Crown Hydro Response to FERC Termination Letter

L A W O F F I C E S O F 1 5 0 0 K S T R E E T , N W ♦ S U I T E 3 3 0 ♦ W A S H I N G T O N , D C 2 0 0 0 5

GGG KKK RRR SSS EEE 202.408.5400 ♦ FAX: 202.408.5406 ♦ WEBSITE: www.gkrse-law.com

June 23, 2011

Ms. Kimberly D. Bose Secretary Federal Energy Regulatory Commission 888 First Street, NE Washington, D.C. 20426

Re: Crown Hydro, LLC Crown Hydro Project, FERC Project No. 11175-024

Response to May 25, 2011 Show Cause Letter Dear Ms. Bose:

Crown Hydro, LLC, the holder of the above hydroelectric license, offers the following project update in response to your May 25, 2011 show cause letter. For the reasons set forth below, Crown Hydro respectfully requests that the Federal Energy Regulatory Commission not initiate any license termination proceedings. Instead, Crown Hydro asks that the FERC continue to hold these proceedings in abeyance until such time as Crown Hydro reports back to the FERC in a period not to exceed 45 days following the close of the Minnesota Legislature’s special session this summer. As explained in this letter, Crown Hydro expects the Minnesota legislature will enact legislation this summer as part of its special session which will remove the historical impediment to this project from obtaining local site control and thereby allow the project to move forward with final construction. 2009 – 2011

As your letter indicates, Crown Hydro provided its last status updates by submitting comprehensive progress reports in June and December, 2009. During 2010, Crown Hydro continued some work on securing site control, but spent much of its time exploring additional financing opportunities and hiring new consultants to help move the project forward. The Current Proposal

Beginning in 2011, Crown Hydro has once again spent significant time and resources in obtaining site control of the “third” powerhouse site referenced in the June 2009 update – i.e., a site just slightly up-river (approximately 150 feet) from the original project site but nonetheless within the project boundary as set forth in ordering paragraph (B)(2) of the March 19, 1999, FERC Order Issuing License. The new site has been substantially designed and engineered and

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Ms. Kimberly D. Bose June 23, 2011

L A W O F F I C E S O F

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because it would be built entirely underground, the facility would have minimal impact to the public. Crown Hydro continues to own two 1700 mm AxialFlow Kaplan turbines along with two 1575 kW Propencia synchromous generators, together with engineering and controls manufactured by Canadian Hydro Components, Ltd. The maximum capacity for the equipment remains at 3.2 MW. The equipment is currently in professional storage and remains ready and capable of being placed in service.

The proposed current site requires the temporary use of a small parcel owned by the

Minneapolis Parks & Recreation Board during project construction, an underground easement for permanent placement of the facility, and the use of underground tunnels previously used for hydropower production by Minneapolis milling companies, which tunnels have now come under the control by the Park Board by a grant of the City of Minneapolis.

Beginning in March 2011, Crown Hydro once again initiated discussions with the Park

Board about obtaining the Park Board’s consent for use of its property. On April 20, 2011, Crown Hydro presented to the Park Board’s Planning Committee, with the full Board present. At the end of that meeting, the Planning Committee directed the Park Board’s Chairman, assisted by the Park Board’s Executive Director, staff, and legal counsel, to work with Crown Hydro in developing the framework of an agreement under which the Park Board would provide access to and use of its property for the project. As in previous years, the Park Board’s primary concern was ensuring minimum flow over the St. Anthony Falls spillway so as to ensure what certain members of the Park Board considered an acceptable aesthetic experience for the public. Crown Hydro’s and the Park Board’s most recent efforts at reaching agreement are detailed below.

The Minnesota Legislature’s Interest In Facilitating Qualifying Hydro Projects

As the FERC is aware, Minnesota has one of the most aggressive renewable energy portfolio requirements in the nation. For its largest utility, Northern States Power Company d/b/a Xcel Energy, Inc., 30% of its energy must come from eligible renewable energy sources by the year 2020. Small hydroelectric facilities like the Crown Hydro project qualify as eligible sources for the state’s RPS.

Given the state’s paramount interest in renewable energy, and because of the Park

Board’s historic reluctance to provide use of its property on reasonable terms, the Minnesota Legislature is currently moving forward the adoption of legislation that would effectively preempt the Park Board and other similarly-situated political subdivisions with respect to the respective municipal governments’ need to grant any “permit, entitlement, license, authorization or consent of any kind,” for small, eligible hydroelectric facilities. On May 2, 2012, the Committee on Environment, Energy and Natural Resources Policy and Finance, Minnesota House of Representatives, passed HF 1440, a copy of which along with its status summary is attached as Exhibit 1. HF 1440 is now on general orders and awaits passage by the full House.







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The companion bill in the Minnesota Senate is SF 1190. SF 1190 was introduced and had its first reading, and was referred to the Local Government and Elections Committee. A copy of SF 1191 and its legislative status summary is attached as Exhibit 2.

The Minnesota Legislature adjourned by its constitutional deadline on May 23, 2011

without the Legislature and Governor agreeing on a state budget. While it appears that the state is headed for a temporary shut-down of non-essential services, the Governor is expected to call a special session of the legislature some time in July so that a budget can be passed and all governmental services funded. Based on discussions with legislative leadership, including authors of the above bills, Crown Hydro expects the Legislature to pass legislation that closely resembles HF 1440 during the special session. As a result, Crown Hydro expects that the Legislature will soon provide access and use of property necessary for the project that the Park Board has been unwilling to provide.

Attached as Exhibits 3 and 4 are letters of support from key Minnesota legislators who

will be primarily responsible for enactment of the expected legislation. Exhibit No. 3 is a joint letter from Representatives Michael Beard and Denny McNamara. Representative Beard is the main author of HF 1440 and Representative McNamara is the Chair, Committee on Environment, Energy, and Natural Resources Policy and Finance. Exhibit 4 is from Senator Gen Olson, chief author of the legislation in the Senate and the Senate’s President Pro Tempore. As can be seen by the letters, the Legislature is prepared to provide the necessary site control.

Discussions With Park Board

Even though the Legislature is poised to provide Crown Hydro and similarly-situated

federally-approved projects the necessary land use and related authorizations through state legislation, Crown Hydro has continued to work in good faith with the Park Board on finding a local resolution. To that end, Crown Hydro representatives met with the Park Board’s Executive Director, staff and counsel regularly in April and May. The purpose of the meetings was, as directed by the Park Board’s Planning Committee, to develop the framework for a mutual agreement under which the project could utilize Park Board property.

The first framework agreement, structured under a letter of intent, contemplated a

straightforward development and use agreement under which Crown Hydro was prepared to pay the Park Board (1) $500,000 upon the commercial operation date, and (2) a minimum annual license/use fee in the amount of $70,000, which amount could increase depending on the level of the project’s energy production. A copy of that draft letter of intent is attached as Exhibit 5.

After Crown Hydro and Park Board staff reached agreement in principal with respect to

the “lessor/lessee” letter of intent (Exhibit 5), the Park Board, led by the board’s chairman John Erwin, preferred instead that the Park Board be a joint owner of the project, but an owner with somebody other than Crown Hydro, LLC’s current sole owner, William Hawks, a Minneapolis businessman. That is, the Park Board insisted that Crown Hydro’s use of Park Board property was conditioned on, among other matters, that Mr. Hawks no longer be directly or indirectly involved with the project. In effect, the Park Board was forcing Mr. Hawks to sell his ownership







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in Crown Hydro to a third party acceptable to the Park Board. That the Park Board was in essence requiring Mr. Hawks to make a forced sale was disappointing to Mr. Hawks, particularly given his tireless commitment over the last decade and investment in the project of more than six million dollars. In the end, however, it was because of his commitment to making sure this project could move forward that Mr. Hawks agreed to the Park Board’s forced sale, even though the requirement would obviously diminish Mr. Hawk’s negotiating leverage in any third party sale.

After much work, the parties reached agreement in principal on how a third party/Park

Board joint venture project would work, and that agreement is reflected in the draft letter of intent dated as of May 13, 2011, which LOI the Park Board’s Superintendent sent the Park Board for its adoption as part of an overall packet for the Park Board’s May 18, 2011 regularly scheduled meeting. The May 13 LOI, along with full board packet, is attached as Exhibit 6.

In both the lessor/lessee and joint venture letters of intent, the Park Board sought to

assure minimum flows over the St. Anthony spillway to protect what certain members of the Park Board considered most important to them: the aesthetics of the falls. Article 404 of the Crown Hydro license establishes the minimum flows for the project. It provides that Crown Hydro will operate the project so that some water always flows over St. Anthony Falls except as follows: (a) during periods of very low flows when the project could not operate at 200 cfs without drying up the falls, the project may only operate from nightfall to dawn; (b) between December 15 and March 15, the project will operate with whatever flows are available even if it dries up the falls; and (c) during low flows in July and August, the project may operate with up to 500 cfs during daylight hours even if it reduces flows over the spillway and up to 1,000 cfs from nightfall until dawn.

In the May 13 LOI, Crown Hydro agreed to effectively shut down the project during

daylight summer hours in order to satisfy a Park Board requirement that the project maintain a minimum of 2000 cfs over the falls, during the daylight hours of June 21 – September 21, generally regarded as the falls’ “prime viewing periods” a much more restrictive flow regime than required by the 1999 License. While the restrictions would obviously impact project energy production, and therefore affect project gross revenues according to the power purchase agreement with Northern States Power, discussed below, Crown Hydro was willing to agree to depart from the 1999 License’s flow requirements if necessary to satisfy the Park Board’s desire to control flow over St. Anthony Falls.1

The May 13 LOI represented an agreement in principal between Crown Hydro, the Park

Board’s Chairman, its Executive Director and the Park Board’s counsel. Following the submittal of the May 13 LOI by the Park Board’s Superintendent to the full board, Crown Hydro

1 It is important to note that while Crown Hydro was willing to relinquish some of its flow rights provided under the 1999 License as a compromise with the Park Board, Crown Hydro was very cognizant during its discussions with the Park Board, that only the FERC, and not Crown Hydro or the Park Board can set flow restrictions for a hydroelectric project licensed on a navigable water of the United States.







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representatives met informally with the Park Board Chairman, along with another Park Board Commissioner and Park Board counsel on Sunday, May 15. At that meeting, the Park Board Chairman and fellow Commissioners expressed confidence that the May 13 LOI would be approved by the board on May 18. Following May 18, the parties would begin work on definitive agreements between Crown Hydro, the Park Board, and a new third-party investor.

On the night of Monday, May 16, however, Crown Hydro representatives received an

email message from the Park Board’s primary counsel (the partner of the Park Board lawyer with whom Crown Hydro had just spent the previous weeks in negotiations). In the email, the Park Board counsel announced that there were “revisions” to the letter of intent. As can be seen by Exhibit 7, however, the unilateral “revisions” that the Park Board made to a previously negotiated document so completely changed the character of the document so as to make it wholly unworkable, both practically and financially.

As can be seen from Exhibit 7, the single largest change (in addition to many others) was

that instead of exercising some measure of control of water over the spillway so as to protect the spillway’s aesthetics during its prime viewing periods, the Park Board instead required that it have “complete operating control” over the facility from June 15 to September 15, and for all other times of the year, the new third party owner would be required to maintain a minimum flow of 2000 cfs over St. Anthony Falls. Attached as Exhibit 8 is a letter from professional engineer Mr. Joel Toso. As Mr. Toso states, a requirement under which the Park Board could effectively shut down the project at any time and for any reason from June 15 – September 15, combined with a requirement that the project maintain a minimum of 2000 cfs at all other times effectively destroy’s the project’s economics. Thus, as it turned out, the Park Board required as a condition of its consent that Mr. Hawks sell 100% of his interest in Crown Hydro, LLC, to which Mr. Hawks agreed, only then for the Park Board to make it both economically and practically impossible for him to do so. Status of Power Purchase Agreement On January 23, 2003, Crown Hydro executed a power purchase agreement with Northern States Power Company d/b/a Xcel Energy, Inc. under which NSP has agreed to purchase 100% of the project’s energy production for an initial term of 20 years. Because of the project’s inability to secure Park Board authorization, the project remains to this date in abeyance under the PPA’s Force Majeure provision (pursuant to Article 14 whereby a “governmental authority’s” failure to act which “prevents or delays” project performance constitutes Force Majeure). Crown Hydro remains in active discussions with NSP regarding the terms of the PPA and related matters. Status of Renewable Development Grant On January 17, 2002, Crown Hydro also executed a Renewable Development Fund Grant Contract Terms and Conditions under which NSP granted the project a total of $5.1 million as







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part of NSP’s Renewable Development Fund administered under Minn. Stat. § 11C.779, of which approximately $1.5 million has been expended to date. The RDF contract also remains in abeyance pending a determination on whether the project will be able to obtain local site control, and Crown Hydro also remains in discussions with NSP on this matter. Request for Further Abeyance Crown Hydro is fully aware that its failure to obtain local site control from the Park Board has caused its 1999 License to remain open and the project unconstructed for a long period of time. Nobody finds that more regrettable than Crown Hydro and Crown Hydro truly appreciates the FERC’s patience and willingness to work with it as it finds a solution which has long vexed it. Fortunately, as the letters from the Minnesota legislators attest, it appears that local site control will be in hand by the end of this summer. Crown Hydro respectfully requests that the FERC defer any action with respect to any termination proceedings until such time as the special session is over and it is known whether HF 1411 or something substantially similar has been passed into law. Within [30] days of the end of the special session, Crown Hydro will provide the FERC a supplemental update, at which time the FERC will have more information from which to make any decisions affecting Crown Hydro and FERC License No. 11175-024. At this time, Crown Hydro will also address and bring current (to the extent practicable) any overdue activities, plans, and filings required by the 1999 License. In the interim, please do not hesitate to ask any questions or seek additional information.

Respectfully Submitted

Donald H. Clarke Law Offices of GKRSE 1500 K Street NW, Suite 330 Washington DC, 20005 Tel (202) 408-5400 Fax (202) 408-5406 [email protected]



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Counsel to Crown Hydro, LLC Exhibits Exhibit 1: HF 1440 along with status summary Exhibit 2: SF 1191 along with status summary Exhibit 3: Joint Letter from Representatives Michael Beard and Denny McNamara Exhibit 4: Letter from Senator Gen Olson Exhibit 5: Lessor/lessee draft Letter of Intent Exhibit 6: May 13 Letter of Intent along with full board packet Exhibit 7: May 13 LOI as revised by Park Board Exhibit 8: Letter from Mr. Joel Toso cc: Minneapolis Parks & Recreation Board Bill Grant, Deputy Commissioner of Energy Barbara Johnson, President, Minneapolis City Council Senator Gen Olson Representative Michael Beard Representative Denny McNamara





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June 22, 2011 Mr. Todd Guerrero Attorney Fredrikson & Byron, P.A. 200 South Sixth Street Suite 4000 Minneapolis, MN 55402 Re: Crown Hydro Project Feasibility under Recent Minneapolis Park and Recreation

Board Letter of Intent Dear Todd: The purpose of this letter is to document our opinion of the Crown Hydro project feasibility under the May 16, 2011 Letter of Intent (LOI) with the Minneapolis Park and Recreation Board. As part of the Crown Hydro team, we worked with the Park Board staff on establishing minimum flow rates and operating procedures that would maintain project viability. These were documented in the May 13th draft LOI. The LOI as modified by the Park Board and dated May 16, 2011 requires that the Park Board has "complete operational control" from June 15 - September 15, therefore be able to shut down the project at any time during that period. It further requires that the facility maintain a minimum 2000 cfs at all other times of the year. These significant changes make the project economically unfeasible. Sincerely, WENCK ASSOCIATES, INC. Joel Toso, P.E. Principal Engineer

Wenck Associates, Inc. 1800 Pioneer Creek Center P.O. Box 249 Maple Plain, MN 55359-0249 (763) 479-4200 Fax (763) 479-4242 E-mail: [email protected]



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Crown Hydro Response to FERC Termination Letter

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