Resolution - Lubbock Power & Light: Consider a resolution authorizing the Mayor of the City of Lubbock to execute that certain Settlement Agreement by and between the City of Lubbock, acting by and through Lubbock Power & Light, and Southwestern Public Service Company, a New Mexico Corporation, regarding that certain Master Power Purchase and Sale Agreement ("Master Agreement") dated as of November 12, 2009, and that certain Transaction Agreement of the same date entered into under the Master Agreement (the "Transaction Agreement", and together with the Master Agreement and any other transactions entered into under the Master Agreement, the "PPA"), providing for an early termination of the PPA.
Item Summary
LP&L has received all necessary approvals to transfer a portion of its load (the Affected Load) from the Southwest Power Pool (SPP) to the Electric Reliability Council of Texas (ERCOT). The Affected Load accounts for approximately 70% of the electric load for LP&L. The portion of the load that is not currently transferring from SPP to ERCOT (Remaining Load) accounts for the remaining 30% of electric load, which is currently served with Partial Requirements Power Service (PRPS) from Southwestern Public Service Company (SPS).
On November 12, 2009, LP&L and SPS entered into a series of agreements (collectively the Purchased Power Agreement or PPA) pursuant to which LP&L agreed to purchase PRPS from SPS beginning on June 1, 2019 through May 31, 2044. Additionally, on March 21, 2017, LP&L and SPS entered into a Transmission Letter Agreement for transmission charges allocable to LP&L in connection with the PPA. The initial level of PRPS totaled 170MW beginning on June 1, 2019 with increases of 1.2% per year through 2044.
LP&L currently intends to seek all necessary approvals to transfer the Remaining Load from SPP to ERCOT. Therefore, the PRPS is necessary to serve the Remaining Load until the anticipated ERCOT integration date of June 1, 2023. Upon the integration of LP&L's Remaining Load into ERCOT, LP&L will no longer need the PRPS; therefore, LP&L's payment obligations under the PPA and Transmission Letter Agreement will become stranded costs of LP&L.
In anticipation of the full integration to ERCOT, LP&L and SPS have agreed to terminate the PPA and the Transmission Letter Agreement, and have identified May 31, 2023 as the current estimate of the Termination Date. Under the terms of the Settlement Agreement, LP&L intends to pay a lump sum, totaling $77.5 million, to SPS as compensation for power- and transmission-related shifted costs under the PPA.
LP&L has also agreed to continue paying SPP charges that are assessed to SPS under the LP&L Network Integration Transmission Service (NITS) Agreement, for up to 24 months, that are attributable to service to LP&L's load after LP&L departs the SPP system (because SPP uses lagging billing determinants for certain charges).
Additionally, LP&L has agreed that the Settlement Agreement will not become effective unless and until it is approved or accepted by the Federal Energy Regulatory Commission (FERC) and the Public Utility Commission of Texas (PUCT).
Following the termination date, the contractual relationship between LP&L and SPS will be limited to this Settlement Agreement and certain easements and crossing agreements necessary for the operation of each respective system. For clarity, the existing water use agreement and the existing franchise agreement pertaining to SPS' retail service territory in Lubbock will continue under the existing terms of each respective agreement.
Fiscal Impact
Under the PPA, LP&L pays over $17.0 million per year for capacity in SPP. With the 1.2 percent annual increase in service, in addition to inflationary impacts, the annual payments will grow well in excess of $17 million per year into the future. The lump sum termination payment of $77.5 million will be funded with long-term bonds, with an estimated annual payment totaling approximately $4.1 million per year. Therefore, the termination of this agreement will trade an approximate $17.0 million annual payment for a $4.1 million annual payment. By reducing annual costs by approximately $12.9 million per year, the average residential (Rate 1) customer will experience power cost savings in excess of 10 percent.
Staff/Board Recommending
The approval of this matter is subject to the EUB and City Council's approval of authority to execute the Settlement Agreement.