Evidence pyramid......
Bright Night Debacle

Request for Reconsideration of Solar Lease Option Agreement and Term Sheet with BrightNight

Bright-night

The following letter was sent to members of the Davis City Council today.

We respectfully request that the Mayor and Council place an item on tonight’s or a future council meeting agenda to reconsider its approval of Item 9 of the March 24, 2020 Solar Lease decision. In its reconsideration we believe Council should (1) direct staff to research the fiscal, legal and business issues identified in this letter, and (2) pending the results of that research, rescind Council’s approval of the Item 9 resolution to allow the City Manager to execute the Lease Option Agreement and Term Sheet (collectively, the “Agreement”) with BrightNight that will “give the solar energy company an Option to Lease up to 235 acres of city-owned land near the City’s Wastewater Treatment Plant on County Road 28H for a Commercial Solar Farm and Solar Energy Testing Facility.”

Our review of the Agreement to date has uncovered serious concerns which we believe have not been fully considered by the City, and that the resolution and lease, as written, establish a legal arrangement that is harmful and disadvantageous to the City and residents in several respects. We, individually and collectively, stand ready to work with staff to facilitate their research of these issues. We are preparing a detailed document fleshing out each issue, which will be available shortly on request.

In summary, the issues are as follows:

1) Lease Rental Rates Are Undervalued and Do Not Consider Opportunity Costs
  • Rates Not Appropriately Derived: Rates appeared to only consider Agricultural land rates, both farmable and unfarmable, and failed to consider other factors that would yield a market rate (matched more closely to commercial rates). Typical solar project lease rates are at least $1,000 per acre. See the article by Strategic Solar Group, titled “What’s the average solar farm lease rate” at the following link: https://strategicsolargroup.com/what-is-the-average-solar-farm-lease-rate/

    Further, Yolo County was able to gain a lease rate more than four times greater for its Grasslands solar project south of Davis. The Yolo County staff report can be accessed HERE

  • Better Rates Negotiated by Other Agencies: Other agencies such as Stanislaus and Yolo sought RFPs or RFQs, resulting in better lease rates and/or other revenue incentives. Choosing to seek a Sole Source procurement process is an approach that is not consistent with the City’s pattern and practice (and possibly inconsistent with formalized procurement policies and procedures).

  • Rental Rate Escalator Does Not Reflect Inflation: The rental rate escalator of 2% does not appear to accurately predict inflation. Rather, a CPI should be proposed especially since other solar farm leases have higher escalator rates and since the base rental rates appear to be below market.

  • Alternative Land Uses May Yield More Revenue: Analysis of other revenue generation opportunities were not considered for projects involving alternative uses. For example, Public Works staff had presented at least three alternative uses for those parcels to the Utilities and Natural Resource Commissions that may have higher financial returns to the City. Those opportunities are now foreclosed for at least the option period of the BrightNight lease.

2) Agreement Terms Unreasonably and Unnecessarily Expose the City to a Variety of Risks/Liabilities

  • Excessive Lease Period With Inadequate Exit Provisions: Comparable solar farm lease option periods are less than 5 years, and comparable operating leases are far less than 49 years. For example, the solar lease with Stanislaus, County began in a single year option in 2009 and then has been extended several times, most recently with was a 4- year lease option and 25-year lease as long as certain provisions were met, such as securing a PPA. Further, those lease payments included 20% of the revenues from the still-operating almond orchard on the property. These excessive time frames represent a cost to the City without offsetting benefit. For example, it prevents the City from acting on any alternative uses with no guarantee of any benefit to the City at the end of the five-year option period.

    In addition, the solar power market changes rapidly, thus raising the risk this project could be decommissioned should it become unfeasible - financially and structurally – which is probable during a 49-year period. Of related concern, the agreement is unclear on the responsibility for decommissioning and restoration costs at the site in the event of plant closure.

    The City is also at immeasurable risk since it is very limited in its ability to terminate the Agreement, i.e., in the event of a “default” especially considering “default” is not defined.

  • No guarantees: The Agreement has no guarantee that the City or its residents will benefit from the solar farm since the Agreement provides for no provision of energy or capacity to the City or the Valley Clean Energy Authority, and BrightNight/PVEL is free to sell its renewable energy to any buyer anywhere in the Western regional interconnection.

    Further, the Agreement does not allow for beneficial “favored nation” pricing should BrightNight/PVEL sell the electricity directly to the City or VCE.

  • No Provisions to Protect the City in the Event of the Lessee’s Insolvency: Further, there are no provisions in the Agreement to protect the City from the costs associated with removal of the project from the leased property in the event of a default as a result of the lessee changing ownership, dissolving, or becoming insolvent or filing bankruptcy.

  • Inconsistent Assignment Provisions: The Term sheet contains two conflicting assignment clauses where one allows for the transfer and assignment, with the City’s written consent that shall not be unreasonably withheld, while another assignment clause does not allow for the assignment or transfer.

  • City Not Fully Indemnified: In addition, the Term Sheet states under “Quiet Enjoyment” that the “City shall protect and defend the right, title and interest of lessee hereunder from any other rights, interests, titles and claims arising through the City,” However, the potential risks and costs associated with defending the Lessee are not addressed. Use of the terms “protect and defend” also appear to be inconsistent with the Indemnification clause.

3) Lack of Due Diligence – BrightNight/PVEL

  • Brightnight Misled the City Staff on the Requirements for the Interconnection Studies at the California Independent System Operator (CAISO): Under the Cluster Study Option, which has an application window of April 1 to 15, site exclusivity is not required, and a refundable deposit of $250,000 can be made in lieu. Under the Independent Study Process, no deadline exists while site exclusivity is required. BrightNight appears to have combined the most stringent aspects of these two different processes. (See CAISO presentation at http://www.caiso.com/Documents/2- InterconnectionApplicationOptionsandProcess.pdf).

  • BrightNight’s Track Record Not Accurately Disclosed: Inconsistent with the staff report, BrightNight’s filings with the California Secretary of State, show that it’s been in business for about a year and that it’s purpose is “investment management.” (The track record discussed in the staff report appears to be attributable to the performance of a prior firm still in existence, once affiliated with Martin Hermann.) For example, the Resolution adopted by Council erroneously states “BrightNight has developed, financed, constructed and operated more than 3,000 megawatts of renewable energy since 2009.” This experience stastement is correctly attributasble to 8minute Solar Enery, which is not a party to this agreement.

  • Real Property Negotiators Disclosed in the Closed Session Agenda May Not Exist: The February 11, 2020 Council meeting agenda under “Closed Session” states the negotiating party is “Davis Energy Technology Center,” however, this entity does not appear on either the California or Delaware Secretary of State business search registry.

  • Conflicts of Interests Not Addressed: BrightNight and PVEL have many related parties. It does not appear that staff considered potential conflicts of interests between BrightNight and its affiliates and PVEL and its affiliates. To the extent there is a conflict of interest, this may invalidate the Agreement or future agreements related to the design and construction of the project.

The aforementioned is only a partial list of concerns, and we will share our additional concerns and other questions that staff should consider prior to moving forward on the Agreement. Based on our concerns, we believe reconsideration is the right recourse for the City and Community, and we look forward to working with you and staff to renegotiate this project and/or consider other projects that are more favorable.

 

Sincerely,

Johannes Troost

Lorenzo Kristov

Matt Williams

Richard McCann

 

~~~~

Attachment A

Legal concerns with the lease.

  • On Page 14 (Lessee paragraph of the Term Sheet) BrightNight's CA registration states the purpose is "Investment management."

  • On Page 14 (Generating Facility paragraph of the Term Sheet) The way it's written, it appears any kind of project can be placed here (other than solar) because the terms say "may include, without limitation."

  • On Page 14 (Property paragraph of the Term Sheet) Get a copy of the survey.

  • On Page 14 (Lease Term; Extensions paragraph of the Term Sheet) City should not

    allow automatic extensions. Extensions should have to be approved by Council to ensure that the project is still producing revenue as promised/projected by the applicant (BrightNight).

  • On Page 15 (Rent paragraph of the Term Sheet) why is the lease payment so much more for APN 042-140-013? What is being proposed to be built on APN 042-140- 009 vs. 042-140-013?

  • On Page 15 (City Termination Rights paragraph of the Term Sheet) City at risk since it limited its rights to terminate only in the event of a "default".

  • On Page 15 (City Termination Rights paragraph of the Term Sheet) The term "default" is not defined. Will the City be able terminate the lease in the event of a default if the project has been financed with bonds or other securities?

  • On Page 15 (City Termination Rights paragraph of the Term Sheet) Because of limitation, the City could not terminate the lease if the project became a health or environmental hazard OR if the City stopped receiving property tax revenue.

  • On Page 16 (Permitted Use paragraph of the Term Sheet) Permitted Use is not meaningful because the definition of a "Generating Facility" is broadly defined (and has no limitations), therefore, I don't know if this Permitted Use clause is enforceable.

  • On Page 16 (Permitted Use paragraph of the Term Sheet) Will any temporary or permanent easements interfere with the enjoyment of adjacent properties not owned by the City? Will the City use imminent domain?

  • On Page 16 (Permitted Use paragraph of the Term Sheet) Will City's ability to provide water sewer be impaired because of this project? What about in a situation where there is a flood?

  • On Page 16 (Ownership and Use by City paragraph of the Term Sheet) In what way will mineral and water rights be limited as a result of the project?

  • On Page 17 (Removal of the Generating Facility and Site Restoration paragraph of the Term Sheet) How is City protected from having to pay to remove the property in the event of a default as a result of the lessee changing ownership, dissolving, or becoming insolvent or filing bankruptcy?

  • On Page 17 (Assignment paragraph of the Term Sheet) This assignment clause is inconsistent with the other Assignment clause on page 19.

  • On Page 17 (Mortgagee Provisions paragraph of the Term Sheet) How will the City ensure that the land will not be pledged or used as collateral to any loan to finance the project?

  • On Page 17 (Mortgagee Provisions paragraph of the Term Sheet) Will staff bring the lease back to Council for approval if the lease is modified?

  • On Page 17 (Cooperation Provisions paragraph of the Term Sheet) If bonds are issued to finance the project, then how can the City terminate the lease in the event of a default? Will the City be involved in the terms of financing?

  • On Page 18 (Indemnity and Insurance paragraph of the Term Sheet) Is there enough insurance?

  • On Page 19 (Assignment and Subletting paragraph of the Term Sheet) This assignment clause is inconsistent with the other Assignment clause on page 17.

  • On Page 19 (Assignment and Subletting paragraph of the Term Sheet) Will the lease with PVEL be provided to Council and/or staff?

  • On Page 19 (Additional Provisions paragraph of the Term Sheet) Is there an agreement between the school district and PVEL?

  • On Page 19 (Additional Provisions – Power Sales sub paragraph of the Term Sheet) Is this legal? If BrightNight has a financial interest in PVEL, We don't think the contract with PVEL and the City to provide energy to the wastewater treatment plant is valid because it is a conflict of interest.

Comments

Robert Canning

Can someone please translate?

Walsh

At the last City Council meeting a lease for a large solar farm was approved, but the process was deeply flawed, and the lease is questionable. You can see the item from the March 24 Agenda here:
http://documents.cityofdavis.org/Media/Default/Documents/PDF/CityCouncil/CouncilMeetings/Agendas/2020/2020-03-24/09-Solar-Farm-Lease-Option-Agreement.pdf

The letter posted above is asking the Council to reconsider a deeply flawed decision that was based on false information.

Greg Rowe

During the 13 years I was in charge of environmental planning for the Sac County Airport System we received a number of unsolicited proposals for solar arrays on airport land at Sacramento In'tl Airport (SMF). The airport has over 5,500 acres, so the proposals ranged from sites in airport parking lots to aircraft approach & departure "buffer" land south of I-5, which extends southward to the intersection of Power Line Road and Garden Highway.

In every case, we met with the proposers, studied their documents, checked their qualifications. We intently listened to their proposal, asked questions, and then politely informed them that we were in the process of developing a Request for Proposals (RFP) and that we'd put them on the distribution. That approach was strongly advocated by County Counsel; there was simply no way the Deputy County Counsel we worked with would have signed off on a sole source contract. As a matter of practice, the County of Sacramento Board of Supervisors will only approve a sole source contract in very limited circumstances (urgency, unique contractor qualifications, no other available contractors having the necessary expertise, etc.

In developing the RFP we carefully researched the solar experience of other airports throughout the country, including visits to other airports, and worked diligently to compose a well-crafted and detailed RFP. It was fortunate that we did so because by the time the solar RFP was issued, some of the companies that initially approached us were no longer in business. The result of that rigorous approach is the 2 solar installations now operating at SMF. Taking the time to do the project this way paid off in the long run.

I respectfully suggest that the City may want to step back, reconsider the March 24 decision, and direct staff to develop and circulate an RFP. Finding a way for participation by Valley Clean Energy may also be advisable.

Pam Gunnell

Johannes, Lorenzo, Matt, and Richard. Thank you for not letting this slip during these difficult times. Lucas thank you for voting" No". I hope council brings this back.

Eileen Samitz

Thanks to all of you did a great job of noticing this issue and raising it. Kudos to Lucas for seeing how this proposal was not a good deal for so many reasons and voted no. The City Council really needs to reconsider this proposal and then reject it.

Larry Guenther

Thanks to Johannes, Lorenzo, Matt, and Richard. A great letter on very little notice. Thanks also to Lucas for voting ‘No.’ Has process gone completely off the rails? Due diligence? Fiduciary responsibility?

Robert Canning

Thanks for all the help understanding this ridiculous contract.

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