SUBJECT: APPROVAL OF A FIRST AMENDMENT TO THE MASTER

AGREEMENT WITH LOS ESTEROS CRITICAL ENERGY FACILITY, LLC

Recommendation

It is recommended that the City Council approve:

a) A first amendment to the Master Agreement for Conveyance of Interests in Real Property between the City and Los Esteros Critical Energy Facility, LLC (LECEF) to modify the process for obtaining an appraisal of fair market value for specific easements and licenses on Water Pollution Control Plant (WPCP) bufferlands, and

b) A modified Pole Line License agreement to realign space to be used by the Licensee, and to grant an option to convert the license to an easement at any time prior to expiration of the term.

Background

In 2002, in conjunction with the development of the Los Esteros Critical Energy Facility (LECEF), the City and LECEF, LLC/Calpine entered into a Master Agreement by which, the City agreed to permit Calpine to obtain and use two easements and one license agreement over WPCP bufferlands, as part of the Dataport/Los Esteros Critical Energy Facility project. The property interests to be conveyed to Calpine under the Master Agreement are as follows:

· An Access Road and Utility Easement Agreement

· An Open Space Easement

· A Pole Line License (to be granted to PG&E to permit PG&E's transmission poles to carry electricity from the LECEF facility off-premises)

The City has recently completed the transaction for an access road and utility easement agreement, for which LECEF has paid $1,069,354.73 for the easement.

Pending final negotiations on the price of the open space easement, the City has granted LECEF, under the Manager's authority, a right of entry (ROE) to complete installation of a landscaped berm on the property. The ROE required an Addendum to the Environment Impact Report (EIR), and the ROE were issued on August 15, 2003. Installation of the berm and landscaping is proceeding.

A Pole Line License has been granted to PG&E; however, changes to the project necessitate modifications to the license and the addition of Calpine to the license.

ANALYSIS

A number of aspects of the transaction have been successfully concluded. To complete the transaction, it is recommended that Council approve the modifications to the appraisal process and to the Pole Line License agreement as outlined below.

Proposed Modification to Appraisal Process

Under the Master Agreement, the determination of fair market value for these property interests is presently through an appraisal process, by which each party obtains appraisals, and then could meet and confer to work out differences between the appraisals. If the parties could not work out a compromise, then the parties would agree to a third, independent appraiser, who would make a final determination binding on both parties.

The City and Calpine have just completed this process for the access road and utility easement agreement. The City and Calpine were not able to arrive at a compromise, and so selected an independent third appraiser. The final value by the independent third party appraiser was set at $9.15/sq. ft. (total: $1,045,000 for 2.62 acres), which is closer to the City value ($12.20/sq.ft.) than LECEF ($5.94 sq. ft.). The independent appraiser clearly thought the City's appraiser's easement valuation (90% of fee value) was more accurate than that suggested by the appraiser retained by LECEF (33% of fee value).

Calpine has suggested that, rather than incur the time and expense of having each party select and pay for their own appraisal and then attempt to resolve any differences with a third party appraisal, the evaluation of the property interests involved in the open space easement and the

Pole Line License also be submitted directly to the same independent third party appraiser, Mr. Jeff Enright, MAI, who has conducted the appraisal for the access road and utility easement.

After evaluating the Calpine proposal, staff believes that submitting the outstanding property interests in the open space easement, and valuation of modifications to the Pole Line License, directly to the independent third appraiser would be efficient and fair. The third party appraiser currently on contract already has evaluated the access road and utility easement agreement and has previous experience with both parties. Under these circumstances, agreeing to have the third party independent appraiser establish the fair market value of the remaining property interests facilitates bringing this project to conclusion.

Proposed Modification to Pole Line License

The current Pole Line License, granted to PG&E, covers an area adjacent to the LECEF facility running to the border of Highway 237, and then east to connect to transmission lines off-site.

LECEF is currently proposing that an easement be granted to it and PG&E jointly for a much smaller easement area to permit a more direct connection into the PG&E's plant and transmission lines (see attached Exhibit A). This revised Pole Line License would be for a term of five (5) years, at which point LECEF would have the option of converting it to a permanent easement. For purposes of appraisal, three property interests would be evaluated: the license, the option to purchase, and the permanent easement.

Staff has no objection to the proposed modifications to the Pole Line License as the changes would have less impact on plant properties than does the current configuration.

PUBLIC OUTREACH

Conducting public outreach was not necessary for this recommendation.

COORDINATION

This project and memorandum have been coordinated with LECEF and PG&E. In addition, the California Energy Commission is aware of the proposed modification. This matter is scheduled to be acted upon by the Treatment Plant Advisory Committee (TPAC) at it’s December 11, 2003 meeting.

COST IMPLICATIONS

In accordance with the Mayor’s Budget Strategy, approval of this recommendation will focus on vital core services to the community.

BUDGET REFERENCE

Not applicable

CEQA

Resolution No. 70259 and Addenda thereto, PDCSH01-088

Richard Doyle

City Attorney

By:

EVET S. LOEWEN CARL W. MOSHER

Chief Deputy City Attorney Director, Environmental Services Department

Attachment