The PUD and Evergreen - Deal Economics
as provided to Governor Gregiore in Ray Brown's letter of July 5th, 2008
The PUD and Evergreen – Deal Economics
While we don’t know the full terms of the deal between Evergreen and the PUD we do have some basic information that allows us to see that the PUD could break-even on this deal if the mill begins operations in 2009. The PUD claim that they will make a profit from this arrangement but that’s unlikely because the amount of profit they show is well within the margin of error of the very basic analysis they have done and because their calculations don’t include all of their costs, notably the exclude the opportunity costs.
The PUD has agreed to sell 23 MWh of power from the BPA at a preferred rate of $40 per MWh. The PUD is selling the Evergreen Cosmopolis 193,000 hours of power at $40 for which Evergreen will pay $7,720,000 per annum. This power originates from Bonneville and if the PUD had this power and were free to sell it to the highest bidder it would sell for, according to the PUD, $67.50 which would be $13,000,000. In other words the PUD’s opportunity cost of selling cheap power at a preferred rate to Evergreen Cosmopolis is $5,280,000 a year, according to the material provided by the PUD.
This is a cost largely borne by the BPA and that’s presumably one of the reasons why the BPA’s approval for this deal was so important.
From the perspective of the ratepayers of Grays Harbor, the deal as presented by the PUD shows that the PUD are only obliged to pay 16.9% of the fuel and operating costs for the power generation at the mill; although they are paying 100% of the capital costs for the powerhouse, $27 million, plus they are posting a $5 million environmental bond.
This is not a bad arrangement for the PUD as this means that their share of the cost of generation is about $50 per MWh and it is reasonable to assume that they can sell the power for more than $50. Just as it would have been reasonable to assume that they could have sold the power that is going to the mill for $40 to someone else for a price greater than $40.
The problem is, that if the pulp mill isn’t running then the PUD would have to pay 100% of the costs and not just 16.9%, with the result that, using the PUD’s own numbers, means that the generation costs balloon to the $175 per MWh.
To put this in perspective, at a production cost of $175 per MWh, it would cost the PUD $21,700,000 to generate 15 MWh’s of power annually at the Cosmopolis mill. According to the PUD’s optimistic forecast, from a person identified only as “Ed Mount”, 5 years from now that 15 MWh’s of power might sell for $67.50 per Mwh or roughly $8,400,000. The result is that, using the PUD’s own figures, if the pulp mill isn’t running, the Cosmopolis powerhouse would produce an annual loss to ratepayers or more than $13 million a year.
The PUD’s misleading assertion in the Daily World on July 3rd that:
“The deal becomes less attractive to the utility district if Evergreen closes the mill. Though the PUD could operate the generators at reduced efficiency, the fuel cost would cause the PUD to lose $13.20 per megawatt-hour….”
This claim is ridiculously optimistic and doesn’t include the opportunity cost to the PUD from the sweetheart power deal with Evergreen. Even with their $13.20 per megawatt-hour claim that would still produce a loss of $1.6 million per annum. However, its very hard to believe that when you go from paying16.9% of the fuel and operating costs to paying 100% of the fuel and operating costs that the loss won’t be substantially greater than what the PUD have stated.
The calculations below illustrate the specific costs and allocations of costs which show that if the Mill runs, the cost is $50; if it fails it is at least $175.
| Calculation | |||
| A | Days Running | 345 | |
| B | Power Generated | 15 | |
| C | Total power generated (MWh/yr) | 124,200 | A x B x 24 hrs |
| D | Hog Fuel required (BDU / year) | 55,000 | |
| E | Hog Fuel Price | 25 | |
| F | Oil Required (bbl / year) | 56,500 | |
| G | Oil Price | 115 | |
| H | Fuel Cost $/MWh | 63 | (D x E + F x G) / C |
| J | Fuel Cost $/MWh (PUD Share) | 11 | H x W |
| K | PUD Bond | 27,000,000 | |
| L | Interest and Fees on Bond | 13,052,000 | |
| M | Asset lifetime (years) | 20 | |
| N | Capital Cost $/MWh | 25 | (K + L) / M |
| P | Operating Cost per year | 5,855,000 | |
| Q | Maintenance cost per year | 4,928,000 | |
| R | O & M Cost $/MWh | 87 | (P + Q) / D |
| S | O & M Cost $/MWh (PUD Share) | 15 | R x W |
| T | Levelized Cost $/MWh | 175 | H + N + R |
| U | Levelized Cost $/MWh (PUD Share) | 50 | J + N + S |
| W | Modifier (% fuel cost to PUD) | 16.9% |
All information provided by Gray's Harbor PUD.