Exhibit 10.3




 





 


RESERVE CAPACITY INTEGRATION AGREEMENT


 


Dated as of May 5, 1987


 


between


 


PACIFICORP, dba PACIFIC POWER & LIGHT COMPANY


 


and


 


BLACK HILLS CORPORATION, dba BLACK HILLS POWER AND LIGHT COMPANY




 





 

















 


RESERVE CAPACITY INTEGRATION AGREEMENT


 


TABLE OF CONTENTS


 


	
  Section 1.

  	
  Term

  	
  1

  
	
   

  	
   

  	
   

  
	
  Section 2.

  	
  Definitions

  	
  1

  
	
   

  	
   

  	
   

  
	
  Section 3.

  	
  Exchange
  of Reserve Capacity

  	
  2

  
	
   

  	
   

  	
   

  
	
  Section 4.

  	
  Relocation
  of Combustion Turbines

  	
  4

  
	
   

  	
   

  	
   

  
	
  Section 5.

  	
  Fuel

  	
  4

  
	
   

  	
   

  	
   

  
	
  Section 6.

  	
  Points
  of Delivery

  	
  4

  
	
   

  	
   

  	
   

  
	
  Section 7.

  	
  Schedules

  	
  4

  
	
   

  	
   

  	
   

  
	
  Section 8.

  	
  Payment
  Schedules

  	
  5

  
	
   

  	
   

  	
   

  
	
  Section 9.

  	
  Uncontrollable
  Forces

  	
  5

  
	
   

  	
   

  	
   

  
	
  Section 10.

  	
  Limitation
  of Liability

  	
  5

  
	
   

  	
   

  	
   

  
	
  Section 11.

  	
  Government
  Regulations

  	
  5

  
	
   

  	
   

  	
   

  
	
  Section 12.

  	
  Arbitration

  	
  6

  
	
   

  	
   

  	
   

  
	
  Section 13.

  	
  Notices

  	
  6

  
	
   

  	
   

  	
   

  
	
  Section 14.

  	
  Assignment

  	
  7

  
	
   

  	
   

  	
   

  
	
  Section 15.

  	
  Choice
  of Law

  	
  7

  



 


EXHBITS


 


	
  Exhibit A
  -

  	
  Combustion
  Turbines situated at Rapid City, South Dakota

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit B
  -

  	
  Calculation
  of average annual production cost

  	
   

  



 

















 


RESERVE CAPACITY INTEGRATION AGREEMENT


 


This
Reserve Capacity Integration Agreement, dated as of the 5th day of May, 1987, by and between Pacific Power &
Light Company (Pacific), and Black Hills Power and Light Company, an assumed
business name of Black Hills Corporation, a South Dakota corporation (Black
Hills).


 


RECITALS


 


WHEREAS
Pacific and Black Hills are joint lessees of the 330 megawatt Wyodak Power
Facility in Gillette, Wyoming; and


 


WHEREAS
Pacific, by virtue of a December 31, 1983 Power Sales Agreement, is Black
Hills’ principal outside supplier of firm electric power and energy; and


 


WHEREAS
Pacific and Black Hills have significant diversity of load patterns and
wholesale marketing opportunities; and


 


WHEREAS
the aforementioned circumstances create opportunities for the integration of
the parties; reserve capacity for the purpose of increasing Black Hills’ system
reliability, better matching Black Hills loads and resources, and enhancing
Pacific’s wholesale marketing opportunities;


 


NOW,
THEREFORE, Pacific and Black Hills wish to exchange and integrate their reserve
capacity upon the following terms and conditions:


 


Section 1.                    Term. This
Agreement shall commence on July 1, 1987 and terminate on June 30,
2012.


 


Section 2.                    Definitions.


 


(a)                                  “Operating and
Maintenance Costs” shall mean all costs of repairs, operating and maintenance
expenses, administrative, accounting and general expenses, other than property
tax and insurance expenses, incurred by Black Hills in the operation and
maintenance of the Combustion Turbines, and including but not limited to:


 


1.  repair costs, losses,
damages, judgments, defense costs and expense sustained or incurred by Black
Hills,


 


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directly
or indirectly, in connection with the performance of services to be performed
hereunder except for such repair costs, losses, damages, judgments, defense
costs and expenses sustained or incurred as a result of Black Hills’
negligence;


 


2.                                       an appropriate
allocation for administration and general expenses;


 


3.                                       costs of
acquiring and maintaining an inventory of fuel oil for Pacific’s account as
required herein; provided, Black Hills shall pay the costs associated
with acquiring and maintaining fuel oil in the storage tanks for its purposes;


 


4.                                       costs of
electric power and energy, at applicable rates, furnished by Black Hills to
service the Combustion Turbines, including heating the fuel oil inventory for
which Pacific is responsible; and


 


5.                                       any taxes
levied specifically on operators of combustion turbines or the generation from
combustion turbines.


 


(b)                                 “Combustion
Turbines” shall mean those facilities situated at Rapid City, South Dakota and
described in Exhibit A to this Agreement.


 


(c)                                  “Incremental
Cost of Generation” means for any hour the highest average annual production
cost ($/MWh) of any of Pacific’s owned or leased coal-fired plant (excluding
lease costs) which was operating during such hour where such production cost
shall be determined from Pacific’s most recently filed FERC Form No. 1
or its successor form and where the fuel cost component of production cost
shall be increased by 7% for system losses. 
An example of a calculation of average annual production cost is
contained in Exhibit B to this Agreement.


 


Section 3.                    Exchange of
Reserve Capacity.


 


(a)                                  Black Hills
maintains the Combustion Turbines on its system to satisfy its system reserve
requirements.  Black Hills warrants that
the Combustion Turbines are in good working order as of the date of this
Agreement.


 


(b)                                 Black Hills
hereby assigns to Pacific the right to use the Combustion Turbines as specified
in this Agreement.


 


(c)                                  Black Hills
shall retain day-to-day operational control of the Combustion Turbines and keep
all necessary operating 


 


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permits
in place.  Black Hills shall maintain
liability and property insurance on the Combustion Turbines consistent with
prudent utility practice and show Pacific as an additional insured, provided
that showing Pacific as an additional insured does not increase the insurance
premiums paid by Black Hills.  Black
Hills shall be responsible for maintaining the Combustion Turbines in good
working order and shall run them for Pacific’s account when requested by
Pacific to do so.  Black Hills shall
proceed with any required repair of the Combustion Turbines with all reasonable
dispatch.  Any insurance proceeds
associated with damage to the Combustion Turbines shall be applied to the cost
of repair.  Pacific shall reimburse to
Black Hills the Operation and Maintenance Costs of the Combustion Turbines and
Pacific shall pay all fuel costs associated with Pacific’s use of them.


 


(d)                                 If the
Combustion Turbines suffer sufficient wear or obsolescence that they cannot be
kept in good working order at a reasonable cost, they shall be replaced at
Pacific’s expense, in which event Pacific shall be responsible for insurance
and property taxes thereon.  Upon the
termination of this Agreement, Black Hills shall pay Pacific an amount equal to
the then-depreciated book value of any Combustion Turbines replaced by Pacific
and ownership of such Combustion Turbines shall then transfer to Black Hills.


 


(e)                                  For the Term of
this Agreement, Pacific will make available up to 100 megawatts of capacity
from its system to meet Black Hills’ reserve requirements.  Such reserve capacity shall be available to
Black Hills only at such time as consistent with prudent utility practice,
Black Hills would, absent this Agreement, have made use of the Combustion
Turbines.  At such times as Black Hills
makes use of its right to this system reserve capacity, it shall pay Pacific
for energy taken with the capacity based upon Pacific’s then-prevailing
Incremental Cost of Generation, not to exceed fuel costs associated with
operating the Combustion Turbines.  If
Black Hills concludes that because of transmission outages, or low voltage
conditions on Black Hills’ system, it is necessary for it to operate the
Combustion Turbines in lieu of taking reserve system capacity from Pacific, it
may do so, but shall be responsible for paying the associated fuel costs as
well as a pro rata share of any taxes levied on the basis of the level of
generation form the Combustion Turbines. 
Black Hills’ right to use the Combustion Turbines, when required by
prudent utility practice to do so, shall be superior to Pacific’s.


 


(f)                                    Pacific will
maintain an inventory of no less than 250,000 gallons of fuel for its use of
the Combustion Turbines and Black Hills shall maintain an inventory of no less
than 250,000 gallons for its purposes.


 


3

















 


(g)                                 In consideration
of the benefits to it from this exchange of reserve capacity, Pacific will pay
Black Hills %50,000 each month of the Term of this Agreement.


 


Section 4.                    Relocation of
Combustion Turbines.  If
agreeable to Black Hills, Pacific at its cost, may relocate the Combustion
Turbines based upon terms and conditions to be negotiated by the parties.


 


Section 5.                    Fuel.  All fuel stored and used on behalf of Pacific
shall be charged to Pacific for any governmental allocations and restrictions
on use which may be applicable during the Term, and all fuel stored and used on
behalf of Black Hills shall be charged to Black Hills for such purposes.


 


During
the Term of this Agreement, by mutual agreement, the parties may elect to
convert the Combustion Turbines to burn natural gas, in which case the
provisions of this Agreement related to fuel costs shall be amended
accordingly.  Neither party shall
unreasonably withhold its consent to such a conversion if the other party is
prepared to pay the cost of the conversion.


 


Section 6.                    Points of
Delivery.  The
deliveries of power and energy contemplated by this Agreement shall be made to
the Wyodak Substation point of interconnection between Pacific’s system and
Black Hills’ system as defined in the Wyodak Sub-station Construction, Ownership
and Operation Agreement among Pacific, Black Hills and Tri-County Electric
Association, Inc. dated September 28, 1981 or to any other point of
interconnecttion as mutually agreed upon by the parties which has an adequate
capacity to accommodate such deliveries. 
Neither party shall unreasonably withhold its consent to establishing
such other points of interconnection; however, nothing herein shall be
interpreted as an agreement by any party to incur additional costs.


 


Section 7.                    Schedules.  The parties shall schedule all deliveries of
power and energy required by this Agreement in accordance with normal
scheduling practices.  Such schedules of
power and energy shall be deemed to be delivered during the hours and in the
amounts scheduled; provided, that if scheduled deliveries are
interrupted due to forces beyond either party’s control, including but not
limited to loss of facilities, such scheduled deliveries shall be adjusted to
reflect such interruptions.  While
recognizing that reserve capacity may be required on an emergency basis, the
parties shall nevertheless use their best efforts, consistent with prudent
utility practice, to minimize rapid changes in deliveries hereunder.


 


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Section 8.                    Payment
Schedules.  Black Hills
shall mail to Pacific, first class postage prepaid an invoice for all Operation
and Maintenance Costs by the third working day of each month.  Invoices shall be based on the estimated
costs for that month and later invoices adjusted as actual costs are
determined.  Pacific shall mail to Black
Hills, first class postage prepaid, an invoice for all energy acquired
hereunder by Black Hills during the prior month, while taking system capacity,
by the third working day of each month. 
The parties shall pay such invoices by the 15th of each
month.  Each monthly payment shall be
made in immediately available funds by the due date.  Simple interest shall accrue on any amount
not paid when due at a rate of 125 percent of the prime rate as established by
the Morgan Guaranty Trust Company of New York during the period of delinquency.


 


Section 9.                    Uncontrollable
Forces.  Neither party to this
Agreement shall be considered to be in default in the performance of any
obligation hereunder if failure to perform shall be due to uncontrollable
forces.  The term “uncontrollable forces”
means any cause beyond the control of the party affected, including, but not
limited to, failure of facilities, flood, earthquake, storm, fire, lightening,
epidemic, war, riot, civil disturbance, labor disturbance, sabotage, restraint
by court order or public authority, by which exercise of due foresight, such
party could not reasonably have been expected to avoid, and by which exercise
of due diligence shall be able to overcome. 
The parties shall not, however, be relieved of liability for failure of
performance if such failure is due to causes arising out of removable or
remediable causes which it fails to remove or remedy with reasonable
dispatch.  Any party rendered unable to
fulfill any obligation by reason of uncontrollable forces shall exercise due
diligence to remove such inability with all reasonable dispatch.  Nothing contained herein, however, shall be
construed to require a party to prevent or settle a strike against its
will.  It is specifically understood and
agreed that Pacific’s delivery of capacity under this Agreement comes from its
system and does not depend upon the existence, operation or the efficiency of
any particular generating resource.


 


Section 10.              Limitation of
Liability.  Neither
party shall be liable for any consequential losses or damages, including, but
not limited to, damages for lost profits arising from its breach of this
Agreement, whether or not such losses or damages are caused by a party’s negligence.


 


Section 11.              Government
Regulations.  The parties
shall submit this Agreement for filing with the Federal Energy 


 


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Regulatory
Commission.  The terms, conditions and
prices for service specified herein shall remain in effect for the term hereof
and shall not be subject to change through application to the Federal Energy
Regulatory Commission pursuant to the provisions of Section 205 of the
Federal Power Act, absent the agreement of the parties hereto.  The parties covenant that neither shall
request relief from any of the provisions of this Agreement pursuant to the
provisions of Section 206 of the Federal Power Act, absent the agreement
of the parties hereto.  The foregoing
statutory references are intended to include and sub-sequent similar
enactments.


 


Section 12.              Arbitration.  If any dispute arises under this Agreement as
to any factual matter, the parties shall submit the factual dispute to a board
of three arbiters, one to be selected by each party and the parties are unable
to agree on the selection of a third arbiter. 
If the parties are unable to agree on the third arbiter, the parties
shall request the senior district judge of the United States District Court of
the District of Wyoming to submit a list of five persons.  Each party shall alternately strike one name
from the list, the first exercise to be determined by lot. The last person
remaining on the list shall serve as the third arbiter. The arbiters shall not
take into account the relative value of each party’s rights and obligations
under this Agreement in resolving any issue. Except as otherwise set forth
herein, the arbitration shall be held under the rules of the American
Arbitration Association. The arbiters shall render their decision in writing
not later 30 days after the matter has been submitted to them. The decision of
the majority of the board of arbiters of the factual dispute shall be binding
upon the parties. The arbiters may in their discretion award arbitration costs
and attorneys fees to either party.


 


Section 13.              Notices.  Any notice, demand, or request under this
Agreement shall be deemed properly served, given, or made if delivered in
person or sent by registered or certified mail, postage paid and return receipt
requested, to the person so designated as its authorized representative.  The titles and addresses of the authorized
representatives hereunder are as follows:


 


	
  For
  Black Hills:

  	
  Vice
  President and Chief Operating Office

  
	
   

  	
  Black
  Hills Power and Light Company

  
	
   

  	
  625
  Ninth Street

  
	
   

  	
  PO
  Box 1400

  
	
   

  	
  Rapid
  City, SD 57709

  



 


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  For
  Pacific:

  	
  Vice
  President, Power Systems

  
	
   

  	
  Pacific
  Power & Light Company

  
	
   

  	
  920
  SW Sixth Avenue

  
	
   

  	
  Portland,
  OR 97204

  



 


Section 14.              Assignment.  This Agreement shall not be assigned to any
third party without the written consent of the other and such consent shall not
be withheld unreasonably.  No assignment
of this Agreement shall operate to discharge the assignor of any duty or
obligation hereunder without the written consent of the other party.


 


Section 15.              Choice of Law.  This Agreement shall be subject to and be
construed under the laws of the State of Wyoming.


 


IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their respective names by their respective officers thereunder duly
authorized.


 


	
   

  	
   

  	
   

  	
  PACIFICORP,
  dba

  
	
   

  	
   

  	
   

  	
  PACIFIC
  POWER & LIGHT COMPANY

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/
  Robert M. Smith

  
	
   

  	
   

  	
   

  	
   

  	
  Dated:
  05/11/87

  
	
  Attest:

  	
  /s/
  Sally A. Nofziger

  	
   

  	
   

  
	
   

  	
  Secretary

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  BLACK
  HILLS CORPORATION, dba

  
	
   

  	
   

  	
   

  	
  BLACK
  HILLS POWER & LIGHT COMPANY

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  /s/
  Daniel P. Languth

  
	
   

  	
   

  	
   

  	
   

  	
  Dated:
  May 5, 1987

  
	
  Attest:

  	
  /s/
  Louise S. Kelley

  	
   

  	
   

  	
   

  
	
   

  	
  Secretary

  	
   

  	
   

  	
   

  



 


7

















 


Exhibit A


to


Reserve Capacity Integration
Agreement


 


COMBUSTION TURBINES


 


4 -                                   B.E. Model Series 5001-P
Combustion Turbines S/N 244781, 244782, 245137, 245252.  Including Site preparation and Inertial
Separator Silencers


 


1 -                                   16' x 20' Concrete Block
Battery House including wiring


 


3 -                                   66' x 40' 1 million gallon
fuel oil tanks, pumps and heaters


 


1 -                                   20' x 24' concrete block
foam house, foam equipment and distribution system for fire protection of the
three oil tanks


 


Fuel
Unloading Station including spill prevention structure, pumps and flow meters


 


Remote
metering and control equipment


 


Unit
transformers 13.2/69 KV


 


MISCELLANEOUS
ITEMS INCLUDING BUT NOT NECESSARILY LIMITED TO THE FOLLOWING:


 


1 -                                   15 KVA dry type
transformer


 


Chain
link fence


 


Certain
test equipment


 


Work
benches and cabinets


 


5 -                                   400 watt mercury vapor lamps


 


Spare
parts


 

















 


RESERVE CAPACITY INTEGRATION AGREEMENT


 


EXAMPLE


 


Determine
the following Pacific Power & Light Costs associated with Jim Bridger
Plant for calendar year 1985 using FERC Form 1:


 


1.                                      Fuel
Cost in $/mWh.


 


2.                                      Production
Cost in $/mWh.


 


3.                                      Production
Cost with losses in $/mWh.


 


1.                                      F =
Fuel Cost in $/mWh: (Pg 402)


 


·                                          Fuel
cost = $104,860,108 (Line 21).


·                                          Net
Generation = 8,752,283 mWh (Line 12).


·                                          F =
$104,860,108 ÷ 8,752,283 mWh = 11.98 $/mWh.


 


2.                                      P =
Production Cost in $/mWh: (Pg 402)


 


·                                          Production
Cost = $145,514,760 (Line 34).


·                                          Net
Generation = 8,752,283 mWh (Line 12).


·                                          P =
$145,514,760 ÷ 8,752,283 mWh = 16.63 $/mWh.


 


3.                                      Production
Cost with losses in $/mWh:


 


·                                          Losses
= 7.00%


·                                          Production
Cost with losses = (1.07 x F) + (P–F)


= (1.07 x 11.98) + (16.63 – 11.98) = 17.47 $/mWh.