A top Federal Energy Regulatory Commission official approved Klamath River Renewal Corp.’s request to develop a “Plan B” for additional funding in case the cost of removing four dams and restoring the lower Klamath River exceeds the $450 million committed to the project.
In a Jan. 23 letter to KRRC and PacifiCorp—which still holds the license and operates the four dams slated for removal—David Capka, Director of the FERC’s Division of Dam Safety and Inspections, accepted a proposal to revise KRRC’s dam removal plan and its cost estimate, to be submitted to the agency by April 29.
The revisions will supplement KRRC’s Definite Plan for removing the dams, a key part of its FERC application with PacifiCorp to transfer the license for four PacifiCorp dams on the lower Klamath River to KRRC, and to surrender that license for decommissioning. The dams are the J.C. Boyle in Oregon, and Copco No. 1, Copco No. 2 and Iron Gate dams in California.
The decision to revise the plan—which includes an analysis estimating project costs at $397.7 million—follows the recommendations made by an independent board of consultants. The board was created at FERC’s direction and is asked to assess the feasibility and costs of the project, along with KRRC’s financial ability to complete it.
The consultants met in October and provided a report to FERC in November with two main recommendations—a “Plan B” for additional funding in case financing from a California bond and PacifiCorp surcharges are inadequate, and a new cost estimate to be prepared by KRRC’s technical consultants. The Renewal Corporation accepted those recommendations and offered its own comments in a Dec. 12, 2018, letter to FERC.
Capka, in response, provided comments to the consultants’ recommendations, and raised another potential issue, indicating that KRRC cannot simply switch to a plan to partially remove the dam facilities if it discovers full removal will exceed costs.
In his letter, Capka notes that partial dam removal is examined in KRRC’s definite plan, and that KRRC indicated it is “primarily for the purposes of environmental review.” However, KRRC’s response to the consultant recommendations states that it has the option to “de-scope” the project by implementing a partial dam removal. “Please verify that the proposed action in the Definite Plan for Commission approval is full dam removal,” Capka’s letter states.
Overall, the independent board of consultants (BOC) found that KRRC’s Definite Plan appropriately recognizes the project’s requirements and vulnerabilities, and that the types of insurance policies and bonds are appropriate for a project of this type, size and duration.
“[I]t is the BOC’s opinion that it is likely that there will be sufficient funding within the state cost cap,” their November report to FERC said. “However, the information reviewed also indicates that there is a possibility of exceeding the state cost cap for both full removal and partial removal schemes.”
Because of that possibility, the consultants found it “imperative” to plan for cost overruns that are not covered by insurance, bonds, indemnification or a guaranteed maximum price with the contractor.
The state cost cap involves three sources of funding to decommission and remove the dams and restore the lower Klamath River. Totaling $450 million, they include a $250 million California bond measure, $184 million in surcharges from PacifiCorp’s Oregon customers and $16 million in surcharges from PacifiCorp’s California customers.
The consultants suggest that KRRC could seek agreements with the states “to obtain further contributions from rate payers or possibly co-licensing between the current Licensee and Transferee. There may well be other alternatives; however, leaving this aspect of the project underfunded carries the risk of incomplete dam removal and incomplete restorative efforts which could result in public safety issues and adversely affect the future of similar river restoration schemes.”
The consultants’ report also found “major shortcomings” in the plan’s cost estimate, including an 8 percent allowance for contractor overhead and profit margin that consultants believe is very low. “A profit expectation in the order of 12 percent (or higher) would be more appropriate,” and under some perspectives, a 20 percent margin for both corporate overhead and profit would be more accurate.
Their report also stated, “[A]ny unforeseen significant cost would not be covered by the proposed funding,” and noted, “It is realistic to anticipate that a major change could occur on this project, as has happened on significant civil work in recent history (Calaveras Dam, Oakland Bay Bridge, Devil’s Slide, the Boston Big Dig).”
KRRC’s response letter outlines several finance methods it plans to use to compensate for unforeseen costs. A comprehensive insurance package will cover harm or damages to a third party; a surety bond in an amount equal to the value of the contract for removal will cover cost overruns or delays within the contractor’s responsibility; KRRC will indemnify PacifiCorp and the states of Oregon and California against any damages from events such as a dam collapse, a major lawsuit by opponents or contaminated soils downstream, it says.
“Using our funds to pay premiums, KRRC will acquire and hold insurance, bond, and indemnification; and those financial instruments will cumulatively provide hundreds of millions of dollars of coverage against risks,” the letter states.
In addition, once a contractor is selected, KRRC will establish a “guaranteed maximum price” for all work including a hatchery, pre-reservoir drawdown work, reservoir drawdowns, dam removal and habitat restoration. The only adjustments to that guarantee will be from “uncontrollable circumstances,” such as changes in law and uninsurable forces, it states.
Clarifying FERC’s expectations for the Definite Plan and cost estimate revisions, Capka asked KRRC to verify that its insurance, bonds and indemnification will be in place before decommissioning work begins, and to include an estimate of the cost of premiums and coverage extension above the $450 million. He also asked for an estimated date for reaching a guaranteed minimum price with the contractor.
Capka also asked for an explanation of how the project will be funded if work extends beyond expiration dates of funding agreements. Consultants had noted that the Oregon and California surcharges expire on Jan. 31, 2022, and the California bond measure expires on June 30, 2021, with exceptions for funds devoted to ongoing mitigation or monitoring.
KRRC “only stated that it would seek extensions from the states, but provided no assurances that the states would be amenable to those extensions,” his letter says.