, although technically complex with many moving parts, for purposes of environmental review, can be broken into, basically, two processes. One process is to just remove the four turbines and the immediate superstructure surrounding the turbines under the purview of a Demolition Permit authorized by the City. Generally, Demolition Permits are categorized as ministerial, and therefore, are exempt from environmental review (see CEQA Guidelines section 15268(a)). In this instance, the turbines, superstructure and ancillary piping and mechanicals would be removed down to the foundation of the immediate plant perimeter and no other removal work on the site would be conducted. The second process would be to complete the demolition of the four turbines and the immediate superstructure surrounding the turbines along with the removal of outlying buildings, tanks, piping and mechanicals, as well as, the remediation of the entire site. This process could entail discretionary actions by one or more agencies. Discretionary actions, or combinations of ministerial and discretionary actions do indeed require environmental review (see CEQA Guidelines section 15268(d)). In this instance, before any demolition or remedial work on any portion of the site could be conducted, if a discretionary action is necessitated, environmental review would be conducted. Currently, both Port and City staffs and their legal counsel are engaged in a review of which process or processes will facilitate the removal of the SBPP taking into account all aspects of CEQA, economies of scale in staging for the removal of the SBPP and various costs associated therewith. E. Dynegy's Willingness and Ability to Perform 1. D~negy's Basic Obli ation. There are ambiguities in the governing of SBPP agreements, however, Dynegy's basic obligation is clear. Under the lease, the termination of the RMR status triggers the "Basic Lease Term Expiration Date." The end of the Basic Lease Term allows the District to require the lessee and operator, Dynegy South Bay, LLC, (the successor to Duke) to perform its "End of Terms Actions" which are to decommission, dismantle, and demolish the power plant and to perform environmental remediation of the site as required under a separate 1999 agreement, the Environmental Remediation Agreement. City staff will continue to work with Port staff and Dynegy as appropriate to clarify any ambiguities in Dynegy's scope and encourage performance. 2. Recent Corporate Chan~,es. In November, 2010 Dynegy shareholders rejected a buy out offer from the Blackstone Group. The two largest shareholders of Dynegy stock, Carl Icahn and hedge fund Seneca Capitol opposed the takeover. 11-9 3/22/11, Item Page 10 of 11 In February, 2011 Shareholders again rejected a second offer from Icahn to buy Dynegy. Seneca Capitol opposed the Icahn offer. Dynegy had publicly warned that if the offers to buy were not accepted it might not be able to continue as a going concern. In late February Dynegy CEO, CFO, Chairman and entire Board announced their resignations. 3. Bankruptcy Concern. A March 8, 2011, annual report to the SEC by Dynegy raised concerns that Dynegy could not comply with certain debt covenants and may have to file bankruptcy. The City Attorney's office has been engaged in discussions and working with the Port Attorney over concerns about Dynegy's ability to perform its future obligations at the SBPP. An initial review by the City Attorney of legal Guarantees that Duke (the SBPP predecessor to LS Power and Dynegy) provided to the Port appears to support the Port's position that even if Dynegy is unable or unwilling to perform its end of term obligations, Duke would be required to do so. We understand that the Port is engaging special bankruptcy counsel to advise on financial issues. The City Attorney will coordinate with the Port Attorney on this issue and report back to the City Council as appropriate. The Port has advised that it has had discussions directly with Dynegy officials regarding Dynegy's ability and willingness to perform its demolition and remediation obligations. Dynegy has expressed its commitment that it fully intends to and has the ability to perform. The Port has requested written confirmation of such from Dynegy. The City Attorney's office will continue to collaborate with the Port regarding issues related to Dynegy's performance and will keep Council apprised of the issues. CURRENT YEAR FISCAL IMPACT The total costs for Mr. Lorman on the project are $134,662.93. Legal fees from Luce, Forward are in the amount of $82,151.50. Depending on direction provided by Council it is anticipated additional future costs may be incurred. ONGOING FISCAL IMPACT The joint planning effort between the Port and the City will involve substantial staff resources and may involve use of outside consultants. At this time, no additional appropriations are necessary to fund this effort. CONCLUSION City legal, business, public works and environmental staffs have been deeply involved in analyzing and responding to the myriad of issues presented by the SBPP project. Aside from the issues presented by the project itself, controversial elements of the project and public statements made by many individuals have elicited multiple Public Record Acts requests. Staff will continue to analyze all issues presented and apprise City Council of project developments and options in public whenever possible. Staff will also continue to work closely with the Port in order to map out a coordinated and legally appropriate process for expediting demolition and removal of the plant and then remediation of the site. Staff is available to answer questions and take whatever new direction City Council may elect. 11-10 3/22/11, Item Page 11 of 11 Attachments A Cal Iso Determination Letter -October 15, 2010 B Team Charter -Final Draft C Port Staff Report re: SBPP March 8, 2011 D List of SBPP Agreements - CD of listed documents E Resolution of City Council Supporting Demolition as First Priority 11-11 EXHIBIT A i '~ `~ California ISO f ~#~a~~`'~ Your Link io Power California Independent System Operator Corporation a i I October 15, 2010 Via Feel Ex & E-mail Mr. Randy Hickok Managing Director Asset Management & Trading Dynegy, Inc. 4140 Dublin Boulevard, Suite 100 Dublin, CA 94568 Dear Mr. Hickok: By letter dated September 29, 2010, the California Independent System Operator Corporation (ISO) notified Dynegy, Inc. that it was extending the Reliability Must Run (RMR) Agreement applicable to Dynegy's South Bay Units 1, 2 and the CT (collectively, the South Bay units). Since then, the ISO has received new information about projected power demand in the San Diego local area, showing that local power requirements are lower than the California Energy Cotrunission (CEC} had previously projected in its 2009 forecasts used in the ISO's 2011 Local Capacity Technical Analysis for 2011 and 2012. Additionally, on September 27, 2010, the San Diego area experienced a record peak demand of 4,684 MW. ISO staff analyzed the weather conditions behind this peak load event in light of the lower CEC forecast. This analysis reinforces the ISO's confidence in the accuracy of the recent, lower power demand projections for the area. For these reasons, the ISO is pleased to inform Dynegy of its decision to rescind the September 29, 2010 notice of extension and the RMR status of the South Bay units will, therefore, terminate on December 31, 2010. We understand that RMR designation caused Dynegy some concern given, among other things, the age of the facilities and the community's long-standing desire and expectation to see the units closed and removed. With this notice, Dynegy is now fi•ee to proceed with decommissioning and demolition in accordance with its lease agreement with the Port of Sail Diego beginning January 1, 2011. As you know, on Jtu1e l I, 2010, the ISO filed a petition for review of the decision of the California Regional Water Quality Board for the San Diego Region denying an administrative extension of the National Pollutant Discharge Elimination System (NPDES) permit for South Bay Units 1 and 2. We will take steps promptly to withdraw that petition. As you also know, a hearing on Dynegy's pending NPDES permit application for operation beyond December 31, 2010 is scheduled for November 17, 2010. We will be submitting comments on Monday, October 18, indicating that the ISO has reassessed the local reliability 11-12 WwW.caiso.com 151 Blue Ravine Road ~ 1=olsom, CA 95630 , 916.351.4400 Mr. Hancock October 15, 2010 Page 2 need for the South Bay traits beyond 2010 and has determined that these units are no longer needed for RMR service beyond the current contract year. The ISO appreciates the RMR service the South Bay units have provided over the years and we are pleased to be able to release them from service at the end of this year. Sincerely, C2~. Steve Berberich Vice President and Chief Operating Officer SBB/ag cc: Joseph M. Paul (Dynegy, li~c.) Daniel P. Thompson (Dynegy, Inc.) R. Alan Padgett (Dynegy, Inc.) James Walsh (SDG&E) Victor Kruger (SDG&E) Larry Chaset (CPUC} The Honorable Cheryl Cox (City of Chula Vista) 11-13 California Independent System Operator Mr. Hancock October 15, 2010 Page 3 bcc: (hardcopy) File bcc: (via electronic transmission) S. Davies K. Casey A. Ulmer C. Mamandur P. Pettingill G. Vanpelt G. DeShazo C. Micsa A. Bhatunik D. Timson R. Kott G. Grotto J. Chipman bcc: (Docuinenttun) Cabinet: Operations Support Folder: Reliability Contracts~I,ARS\ 2011 LARS\Notices\ Filename: 100929 Dynegy South Bay RMR Extension ~1-14 California In ependent System Operator } California ISO Your Link to Power Keith E. Casey, Ph.D. Vice President, Market & Infrastructure Development July 26, 2010 Mr. Jim Avery Sr. Vice President, Power Supply San Diego Gas & Electric 8330 Century Park Court San Diego, CA 92123 Dear Jim: California Independent System Operator Corporation The California Independent System Operator (ISO) is aware of the urgency you, the community of Chula Vista and others place on the retirement of the South Bay Power Plant (SBPP). This letter is in response to your related inquiry about the relationship of the Sunrise Powerlink project to the future retirement of SBPP. Under current conditions, the SBPP is vital to maintaining local reliability for the San Diego area and has been designated as a Reliability Must Run (RMR) resource by the ISO. Over the longer term, the Sunrise Powerlirilc also plays a critical role in meeting the reliability needs for the San Diego region and once completed will eliminate the RMR requirement for the SBPP. The Sunrise Powerlink plays such a critical role that were the project to be abandoned or indefinitely delayed due to legal challenges, the SBPP would need to remain under RMR designation until an alternative comparable transmission or generation solution is identified and implemented. This would likely require an extension of the RMR requirement for the SBPP well beyond 2012 given the tune it takes to identify, approve, and build major generation and transmission projects. In short, the Sunrise Powerlink is a critical, necessary element for releasing SBPP from its RMR designation. This is not to say that the Sunrise Powerlink must be completed and commercially operational before the SBPP can be released from an RMR designation. If there is clear and compelling evidence that the Sunrise Powerlinlc project will be completed by 2012 and additional infrastructure improvements in the San Diego region are completed this year (or on track for next year), it may be possible for the ISO to remove the SBPP from RMR designation in 2011. In light of local community concerns and water discharge permitting issues with the plant, the ISO has been working diligently with your staff to identify a set of actions that could eliminate the RMR requirement for SBPP in advance Sunrise Powerlinic's commercial operation. Based on that analysis and with an understanding that system conditions may change over time, it may be possible for the ISO to remove the RMR designation for the SBPP under the following conditions. WWW.Cai50.COm ~ 151 Blue Ravine Road Folsom, CA 95630 (916.351.4400 11-15 The permitting and legal challenges to the construction of the Sunrise Powerlinlc are resolved and construction is underway with no major obstacles that could delay completion of the project beyond 2012; and The numerous generation peaking projects, operating procedures, proven demand response and transmission upgrades that we have discussed with your staff are completed or in some cases nearly completed. We look forward to reviewing progress in these areas when we undertake our 2011 RMR designation process, which will begin in September of this year. Additionally, we will be following your progress in overcoming challenges to the Sunrise Powerlink project and will continue to analyze the risks as they unfold. I appreciate the opportunity to outline our decision process as it pertains to this complex and vital project. Please call me if you have any questions or want to discuss the matter fiirther. Re ards Keith E. Ca y, Ph.D. Vice President, Market & Infrastructure Development Cc: K. Edson N. Saracino S. Davies A. Ulmer 11-16 EXHIBIT B TEAM CHARTER FOR South Bay Power Plant Joint Planning Team March 1.2011 TABLE OF CONTENTS 1. Purpose ......................... .................................................................2 2. Objectives ..................... ................................................................. 2 3. Benefits ......................... ................................................................. 2 4. Ground Rules ................ .................................................................2 5. Team Members ............. ................................................................. 3 6. Meeting Activities ......... ................................................................. 3 7. Action Items .................. .................................................................4 8. Team Charter Approval ................................................................. 4 EXHIBIT A: Team Charter Roles and Responsibilities .................... 5 San Diego Unified Port District 1. PURPOSE We have created this team to work together to expedite the dismantling, demolition and remediation of the SBPP. 2. OBJECTIVES • Jointly explore solutions to expedite the removal of the SBPP and remediation of the property • Outline a process for the immediate demolition and dismantling of the SBPP as a stand alone project • Determine the appropriate CEQA process • Enhance relationships with other stakeholders and the public 3. BENEFITS • Preserve and maintain the public's trust • Enhance the beautification of the bay and provide future public uses • Forge and build new and existing relationships between all parties involved • Facilitate the implementation of the approved Chula Vista Bayfront Master Plan 4. GROUNDRULES • Trust will be the foundation for the team • All parties will give 100% cooperation to the team • Assume MRI-Most Respected Intentions from all involved • Keep an open mind • One speaker at a time; be an active listener • All perspectives are heard and considered • You are responsible for how you present your position • Communicate in a way that promotes understanding and minimizes defensiveness • Participate in a way that produces the best outcome for all • Coordinate communications with the public and stakeholders to ensure a high level of public transparency San Diego Unified Port District 5. TEAM MEMBERS Joint Executive Sponsor Team: Citv of Chula Vista: Jim Sandoval (City Manager), Glen Googins (City Attorney), Scott Tulloch (Assistant City Manager), Gary Halbert (Assistant City Manager) and Bart Meisfeld (Asst. City Attorney). Port of San Dieoo: Wayne Darbeau (CEO), Duane Bennett (Port Attorney), Randa Coniglio (VP, Operations), Jeffrey McEntee (CFO), Irene McCormack (VP, Ext. Relations) and Steve Kirkpatrick (Chief Engineer). Joint Working Team Members: Citv of Chula Vista: Matt Little (Assistant Director, Public Works), Eric Crocket (Re-Development Manager), Marisa Lundstedt (Land Use Planning/Environment), Lou EI- Khazen (Building Official/Permits), Mike Shirey (Deputy City Attorney). Port of San Dieoo: Kristine Zortman (Senior Asset Manager), Celia Brewer (Assistant Port Attorney), Bill McMinn (Deputy Port Attorney), John Helmer (Govt. & Community Relations), Bill Hays (Manager, Environment & Land Use Planning), Larry Sherry (Senior Engineer) and Marguerite Elicone (Communications). Team Leader ................... Kristine Zortman (Port of San Diego) ........................................ Matt Little (City of Chula Vista) 6. MEETING ACTIVITIES 1. Meeting Structure: co-chairs Kristine Zortman and Matt Little 2. Frequent meetings or conference calls a. Alternate sites San Diego Unified Port District 7. ACTION ITEMS Item # Action Who When ~ Send draft Team Charter to Chula Vista for feedback and additional information Wayne 2/7/11 2 Provide feedback re: draft Team Charter Project Team 217/11 3 Review Team Charter Team 2/7/11 4 Present Team Chart at Closed Session Kristine Zortman 2/8/11 5 First Team Meeting Project Team 2/16/11 6 Adopt Team Charter Project Team 3/8/11 8. TEAM CHARTER APPROVAL Date: Port of San Diego City of Chula Vista San Diego Unified Port District EXHIBIT A. TEAM CHARTER ROLES/RESPONSIBILITIES Team work is demonstrated by promoting and practicing collective cooperation. It involves open communication, respect, trust, and the commitment to common goals. An effective team shares the workload, credit, and consequences of its actions. TEAM SPONSORS • Champion the team's mission • Provide guidance to help the team meet the mission and schedule • Interact with Senior Management regarding project issues • Arbitrator/decision maker as appropriate TEAM LEADER • Guide team activities • Track progress • Schedule and lead meetings • Provide final reports • Interface with liaison members • Ensure mission, goals, objects, and methodology is followed • Ensure schedule is met TEAM MEMBERS • Be an active, participative, contributing team member • Accept and complete assignments on time • Lead or participate in sub-committee work SDUPD Docs No. 454361 EXHIBIT C AGENDA 1TFM 27 5AN D1EG0 UNIFIED PORT DlSTRlCT DATE: March 8, 2011 SUBJECT: ,SOUTH BAY POWER PLANT A) STAFF PRESENTATION AND UPDATE ON JOINT PLANNING EFFORT AND TEAM CHARTER W1TH THE CITY OF CHUlA VISTA B) RESOLUTION ESTABLISHING RENT FOR DYNEGY SOUTH BAY, LLC, FOR THE PERIOD FROM NOVEMBER 2, 2009 THROUGH DECEMBER 31, 2014 EXECUTIVE SUMMARY: Staff is presenting to the Board an update of recent discussions and meetings with the City of Chula Vista {City} in the collaboration of a joint planning and demolition process team, in order to possibly facilitate an expedited demolition plan for the South Bay Power Plant (SBPP}. In addition, staff is recommending that the Board adapt a resolution establishing the rent for Dynegy South Bay, LLC, for the period of November 2, 2009 through December 31, 2014. Background: The SBPP depicted on the attached map was acquired by the District from San Diego Gas & Electric {SDG~E} in 1999, in order to facilitate its removal from the Chula Vista Bayfront. Concurrent with the acquisition, the District entered into a lease agreement with Duke Energy South Bay, LLC {Duke). The District subsequently consented to two lease assignments, and currently has a lease with Dynegy South Bay, LLC, a Delaware Limited Liability Company {Dynegy} to operate the SBPP located at 990 Bay Boulevard in Chula Vistal {included on CD). The lease termination is tied to several factors including the regulatory approvals related to the termination status of the Reliability Must Run {RMR} designation imposed by CaJifarnia Independent Systems Operator {CALiSO). On October 15, 2010 ^ynegy received a fetter from CALISO terminating the RMR status effective December 31, 2010. The termination of the RMR status is key to clearing the way #or the removal of the SBPP from the Chula Vista Bayfront. In early 2009, Dynegy and the District commenced the planning process for the demolition of the SBPP. Assuming that the RMR would be removed at the end of 2012, the goal was to complete the environmental review by 2012, in order for Dynegy to t SDUPD Clerk's office Document No 38358, flied November 29, 1999, Lease Agreement between SDUPD as Lessor and Duke Energy South Bay LLC as Lessee San Doego Unified Port D~stnct Board Meeting -March 8, 2Q11 ~~-~$ AGFIVDA 1TFM 21 Page 2 of 9 immediately commence decommissioning and demolition. Dynegy submitted preliminary plans to the Distract for the demolition project on December 15, 2009. Throughout 2010, District staff worked with Dynegy to finalize a project description for the demolition, required to commence the California Environmental Quality Act (CEQA} process. Joint Planning Effort: In October 2010 the District became aware that discussions were occurring between Dynegy and the City. The City has indicated that its primary objective in these discussians was to explore the possibility of the City assuming same or a!I of Dynegy's demolition and remediation obligations under the lease and related agreements in order to expedite the demolition and remediation process. These discussions are ongoing. Since October, the project has evolved and the District and the City are now considering a modified demolition approach on the SBPP. Both City and District staff have met to discuss an expedited approach in demolishing the above ground facility, while addressing the appropriate decommissioning, demolition, and project scope for the subsurface infrastructure elements and the remediation. On February 16, 2011 City and District staff met to discuss a Team Charter (attached) that outlines the cooperative nature of a demolition project scope benefiting the public through the possibility of expediting the demolition and removal of the SBPP, thereby eliminating the visual blight on the Chula Vista horizon and Bayfront. In order to facilitate candid discussion, the City and the District entered into a confidentiality agreement to protect information related to real estate negotiations or potential litigation strategies of either party. The primary focus. of the effort will be open and transparent to the public. On March 1, 2011 the City adopted Resolution 2011-042 (attached} supporting the expedited demolition of the SBPP2. This presentation and update to the Board demonstrates the collaborative effort between the City and District. Rent: To finance the acquisition of the SBPP from SDG&E, lease revenue bands were issued in 1999. The funding source for the issuance of the bonds was lease revenue generated from the operations of the SBPP paid directly to the bond holder, The Bank of New York Trust Company, N.A. During the bond financing period, April 1999 through November 1, 2009, the District did not receive any rent from the operations and leasing of the SBPP, as those revenues were directed to the bond holder. z City of Chuta Vista, Resolution No 2011-042, adopted March 1, 2011, Resolution of the City Caunc~l of Chuta Vista to 5uppart the Expedited Demohuon of the South Bay Power Plant San Diego Unified Port Distract Board Meehng -March 6.2011 11-19 AGENDA 1 TEM 27 Page 3 of 9 Upon defeasance of the bonds, the lease requires rent to be paid to the District commencing on the first day after the Bond Financing Period (November 2, 2009}3. To establish the fair market rental value, Dynegy and the District obtained independent outside appraisals (included on CD} as outlined in the lease prescribed appraisal procedure4. The difference in fair market rental value between the appraisals was significant and the appraisers were unable to resolve their differences. As an alternative to having the two appraisers select a third appraiser, on January 20, 2011 Dynegy submitted an offer to pay the District a lump sum payment of $6,000,000, for the period beginning November 2, 2009 and ending December 31, 2010 during operation of the SBPP. Thereafter, Dynegy offered to pay the District $2,000,000 per year for the years of 2011 through 2014, attributable to rent during the demolition period. Based upon the prolonged appraisal process and the recent submittal of a rent settlement offer from Dynegy, staff is recommending that the Board consent to the lump sum payment of $6,000,000, for the period beginning November 2, 2009 and ending December 31, 2010 and an annual rent of $2,000,000 for the period of 2011 through 2014. RECOMMENDATION: 1) Receive staff's presentation and update on the joint planning effort and Team Charter with the City of Chula Vista; 2) Adopt resolution and supplement to lease establishing rent for Dynegy South Bay, LLC, for the period from November 2, 2009 through December 31, 2014. FISCAL IMPACT: While the joint planning effort between the District and the City could potentially facilitate an expedited demolition process, there is no fiscal impact from the joint planning effort. It is anticipated that the effort will facilitate a level of transparency and create good will with the public and associated stakeholders. During the bond financing period, April 1999 through November 1, 2009, the District did not receive any rent revenue from the SBPP. The proposed rent settlement for the period of November 2, 2009 through demolition is expected to result in a positive fiscal impact to the District. Since November 2, 2009, Dynegy has been making interim monthly rental payments of $386,750 far the land pending the results of the rent review with the District. Dynegy has paid $5,401,608.33 in interim rent to the Distrrct. ~ SDUPD Clerk's Office Document No 38358, filed November 29, 1999, Lease Agreement between SDUPD as Lessor and Duke Energy Saute Bay LLC as Lessee, Article 3, Section 3 1 {b) "SDUPD Clerk's Office Document No 38358, flied r~tovember 29, 1999, Lease Agreement between SDUPD as Lessor and Duke Energy South Bay LLC as Lessee, AppendFx A-2 San Diego Urnfied Port District Board Meei~ng -March B, 2411 11-20 A GFNDA l TEM 2? Page 4 of 9 Only $2,793,333.33 has been applied as revenue with the remaining $2,608,275 held in a liability account pending resolution of the rent review, Since November 2009, Dynegy has paid $245,752 in rent to the District for the water parcels. Subject to the Board's approval of the resolution, the District will recognize the entire $2,608,275 suspended in the liability account and an additional $475,515.67 (the difference between the rent paid for the land and 54% of the rent paid for the water and the total rent owed) as revenue. This represents a total of $3,083,790.67 of additional rent revenue to the District for the fiscal year 2011. COMPASS STRATEGIC GOALS: This agenda item supports several key strategic goals. Establishing a joint planning effar# with the City of Chula Vista, strengthens the public's trust with the Dis#rict building a level of confidence and transparency, the expedited demolition process will improve the environmental conditions along the waterfront and of the Bay; and the removal of the SBPP will facilitate future re-development an tidelands. Additionally, settling the rent with Dynegy strengthens the Distnct's financial performance. ~ Enhance and sustain a dynamic and diverse waterfront. Protect and improve the environmental conditions of San Diego Bay and the _ Tidelands, ® Develop and maintain a high level of public understanding that builds confidence and trust in the Port. ® Strengthen the Part's financial performance. DISCUSSION: Background: In 7999 the California Maritime Infrastructure Authority (Authority) issued $115,000,000 {aggregate principal amount) of taxable lease revenue bonds for the benefit of the District, to acquire the SBPP and related land and water parcels. The Authority is authorized to make loans and issue bonds to assist local agencies in financing projects and determines that there are significant public benefits. With the acquisition of the SBPP from SDG&E, the District entered into a lease agreement with Duke Energy South Bay, LLC. In January 2006, Duke Energy announced the sale of its power generation assets outside the mid-west to LS Power. The District consented to the transfer of ownership to LS Power on May 6, 2008 subject to the condition that the original Duke Lease Guaranty, Environmental Remediation Guaranty, and Guaranty of Contract and Permit Rights Assignment and Property Escrow Agreement {Duke Guarantees5 included on CD) held by the District in connection with the SBPP, remained in full force and effect and were not in any way compromised by the a SDUPD Clerk's Office Document No 39818, filed November 30, 1999, Lease Guaranty, SDUPD Clerk's Office Document No 51868, fled Aprll 10, 2007, Environmental Remed~at~on Agreement Guaranty, SDUPD Cleric's Office Document No 51892, filed Apnl 10, 2007, Guaranty of Contract and Permit R~ghtS Assignment and Properly Escrow Agreement San Diego Unified Port District Board Meeting -March 8, 2011 11-21 A GEIYDA ITEM 21 Page 5 of 9 t_S Power transaction. LS Power also defeased the lease revenue bonds issued to acquire the SBPP by depositing securities into an escrow account, which covered all bond payments. On November 7, 2006 the Board consented to the merger and sale of LS Power's interest In the SBPP to Dynegy, Inc. This merger gave the combined company enhanced scale, diversity of cash flows and an improved market position in the power generation sector, making Dynegy the fifth largest independent power producer of electric power in the United States. The District continued to retain the Duke Guarantees, which are unconditional and remain in effect unless released by the District. The lease, as consented to with Oynegy, has alease-term that is tied to several variables, with the most important being the regulatory approvals related to the termination status of the RMR designation imposed by CALISO. The terms of the lease are summarized on the attached EXISTING AND PROPOSED LEASE INFORMATION SUMMARY. Removal of RMR Status by CALISO: In October 2009 CALISO removed the RMR designation from two of the four operating units at the SBPP effective December 31, 2009. It was anticipated that the remaining two units would continue to provide power and be operational until the end of 2012. In a letter to Dynegy dated October 15, 2010, CALISO stated that based on new information about projected power demand in the San Diego region, it would rescind its September 29, 2010 notice that the RMR would be extended for the remaining two operational units at the SBPP. The letter terminated the RMR designation from the last two operating units effective December 31, 2010 and triggered the end of operations for the 50-year old plant. The termination of the RMR status is key to clearing the way far the removal of the power plant from the Chula Vista Bayfront and far the future redevelopment of over 100-acres of District tidelands. Under the lease, the termination of the RMR status triggers the Basic Lease Term Expiration Date. The end of the Basic Lease Term allows the District to require the lessee and operator, Dynegy South Bay, LLG, (the successor to Duke) to perform Its "End of Term Actions" which are to decommission, dismantle, and demolish the power plant and to perform environmental remediation of the site as required under a separate 1999 agreement, the Environmental Remediation Agreement6 {Included on CD). Planning for Decommissioning and Demolition: In anticipation that the RMR status would be removed at the end of 2012, Dynegy and the District began planning, scoping and negotiating the details of the demolition project in early 2009. The initial goal (based on the assumption that the RMR would be e SDUPD Clerk's Office Document No 38358, filed November 29, 1999, Lease Agreement between SDUPD as Lessor and Duke Enert,~y South Bay LLC as Lessee, Article 18, Section 18 1 {ay, and SDUPD Clerk's Office Document Number 51866, fled April 1Q, 2007, Environmental Remediation Agreement between SDUPD and Duke Energy South Bay, LLC San Diego Unified Port btstnct Board Meeting -March 8, 2011 11-22 /AGENDA ITEM 27 Page 6 of 9 removed at the end 2012} was to have the environmental review and other approvals and permitting completed by early 2012 so that decommissioning and demolition could begin immediately upon removal of the RMR designation. District staff from Real Estate, Land Use Planning, Environmental Services, Engineering and the Port Attorney's Office met with Dynegy's planning team throughout 2009 to develop a scope for the project that could eventually be translated into the tenant project application. On December 15, 2009, Dynegy formally submitted preliminary plans to the District for the demolition project. District staff continued to meet with Dynegy's team to review and discuss their proposed plans throughout 2010, On April 6, 2010, the Board granted authorization to proceed with preliminary project review and to initiate environmental review7. On June 8, 2010, after a Request for Proposal process, the Board authorized a Three-Party Agreement with AECOM to prepare the Environmental impact Report for the projects. While the project description has not been finalized, due to negotiated details regarding removal of above and below ground and in-water structures, biological and hazardous materials technical studies are under way to assist in this process. City of Chula Vista and Port District Joint Planning Effort: In the fast two weeks of October 2010, District staff became aware of discussions between Dynegy and the City that included the potential of increased City participation in the planning and demolition process. Under discussion was the possibility that the City would assume Dynegy's end of term obligations with a mutual termination agreement between Dynegy and the District. As District staff understood it, the City's objective was to expedite the power plant removal and site remediation. As a result, staff was asked to analyze a draft term sheet, which represented a mutually agreed upon termination of the lease between the District and Dynegy. The term sheet and other items were presented at the November 9, 2010 Board meetings. Over the ensuing months, the Port Attorney's office and the Crty Attorney's office continued discussions in the possibility of a joint planning effort between the City and the District for the purposes of expediting the demolition of the SBPP, On February 4, 2011 the President, Wayne Darbeau, sent to the City Manager a draft Team Charter in order to facilitate diaEogue for the purpose of identifying a process to possibly expedite the demolition of the SBPP. On February 16, 2011 District staff met with Chula Vista staff to discuss a joint demolition and planning process for the SBPP between the City and the District, Staff members from the District included: Duane Bennett, Jeff McEntee, Kristine Zortman, Celia Brewer, Bill McMinn, John Helmer, Bill Hays, Larry Sherry, Marguerite Elicone and Melissa Steeg. The City was represented by: Matt Little, Marisa Lundstedt, Lou EI-Khazen, Gary Halbert, T SDUPD Agenda Item No 30, Apnl 6, 2x10, Preliminary Protect Review for the South Bay Power Plant Demolition and Remed~at~on and D+rection to Staff to Commence Environmental Review SDUPD ResoluUOn No 2410-92, June 8, 2010, Authorrzatian to Enter Into Agreement with and Among the San Diego Unified PoR Distract, Aecom Fechnicai Services, Inc and Dynegy South Bay, LLC e SDUPD Agenda item No 31, November 9, 2014, Update on South Bay Power Plant and Status of Decommis5~on~ng and Removal of FacahUes and Environmental Remedianon of Site and Direction to Staff San Diego Unified Port District Board Meenng -March 8, 20t 1 11-23 AGENDA 17EtN121 Page 7 of 9 Glen Googlns and Scott Tuiloch. A clear action plan was discussed with the goal to expedite the demolition of the SBPP. The Part attorney discussed a separate demolition plan and remediation strategy under the Comprehensive Environmental Remediation Compensation Liability Act (CERCLA). He went on to discuss issues surrounding distrust and some historical legacy issues that have plagued communications between the City and the District in the past. He encouraged stronger communications and sharing of information to faciii#ate better working relationships. Both parties agreed that confidentiality is critical to the success of the joint planning process, while balancing the public's trust by maintaining a high level of transparency. The current action items that staff is presenting are as follows: 1 } A confidentiality agreement or similar agreement between the City and the District; 2} Identification of an expedited demolition process for the above ground structures of the SBPP; 3) identification of the appropriate CEQA process for the SBPP and a schedule for the demolition process. To further demonstrate the collaborative nature of this joint planning effort, on March 1, 2011 the Cit~ adopted Resolution 2011-042 supporting the expedited demolition of the SBPP' . Rent Article 3. Section 3.1 {a) and {b)' (a1 Basic Rent during Bond Financing Period: The lease agreement defines Basic Rent and provides for periodic rent adjustments". The taxable lease revenue bonds that were issued in 1999 by the California Maritime infrastructure Authority in the amount of $115,000,000 were secured by the lease rent revenue required under the lease of the plant to Duke Energy South Bay, LLC. The lease payments were, in turn, guaranteed by Duke Energy, Duke Energy South Bay, LLC's parent company, During the bond financing period the rent required under the lease was due on specific dates and in pre-determined amounts necessary to cover the principal and interest payments on the bonds. The (ease revenue was paid directly to the bond holder, The Bank of New York Trust Company, N.A. On November 1, 2009 the bond financing period was paid in full, and the bond and loan obligations were deemed to have been satisfied, thereby concluding the Basic Rent during Bond Financing Period. t0 Cdy of Chula Vista, Resolution No 201-042, adopted March 1, 2411, Resolution of the City Council of Chula Vista to Support the Expedited Demolition of the South Bay Power Plant " SDUPD Clerk's office Document No 38358, filed November 29, 't989, Lease Agreement between SDUPD as Lessor and Duke Energy South Bay LLC as Lessee, ArLGe 3, Section 3 1 San Diego Urnfied Port Distnct Board Meeting -March 8.2D11 11-24 AGEND~41 TEM 29 Page 8 of 9 (b) Basic Rent After Bond Financinc,~ On November 2, 2009 the rent for the facility and site was to have been adjusted to the fair market rental value12. The District and Dynegy have been following the lease prescribed appraisal process for determining the fair market rent and have also considered other ways of reaching agreement on the rental amount. In Late 2008 District staff commissioned appraisals to be u#ilized in negotiations and initiated discussions with Dynegy. In October 2009, CALISO removed the RMR designation from two of the four operating units at the power plant. It was then necessary far bath the District and Dynegy to update their appraisals to reflect the impact of CALISO's action. Meanwhile, Dynegy agreed to make interim monthly rent payments to the District in the amount of $386,750 commencing on November 2, 2009 until the rent adjustment process was concluded. After completing the updates to the appraisals in January 2010, the District and Dynegy reinitiated the rent discussions- Once it was determined that the parties would nat be able to reach a mutually acceptable rental amount both3parties agreed to proceed with the next step in the procedure outlined in the lease' .The District's and Dynegy's respective appraisers selected a mutually agreeable third appraiser to determine the fair market rent far the facility and far the site. Over the last several months the District and Dynegy have been negotiating athree-party engagement letter with Deloitte Financial Advisory Services, LLP for the third appraisal. On September 22, 2010 Dynegy made a verbal offer to settle the rent with a negotiated amount, rather than to proceed with the third appraisal. On September 29, 2010 Dynegy withdrew its offer and suggested that the parties proceed with the appraisal as previously planned. On January 20, 2011 Dynegy re-submitted to the District a rent settlement offer that included alump-sum payment of $6,000,000 for the period of November 2, 2009 through December 31, 2010 and $2,000,000 annually from 201 i through 2014 during post-operations and End of Term Actions14. On January 26, 2011 Dynegy followed up on their previous offer via email to District staff to clarify that their rent offer was to cover all rents due to the District including rent on the three water parcels, covered under separate leases, Since November 2009 the total amount of rent paid to the District for the water parcels is $245,752. Since November 2, 2009, Dynegy has been making interim monthly rental payments of $386,750 pending the results of the rent review with the District. Dynegy has paid to the District $5,401,608.33 in interim rent. Only $2,793,333.33 has been applied as 'Z SDUPD Clerk's Office Document Na 38358, fled November 29, 1999, Lease Agreement between SDUPp as Lessor and Duke Energy South Bay LLC as Lessee, Article 3, Sectwn 3.1 {b} 13 SDUPD Clerk's Office Document No 38358, fled November 29, 1999, Lease Agreement between SDUPD as Lessor and Duke Energy South Bay LLC as Lessee, Appendix A-2 " SDUPD Clerk's office Document Na 38358, filed November 29, 1999, Lease Agreement between SDUPD as Lessor and Ouke Energy South Say LLC as Lessee, Article 1 S, 5ectian 18 1 {a}, and SDUPD Glerk's office Document Number 51866, filed Apnl 10, 2007, Environmental Remed~arion Agreement between SDUPD and Duke Energy South Bay, LLC San Diego Urnfied Port Distract Board Meeting - M1+tarch 8, 2011 11-25 AGENDA ITEM 21 Page 9 of 9 revenue with the remaining $2,608,275 held in a liability account pending resolution of the rent review. Staff recommends that the Board adopt the rent terms as outlined above. Subject to the Board's approval of the resolution, the Drstrict will recognize the entire $2,608,275 suspended rn the liability accoun# and an additional $475,515.67 (the difference between the rent paid for land and 50% of the rent paid on the water and the total rent awed) as revenue. This represents a total of $3,083,790.67 of additiana! rent revenue to the District in frscal year 2011. Port Attorney's Comments: The Part Attorney's Office has been deeply involved in analyzing and responding to the myriad of legal issues presented by the SBPP. Legal analysis regarding demolition and remediation of the SBPP started in 2007 The Port Attorney has been working continuously with the Chula Vista City Attorney to ensure optimal communication and to properly coordinate their respective agency efforts. The District will continue to meet with Chula Vista representatives and other involved stakeholders in furtherance of expediting demolition of the SBPP structures consistent with the requirements of CEQA. Environmental Review: This proposed Board action does not constitute a project under the definition set forth in California Environmental Quality Act (CEQA) guidelines Section 15378 and is not subject to CEQA, as amended. Equal Opportunity Program: Nat applicable. PREPARED BY: Kristine A. Zortman Senior Asset Manager, Real Estate San fliego United Port Distract Board Meeting -March 8, 201 t 11-26 EXHIBIT b INDEX OF SOUTH BAY POWER PLANT DOCUMENTS 1. #38353 -Asset Sale Agreement: SDG&E, seller & San Diego Unified Port District, buyer (754 pgs.) 2. #38354- Operation and Maintenance Agreement -SBPP (58 pgs.) 3. #38355 -Facilities Services Agreement: SDG& E and SDUPD (102 pgs.) 4. #38357 -Property Escrow Agreement with Duke Energy South Bay, 4/23/03 (18 pgs•) 5. #38357 -Quitclaim Deed Easement Reservation and Covenant Agreement (69 pgs.) 6. #38358 -Lease with Duke Energy South Bay LLC for Operation of SBPP (81 pgs.) 7. #38359 -Cooperation Agreement with Duke Energy South Bay LLC (221 pgs.) 8. #38360 -Three party Agreement by and among SDG&E, SDUPD and Duke (42 pgs) 9. #39100 -Water Lease to Duke Energy South Bay LLC for Public Utility (21 pgs.) 10. #39101 - Leasc to Duke Energy South Bay LLC for Intake and Outflow (34 pgs.) 11. #39102 -Lease to Duke Energy South Bay LLC for Establishment and Use of Water Intake and Discharge Channels (10 pgs.) 12. #45911 -Property Escrow Agreement with Duke Energy South Bay (18 pgs.) 13. #48335 -Contract & Permit Rights Assignment and Assumption Agreement (26 pgs.) 14. #51866 -Environmental Remediation Agreement between SDUPD and Duke (24 pgs•) 15. #51868 -Environmental Remediation Agreement Guaranty (11 pgs.) 16. #51891 -Assignment and Assumption of Lease Guaranty from Duke (24 pgs.) 17. #51892 -Assignment and Assumption of Guaranty of Contract ana rermit rights Assignment (23 pgs.) 18. #52376 - Amendment No. 1 to Quitclaim Deed Easement Reservation (7 pgs.) 19. #56143 -Real Estate Exchange Agreement and Joint Escrow Instructions (205 pgs.) 11-27 20. #98208 -Resolution No. 98-372 Asset Sale Agreement (4 pgs.) 21. #429849 - Resolution No. 2010-78 Chula Vista Bayfront Master Plan Amendment (514 pgs.) 22. #429849 -Bill of Sale and Assignment (2 pgs.) 23. Bill of Sale & Severance (4 pgs.) 24. #39818 -Lease Guaranty from Duke Capital Corporation (12 pgs.) 25. Memorandum of Agreement SBPP: SDUPD & Duke Energy South Bay LLC 26. Related Agreements Assignment & Assumption Agreement (13 pgs.) 11-28 EXHIBIT E RESOLUTION NO. 2011-042 RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CHULA VISTA TO SUPPORT THE EXPEDITED DEMOLITION OF THE SOUTH BAY POWER PLANT WHEREAS, in 19b0, San Diego Gas & Electric ("SDG&E") constructed the South Bay Power Plant ("SBPP"} on the Chula Vista Bayfront and began operation; and WHEREAS, in the decades to follow the SBPP served reliably as a major supplier of electrical energy to the San Diego region; and WHEREAS, over time the SBPP became outdated and it was determined that its negative impacts on the environment would soon outweigh its benefits; and WHEREAS, in 1999, the San Diego Unified Port District {"Port") acquired the SBPP from SDG&E in order to wind down its operations and facilitate its removal from the Chula Vista Bayfront; and WHEREAS, on October 15, 2010, the California Independent System Operator (ISO) determined that the operation of the SBPP was no longer necessary to service the electrical energy needs of the San Diego region; and WHEREAS, on December 31, 2010, Dynegy, Inc. ("Dynegy") ceased operations of the SBPP and proceeded to disconnect the SBPP from the regional power grid; and WHEREAS, the agreements to operate the SBPP between the Pori and Dynegy establish Dynegy as the responsible party to dismantle and demolish the plant and remediate the plant site within a prescribed period using funds set aside for that purpose; and WHEREAS, the expeditious dismantling and demolition of the SBPP will be in the best interest of the community by eliminating visual blight from the Chula Vista Bayfront; and WHEREAS, City staff has been working collaboratively with Port staff to evaluate the legal and practical steps necessary in order to expedite the SBPP demolition process; and WHEREAS, City Council desires to encourage this process and declare expedited demolition of the SBPP a top priority. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Chula Vista hereby: 1. Declares its official support for the expedited demolition of the SBPP by the responsible parties as a top priority; and 11-29 Resolution No. 2011-042 Page 2 2. Authorizes and directs City staff to continue to work cooperatively with the Port staff to encourage an expedited demolition process by the responsible parties. Pre d by amela Bensoussan, Councilmember Council Ene~v Subcommittee Approved as to form by en ogins ey Steve Casda; ~duncilinember Council erav Subcommittee PASSED, APPROVED, and ADOPTED by the City Council of the City of Chula Vista, California, this 1st day of March by the following vote: AYES: Counciimembers: Aguilar, Bensoussan, Castaneda, Ramirez and Cox NAYS: Councilmembers: None ABSENT: Councilrnembers: None ATTEST: 0 Donna R. Norris, C, City Clerk STATE OF CALIFORNIA ) COUNTY OF SAN DIEGO } CITY OF CHULA VISTA ) 1 ~ Cheryl Co M or I, Donna R. Norris, City Clerk of Chula Vista, California, do hereby certify that the foregoing Resolution No. 2011-042 was duly passed, approved, and adopted by the City Council at a regular meeting of the Chula Vista City Council held on the 1st day of March, 2011. Executed this 1st day of March 2011. Donna R. Norris, CM ,City Clerk 11-30 ~~t i~l ~OY~af_ .~- vi ~p`nxa~l`~r) From: Oma Sent: Monday, March 21, 2011 8:02 AM To: Cheryl Cox; Patricia Aguilar; Pamela Bensoussan; Rudy Ramirez; Steve Castaneda Cc: UST Wendy Fry Subject: South Bay Power Plant - "Just Walk Away" Dear Honorable Mayor and Council Members: Regretfully I have to work on Tuesday afternoon and won't be able to attend your special session on the SBPP issue. Please read/place my comments below into the written record. My understanding of Dynegy's potential bankruptcy is that it would still the Port of San Diego responsible for dismantling/cleaning up the site. And if (probably "when") the Port comes you with their offer of a multi-milltion dollay payout to get out from under this obligation, please, Please, PLEASE just walk away. I would much rather see an "eyesore" on the waterfront for [as long as it takes for the wheels of bureaucracy/the court system to force them to dismantle and sanitize the site] than see more library hours cut, parks/senior centers closed, after school programs terminated, i£ you gamble with potentially tens of millions in environmental mitigation costs ... and lose. As we are a generation, two max, away from the end of personal consumption of fossil fuels there will be many folks, directly and tangentially in the business, going under. Consider how many gas stations will close when we switch over to plug-in electric, and then hydrogen cars. By accepting responsibility for SBPP's clean-up you will set a precedent. Every independent property owner (regardless of whose corporate brandis on the marquee) will demand a bail-out when they can no longer compete with Chevron, BP, etc. in an increasingly litigious and environmentally conscious business climate. Expect to see the vacant lot at Third & E" replicated 10-fold throughout the West Side as owners who have already banked and/or spent their profits just walk away. We are unfortunately (or not, depending on your perspective) also a generation away from urban Build-out which will force the another, even more drastic, contraction of the construction industry. Their lobbyists will bring intense pressure to bear on all levels of government to spend tax dollars cleaning up former wrecking yards, transmission shops, body shops etc. The campaign led by developer Bill Ostrem to ED Rl residential homes so he could widen Second Avenue for Riverwalk, was just the harbinger of things to come if his ilk see the chance to get cities to pay the costs of making contaminated land build-able again. The fight is going to get ugly (think Gaylord x 100) as there is no "Win-Win" option. You, or your immediate successors, will have to grapple with the real Inconvenient Truth of our age: Sustainable Growth ... Isn't. Omar Firestone Chula Vista, CA 91910 i ©~©,