After the signatories to the Klamath Hydroelectric Settlement Agreement officially recommitted to removing four dams on the Klamath River last month, local politicians brought up concerns with Oregon, California and PacifiCorp committing more funds to the project.
In a joint statement, Klamath County Commissioner Donnie Boyd, State Representative E. Warner Reschke and State Senator Dennis Linthicum said the parties entering into a Memorandum of Agreement would hold Oregon taxpayers responsible for more unforeseen financial hurdles associated with the project in the future.
“Oregon’s taxpayers will be on the hook for millions if this imprudent cronyism is allowed to stand,” Linthicum said. The statement said the liability could amount to “potentially billions of dollars.”
But how much, exactly, would taxpayers be on the hook for? And how likely is the dam removal project to exceed its $450 million budget in the first place?
The original $450 million is broken down into two parts: $200 million from a surcharge on PacifiCorp’s ratepayers (mostly in Oregon, with a small percentage from California) and $250 million in water bonds authorized by California’s Proposition 1, a $7+ billion fund for watershed ecosystem restoration that the state’s voters approved in 2014.
November’s Memorandum of Agreement pledges an additional $45 million in case the project runs over budget, split three ways between Oregon, California and PacifiCorp. If the project exceeds that additional contingency, the three entities have said they will split those costs evenly.
Much of the skepticism has centered around the ability of the Klamath River Renewal Corporation, a dam removal entity created to carry out the KHSA, to complete the project. Back in July, the Federal Energy Regulatory Commission denied the full transfer of the dams’ license from PacifiCorp to KRRC (as outlined in the KHSA), instead opting to make the two entities co-licensees, citing “uncertainty around the adequacy of available funding through completion of the project.”
“The Commission’s Order today reinforces what I have been saying since KRRC’s inception: KRRC is incapable of handling any hydropower project,” Representative Doug LaMalfa (R-Calif.) said in a statement following the order.
Mark Bransom, KRRC’s chief executive officer, said he didn’t interpret FERC’s order that way. He pointed to language in the order that praised KRRC’s “Plan B” to address risks that would exceed the project’s budget. That “Plan B” included engineering ways to reduce costs and risks, securing additional third-party funding and considering reducing the scope of the project.
“While there would be uncertainty around the adequacy of the available funding through completion of the Project, the Renewal Corporation’s “Plan B” appears to be appropriate,” the FERC order read.
In the project’s license transfer proceedings, FERC has stated that they want to be extra scrutinous because of the concern that KRRC may not be able to complete the project, after which a full license transfer would no longer allow the Commission to hold PacifiCorp accountable for the dams.
Bransom said FERC still chose to keep PacifiCorp on the license because the Commission felt that PacifiCorp’s previous experience with dam removal made them an asset to this project, and that, as the original owner of the dams, they should still bear some responsibility for them during their removal.
“FERC really made a policy call there,” Bransom said. “They concluded that the KRRC has the legal, technical and fiscal capacity to implement the settlement agreement, but as a matter of policy FERC believes it’s in the public interest to have the utility stay in the stew.”
Those involved with the project believe November’s MOA was mainly a way for KHSA signatories to demonstrate their commitment to carrying out the KHSA rather than to infuse more money into it. The additional $45 million will only be disbursed in the event that KRRC needs it, and Bransom said the project’s contingency fund means that need is highly unlikely.
The existing contingency fund, totaling roughly $50 million, came from a risk register, a living document that quantifies the various risks a project like this could face. It lists each risk scenario, along with the likeliness that it will occur and the minimum and maximum additional cost it could add to the project. For example, upstream dredging may result in unforeseen conditions that delay the project further. The risk analysis says there’s a 30% chance that will happen, and it’s estimated to cost between $100,000 and $6 million.
“That was not just a random, sort of ‘pull it out of the air’ number,” Bransom said of the $50 million contingency. “That $50 million was the result of a significant risk analysis.”
KRRC’s first-quarter 2020 risk assessment update filed with FERC determined that, based on a Monte Carlo risk analysis, the maximum amount the project could cost based on the various risks (a.k.a. a worst-case scenario) was $466.9 million. While that exceeds the project’s budget by about $16 million, the analysis said the $450 million cost cap still represents the higher end of the most probable range of total project costs.
“At this point, there are no project cost overruns and we’re hopeful the funding provided for in the agreement will be sufficient,” said PacifiCorp spokesperson Bob Gravely.
Bransom said the project is employing a broad risk management program, which includes that risk assessment, contractors that have done this kind of work before and insurance that covers all parties involved in the removal and restoration efforts.
Kiewit, one of North America’s largest engineering and construction companies, will take care of the actual removal of the dams, and Resource Environmental Solutions will restore the dried-up reservoir beds to the river’s natural ecosystem. Both of these contractors have their own insurance policies, surety bonds and have negotiated guaranteed maximum prices with KRRC, which are unlikely to change significantly now that the project design has reached 90% completion. KRRC will also acquire general liability insurance for issues that could arise between the time the license is transferred to them and when Kiewit begins its dam removal work.
But if Murphy’s Law takes effect and all proposed risk scenarios come true, what authority do the states and PacifiCorp have to shore up additional funds?
As a regulated investor-owned utility, PacifiCorp has to answer to the public utility commissions of Oregon and California if it wishes to raise its $15 million through a customer surcharge. Lianne Randolph, a California Public Utility Commissioner, said even with additional costs her agency believes carrying out the KHSA is still in the best interest of PacifiCorp’s ratepayers compared to relicensing the dams, which will require costly refurbishments to comply with modern environmental regulations. That suggests that a pathway does exist for PacifiCorp to acquire more funding through customer surcharges, at least in California. Though, of course, there’s nothing stopping the company or even Warren Buffett himself from shelling out the extra cash directly.
“No additional customer funding beyond what’s already been provided will occur unless it is demonstrated to be in the best interest of customers and approved by the appropriate regulatory commissions,” Gravely said.
California’s $15 million would come from money appropriated to the California Natural Resources Agency through Proposition 68, which was passed in 2018. That allocated $4 billion to the state’s parks, water infrastructure and environmental restoration projects.
“Using $15 million as a contingency for dam removal if needed is appropriate and consistent with legislative intent,” said Lisa Lien-Mager with the California Natural Resources Agency.
Harry Esteve, communications manager for the Oregon Department of Environmental Quality, reiterated that the project likely won’t need the extra money. But he said that Oregon’s $15 million would likely come from the Clean Water State Revolving Fund, an Environmental Protection Agency program that provides low-interest loans to various water infrastructure projects.
“Oregon would consider a variety of sources for repayment over time,” Esteve said.
As for the criticism that Governor Brown has entered into a financial deal without legislative approval, deputy communications director Charles Boyle said there are “several sources” available that don’t require appropriations through the legislature.
“The governor’s executive authority is clear,” Boyle said.