Guest Commentary: City’s FAQ on the BrightNight Lease Option Is Misleading and Factually Incorrect – Part 2 of 4

By Alan Pryor and Richard McCann

At the last City Council meeting, 22 people called in in opposition to the City of Davis entering into a lease option agreement with BrightNight to develop a solar project on a 235-acre City-owned parcel next to the City’s waste water treatment plan. After the controversy has risen to a high profile, the City Staff issued a “Q & A City of Davis Solar Lease 4/15/20” to defend its decision. Unfortunately, this response is misleading and filled with errors.

We go through the Staff’s responses, question by question in their order. Our responses address the gist of the question. You can follow the link to the Staff’s answers if you are interested, but you should have a good understanding of the issues from this article. Because answering these questions completely is a lengthy endeavor, we have divided this into four parts. This is Part 2 covering Questions 6 through 11 .

Part 1 covering Questions 1 through 5 can be found here. Part 3 covering Questions 12 through 18 and Part 4 covering Questions 19 through 23 will be published in the immediate future.

The questions posed in both Parts 1 & 3 & 4 are posted at the end of this article

Q6.  What are the allowable uses for this land under Yolo County zoning?

The City’s Answer:  The site is zoned “Public/Quasi Public (PQP)” under Yolo County zoning and that land use designation does not allow for many revenue-generating uses. Allowed or permitted land uses on PQP-zoned land include: passive recreation (hiking, biking, etc.), active recreation (sports fields, campgrounds, golf courses, etc.), public and quasi-public uses (airports, wastewater treatment plants, landfills, government buildings, schools, churches, etc.), and other uses (agriculture, solar fields, cemeteries, and park-related retail/commercial uses). Large-scale, private, commercial development is not allowed under this zoning designation, so commercial rates are not comparable.

City Staff claims that large-scale, private, commercial development is not allowed under the zoning designation for the land in question so commercial rates are not comparable. But large-scale solar development is currently allowed for the parcel under County zoning laws and this 25 MW solar development is, in fact, a huge large-scale private commercial development. So competitive commercial land lease rates should clearly have been required by the City for the land-lease and the failure to do so is undeniably a waste of City assets. Further, the City is allowing the developers to avoid the expense of rezoning that land.  Avoiding rezoning costs has a substantial value for the developer because cost-avoidance increases their bottom-line.

Q7.  Were there other land uses that were considered?

The City’s Answer:  The City Council determined that using some of the property for solar generation was preferable to other potential uses (with little investment of City funds) and was consistent with the City’s Climate Action Plan. The Lease Option Agreement does not preclude using a portion of the property for other uses. Final terms and amount of acreage used for solar has yet to be determined.

Other options that had been noted in the past were an organics processing facility, expansion of existing solar on the site, habitat conversion, and stormwater/agricultural runoff. The City has continued to explore its organics processing options and is currently discussing potential opportunities to partner with UCD on an organics facility.

Staff says the Council made the decision that solar was the best use of the land, but that is only because that is what Staff recommended to Council based on incomplete information. In fact, the determination of the best use of the property was still ongoing with the Utilities Commission, the Natural Resources Commission, and Open Space and Habitat Commission, which have all discussed the matter in recent months. Solar was only one of many potential uses discussed, and all of the Commissions expected the matter to be brought back to them for further discussions and a final recommendation. Staff was fully aware of these unfinished discussions but decided to end-run this process and made a unilateral decision that was NOT supported by any Commission.

One alternative option being considered was use of the Wastewater Treatment Plant site for composting the City’s organic waste. Composting of the City’s organic waste was determined to be the likely lowest cost option for handling of the organic waste stream by the City. Every other organic processing option would produce additional costs that were substantially in excess of the meager $78,000/year lease revenue initially received for the solar land lease.  It is otherwise unlikely, as Staff are aware, that a deal with UCD for processing the City’s organic waste would ever be worked out because UCD’s anaerobic organic waste digester cannot process the City’s landscaping green waste.  Thus, the solar land lease is likely a net economic loss for the City, because it precludes implementing the lowest cost option for organics/green waste processing.

Q8.  Why is the City using a fixed-rate rental rate escalator?

The City’s Answer:  The City prefers a fixed-rent escalator in lease agreements. That fixed-rent escalator is usually between 2-3%. Given the long length of the proposed lease term (49 years), staff believe 2% is reasonable and will more or less reflect inflation over the next 50 years. Calculating escalations to the Consumer Price Index (CPI) is an administrative burden, and there is usually a lag time in announcing the CPI rate.

The City claims it would be an administrative burden to have a variable escalator in the land lease rate and a fixed escalator is easier. But it would take not more than an hour once a year to look up the relevant inflation index and calculate the new lease rate and send a letter to BrightNight. This is hardly an administrative burden. Or the City can just make BrightNight do it and double-check their calculations. Instead Staff has arbitrarily used the lower end of the escalation scale as a fixed benchmark.

For those of you who have seen the movie The Treasure of Sierra Madre, the City’s answer sounds a whole lot like, “Administrative Burden!!!  Administrative Burden!!!  We don’t need no Administrative Burden!!! ” 

Q9. What is the Term Sheet in the Lease Option Agreement? 

The City’s Answer:  Its purpose is to outline some (not all) of the main deal points, which will then serve as a template for creating a final ground lease (if such a ground lease is created). The Term Sheet attached to the Lease Option Agreement is not meant to encompass all of the possible terms in the future ground lease. The Term Sheet attached as an exhibit to the Lease Option Agreement is also not meant to be a complete agreement or encompass all of the terms of any future ground lease.

The Term Sheet is a set of requirements that will be in the final lease agreement to be negotiated between the City and BrightNight Energy. The City claims the Term Sheet is completely negotiable in the future, and that it will get a better deal once the final terms are agreed upon. But this is not necessarily true. As mentioned in Part 1 of this series of articles, only the “Solar Development details” in the Term Sheet will be finalized later in the Lease Option Agreement the City has already signed. All of the other terms in the lease agreement appear to be not subject to renegotiation. “Solar Development details” has to do with the size and/or the type of the solar system.  This phrase, “Solar Development details” does not at all indicate that term, pricing, and/or other contractual problems with the lease can be renegotiated.

Further, it is not clear what leverage the City has over BrightNight for changing the terms significantly. Arguably the City’s permitting authority is basically ministerial, and can not be used to gain other benefits.

Q10.  Were there any other solar leases to comparable to the City’s deal with BrightNight?

The City’s Answer: Staff was not able to find any comparable “arms-length” solar leases in Yolo County. That means that the City was not able to find any straight leases between two independent parties, a landlord and a solar company as the tenant. According to one of the land brokers/appraisers the City worked with, solar leases exist in Yolo County, but none that they knew of were “arms-length” transactions and/or at a market value (i.e., they were instead used as a mechanism to finance the solar infrastructure).

Staff says there were not any comparable “arms-length” solar land lease deals in Yolo County by which to compare the fairness of the BrightNight solar land lease. But did Staff not look at other solar land lease rates in the Central Valley? If they did, what were they? If not, why not? A simple internet search reveals a wealth of other available information to use to benchmark the BrightNight deal but Staff apparently did not contact any other land lease holders or consultants in the industry but instead decided to accept very low agricultural land lease rates offered by BrightNight without any other comparison?

At Wednesday’s Utilities Commission meeting, Ash Feeney expanded on why the City chose an “arms length” lease, when he said, “It was the only offer on the table.”  

Commissioner Williams followed up Mr. Feeney’s statement with a question to Mr. Feeney and Councilmember Dan Carson (who had previously cited Fiscal Responsibility as a primary goal of Council and staff).  Mr Williams asked, “So Ash, am I correct in understanding your statement that the length and breadth of staff’s efforts on fiscal responsibility are determined by the offers that the private sector puts on the table … and that staff does not look for fiscal responsibilities on its own like Yolo County did in the case of its Grasslands Park solar facility?” 

Q11.  How does the City solar deal compare to the County’s project at the Grasslands Regional Park?

The City’s Answer:  These projects are very different from one another.

• The City’s deal is a simple land lease with no financial risk to the City. The Yolo County deal was a very complicated $25 million public-private financing of solar infrastructure using the County’s land as collateral.
• The County does not lease Grasslands and thus, there is no comparable lease rate to the City deal.
• Unlike in the City/BrightNight deal, the County owns the solar infrastructure, operates it and maintains it.
• The County does not operate or maintain Grasslands.
• The financial benefit to the County in its solar deal is primarily the savings the County achieves by generating its own solar power as opposed to purchasing that same power from PG&E. The County also generates revenue by selling solar electricity to PG&E.
• Revenue from the County’s Power Purchase Agreement is in part used to pay off the bonds used to finance the construction of the solar infrastructure.

The Staff’s answer is interesting because it shows large benefits the County receives from ownership of their large solar system, but then inexplicably claims, without any evidence, that such a structure would be too risky for the City because of risk of performance and operation and maintenance responsibilities.

But this is simply not true. Even with the repayment of the bonds and all operational expenses and maintenance (mostly done by the solar system vendor, SunPower, who has a research facility here in Davis), the County still received approximately 70 times the revenue on a per MW basis than does the City by simply leasing the City land. Over a 35-year period, this would result in over $170,000,000 in net revenue to the City or about $121,000,000 in NPV at a 3% discount.

This would pay for all of the City’s additional costs necessary over the next 10 years to bring the City’s streets and bike paths up to desired functional standards.

It is important to note that the City might not be able to gain the exact same benefits in today’s power market, but the magnitude is so large that those potential benefits cannot be discounted lightly.

And the solar system vendor also guarantees the output of the solar system for an extended period of time removing solar system performance as a risk factor to the County. By failing to properly evaluate a detailed no-capital outlay system purchase option as done by the County with their Grasslands Park solar system and present this analysis to the Council and the public, the City failed to consider how to maximize the value of that land to our long-term financial detriment. Clearly this was a failure on the part of Staff and the Council to conduct the due diligence that it otherwise claims that it had done.

Epilogue

Part 1. published on Thursday answered the following questions that exposed the City’s misguided efforts surrounding this lease and lease option agreement:

Q1.  Did the City enter into a lease for a solar farm?

Q2.  Is the lease rate at market value? Were all uses considered?

Q3.  How was the lease rate determined?

Q4.  The City did not utilize the RFP process for this solar deal. Why?

Q5.  Is a sole-source procurement process consistent with the City’s procurement policy?

The upcoming Part 3 will delve into the following questions:

Q12.  The option period and lease period seem long. Are they typical for this industry?

Q13.  What are the City’s rights to decommission the site or restore it down the road?

Q14.  What if the lessee defaults on the project?

Q15.  Why doesn’t the agreement stipulate that Davis residents will benefit from the solar power generated at the site? Can the lessee sell power to Valley Clean Energy (VCE)?

Q16.  What will happen to the deal if the lessee goes out of business?

Q17.  It appears that the term sheet attached to the lease option agreement contains two conflicting assignment clauses. Can you clarify this?

Q18.  How is the City protected from any future claims made against this project?

The upcoming Part 4 will delve into the following questions:

Q19.  What was the hurry to apply for connection to the California Independent System Operation (Cal ISO)?

Q20.  What is BrightNight’s track record? Isn’t it a new company?

Q21.  The negotiating party identified on the February 11, 2020, City Council closed session agenda is listed as Davis Energy Technology Center. What is that?

Q22.  Are there potential conflicts of interest between BrightNight and its affiliates and PVEL and its affiliates?

Q23.  What about CEQA concerns?

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About the Authors:

Richard McCann:  Richard is a Davis resident and much of his work has focused on identifying market trends, and developing and assessing incentive structures in both energy markets and environmental regulations. He has analyzed and designed both wholesale and retail electricity pricing and identified key technological and institutional factors driving pricing factors. In particular, he has addressed both the market and environmental barriers to increased renewables energy development.  That work has included utility-scale, community or neighborhood, and customer-side resources. He also successfully persuaded electric utilities to institute asset acquisition programs that produced benefits for both specific customer classes and larger communities.  On water policy, he analyzed water transfer markets, water efficiency measures, and agricultural water management. And he has participated in a broad range of regulatory forums beyond energy and water, including air quality and greenhouse gases, and land-use planning.  He is a member of the City of Davis Natural Resources Commission,  a past member of the Utilities Commission, and a former member of the Technical Advisory Subcommittee of the city’s Community Choice Energy Advisory Committee which recommended a community energy agency.  That recommendation eventually bore fruit in the form of Valley Clean Energy (VCE), which saves Davis and Yolo County residents money on their monthly electric bill, with cleaner renewable energy to boot. Richard was just selected as a group member for city’s 2020 Environmental Recognition Award for his work on behalf of that Technical Advisory Subcommittee

Alan Pryor:  Davis resident Alan Pryor has a long career in commercializing large-scale alternative energy projects and other environmentally benign technologies. He is the founder and a director of Yolo Clean Air, a nonprofit organization that focuses on improving air quality for the benefit of environmentally sensitive individuals suffering from respiratory health problems – particularly children and senior citizens. He is also the current chair of the local Sierra Club Yolano Group (which has taken no position in this matter),  a member of the city’s Natural Resources Commission, and former Chair of the city’s Community Choice Energy Advisory Committee.

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