REPORT TO COUNCIL
SUBJECT
Title
Action to Authorize the Office of the City Manager to Negotiate and Execute Amendment No. 3 to the Steam Sales Agreement with The Newark Group, Inc. to Extend the Agreement Until March 31, 2024 and Add Additional Financial Provisions
Report
COUNCIL PILLAR
Deliver and Enhance High Quality Efficient Services and Infrastructure
BACKGROUND
Since 1994, the City’s Electric Utility, Silicon Valley Power (SVP), has provided steam from the City’s cogeneration facility (Cogen) to The Newark Group, Inc., a Greif Company (Newark), for purchase and use in the manufacturing of recycled paper products at Newark’s California Paperboard Mill (California Paperboard). This type of manufacturing uses significant quantities of electricity, steam, water and sewer services. Cogen was designed to provide steam to California Paperboard, and Newark is SVP’s only customer for the purchase of steam. Newark is one of the City’s largest electric, water and sewer customers.
On November 17, 2015, Council approved a five (5) year Steam Sales Agreement with The Newark Group, Inc. with an expiration date of October 31, 2020. On March 9, 2021, Council approved Amendment No. 1 to extend the term of the Agreement to October 31, 2021, primarily due to the impact of the COVID-19 pandemic. On October 19, 2021, Council approved Amendment No. 2 to extend the term of the Agreement to March 31, 2022, due to continuing Pandemic-related delays and the evolving need for a more detailed and updated Cogen Capital Investment Plan that would allow for Cogen’s operation on a long-term basis.
DISCUSSION
In the intervening five months, SVP staff developed a more detailed Capital Improvement Plan to share with Newark and provided Newark with an indicative steam pricing proposal based on that plan. Upon review, Newark has expressed a preference to upgrade its own steam production facilities to meet all of its steam requirements. Newark estimates that this changeover will require up to two years and, therefore, Newark would like to continue purchasing up to two more years of steam service from Cogen.
Amendment No. 3 will be structured to provide continuing steam service to March 31, 2024, as Newark has requested, provided that, in addition to the proposed steam rate methodology, Newark consents to pay for any and all capital investment needed to support operation of Cogen until March 31, 2024, when the term of the amended agreement ends. If additional capital investment is required and Newark does not consent to pay for such investment, the Agreement would be terminated upon the City’s determination that Cogen is no longer safely operable or out of compliance with legal and regulatory requirements.
Amendment No. 3 essentially provides Newark a transition away from SVP steam service while Newark upgrades its steam production facilities. By providing this transition, SVP will be assured of stable, predictable power sales to this existing customer by keeping Newark in SVP’s service territory, and Newark will be able to maintain its production of recycled paper products. Without an extension, SVP may lose the opportunity to make future sales of electricity to Newark and to make future sales of water, recycled water and sewer service to Newark.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(b)(4) in that it is a fiscal activity that does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment.
FISCAL IMPACT
The revenue from steam sales to Newark was approximately $2 million in Fiscal Year (FY) 2020/21, and the estimated revenue for steam sales for FY 2021/22 and for FY 2022/23 is $1.5 million annually. As the transition contemplated in Amendment No. 3 progresses, SVP expects a winding down of steam sales revenue receipts. The net impact is that the potential cost savings from reduced operations at Cogen will offset the loss of steam revenue from Newark in the long term.
COORDINATION
This report has been coordinated with the Finance Department and City Attorney’s Office.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov.
RECOMMENDATION
Recommendation
Authorize the Office of the City Manager to Negotiate and Execute Amendment No. 3 to the Steam Sales Agreement with The Newark Group, Inc. to extend the Agreement until March 31, 2024 and include additional financial provisions.
Staff
Reviewed by: Manuel Pineda, Chief Electric Utility Officer
Approved by: City Manager’s Office
ATTACHMENTS
1. Steam Sales Agreement
2. Amendment No. 1 to the Steam Sales Agreement
3. Amendment No. 2 to the Steam Sales Agreement