Attachment

UTILITY COMMITTEE AGENDA March 28, 2011 - 5:00 P.M. - Council Chambers - City Hall - City of Dover Public comments are welcomed on any item and will be permitted at appropriate times. When possible, please notify the City Clerk (736-7008 or CityClerk@dover.de.us) should you wish to be recognized. AGENDA ADDITIONS/DELETIONS 1. Evaluation of Proposals - Energy Management Agreement 2. Adjournment by 5:55 P.M. /tm S:\AGENDAS & MINUTES\Committee-Agendas\2011\03-28-2011 UTILITY.wpd THE AGENDA ITEMS AS LISTED MAY NOT BE CONSIDERED IN SEQUENCE. THIS AGENDA IS SUBJECT TO CHANGE TO INCLUDE THE ADDITION OR THE DELETION OF ITEMS, INCLUDING EXECUTIVE SESSIONS.

ACTION FORM PROCEEDING: Utility Committee AGENDA ITEM NO.: DEPARTMENT OF ORIGIN: Public Utilities Administration DATE SUBMITTED: 3/17/2011 PREPARED BY: Ronald H. Lunt, Public Utilities Director SUBJECT: Evaluation of Proposals – Energy Management Agreement REFERENCE: N/A RELATED PROJECT: N/A APPROVALS: City Manager, Controller EXHIBITS: Exhibit #1 - Recommendation of Energy Manager EXPENDITURE REQUIRED: $996,000/year AMOUNT BUDGETED: FY 11 - $2,280,000 FUNDING SOURCE (Dept./Page in CIP & Budget): Public Utilities – Electric Division, Operating Budget 480-8102-592-65-44, Operator/Supply Management Fee TIMETABLE: To become effective upon Council’s approval and City Manager execution of contract. RECOMMENDED ACTION: Staff recommends that the City Manager be authorized to execute a five (5) year contract with an annual fee of $996,000, plus additional services as required, with The Energy Authority, Inc. as per the terms of the Request For Proposal. BACKGROUND AND ANALYSIS On May 4, 2006, the City of Dover (City) entered into the Energy Management Agreement with Pace Global Asset Management, LLC (PACE) to assist the City with its energy procurement, energy sales, purchase of fuels, establishment and management of risk policies, develop and manage hedging protocols, provide power plant oversight and bidding strategy, and related energy procurement processes. This contract expires on June 30, 2011. A staff team was organized to solicit proposals from potential bidders and consisted of Antony DePrima, City Manager; Donna Mitchell, Controller; Ronald Lunt, Public Utilities Director; and due to the confidentially of the various proposals Mr. Kirk Betts, Counsel from Betts and Holt LLP, conducted the solicitation process. On November 2, 2010, the team issued a Request for Qualifications to sixteen (16) firms; seven (7) seven responses were received. After evaluating the submittals the team selected three finalists and on January 4, 2011 a Request For Proposal (RFP) was sent to these parties. As part of the RFP request the current Energy Management Agreement was included in the package and would be used as a basis for the new agreement. On February 8th and 9th interviews were conducted with the three parties. Subsequent to these interviews a Best and Final offer was requested and due to the team on February 28th so they could provide a final recommendation. Of the three proposals that were submitted, one was rejected as non-compliant and not considered for the final recommendation. A summary of the recommendation (exhibit #1) from team is included in the attachment and contains the details of the analysis. It is noteworthy that the selected firm also provided the lowest cost services and represents over a forty-percent decrease in base rates, not including potential incentives. Below is an overview of the submitted prices using PACE Global base price and fixed ARR management: Bidder Year 1 Year 2 Year 3 Year 4 Year 5 Total Contract PACE Global $1,170,000 $1,205,100 $1,241,253 $1,278,491 $1,316,845 $6,211,689 The Energy Authority $996,000 $996,000 $996,000 $996,000 $996,000 $4,980,000

Exhibit #1 March 16, 2011 Recommendation of Energy Manager Background PACE Global has been the supplier of energy management services since 2006; its contract expires on June 30, 2011. Dover initiated an RFQ/RFP process in October to obtain competitive proposals for continuing the types of services described in its Energy Management Agreement (EMA). All potential suppliers were provided a copy of the EMA to afford an opportunity to either self-disqualify, determine that it had the capacity to perform the comprehensive services required, or to align with an entity that would supplement the core services to be provided by the primary respondent. The process resulted in eight notices of interest, seven statements of qualifications, and three qualified suppliers (ACES Power Marketing (ACES), PACE Global (PACE), and The Energy Authority (TEA)) who were invited to submit financial proposals. Dover interviewed the three qualified suppliers, clarified contract details, and requested best and final financial proposal that complied with the comprehensive EMA and an alternate financial proposal that excluded power plant oversight and technical services (Alternative A). The Evaluation Committee concluded that Alternative A would not be in the City’s interest. It determined ACES’ base proposal was non-conforming because it excluded the minimum technical support and plant oversight services required by the RFP. The proposals submitted by PACE and TEA were comprehensive and fully complied with the RFP. RECOMMENDATION The Evaluation Committee recommends the TEA proposal. TEA is a not-for-profit organization owned by and operated exclusively for the benefit of municipal and governmental power suppliers. It serves load in many of the regional transmission organizations (like PJM), dispatches generation, and manages daily loads, purchases, and balancing. Its services are extensive and its mission is to optimize the value of energy management services to its partners and members. The Evaluation Committee believes that TEA’s core business, focus, and not-for- profit strategy yields a lower cost for its fixed expenses (building, trading desk, weather services, software, etc.). From a cost perspective, it is approximately $250,000/year lower than PACE and its price is fixed for the five year term. 1

DISCUSSION OF THE PROPOSALS PACE: PACE’s proposal adhered to the terms of the Energy Management Agreement. PACE has an advantage because it is the incumbent and entity most aware of Dover’s current needs, plant dispatch, reporting expectations, risks, etc. Clear from its presentation and proposal, PACE relies on a generally positive review of its historic performance, a perceived bias against changing energy managers, institutional knowledge with respect to Dover’s generation and its solar and gas turbine projects, and significant value-added services. PACE has demonstrated that it has resources to perform the scope of work described in the EMA. In the course of this RFQ/RFP, PACE reduced its fee significantly, but this comes at a cost. In addition to allocating fewer staff resources in the base fee, the cost reduction imposes several new conditions: a) a generation cumulative run-time limit of 100 unit run-hours/year (that is, the sum total of all run hours of all units, including for PJM testing - over 100 hours triggers an hourly fee); b) a limit of two EEI/ISDA agreements per year; and c) reduced staff participants in the monthly meetings. PACE proposed a base fee of $89,250/mo. plus $8,250 to optimizing the value of Auction Revenue Rights (ARR)(a transmission strategy to mitigate the cost of congestion) for a total of $97,500/mo., or an incentive arrangement that would hold the base fee at $89,250/mo., but pay PACE 35% of the value of ARRs up to a total additional payment of $300,000/year. Outside of these few changes, the contract would remain essentially the same. The proposal gives Dover the right to terminate the generation services component of the proposal (valued at $11,650/month) upon 60 days notice after the first year. The evaluation committee believes this is such a low probability as to give it no additional weight for purposes of evaluating the proposal. PACE brings a high caliber staff, extensive utility and private exposure, a full menu of services, and experienced personnel that give Dover a one-stop, integrated approach for utility operations. Looking to the next three years, it has experience with NAES and would be a resource for a plant operator RFP, although at an additional consulting expense similar to other power supply contracting that it has done. The Energy Authority (TEA): TEA, a corporation owned by member public power agencies, serves a variety of wholesale electric functions for its public power members and partners. It is primarily a wholesale power supply manager with a variety of arrangements with its members and partners, ranging from full requirements supply to dispatch rights. Its core business and services mirror Dover’s requirements and it operates from a not-for-profit perspective. We perceive that it is careful and risk averse, given the numerous clarifications that it submitted during each round of the financial proposal submissions as it became more confident of its approach to serve Dover’s requirements. TEA has experience in multiple jurisdictions and RTOs, including PJM-West, where it services significant loads, but Dover would be its first footprint in PJM-East, a unique zone with the highest density of consumers and the greatest transmission constraints. Because it operates in a 2

number of RTO’s, including PJM, it has a breadth of experience that is not similarly possessed by PACE. Given Dover’s load profile and data from the past five years, coupled with its existing positions, TEA will assume management of Dover’s requirements virtually seamlessly. TEA provides a wealth of services for municipal and governmental suppliers, virtually all of which will be made available to Dover. Unlike the PACE proposal, it does not seek incentives to perform at its best with respect to congestion risk management, it does not impose run-time limits, limits on the number of master agreements negotiated during the term, or price escalators. TEA, as a public power oriented supplier of services also provides Dover an opportunity to exchange ideas with others in this highly dynamic and very competitive arena. FINANCIAL REVIEW The Evaluation Committee concluded the following, after taking into account the incentive proposals contained in PACE’s proposal (least cost to highest cost): 1. The Energy Authority: $ 996,000/year; five year total: $4,980,000 2. PACE with ARR adder: $1,170,000/year; five year total: $6,211,689 3. PACE with ARR 35% cap: $1,371,000/year; five year total: $7,186,084 The difference between 1 and 2 above is $1.23 million over the five year term. 3