DOCUMENTING A PUBLIC–PRIVATE ENERGY PARTNERSHIP

            Public-Private Partnerships have become more common and quite useful in the development of generation and transmission projects.  There are certain unique qualities inherent in municipal utilities which make them an attractive partner.  First of all they are a part of the local government which has the ability to enter into development agreements, conduct environmental reviews, condemn the property necessary for the project and otherwise cooperate in planning and zoning matters.  In California and in many other jurisdictions municipalities are able to own and operate utilities, including generation, transmission and distribution facilities without being subject to public utility commission jurisdiction.  Such successful Public-Private Partnerships include the Path 15 Upgrade Project in the California Central Valley and the Trans Bay Cable Project, connecting Contra Costa County and San Francisco County through an underwater DC cable. 

These types of relationships must be founded upon not only trust and a dedication to cooperation, but carefully drafted agreements.  The purpose of this article is to briefly outline the various agreements which may be entered into between the public entity (“PE”) and the project developer to govern the different phases of the project.  These include the planning, development and operational phases. 

DEVELOPING THE DEAL POINTS

            After all the introductions are over and the general discussions relating to how wonderful the project is and how needed the project is from a power grid reliability standpoint or renewable energy standpoint, the discussion regarding who is responsible for what, who is to assume liability and for what, and who is to receive what benefits out of the project, must take place.  These are the discussions where the rubber first meets the road and where the parties can truly find out if they can or cannot work together.  With the negotiating teams identified, their varied personalities are revealed as the deal points are drawn to the surface.

            The initial question from the standpoint of the public partner is clear: “What is the benefit to us?”  In today’s economy this becomes a very important question for the public entity.   In evaluating the benefits and the burdens, an examination must be made of the role the PE will be engaging in during construction, as well as after the commencement of commercial operations.  Before the commencement of commercial operations it would appear that a good part of the risk falls on the developer, who must finance the expense to the point where outside financing is available.[1]  Such pre-financing risks include the expenses incurred in applying to the Federal, State and Local regulatory authorities to obtain all necessary authorizations for the project, including the necessary environmental review; reimbursement to the cooperating PE for all of its staff time and consulting expense made necessary in promoting and pursuing the project; and the engineering work necessary for the preliminary project design and description. 

During the permitting stage the PE may find itself engaging in the CEQA process and pre-condemnation activity to the extent it assists in the program to acquire all real property rights through cooperation with the various property owners who will be impacted in one way or another by the project.  These activities may expose the PE to certain liabilities which must be adequately protected against by the developer.

Following commercial operations and through what may be considered the long term, or management and operation of the project, the PE may be requested to hold title, and must therefore be adequately compensated for the operational risks involved.  These may include such risks as exposure to penalties levied by the Western Electricity Coordinating Council (“WECC”) or some other entity for violations of reliability standards developed by the North American Electric Reliability Corp. (“NERC”) under agreement with the Federal Energy Regulatory Commission (“FERC”), deductibles under policies of insurance or exposure under leases, easements, licenses and other contracts which may be assigned to the PE for the purpose of the operation and maintenance of the project.  A prime example of exposure to liability in oil production is the most recent BP oil rig failure where the penalties may extend into the billions of dollars.  In a project where the developer or an assignee other than the PE will own and operate the project following commercial operations, there will be no ongoing or continuing exposure to the PE and the consideration flowing to the PE will most likely be a sum certain as a residual public benefit. 

            With the foregoing in mind, the rest of the article will address the following types of agreements which would typically be employed in these types of partnerships:

•      Letter of Intent or Memorandum of Understanding,

•      Confidentiality Agreement,

•      Reimbursement Agreement,

•      Project Development Agreement,

•      Purchase and Sale Agreement, and

•      Project Administration Agreement. 

LETTER OF INTENT/MEMORANDUM OF UNDERSTANDING

One of the most important documents to be created is the non-binding letter of intent or memorandum of understanding (“MOU”), which will be received by the council or board of the PE as the basis for moving forward with negotiations on a comprehensive agreement (referred to herein as the “Project Development Agreement” or “PDA”).  The MOU, from the standpoint of the PE, should contain enough detail to demonstrate the basis for the PE entering into the further necessary negotiations and frame the basic deal points, including the benefits to flow to the PE. 

From the standpoint of the developer, who is intent on recovering as many of its expenses as possible under rates approved by the rate setting authority, the description of the compensation, fees or concessions to be provided to the PE should be carefully drafted and the MOU presents the first opportunity to begin framing these issues.   Another important consideration by the developer, at this early stage, is the need to set the general limits of what is expected of it by way of compensation to the PE under the project agreements.  This allows it to proceed with the substantial investment in the development of the project without leaving the element of cost wholly unidentified.

From the PE’s perspective, however, the use of certain terms and definitions designed with an eye for recovery through the rate setting process should not prejudice it in recovering all of its costs and expenses incurred in performing under the various project agreements.      

The MOU serves other purposes as well.  It makes a statement that the project is being pursued in a significant way.  The fact that there is a public-private partnership being developed may be important in obtaining an initial green light from the various jurisdictional authorities and lends support to the credibility of the project and the greater likelihood of success.

CONFIDENTIALITY AGREEMENT

Before the drafting of the PDA can proceed in earnest, there must be an agreement regarding the sharing of confidential information.  This will allow the developer to be as candid as possible and support the exchange of the information necessary to negotiate and draft the contemplated agreements.  In addition, there may be third party contracts assigned to the PE in the event it is to participate in the ownership and/or operation of the project upon commercial operation.  Such assigned contracts may be very technical and the various contractors, as well as the developer, may need protection from public disclosure.[2]  These contracts may include the contract for the engineering, procurement and construction, which must by its nature address plans and engineering information of a proprietary nature.  Finally, the PE involved will most likely conduct the environmental review, which will take into consideration the effects on the environment of the particular technology being employed.

The confidentiality issues do not go away with the drafting of the agreement, but require constant vigilance among the parties and other participants.  The necessary actions to be undertaken will include the labeling of confidential information carefully and the establishment by the PE of a clear policy applicable to records retention.  Most jurisdictions will generally recognize communications with counsel, communication of trade secrets and architectural or engineering plans as being protected from disclosure under public records requests.   

REIMBURSEMENT AGREEMENT

Another important preliminary agreement is the reimbursement agreement, which must provide for the reimbursement of all expense, including the employee and consultant expenses, actually incurred by the PE.  After all, in any of these permitted energy/transmission related projects, there are many hurdles to jump over in order to finally flip the switch and at any point in time the project could stall or derail.  In such event, the PE partner should not to be on the hook for any of the financial risks, including its internal expenses.          

PROJECT DEVELOPMENT AGREEMENT

The importance of the MOU cannot be understated, however, the number of important issues remaining to be worked out around the deal points contained in the MOU are numerous and critical to both parties.  These issues include such things as a) identifying which project assets are to be retained by the developer and which assets are to be transferred to the PE,[3] b) identifying the division of responsibilities during all stages of development, as well as during the operational period, c) setting forth the nature of the cooperation by both parties in such matters as project financing, permitting, conduct of the environmental review and conduct of any eminent domain proceedings undertaken for the acquisition of land necessary for the project, d) creating a procedure for dispute resolution which will expedite the resolution of disputes where possible to avoid a delay in carrying out the project and e) identification of time frames under which the parties are to perform, among many other matters.     

PURCHASE AND SALE AGREEMENT

A purchase and sale agreement (“PSA”) is necessary where the PE will assume the ownership and operation of the project as a self regulated municipal utility.  The developer, on the other hand, can remain responsible (where the project is a transmission line project) as a participating transmission owner under the tariffs of the regional electric transmission organization[4] and receive and manage the receipts under the approved rates in keeping with the requirements of project agreements.  This kind of sale to and management by the PE would secure for the developer a substantial return on its equity investment, while allowing it to avoid direct liability for the operation of the project and yet retain some control (See section on Project Administration Agreement). 

The PSA is really at the heart of the transaction if the PE is to own and operate the project once it is fully constructed and ready for commercial operation.  The drafting of the PSA must take into consideration what the completed project will include and on what conditions the developer must sell and the PE must purchase.

Where the project is to be retained by the developer the real substance of the bargain is the initial cooperation in pursuing the CEQUA compliance, property acquisitions and permitting.  In such an event the PDA may be the final peace to the puzzle.

PROJECT ADMINISTRATION AGREEMENT

This document may have a dual purpose in the event the PE is to provide the operation and maintenance functions as well as the overall management of the project.  This document will once again be viewed by the parties as an opportunity to carefully define their respective interests during the functional operation of the project. 

The developer will seek to participate as fully as possible in the decisions affecting such things as budget planning, including operations, maintenance and staffing issues, liability and property insurance coverage, contacts with the regulatory agencies and independent system operators, major upgrades, environmental and decommissioning issues, capital improvements and upgrades, among others.  While the PE will be seeking to be fully compensated, indemnified, insured or otherwise fully covered for all of the expenses and other liabilities to which it will be exposed during the operational period, along with a management component above and beyond actual expenses.

CONCLUSION