HomeMy WebLinkAboutVAN HORN CONSULTING - 2005-03-10�CONTRACTS SUBMITTAL TO
CITY CLERK'S OFFICE
To: JOAN FLYNN, City Clerk
Name of Contractor: VAN HORN CONSULTING
Purpose of Contract: For Example: Audit Services or Water Quality Testing Huntington Lake —Huntington Central Park
Economic Analysis
Amount of Contract:
Not to exceed $94,500.00.
Copy of contract distributed to: The original insurance certificate/waiver distributed
t
Initiating Dept. ❑ o Risk Management ❑
City Treasurer ❑ ORIGINAL bonds sent to Treasurer ❑
PVA� � I
Name/Extensio
City Attorney's Office
Date: L,�-2
AMENDMENT NO.2 TO AGREEMENT BETWEEN THE
REDEVELOPMENT AGENCY OF THE CITY OF HUNTINGTON BEACH
AND VAN HORN CONSULTING
THIS AMENDMENT is made and entered into by and between the REDEVELOPMENT
AGENCY OF THE CITY OF HUNTINGTON BEACH, a public body, hereinafter referred to as
"Agency," and VAN HORN CONSULTING, a sole proprietorship, hereinafter referred to as
"Consultant."
WHEREAS, Agency and Consultant are parties to that certain agreement, dated March
10, 2005, entitled "Professional Services Contract Between the Redevelopment Agency of the
City of Huntington Beach and Van Horn Consulting for Economic Analysis - Huntington Beach
AES Power Plant," as previously amended by Amendment No. 1 thereto, which agreement shall
hereinafter be referred to as the "Original Agreement," and
Agency and Consultant wish to further amend the Original Agreement to provide for
additional work by Consultant and additional compensation to Consultant,
NOW, THEREFORE, it is agreed by Agency and Consultant as follows:
1. ADDITIONAL WORK
Consultant shall perform additional tasks described as Proposed Tasks 4, 5, 6, and
7, as set forth in Consultant's proposal dated April 17, 2006, a copy of which is attached hereto
as Exhibit "A" and incorporated by this reference as though fully set forth herein. Consultant
shall commence work on Proposed Task 4 immediately upon execution of this Amendment by
Agency. Consultant shall not commence nor perform any work on Proposed Tasks 5, 6, and 7
unless and until Consultant has received prior written authorization to proceed with such Tasks
from Agency's Deputy Executive Director.
2. ADDITIONAL COMPENSATION
Section 4 of the Original Agreement, entitled "Compensation," is hereby amended
to read as follows:
In consideration of the performance of the services
described herein, AGENCY agrees to pay CONSULTANT on a
time and materials basis at the rates specified in Exhibit "B,"
which is attached hereto and incorporated by reference into this
Agreement, a fee, including all costs and expenses, not to exceed
Ninety -Four Thousand Five Hundred Dollars ($94,500.00).
06agreeNan Horn Amendment # 2
3. REAFFIRMATION
Except as specifically modified herein, all other terms and conditions of the
Original Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties herto ha,,caused this Agreement to be executed
by and through their authorized officers on / —2996.
VAN HORN CONSULTING, a sole
proprietorship
��Zdi �"' �✓ �Gt-del �7V %''47
print name
REDEVELOPMENT AGENCY OF THE
CITY OF HUNTINGTON BEACH, a public
body
Deputy ixecutive Direc r
ITS: (circle one) C'resiereilt APPROVED AS TO FORM:
AND
print name
ITS: (circle one) Secretary/Chief Financial
Officer/Asst. Secretary - Treasurer
s�ZAgen y General Co e11 I'
�/, 6�06
REVIEWED AND APPROVED:
2
Executive Director
(only for contracts $50,000 and over)
06agreeNan Horn Amendment # 2
EXHIBIT A
VAN HORN CONSULTING
Economic, Technical & Management Consulting
Memorandum
12 Lind Court
Orinda, California 94563-3615
925 254-3358 Phone
925 254-3359 Fax
consulting@vhcenergy.com
To: Shari Freidenrich, Teresa Judd, & Paul D'Alessandro, Assistant City Attorney
From: Andy Van Horn, James Tsui
Date: April 17, 2006
Re: Review of April 13 Meeting/Conference Call with BOE & AES and Proposed
Additional Tasks to Further Inform BOE
Observations and Recommendations
The following are our observations and recommendations after last Thursday's meeting.
During the call the BOE staff indicated their interest in reference materials that would be
informative. Although a number of useful documents are cited in VHC's spreadsheet,
BOE doesn't have these documents and are unlikely to get them in a timely fashion, if at
all. 'J I think we should provide several source documents and citations to them as soon as
possible. Beyond supplying the CPUC documents, VHC could summarize their salient
points. These points should also be summarized in a set of briefing materials (i.e. a
Powerpoint presentation format) updating the results we presented in the meeting. A
proposed task to do this is given at the end of this memo.
As I discuss below, I have some new insights that will demonstrate unequivocally why the
appropriate replacement plant as of l/l/2006 is a Combustion Turbine, not a Combined
Cycle unit. I could summarize this analysis in several slides that could be transmitted to
Stanley Siu via email next week.
Strategically, you could easily send a "follow-up" email early next week to Stanley Siu,
mentioning the fact that several times during the conference call BOE staff indicated an
interest in reference materials. Your email could be accompanied by the proposed
presentation. (Note: BOE tried to be helpful by citing sections of the assessor's manual to
us, we should return the favor.)
Several primary documents I have relied on are SCE filings about market prices and a
recent contract SCE signed with a cogenerator. Although Eric tried to question SCE's CT
proxy capacity value, the value I used has been filed in both SCE's general rate case and in
the SRAC (short run avoided cost) proceeding, subject to downward adjustments that I
have just figured out how to calculate for BOE assessment purposes. Other documents that
BOE should be aware of, give installation costs for CTs and CCGTs that are more recent
46
Memo to Shari Freidenrich, Teresa ?, & Paul D'Alessandro, Assistant City Attorney Page 2 of 6
April 17, 2006
and probably higher than BOE is using. These are based on recent filings at the CPUC for
new combined cycle plants in California. These costs are considerably higher than two
years ago and were the basis for VHC's replacement cost valuation.
2. Eric Pendergraft stated that two of the AES-HB generating units were operating only 5%
of the time and that two were operating 70% of the time. (Probably, units 1 and 2, since
they are under RMR contracts.) This makes our point that, at the very least, the two units
operating at 5% should be replacement cost valued as combustion turbines (CTs), not as
baseload combined cycle units (CCGTs).
Eric's statement warrants further explanation. Although units 1 and 2 are "operating" 70
percent of the time, they are probably providing spinning reserves for much of that time
and are not generating power. FERC quarterly report submissions by AES indicate overall
plant generation in 2005 for all 4 units was a combined 15 percent capacity factor, which
can be consistent with Eric's statement only if many "operating hours" were "non -
generating" hours. Moreover, the point of my graph had to do with MWh generated and
prices for MWh, not for spinning reserves, which are another source of income, not
adequately considered (if at all) by BOE.
The FERC/EIA data is not divided by generating unit. EPA data, on the other hand,
measure stack emissions and Btu for each unit — and could tell us the relative loading and
operating hours for each unit. We can get it later and analyze it, in order to understand
how the individual units are being operated and when, and hence what revenues they
would command in the market.
I believe that further thinking, research and explanation can drive home our points about
the differences between CTs and CCGTs. VHC engineers and I can have already
discussed the arguments raised by AES. We can point out and reemphasize with simple
numerical examples that the physical, external and function obsolescence factors used by
BOE can better reflect the way these different types of generating units actually earn their
money. A replacement plant would also earn money by providing capacity, energy and
ancillary services in the same fashion as the existing plant, as BOE stated: "to produce the
same benefit." Wade Norwood, cited the "principle of substitution," which should mean
the same thing, but cannot, if the replacement plant is a Combined Cycle.
The more I think about this, the more I think BOE needs to consider improvements to its
methodology for valuing power plants. (Neither CTs nor CCGTs are replicas of existing
steam plants, but the BOE's obsolescence factors should be as close to 1.0 as possible.
Otherwise, they're trying to compare the value of a Freightliner diesel truck to a Honda
Civic by scaling things like gas miles per gallon or to compare apples and cabbages based
on weight, etc.)
4. There are other issues that remain relevant, such as the site value. The Board Staff
indicated that Board Rolls indicate acreage as well as site value and value of
improvements. Section 326 of some document indicates maps. It would be useful for the
City to get this data. Mike Heineke could also review p 13, Sec 501? of the Assessor's
Memo to Shari Freidenrich, Teresa ?, & Paul D'Alessandro, Assistant City Attorney Page 3 of 6
April 17, 2006
Handbook and craft his own arguments to refute the BOE's interpretation of "highest and
best" use. He made some cogent arguments in our post -call conversation, which should be
written down. Overall, the Board pretty much ignores appreciation in the site value by
assuming that remediation and other costs would be a wash. Of course, it would take more
detailed study to determine this. Meanwhile, BOE won't reveal what they actually do for
the AES-HB site.
The BOE stated again that the $35,100,450 value for the 22.05 acres was a 2003 value. At
a minimum, you could go before the BOE in May and point out the appreciation in HB
land values. You can make several overarching points to the Board:
a. The site values need to be updated and reflect the unique infrastructure and coastal
location,
b. The BOE's replacement value choice of a CCGT is not appropriate in all cases and
should be changed in accord with the presentation I propose below.
c. The use of below market contracts in the income approach needs to be revisited.
These are similar to the points you made last year, but you could use the forum to provide
the Board with updated information.
6. The CEC license extension proceeding. Although I believe the outcome is foreordained
and that the operating license will be renewed absent new information, I believe that the
City should intervene. It is simple to do and, perhaps, can elicit some useful information,
as well as putting AES on notice that the City is interested.
Moreover, it will give the City a better position to raise issues before the CEC, when and if
they arise in the future. And, certainly, in 2011 or before, when AES applies for a new
license, the CEC will be aware of the City's interest and can't say, "well no-one raised the
issue, so..."
The intervention could be as simple as asking the CEC or AES to explain AES statement
on page 1 of Attachment A to its submittal to the CEC: 2005 Annual Compliance Report
for the Huntington Beach Generating Station (00-AFC-13), which reads:
"2) A summary of the current project operating status and an explanation of any
significant changes to facility operations during the year.
Inclusive in the reports are our operating characteristics. We have not seen any
significant changes in our facility operations with the exception of our run profile being
expanded above initial projections. " [Italics and bold emphasis added.]
The City should ask for the AES-HB reports and an explanation or analysis of the effects
and impacts of the expansion of the run profile. Were any steps needed to mitigate the
impacts of the expanded run profile or are the impacts de minimis? How was this
determined?
Memo to Shari Freidenrich, Teresa ?, & Paul D'Alessandro, Assistant City Attorney Page 4 of 6
April 17, 2006
Nevertheless, the City should request the reports and the projections of run profile and any
related projections about the plant's operations (current and initial.)
In addition, the City should also request the reports filed by AES to the CEC's compliance
manager, CPM, cited on p 3 of 22 for condition AQ-11: "Project owner shall provide
operating records, including fuel use data and total operating hours for Units 3 and 4 and
Unit 5..."
This information would be helpful for valuation purposes, as well as monitoring
environmental impacts that are usually proportional to plant operations.
7. Eric Pendergraft stated that AES-HB plant capacity factors were declining like Redondo
Beach, which means that plant generation is decreasing. But operating hours do not appear
to be declining for units 1 and 2, according to Eric. He also stated that at least two units
frequently operate at a minimum loading of about 10 percent. (I specifically asked
whether the minimum load was 60 percent of full load and whether or not the SCRs
required operation at 60 percent in order to keep operating properly. He said no, 10
percent minimum load operation worked fine. Indeed, 10 to 30 percent is a reasonable
minimum load value for a steam generating station like AES-HB. However, my example
used numbers characteristic of a combined cycle unit. Hence, Eric's answer verified that
the operating characteristics of the AES-HB plant are very different than a replacement
CCGT would be.
Given the notable reluctance of AES to provide any information about the plant, including
publicly available information, I would recommend that the City intervene in the CEC
proceeding. If it does, the City should ask the CEC to create a file of all public documents
and forms required to be submitted by the plant owner or operator and to maintain this file
in a location where it would be accessible to the City or its designated representatives. If
the CEC can't do this as a requirement of its license extension, the City should create such
a requirement before approving Poseidon or the 2011 license. (It is a waste of time to be
chasing after AES for public data.)
9. Overall, I think that the City can make further headway with BOE, both with the Board
and with the Staff. I also think that limited intervention at the CEC, asking the questions
listed above, is warranted.
Finally, I would be interested in any additional feedback from you, Mike, Steve or Paul on
what we learned from the meeting.
Status of Current Contract Tasks
Task 1: Additional Interaction with BOE/Staff
This task was budgeted for 24 hours. Preparation for the April 13 meeting, the meeting itself and
this memo have completed the "keep the ball rolling" effort under this task.
Task 2: Develop a "Straw Man" Replacement Cost -Based Valuation
Memo to Shari Freidenrich, Teresa ?, & Paul D'Alessandro, Assistant City Attorney Page 5 of 6
April 17, 2006
The VHC "straw man" valuation was developed, based on information from the CEC, FERC, EIA
and CPUC, as well as SCE and the market. 56 hours were allotted; 85+ hours were spent
developing the data, methods and valuation. The results were presented on April 13 and could be
updated, based on what I learned at the meeting.
Task 3: Reevaluate the AES-HB Plant Income Potential Based on Results of SCE's Recent
Power Solicitations
SCE cancelled its power solicitation. Eric Pendergraft mentioned that AES had bid, but, of
course, provided no information. Nevertheless, VHC prepared an income/capitalized earnings
valuation, which I presented on April 13. No hours were budgeted; 30 hours were spent.
I have just submitted an invoice for these completed tasks for the amount budgeted for Tasks 1
and 2, $17,000.
Proposed Tasks:
The following tasks will build on Tasks 1 through 3 and enable VHC and the City to press
forward in our dialogue with BOE, while there is still time to influence the 2006 valuation. These
proposed tasks will continue to lay additional ground work to better inform BOE staff about the
electricity market and to improve their valuation of the AES-HB power plant.
Task 4: Prepare Powerpoint Presentation for Stanley Siu and BOE Staff with Examples
and Updated Results
The presentation would include the following topics:
How to Determine the Most Appropriate Replacement Technology for an Existing
Generating Plant
- An economic screening comparison will demonstrate that a CT, not a CC, is the
appropriate replacement plant technology to apply.
How to Calculate Obsolescence Factors for Capacity Payments (MW) and Energy
Payments (M") for an Existing Power Plant
- Several slides would demonstrate the methods for calculating functional,
physical and external obsolescence factors, to address some of the issues raised
by Eric Pendergraft and Wade Norwood, as well as BOE.
Updated Replacement Cost Valuations and an Income/Capitalized Earning Valuation
Based on Information from April 13 Meeting and New Insights
Information Sources for Replacement Capacity Costs, Capacity Values and Market Prices
Estimated Level of Effort: 38 hrs from Andy Van Horn and James Tsui.
Estimated Costs: $9,500
Deliverable: Powerpoint presentation discussing Methods, Data and including Updated
Valuation Results for electronic transmission to Stanley Siu and other interested parties.
Memo to Shari Freidenrich, Teresa ?, & Paul D'Alessandro, Assistant City Attorney Page 6 of 6
April 17, 2006
Task 5: Continued Interaction With BOE Staff
This task will keep the dialogue alive, provided BOE has questions on the presentation
prepared in Task 1, or if it wishes to discuss other aspects of the methods or the behavior of
the electricity market. It includes 4 hours for James Tsui to appear with you before the Board
in Sacramento at the May meeting, if you wish. Now that we have BOE staff s attention we
should budget at least 4 person days to cover possible interactions, even after May, in order to
be able to continue our dialogue with BOE staff.
Estimated Level of Effort: 36 hours, James Tsui, Andy Van Hom and Mike Katz
Estimated Cost: $9,000
Deliverable: Meeting with BOE staff, phone discussions, brief presentation to the Board in
May in Sacramento
Task 6: Prepare A Report Discussing VHC's Valuations of the AES-HB Power Plant
This report would discuss our updated findings and results and would be directed to the City
Council, as well as to the BOE. It would summarize the results and recommendations from
Tasks 1 through 5.
Estimated Level of Effort: 18 hours, Andy Van Horn
Estimated Cost: $4,500
Task 7: Review CEC materials and Make Recommendations As Needed.
Assuming the City decides to file to intervene, in order to gain access to data submitted by
AES, enhance its position in future proceedings and to find out what AES-HB means by an
"expanded run profile," VHC would review materials and support the City, as needed.
Estimated Level of Effort: 24 hours, Andy Van Horn, James Tsui
Estimated Cost: $6,500
Conclusions:
I think we now have BOE's attention. Based on what I learned from the meeting last
Thursday, the City should be able to help the BOE derive a more accurate assessment for the
AES-HB power plant, if it continues the dialogue with BOE. I also think that a pro -forma
intervention with the CEC is desirable for the reasons given above.
I look forward to discussing these recommendations and additional efforts with you and the
other Huntington Beach personnel working on this issue.
Exhibit " B"
VAN HORN CONSULTING
SCI-EJDULE OF FEES FOR PROFESSIONAL SERVICES
The Van Horn Consulting Group provides its professional services on a time and expenses
basis by applying he following hourly billing rates:
Professional Fees:
Dr. Andrew Van Horn
$250
Dr. Greg Hamm
$300
Mr. David Arpi
$250
Dr. Edward Remedios
$200
Dr. Keith VVhite
$200
Dr. Ronald. Cooper
$180
Dr. Constance Miller
$140
Mr. Blair Schmicker
$110
Research Assistant
$ 80
Clerical support
$ 50
Direct expenses, including copying, travel, delivery services and
the like, are billed at our
cost. Other arrangements, including a retainer or fixed fees can be negotiated to meet client
needs.
.r
1. Date:
2. Department
3. Requested by:
CITY OF HUNTINGTON BEACH
Professional Service Contracts
Purchasing Certification
July 6, 2006
Economic Development
Stanley Smalewiz
4. Name of consultant: Van Horn Consulting
5. Attach the written statement of the specification, conditions and other requirements for
the requested services that was provided to solicited consultants in your answer to 11
of this form.
6. Amount of the contract: $94,500
7. Are sufficient funds available to fund this contract?' ® Yes, ❑ No
8. Company number and object code where funds are budgeted: 30580101.69325
9. Is this contract generally described on the list of professional service contracts
approved by the City Council'? ® Yes, ❑ No
10. Is this contract within $25,000 or 25% (whichever is less) of the amount stated on the
list of professional service contracts approved by the City Council?'
® Yes, ❑ No
11. Were (at least) informal written proposals requested of three consultants?
❑ Yes, ® No
Explanation: N/A - Amendment #1
12. Attach list of consultants from whom proposals were requested (including a contact
telephone number).
13. Attach proposed scope of work.
14. Attach proposed payment schedule.
Department Head Signature
RI HARD A DRIL, Manage
Purchasing/Central Services
' If the answer to any these questions is "No," the contract will require approval from the City Council.
Professional Services Contract Purchasing Certification June 2006
su it:y Contracts Submittal to Et F-*
City Clerk's Officey "
H�,� 2005 DEC 27 PM 3: 30
CITY
To: City Clerk ri�I�d�'i Oil
14UNTI'MIGTC7' ,J D AC11
1. Name of Contractor: Van Horn Consulting (Amendment #1)
2. Purpose of Contract: For Example: Audit Services or Water Quality Testing Huntington Lake — Huntington Central Park
Economic Analysis- Huntington Beach AES Power Plant
3. Amount of Contract: $65,000
Copy of contract distributed to: The ORIGINAL insurance certificate/waiver sent to Risk
Management
Initiating Dept.`
City Treasurer _ ORIGINAL bonds sent to Treasurer
City Attomey's Office
Date: 12/23/05
I` -k4
g:/Attymisc/forms/city clerk contract transmittal.doc
AMENDMENT NO. 1 TO AGREEMENT BETWEEN THE
REDEVELOPMENT AGENCY OF THE CITY OF HUNTINGTON BEACH AND
VAN HORN CONSULTING
THIS AMENDMENT is made and entered into by and between the REDEVELOPMENT
AGENCY OF THE CITY OF HUNTINGTON BEACH, a public body, hereinafter referred to as
"Agency," and VAN HORN CONSULTING, a sole proprietorship, hereinafter referred to as
"Consultant."
WHEREAS, Agency and Consultant are parties to that certain agreement, dated March
10, 2005, entitled "Professional Services Contract Between the Redevelopment Agency of the
City of Huntington Beach and Van Horn Consulting for Economic Analysis - Huntington Beach
AES Power Plant" which agreement shall hereinafter be referred to as the "Original Agreement,"
and
Agency and Consultant wish to amend the Original Agreement to provide for additional
work by Consultant and additional compensation to Consultant,
NOW, THEREFORE, it is agreed by Agency and Consultant as follows:
1. ADDITIONAL WORK
Consultant shall perform the additional tasks set forth in Consultant's proposal
dated August 16, 2005, a copy of which is attached hereto as Exhibit "A" and incorporated by
this reference as though fully set forth herein.
2. ADDITIONAL COMPENSATION
Section 4 of the Original Agreement, entitled "Compensation," is hereby amended
to read as follows:
In consideration of the performance of the services described herein, AGENCY
agrees to pay CONSULTANT on a time and materials basis at the rates specified in Exhibit `B,"
which is attached hereto and incorporated by reference into this Agreement, a fee, including all
costs and expenses, not to exceed Sixty-five Thousand Dollars ($65,000.00).
05agree/amend van hom
3. REAFFIRMATION
Except as specifically modified herein, all other terms and conditions of the
Original Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by and through their authorized officers on
VAN HORN CONSULTING, a sole REDEVELOPMENT AGENCY OF THE
proprietorship CITY OF HUNTINGTON BEACH, a public
body
i- ���e� -� %�r<�� ✓. f<���a /,�, Deputy xecutive Director
print name
ITS: (circle one) C t A. 'ROVED AS TO FORM:
AND
LE
print name
ITS: (circle one) Secretary/Chief Financial
Officer/Asst. Secretary - Treasurer
- r g ncy Generaf4rounsel
REVI A APPROVED:
Exec e Director
(only for co cts $50,000 and over)
05agree/amend van horn 2
VAN HORN CONSULTING
Economic, Technical & Management Consulting
August 16, 2005
Shari L. Freidenrich, CPA, CCMT, CPFA
Treasurer
City of Huntington Beach
2000 Main Street
P.O. Box 190
Huntington Beach, CA 92648
61 Moraga Way, Suite 1
Orinda, California 94563-3029
925 254-3358 phone/fax
vhconsult@earthlink.net
RE: Proposal for Follow -On Assistance Regarding the California Board of
Equalization's Valuation of the AES Huntington Beach Power Plant
Dear Shari:
Van Horn Consulting's (VHC's) work under our existing contract to assist the City of
Huntington Beach (City) regarding the California Board of Equalization's (BOE's) valuation
of the AES-Huntington Beach (AES-HB) power plant is nearly completed. We have
submitted our draft final report evaluating the BOE's recent valuations of the plant and
recommending valuation process improvements for the future. Along the way, we met with
City and AES personnel as well as Board member Claude Parrish and his advisors, engaged in
a conference call with BOE staff and provided supporting testimony during your appearance
before the Board this past May. VHC anticipates that the remaining limited work scope and
budget under the existing contract will provide for a one -day meeting with City personnel and
a one -day exploratory meeting with BOE member(s) and/or staff to begin pursuing valuation
methodology changes addressed in our report for application in the 2006 valuation cycle.
This letter proposes limited follow-on work to assist the City in effectively pursuing an
improved and more transparent valuation process, in order to address future power plant
valuations that may be affected by new power contracts or even construction of new and more
profitable replacement generating units at the AES-HB site. The proposed Scope of Work and
Personnel/Budget allocation are presented below.
I. PROPOSED SCOPE OF WORK
This proposal describes three tasks aimed at "keeping the ball rolling" through the end of
2005. Additional or subsequent work may become desirable, depending especially on the
outcome of our interactions with the BOE and/or BOE staff, and on developments regarding
the AES-HB power plant, such as new contracts or announced plans to construct new
generating units.
Shari Friedenrich Page 2
August 16, 2005
Task 1: Additional Interaction with BOE/Staff.
In this task VHC will conduct follow-on interactions with the BOE or BOE staff, to
✓ clarify and further advance VHC's and the City's recommendations regarding the
valuation process, and
✓ request and evaluate data and procedural information from that process, which may
become more available now that urgencies of the 2005 valuation cycle have
passed.
The extent of this effort will clearly depend on future developments, but VHC proposes a
"keep the ball rolling" effort of 3 person days or 24 hours.
Task 2: Develop a Specific "Straw Man" Replacement Cost -Based Valuation
The BOE's valuation of the AES-HB plant emphasized the income -based approach for 90
percent of its valuation, versus a 10 percent weighting of the replacement cost less
depreciation (Rep1CLD) approach. However, developments to date make it worthwhile to
develop and present to the BOE a trial quantitative Rep1CLD-based valuation of the AES-HB
plant. This is worthwhile for several reasons:
0 BOE rules and procedures require that if multiple valuation approaches are
used (the BOE has used the Rep1CLD approach in combination with the
income -based approach), the approaches should be reconciled. Thus, if a
credible Rep1CLD-based valuation is substantially higher than the BOE's
recent valuations of the plant, this should prompt efforts and discussions
regarding reconciliation, perhaps including critical reevaluation of the income -
based valuation.
0 Much of the information required to develop a full income -based valuation is
still unavailable to us, including information on plant operating costs, on the
tolling contract with Southern California Edison (SCE), actual revenues
recently achieved by AES under the tolling contracts, any other revenues
achieved by AES (as implied by FERC data forms), and revenues achieved by
AES's tolling contract counterparties (Williams and SCE).
0 Rep1CLD valuation necessarily includes valuation of the site itself, as part of
cost of replacing the plant. This provides a good platform for calling attention
to the site value including the importance of rising coastal Huntington Beach
property values and the unique value of the site for generation development,
including the ability to avoid or minimize otherwise costly and difficult
infrastructure (especially transmission) and permitting hurdles. Based on the
Shari Friedenrich
August 16, 2005
Page 3
information reported in our recent draft report, we suspect that site value by
itself would be about as high as the total value the BOE has assigned to the
plant (perhaps higher), without even considering AES's substantial investment
in the plant. Site value also contributes to income -based assessment of value.
A key aspect of developing a specific Rep1CLD valuation will be more in-depth evaluation of
how recent property sales information should be used to estimate the value of the AES-HB
plant site. We will also continue to pursue whether and how the unique site value for electric
generation can be quantified as "higher and better" than already high -valued residential/
commercial development prospects for the site.
Additionally, VHC's recent final report to the City regarding AES-HB plant valuation points
out several issues regarding assumed replacement generation property and its operation, as
well as regarding how depreciation and obsolescence factors are applied to replacement cost
in order to derive a Rep1CLD-based plant valuation. In this task, we will now develop and
apply specific quantitative estimates regarding replacement cost, operation of a replacement
plant, and application of depreciation and obsolescence factors.
The result of this Task will be a short report or memorandum summarizing important issues,
uncertainties and assumptions regarding the Rep1CLD valuation, the likely correspondence of
our approach to the BOE's approach (for which the specifics are currently confidential), and
the actual, quantitative valuation result.
The proposed level of effort for this task is 7 person -days or 56 hours.
Optional Task 3: Reevaluate AES-HB Plant Income Potential Based on Results of Southern
California Edison's Recent Power Solicitations
In 2005, Southern California Edison released two solicitations for power. Some aspects of the
resulting offers and contracting arrangements will become public and be submitted to the
California Public Utilities Commission (CPUC) in the near future. Such information, as well
as public discussion and resolution regarding the CPUC's Market Price Referents used for
evaluating and compensating renewable energy providers, can provide an improved basis for
estimating the market value of energy and other power services (capacity, local reliability,
capacity) in the Los Angeles area.
VHC can assist the City in evaluating if such information justifies a more market -based
estimation of the AES-HB plant's income potential under the income -based valuation
approach, versus a tolling contract -based estimation such as now applied by the BOE. If any
publicly released power purchase information applies specifically to the AES-HB plant (such
as regarding a new contract with SCE, or regarding intent to build a new plant), then such
information will be very important for reevaluation of the plant's valuation, especially since it
Shari Friedenrich
August 16, 2005
Page 4
will likely require significant changes to the BOE's current assumptions, when conducting the
2006 and subsequent valuation cycles.
The proposed level of effort for this task is not specified since Task 3 is optional and would
depend on future developments. However, VHC could allocate 1 person -day or 8 hours to
screen the released information on the SCE power contracts and on Market Price Referents, in
order to recommend whether or not any further steps are warranted.
II. STAFFING, SCHEDULE AND FEES FOR PROFESSIONAL SERVICES
VHC provides its professional services on a time and expenses basis, although other
arrangements can be made to meet client needs. Expenses, such as travel, copying, reports,
communications, delivery services and the like, are billed at our cost. Our current hourly
professional billing rates are shown at the end of this letter.
The work proposed above would be carried out on a schedule to be mutually agreed upon.
Keith White, Ph.D. and I will perform the work under my direction with assistance as required
by Edward Remedios, Ph.D. or James Tsui, MBA.
Estimated professional fees for the estimated 80 professional man hours needed to accomplish
Tasks 1 and 2 would be $17,000. An expanded scope of work could be developed later, if it
is warranted by future events, such as our interactions with the BOE staff, the outcomes of
SCE's power solicitation, or potential new developments at the plant itself.
We look forward to continuing our analysis of the power plant valuation process on behalf of
the City.
If you have any questions, please call me.
Sincerely yours,
Andrew J. Van Horn, Ph.D.
Shari Friedenrich
August 16, 2005
VAN HORN CONSULTING
SCHEDULE OF FEES FOR PROFESSIONAL SERVICES
Page 5
August 1, 2004
The Van Horn Consulting Group provides its professional services on a time and expenses
basis by applying the following hourly billing rates:
Professional Fees:
Andrew Van Horn, Ph.D.
$250
Greg Hamm, Ph.D.
$300
Michael Katz, M.S., P.E.
$300
Kristine Chase, Ph.D.
$250
James Tsui, B.S.E., MBA
$220
Edward Remedios, Ph.D.
$200
Keith White, Ph.D.
$200
Constance Miller, Ph.D.
$140
Mr. Blair Schmicker, B.A.
$110
Research Assistant
$ 80
Clerical support
$ 50
Direct expenses, including copying, travel, delivery services and the like, are billed at our
cost. Other arrangements, including a retainer or fixed fees, can be negotiated to meet client
needs.
su _ ity Contracts Submittal to
City Clerk's Office
H niBeach• 3I ti; f T Y 0. F 0N' bEA C,:'i, CA
To: City Clerk 2005 h7,A Pi 1 1 P 3: 31
1. Name of Contractor: Van Horn Consulting
2. Purpose of Contract: For Example: Audit Services or Water Quality Testing Huntington Lake — Huntington Central Park
Economic Analysis- Huntington Beach AES Power Plant
3. Amount of Contract: $48,000
Copy of contract distributed to: The ORIGINAL insurance certificatelwaiver sent to Risk
Management
Initiating Dept._
City Treasurer ORIGINAL bonds sent to Treasurer
City Attorney' s Office
Date: 3/10/05
g:lAttymisclformslcity clerk contract transmittal.doc
PROFESSIONAL SERVICES CONTRACT BETWEEN THE
REDEVELOPMENT AGENCY OF THE CITY OF HUNTINGTON BEACH
AND
VANHORN CONSULTING
FOR
ECONOMIC ANALYSIS- HUNTINGTON BEA CHAES PO WER PLANT
THIS AGREEMENT ("Agreement") is made and entered into this ' dA day of
i y -A C-'�- , 20y 5'' , by and between the Redevelopment Agency of the City of
Huntington Beach, a municipal corporation of the State of California, hereinafter referred
to as "AGENCY," and VAN HORN CONSULTING, a
Sole Proprietorship, hereinafter referred to as "CONSULTANT."
WHEREAS, AGENCY desires to engage the services of a consultant to
conduct economic analysis and evaluation studies of the AES Power Plant; and
Pursuant to documentation on file in the office of the Agency Clerk, the provisions
of the Huntington Beach Municipal Code, Chapter 3.03, relating to procurement of
professional service contracts have been complied with; and
CONSULTANT has been selected to perform these services,
NOW, THEREFORE, it is agreed by AGENCY and CONSULTANT as follows:
1. SCOPE OF SERVICES
CONSULTANT shall provide all services as described in Exhibit "A"
which is attached hereto and incorporated into this Agreement by this reference. These
services shall sometimes hereinafter be referred to as the "PROJECT."
CONSULTANT hereby designates Andrew J. Van Horn, Ph.D. who shall
represent it and be its sole contact and agent in all consultations with AGENCY during the
performance of this Agreement.
agree/forms/agency profservl4I14/03-A I
2. AGENCY STAFF ASSISTANCE
AGENCY shall assign a staff coordinator to work directly with
CONSULTANT in the performance of this Agreement.
3. TERM, TIME OF PERFORMANCE
Time is of the essence of this Agreement. The services of CONSULTANT
are to commence as soon as practicable after the execution of this Agreement by AGENCY
(the "Commencement Date"). This Agreement shall expire on December 31, 2007,
unless sooner terminated as provided herein. All tasks specified in Exhibit "A" shall be
completed no later than three years from the Commencement Date of this
Agreement. These times may be extended with the written permission of AGENCY. The
time for performance of the tasks identified in Exhibit "A" are generally to be shown in
Exhibit "A," This schedule may be amended to benefit the PROJECT if mutually agreed
to in writing by AGENCY and CONSULTANT.
4. COMPENSATION
In consideration of the performance of the services described herein,
AGENCY agrees to pay CONSULTANT on a time and materials basis at the rates
specified in Exhibit "B," which is attached hereto and incorporated by reference into this
Agreement, a fee, including all costs and expenses, not to exceed
Fourty-eight Thousand Dollars ($48,000).
5. EXTRA WORK
In the event AGENCY requires additional services not included in Exhibit
"A" or changes in the scope of services described in Exhibit "A," CONSULTANT will
undertake such work only after receiving written authorization from AGENCY.
agree/forms/agency profserv/4/14103-A 2
Additional compensation for such extra work shall be allowed only if the prior written
approval of AGENCY is obtained.
6. METHOD OF PAYMENT
CONSULTANT shall be paid pursuant to the terms of Exhibit "B."
7. DISPOSITION OF PLANS, ESTIMATES AND OTHER DOCUMENTS
CONSULTANT agrees that title to all materials prepared hereunder,
including, without limitation, all original drawings, designs, reports, both field and office
notices, calculations, computer code, language, data or programs, maps, memoranda,
letters and other documents, shall belong to AGENCY, and CONSULTANT shall turn
these materials over to AGENCY upon expiration or termination of this Agreement or
upon PROJECT completion, whichever shall occur first. These materials may be used by
AGENCY as it sees fit.
8. HOLD HARMLESS
CONSULTANT hereby agrees to protect, defend, indemnify and hold
harmless AGENCY, its officers, elected or appointed officials, employees, agents and
volunteers from and against any and all claims, damages, losses, expenses, judgments,
demands and defense costs (including, without limitation, costs and fees of litigation of
every nature or Iiability of any kind or nature) arising out of or in connection with
CONSULTANT's (or CONSULTANT's subcontractors, if any) negligent performance of
this Agreement or its failure to comply with any of its obligations contained in this
Agreement by CONSULTANT, its officers, agents or employees except such loss or
damage which was caused by the sole negligence or willful misconduct of AGENCY.
CONSULTANT will conduct all defense at its sole cost and expense and AGENCY shall
agree/fomns/agency profserv/4114103-A 3
approve selection of CONSULTANT's counsel. This indemnity shall apply to all claims
and liability regardless of whether any insurance policies are applicable. The policy limits
do not act as limitation upon the amount of indemnification to be provided by
C OMI-1Y81Nr11►YM
9. PROFESSIONAL LIABILITY INSURANCE
CONSULTANT shall obtain and furnish to AGENCY a professional
liability insurance policy covering the work performed by it hereunder. This policy shall
provide coverage for CONSULTANT's professional liability in an amount not less than
One Million Dollars ($1,000,000.00) per occurrence and in the aggregate. The above -
mentioned insurance shall not contain a self -insured retention, "deductible" or any other
similar form of limitation on the required coverage except with the express written consent
of AGENCY. A claims -made policy shall be acceptable if the policy further provides that:
A. The policy retroactive date coincides with or precedes the initiation
of the scope of work (including subsequent policies purchased as
renewals or replacements).
B. CONSULTANT shall notify AGENCY of circumstances or
incidents that might give rise to future claims.
CONSULTANT will make every effort to maintain similar insurance during
the required extended period of coverage following PROJECT completion. If insurance is
terminated for any reason, CONSULTANT agrees to purchase an extended reporting
provision of at least two (2) years to report claims arising from work performed in
connection with this Agreement.
agree/forms/agency profserv14114/03-A 4
10. CERTIFICATE OF INSURANCE
Prior to commencing performance of the work hereunder, CONSULTANT
shall furnish to AGENCY a certificate of insurance subject to approval of the Agency
Counsel evidencing the foregoing insurance coverage as required by this Agreement; the
certificate shall:
A. provide the name and policy number of each carrier and policy;
B. shall state that the policy is currently in force; and
C. shall promise that such policy shall not be suspended, voided or
canceled by either party, reduced in coverage or in limits except
after thirty (30) days' prior written notice; however, ten (10) days'
prior written notice in the event of cancellation for nonpayment of
premium.
CONSULTANT shall maintain the foregoing insurance coverage in force
until the work under this Agreement is fully completed and accepted by AGENCY.
The requirement for carrying the foregoing insurance coverage shall not
derogate from CONSULTANT's defense, hold harmless and indemnification obligations as
set forth in this Agreement. AGENCY or its representative shall at all times have the right
to demand the original or a copy of the policy of insurance. CONSULTANT shall pay, in
a prompt and timely manner, the premiums on the insurance hereinabove required.
11. INDEPENDENT CONTRACTOR
CONSULTANT is, and shall be, acting at all times in the performance of
this Agreement as an independent contractor herein and not as an employee of AGENCY.
CONSULTANT shall secure at its own cost and expense, and be responsible for any and
agreelforms/agency profservl4/14103-A 5
all payment of all taxes, social security, state disability insurance compensation,
unemployment compensation and other payroll deductions for CONSULTANT and its
officers, agents and employees and all business licenses, if any, in connection with the
PROJECT and/or the services to be performed hereunder.
12. TERMINATION OF AGREEMENT
All work required hereunder shall be performed in a good and workmanlike
manner. AGENCY may terminate CONSULTANT's services hereunder at any time with
or without cause, and whether or not the PROJECT is fully complete. Any termination of
this Agreement by AGENCY shall be made in writing, notice of which shall be delivered
to CONSULTANT as provided herein. In the event of termination, all finished and
unfinished documents, exhibits, report, and evidence shall, at the option of AGENCY,
become its property and shall be promptly delivered to it by CONSULTANT.
13. ASSIGNMENT AND DELEGATION
This Agreement is a personal service contract and the work hereunder shall
not be assigned, delegated or subcontracted by CONSULTANT to any other person or
entity without the prior express written consent of AGENCY. If an assignment, delegation
or subcontract is approved, all approved assignees, delegates and subconsultants must
satisfy the insurance requirements as set forth in Sections 9 and 10 hereinabove.
14. COPYRIGHTS/PATENTS
AGENCY shall own all rights to any patent or copyright on any work, item
or material produced as a result of this Agreement.
agree/forms/agency profserv/4/14103-A 6
15. AGENCY EMPLOYEES AND OFFICIALS
CONSULTANT shall employ no AGENCY official nor any regular
AGENCY employee in the work performed pursuant to this Agreement. No officer or
employee of AGENCY shall have any financial interest in this Agreement in violation of
the applicable provisions of the California Government Code.
16. NOTICES
Any notices, certificates, or other communications hereunder shall be given
either by personal delivery to CONSULTANT's agent (as designated in Section 1
hereinabove) or to AGENCY as the situation shall warrant, or by enclosing the same in a
sealed envelope, postage prepaid, and depositing the same in the United States Postal
Service, to the addresses specified below. AGENCY and CONSULTANT may designate
different addresses to which subsequent notices, certificates or other communications will
be sent by notifying the other parry via personal delivery, a reputable overnight carrier or
U. S. certified mail -return receipt requested:
TO AGENCY:
Redevelopment Agency of the City of
Huntington Beach
ATTN:Gus Duran
2000 Main Street
Huntington Beach, CA 92648
17. CONSENT
TO CONSULTANT:
Andrew J. Van Horn, Ph.D.
61 Moraga Way, Ste I
Orinda, California 94563-3029
(925) 254-3358 Phone/Fax
vh co nsul t@earth l i nk. n e t
When AGENCY's consent/approval is required under this Agreement, its
consent/approval for one transaction or event shall not be deemed to be a consent/approval
to any subsequent occurrence of the same or any other transaction or event.
agree/forms/agency profserv/4/14103-A 7
18. MODIFICATION
No waiver or modification of any language in this Agreement shall be valid
unless in writing and duly executed by both parties.
19. SECTION HEADINGS
The titles, captions, section, paragraph and subject headings, and descriptive
phrases at the beginning of the various sections in this Agreement are merely descriptive
and are included solely for convenience of reference only and are not representative of
matters included or excluded from such provisions, and do not interpret, define, limit or
describe, or construe the intent of the parties or affect the construction or interpretation of
any provision of this Agreement.
20. INTERPRETATION OF THIS AGREEMENT
The language of all parts of this Agreement shall in all cases be construed
as a whole, according to its fair meaning, and not strictly for or against any of the parties.
If any provision of this Agreement is held by an arbitrator or court of competent
jurisdiction to be unenforceable, void, illegal or invalid, such holding shall not invalidate
or affect the remaining covenants and provisions of this Agreement. No covenant or
provision shall be deemed dependent upon any other unless so expressly provided here.
As used in this Agreement, the masculine or neuter gender and singular or plural number
shall be deemed to include the other whenever the context so indicates or requires.
Nothing contained herein shall be construed so as to require the commission of any act
contrary to law, and wherever there is any conflict between any provision contained herein
and any present or future statute, law, ordinance or regulation contrary to which the parties
have no right to contract, then the latter shall prevail, and the provision of this Agreement
agmelfonnslageney profserv/4/14/03-A 8
which is hereby affected shall be curtailed and limited only to the extent necessary to bring
it within the requirements of the law.
21. DUPLICATE ORIGINAL
The original of this Agreement and one or more copies hereto have been
prepared and signed in counterparts as duplicate originals, each of which so executed shall,
irrespective of the date of its execution and delivery, be deemed an original. Each
duplicate original shall be deemed an original instrument as against any party who has
signed it.
22. IMMIGRATION
CONSULTANT shall be responsible for full compliance with the
immigration and naturalization laws of the United States and shall, in particular, comply
with the provisions of the United States Code regarding employment verification.
23. LEGAL SERVICES SUBCONTRACTING PROHIBITED
CONSULTANT and AGENCY agree that AGENCY is not liable for
payment of any subcontractor work involving legal services, and that such legal services
are expressly outside the scope of services contemplated hereunder. CONSULTANT
understands that pursuant to Huntington Beach City Charter Section 309, the Agency
Counsel is the exclusive legal counsel for AGENCY; and AGENCY shall not be liable for
payment of any legal services expenses incurred by CONSULTANT.
24. ATTORNEY'S FEES
In the event suit is brought by either party to construe, interpret and/or
enforce the terms and/or provisions of this Agreement or to secure the performance hereof,
agree/forms/agency profserv/4/14/03-A 9
each party shall bear its own attorney's fees, such that the prevailing party shall not be
entitled to recover its attorney's fees from the non -prevailing parry.
25. SURVIVAL
Terms and conditions of this Agreement, which by their sense and context
survive the expiration or termination of this Agreement, shall so survive.
26. GOVERNING LAW
This Agreement shall be governed and construed in accordance with the
laws of the State of California.
27, ENTIRETY
The parties acknowledge and agree that they are entering into this
Agreement freely and voluntarily following extensive arm's length negotiation, and that
each has had the opportunity to consult with legal counsel prior to executing this
Agreement. The parties also acknowledge and agree that no representations, inducements,
promises, agreements or warranties, oral or otherwise, have been made by that party or
anyone acting on that parry's behalf, which are not embodied in this Agreement, and that
that parry has not executed this Agreement in reliance on any representation, inducement,
promise, agreement, warranty, fact or circumstance not expressly set forth in this
Agreement. This Agreement, and the attached exhibits, contain the entire agreement
between the parties respecting the subject matter of this Agreement, and supercede all prior
understandings and agreements whether oral or in writing between the parties respecting
the subject matter hereof.
agree/forms/agency profservl4/14103-A 10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by and through their authorized offices the day, month and year first above
written..
CONSULTANT,
V14NHORN CONSULTING,
a Sole Proprietorship
�f I
BY
print name
ITS: (,circle onga' �etstfYice C�esist
AND
By:
ITS: (circle one) Secretary /Chief Financial Officer/Asst.
Secretary — Treasurer 1
agrcc/forrns/agcncy profserv/4/14/03-A 1
.................................... .
REDEVELOPMENT AGENCY OF
THE CITY OF HUNTINGTON BEACH, a
municipal corporation of the State of California
&ue 6 4�;4
Deputy Executive Director
APPROVED AS TO FORM:
Agency .-Couns
REVIEWED AND APPROVED:
Executive Director
(only for contracts ,S50, 000.00 and over)
VAN HORN CONSULTING Exhibit "A"
Economic, Technical £Management Consulting
November 29, 2004
Mr. Gustavo A. Duran
Housing and Redevelopment Manager
City of Huntington. Beach
2000 Main Street
P.O. Box 190
Huntington Beach, CA 92648
61 Moraga Way, Suite 1
Orinda, California 94.563-3029
925 254-3358 phone/fax
vhconsult@earthlink.net
RE: Proposal for Review of Factors Affecting the 2005 Assessment of Value for the
. AES Huntington Beach Power Plant
Dear Mr. Duran:
Van Horn Consulting (VHC) is pleased to present the following scope of work to assist the
City of Huntington Beach (the City) in understanding and advocating critical methods and
information used for future fair market value assessments of the AES Huntington Beach
Power Plant (the Plant). Major reasons for this proposed project are to:
• convince the California Board of Equalization (Board) to consider improved methods
and information in its 2005 and subsequent assessments,
• obtain greater transparency and access to information regarding past (2003) and future
assessments, and
• help the City preliminarily evaluate prospects for achieving a valuation different from
2003 and 2004.
The above work and rationale are reflected in Tasks 1-3 described below. Follow-on Task 4
represents ongoing VHC support for meeting and consulting with the City or the Board, in
order to evaluate and resolve assessment issues, and also, if requested, to derive a full,
quantitative, independent fair market valuation of the plant.
1. INTRODUCTION TO THE VAN HORN CONSULTING GROUP
Van Horn Consulting (VHC) conducts rigorous analyses' of electricity, natural gas, coal and
emission markets, power plants, environmental and energy regulations, technology advance,
utility system operations, business strategies and contracts. Since 1987, we have assisted
electric and gas utilities, independent power producers and merchant plant developers, energy
and emission allowance marketers, natural gas transmission and coal companies, electric and
gas users, the Electric Power Research Institute (EPRI) and others in examining competitive
and regulatory issues associated with the sale and valuation of power plants. In addition to
management consulting, we have testified before FERC, state regulatory commissions, in
Mr. Gus Duran Page 2
November 29, 2004
court and arbitration proceedings and are experienced in developing expert testimony,
providing due diligence and litigation support.
Studies of complex market, energy and environmental issues combined with management
consulting constitute the core of our practice. We have consulted on a broad spectrum of
decisions and strategic issues, including:
➢ power plant divestiture and valuation,
➢ electric power system operations under regulated and competitive market
situations,
➢ emission reduction strategies and their costs and benefits,
➢ electricity, fuels and emission allowance price forecasting,
➢ economic viability and need for natural gas pipeline and electric generation
capacity additions and expansions,
➢ cost -benefit tests,
➢ ratemaking methods, such as long -run marginal cost -based rates, rolled -in
versus incremental rates, and stranded costs,
➢ natural gas transportation and storage tariffs,
➢ prudence reviews,
➢ consequential damages from breach of contracts,
➢ integrated resource planning,
➢ environmental compliance, and
➢ national energy and environmental policy issues.
VHC is a leader in developing and applying quantitative tools, including simple and
sophisticated models, as well as applying econometric and statistical methods. We developed
the first electric utility integrated resource planning model distributed by the Electric Power
Research institute (EPRI), and have developed and applied market models to evaluate power
plant technologies, operations, emission controls and compliance strategies for NO., S02,
particulates and carbon. We have devised statistical models of natural gas demand and prices
and projected coal and emission market behavior. In addition, VHC applies and evaluates
detailed electricity market models and forecasts developed by others in order to value assets
and examine investment decisions. I have previously provided VHC's Professional
Qualifications statement, which contains summary resumes.
Our experience enables us to understand both the regulatory and competitive environments
facing the energy industry and to value assets operating under new market rules. As a result,
Mr. Gus Duran Page 3
November 29, 2004
we have testified and provided litigation support in regulatory and civil proceedings on behalf
of electric and gas utilities, power producers, electricity consumers, gas buyers and
transporters.
In short, we have decades of industry experience with an understanding of both nuts -and -bolts
functions and, in particular, the key elements that must go into a proper valuation of power
generation assets, like the Huntington Beach Generating Station.
11. PROPOSED SCOPE OF WORK
This proposal describes four tasks aimed at informing the City regarding valuation options
and consequences, as well as achieving a more transparent and appropriate valuation process.
Task 1: PrelimiLiM Review of the 2003 Pro e
jjy Tax Assessment of the AES Huntin on
Beach Generation Station and Evaluation of the Need for and Implications of Methodological,
Data and Assum Lion Chan es.
In this task VHC will review available information regarding the data, assumptions and
methodology used in the Board's 2003 assessment of the fair market value of the Huntington
Beach power generation facility owned by AES Huntington Beach, L.L.C., as of January 1,
2003. We will consider if the methodology, assumptions and data were appropriate (or
sufficiently transparent), if important sources of value were overlooked, and if and where
changes might be needed for an updated assessment, due to altered conditions or information.
Our review would focus on the "income" (capitalized earning ability, or CEA) approach
(weighted 90 percent in the Board's past valuation) with less emphasis on the "replacement
cost new less depreciation (Rep1CLD) approach" (weighted 10 percent). We will identify and
critique important technical, market, and appraisal methodology assumptions reflected in the
Board's 2003 assessment, as well as changes that should be considered for the upcoming 2005
assessment, based on conditions prevailing as of January 1, 2005. Our focus will be on the
relative merits and the possible combination of contract- and market price -based approaches
for projecting future cash flow, as the basis for estimating CEA.
The task will consider the extent to which the past valuation's representation of contracts
requires clarification, revision or updating, and if a contract -based projection of future income
as used by the Board for 2003 would be sufficiently comprehensive, versus needing to be
supplemented with other projected revenue sources. In considering the market -based (as
opposed to contract -based) approach to estimating CEA, we will consider whether and how
the market -based approach used by AUS Consultants for AES in 2003 requires revision and
updating. Reasonableness and self -consistency will be assessed for key income projection
assumptions, such as forecasted natural gas and electricity prices over a 20-year period;
generating unit heat rates, capacity factors, and operating costs; and the discount rate applied
Mr. Gus Duran Page 4
November 29, 2004
to future income. Regarding contracts, we will evaluate how, specifically (if contract
information is available) or generically (if not available) the income implications of the AES
Tolling Agreement with Williams Energy Services and the AES contract with Southern
California Edison should be addressed in the valuation, including treatment of actual and
projected bonus payments. It will likely be necessary for the City to request copies of relevant
information regarding these and other contracts affecting revenues and cash flows for
Huntington Beach generating units.
For the CEA approach, we will also address the appropriate economic lifetime for assessing
future income potential, as well as the methodology for assigning reversion value, that is, the
market value of the plant and site at the end of the economic life. It is unclear if and how this
reversion value was incorporated into the 2003 assessment, and it could be a significant
contributor to overall future income potential. AES's long term plans for the site could have
bearing on estimated reversion value, and our findings might recommend that the City request
such plans, in appropriate detail.
In addressing the "Replacement Cost Less Depreciation Approach" to assigning fair market
value, we will consider the depreciation component, including the different, potentially
overlapping, kinds of depreciation or obsolescence factored into the 2003 valuation. It will
also be important to consider whether the replacement cost less depreciation approach
adequately addressed the value of the land as a well -situated power plant site, as well as
AES's recent investments for plant refurbishment.
VHC's proposed level of effort for this initial task is six man days or 48 hours.
Task 2: Suggest An Improved, More Transparent and Standardized Framework for the
Valuation Process.
Since the valuation process conducted by the California Board of Equalization is ongoing, it is
desirable to base each year's assessment on information sources that are unbiased, consistent,
recognized and transparent. Based on the data available from the 2003 assessment and
publicly available data sources and reports, such as those prepared by the California Energy
Commission and the California Independent System Operator, VHC will suggest sources for
projected prices and other market factors identified in Task 1 that should be considered in
estimating the Fair Market value of the AES Huntington Beach power plant.
There may be a strong interrelationship between the kinds of information, public and
confidential, available for us to use and the extent of access the City is afforded regarding
relevant information and methodology. This issue needs to be addressed. For example, key
types of evolving information that may be important to include are generating unit
characteristics such as capacity, heat rates, unit availability and operating costs; actual and
projected capacity factors; power (energy and capacity) contracts; recent revenues and costs
(including contract bonus payments); electricity and fuel market forecasts; and the market
value of surplus emission allowances allocated each year to the plant. Many of the same
Mr. Gus Duran
November 29, 2004
Page 5
market and operational factors would also be applicable to other Southern California power
plants operating within the Western interconnected electricity grid.
The proposed level of effort for this abbreviated framework development task is 16 hours.
Task 3: Summarize and Present VHC's Preliminary Findings
We will prepare and present a summary briefing on Task 1 and 2 findings, accompanied by a
discussion with you to answer questions and consider future options, at City offices in
Huntington Beach.
The proposed level of effort for this task is 16 hours.
Task 4: Provide OnWingSpport, Education and Review for the 2005 Appraisal Process
As pointed out on December 4, 2003, by Harold Hale of the Valuation Division of the State
Board of Equalization, the valuation of power plants is "a very complex process [with] very
complex appraisal procedures." In 2003, the State Board staff had 42 new generation
facilities to value, Which required them to make quick decisions regarding electricity and
natural gas markets that have undergone dramatic changes. In conducting an appraisal, it is
important that all parties, particularly the Board and its staff, understand the primary market
drivers and relationships affecting the market value of individual power plants over a number
of years. Moreover, it should be clear that the utilization of better or more appropriate market
information can reduce the potential inaccuracies in each assessment. The valuation process
and its input information should facilitate realistic yearly updates to plant valuations. In
addition, the valuation process has substantial financial implications not only for the plant
owner, but also for the City of Huntington Beach. Therefore, it is appropriate that the City, not
just the plant owner, has meaningful access to the process.
If directed to do so, VHC is willing to work with the City of Huntington Beach, State Board of
Equalization staff and others to clarify the valuation process and issues, and to help devise
improved means for fair market valuation. Task 4 follow-on work would be conducted at
your request and could include presentations to and meeting with City officials or the Board
of Equalization, meetings with AES or Southern California Edison, interpretation of contract
terms and conditions, and review of the Board's cash flow assumptions and methods. It could
also include additional independent analysis, potentially including (if requested) a full,
quantitative, independent derivation of fair market value, such as for submission to the City
and the Board of Equalization.
Mr. Gus Duran Page 6
November 29, 2004
III. STAFFING, SCHEDULE AND FEES FOR PROFESSIONAL SERVICES
VHC usually provides its professional services on a time and expenses basis, although other
arrangements can be made to meet client needs. Expenses, such as travel, copying, reports,
communications, delivery services and the like, are billed at our cost. Our current hourly
professional billing rates are shown at the end of this letter.
The work proposed in Tasks 1 to 4 above would be carried out on a schedule to be mutually
agreed upon. The work will be performed under my direction. Keith White, Ph.D., Edward
Remedios, Ph.D, and I will perform the majority of the estimated 80 professional man-hours
of effort needed to conduct Tasks 1, 2 and 3.
Estimated professional fees for Tasks 1, 2 and 3 would be $18,000. I suggest that $30,000
should be budgeted for potential follow-on efforts under Task 4. The discretionary
expenditures under Task 4 would be based on your needs and approval of efforts as they arise.
Thus, the budget request for the efforts anticipated here under Tasks i to 4 would be $48,000.
I believe that our extensive industry knowledge and experience will enable us to provide the
City of Huntington Beach with the required expertise, timely support and a professional work
product. We look forward to the prospect of working with you.
If you have any questions, please call me.
Sincerely yours,
4And'ew/an�Horn, Ph.D.
Exhibit "B"
VAN HORN CONSULTING
SCHEDULE OF FEES FOR PROFESSIONAL SERVICES
The Van Horn Consulting Group provides its professional services on a time and expenses
basis by applying the following hourly billing rates:
Professional Fees:
Dr. Andrew Van Horn
$250
Dr. Greg Hamm
$300
Mr. David Arpi
$250
Dr. Edward Remedios
$200
Dr. Keith White
$200
Dr. Ronald Cooper
$180
Dr. Constance Miller
$140
Mr. Blair Schmicker
$110
Research Assistant
$ 80
Clerical support
$ 50
Direct expenses, including copying, travel, delivery services and the like, are billed at our
cost. Other arrangements, including a retainer or fixed fees can be negotiated to meet client
needs.
S" .,itvINSURANCE AND INDEMNIFICATION WAIVER
xud�n ,
MODIFICATION REQUEST
ECEIE
1. Requested by: David C. Biggs MAR 0 3 2005
2. Date: February 24 2005 city of Hunftngton Beaci,
3. Name of contra ctorlpermittee: Van Horn Consulting cityAttorney's office
4. Description of work to be performed: Economic Analysis - Valuation of the AES Power
Plant
5. Value and length of contract: Until December 31, 2007
6. Waive rlmodification request: Professional Liability
7. Reason for request and why it should be granted: See attached memo regarding
Professional Liability. Van Horn has indicated that all associates listed in his proposal are
independent contractors, not employees.
8. Identify the risks to the City in approving this waiver/modification: No risks are identified.
;21)-seq
ead Signature rDate:
.... ..........
.............
APPROVALS;
Approvals muss be obtained in the orderlisted this form. Two approvals are required..
for a;request to ba:granted': Approval from the City Administrator's Office is only required if
Risk Management and the City-Attorney's Office disagree.
1. Risk Management /
.Approved ElDenied .��
Signature Date
2. ;Attorney's Office
pppoved ❑ Den e 3 ��
Sign ure Date
3. City Administrator's Office
❑ Approved ❑ Denied
Signature Date
If approved, the completed waiverlmodification request it. to besubmitted to the
City Attorneys Office along with the contract for.approval.:: Once the contract bias been approved,
this form 'is to be filed u4iith the' Risk Management Division of Administrative Services
�..... ............id l..:...+�.J.... n1nA111IME: 4C%.Cn ARA
CITY OF HUNTINGTON BEACH
InterOffice Communication
Economic Development Department
TO: Karen Foster, Risk Manager
Jennifer McGrath, City Attorney
�1
FROM: David C. Biggs, Director of Economic Development ? ;t
DATE: February 23, 2005
SUBJECT: Professional Liability Insurance Waiver Request — VAN HORN
CONSULTING
The Economic Development Department is requesting a waiver of the requirement for
professional liability insurance for a professional services contract with Van Horn
Consulting.
Our rationale for requesting the waiver is consistent with the proposed scope of work and
the associated risk. The City is working to provide information to the State Board of
Equalization (SBE) to assist them in establishing the assessed value for the AES Power
Plant. The City solicited proposals from three firms to provide the desired professional
assistance. The firm of Van Horn Consulting was selected as the best -qualified firm with
the most responsive proposal.
The City's risk associated with this effort is negligible in our assessment. Van Horn will
be providing information to the SBE.
The SBE and its staff will choose to utilize the data/information or not. It will
independently assess the data/information provided by the City and Van Horn and the
SBE will determine whether to give any weight to the information in setting the assessed
value. The City will not be using the Van Horn information or work product to take any
action nor make any decision itself. As such, it is hard to imagine any action or inaction
by Van Horn that could give rise to a claim that could be covered by a professional
liability insurance policy.
As such, we would request your approval of the waiver. We are rapidly approaching the
point in time by which we need to provide information to the SBE for the 05/06 tax year
valuation, and would request a timely approval of the waiver.
c: Penelope Culbreth-Graft, City Administrator
GADavidIMEM0MVanHomConsu1t.D0C
S X
CITY OF HUNTINGTON BEACH
2000 Main Street, Huntington Beach, CA 92648
Declaration of Non -Employer Status
In order to comply with the City Council Resolution No. 6277, you are required
to provide proof of Workers' Compensation Insurance. If you have no employees,
this form must be signed and returned to:
City of Huntington Beach
Risk Management Division
2000 Main Street
Huntington Beach, CA 92648
I certify that in the performance of the activity or work for which this permit is
issued, 1 shall not employ any person in any manner so as to become subject to
California Workers' Compensation Insurance requirements.
I authorize the City of Huntington Beach to immediately and retroactively revoke
the license or permit issued under this declaration if I hare any employee(s) or
become subject to the provision of the laws requiring Workers' Compensation
Insurance.
Applicant/Company Name:
Address:
Applicant's Signature:
Title: 1"rm�_--C-
Location Signed:
Telephone Number: ?;—IS 2,-f . 3 3S t
PROFESSIONAL SERVICE CONTRACTS
Hunhn Beach®'
PURCHASING CERTIFICATION
ECEIV.D
MAR 0 8 2005
1. Requested by: David C. Biggs
City of Huntington Beach
2. Date: February 11, 2005 CityAttorney's office
3. Name of consultant: Van Horn Consulting
4. Description of work to be performed: Economic Analysis - Valuation of AES
Power Plant
5. Amount of the contract: $48,000.00
6. Are sufficient funds available to fund this contract?t ® Yes, ❑ No
7. Company number and object code where funds are budgeted: 30580101.69325
8. Is this contract generally described on the list of professional service contracts
approved by the City Council'? ® Yes, ❑ No
9. Is this contract within $25,000 or 25% (whichever is less) of the amount stated on
the list of professional service contracts approved by the City Council?'
N. Yes, ❑ No
10. Were (at least) informal written proposals requested of three consultants?
® Yes, ❑ No
Explanation:
E,1 1. Attach list of consultants from whom proposals were requested (including a
contact telephone number).
,42. Attach proposed scope of work.
13. Attach proposed payment schedule.
Purchasing/Central Services
1 If the answer to any these questions is "No," the contract will require approval from the City Council.
Purchasingcert_VanHorn.doe 2/11/2005 4:03 PM
Proposals Received 2004
Economic Analysis — Valuation of AES Power Plant
David W. Raich, MAI
First American Commercial Real Estate Services
1217 E. Normandy Place
Santa Ana, California 92705
Andrew J. Van Horn, PhD
Van Horn Consulting
61 Moraga Way, Ste 1
Orinda, California 94563
Mr. Kabirr Faal, Principal
Navigant Consulting
225 W. Broadway, Ste 400
Glendale, CA 92204