PALO VERDE - MORGAN 500kV TRANSMISSION PROJECT

Transcription

1 Agenda Number 4. Attachment. Draft PALO VERDE - MORGAN 500kV TRANSMISSION PROJECT JOINT PARTICIPATION AGREEMENT BETWEEN ARIZONA PUBLIC SERVICE COMPANY AND CENTRAL ARIZONA WATER CONSERVATION DISTRICT AND SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT DISTRICT FINAL 10/4/11

2 TABLE OF CONTENTS 1. Parties Recitals Agreement Effective Date and Term Definitions Future Development Ownership and Title to Delaney 500kV and Sun Valley 500kV Substations Administration and Committees Construction of Facilities Operating Agent Capital Improvements Ownership Ratios and Cost Responsibility Ratios Construction Costs Operating Costs Capital Improvement Costs Billing and Payment Taxes Reduction of Capacity in the Delaney 500kV and Sun Valley 500kV Substations Operating Emergency Project Insurance General Provisions Affecting Project Insurance Mortgage and Transfer of Interest Liability; Covenant Not to Execute Severance of Improvements Defaults Dispute Resolution Provisions Removal of Project Manager or Operating Agent Authorizations and Approvals Waiver Uncontrollable Forces Audit Accrual of Causes of Action Relationship of the Parties Governing Law Successors and Assigns Notices Severability No Dedication of Facilities Regulatory Authority Section Headings ii

3 41. Representations and Warranties No Third Party Rights Right of First Refusal Revision of Overhead Loadings Entire Agreement Partitionment Survival Signature Clause Appendix A - Palo Verde Morgan 500kV Project Description... A-1 Appendix B - Initial Ownership and Cost Responsibility Ratios... B-1 Appendix C - Diagrams of the Delaney 500kV Switchyard Project... C-1 Appendix D - Diagrams of the Sun Valley 500kV Substation Project... D-1 Appendix E - Description of Delaney 500kV Switchyard Property... E-1 Appendix F - Description of Sun Valley 500kV Substation Property... F-1 Appendix G - Overhead Loading Applied to Capital Improvement Costs... G-1 Appendix H - Overhead Loading Applied to Operating Costs... H-1 Appendix I - Overhead Loading Applied to Construction Costs... I-1 Appendix J - Application of Overhead Load Calculations... J-1 iii

4 PALO VERDE - MORGAN 500KV TRANSMISSION PROJECT PARTICIPATION AGREEMENT 1. Parties. The Parties to this Palo Verde to Morgan 500kV Project Participation Agreement ( Agreement ) are Arizona Public Service Company ( APS ), an Arizona corporation. Central Arizona Water Conservation District ( CAWCD ), multi-county water conservation district organized and existing under and by virtue of the laws of the State of Arizona, and Salt River Project Agricultural Improvement District ( SRP ), an agricultural improvement district organized and existing under and by virtue of the laws of the State of Arizona. 2. Recitals. 2.1 On August 9, 2004, APS, CAWCD and SRP entered into the Palo Verde to TS5 (Sun Valley) Memorandum of Agreement to site a 500kV transmission line that would originate at the Palo Verde Substation and terminate at the TS5 (Sun Valley) Substation. 2.2 On December 16, 2008, APS, CAWCD and SRP entered into the TS5 (Sun Valley) TS9 (Morgan) Memorandum of Agreement to site a 500kV transmission line that would originate at the TS5 (Sun Valley) Substation and terminate at the TS9 (Morgan) Substation. 2.3 On August 17, 2005, the Arizona Corporation Commission (ACC) granted APS a Certificate of Environmental Compatibility for the future construction of a 500kV transmission line, the Palo Verde to TS5 (Sun Valley) Project. 2.4 On March 17, 2009, the ACC granted APS a Certificate of Environmental Compatibility for the future construction of a 500kV transmission line, the TS5 (Sun Valley) to TS9 (Morgan) Project. 2.5 The Palo Verde Morgan 500kV Transmission Project will include the projects previously known as: Palo Verde TS5 (Sun Valley) Project and the TS5 TS9 (Sun Valley Morgan) Project. 2.6 This project will serve the electric energy needs in the northern Phoenix Metropolitan area. It will increase the import capability to the Phoenix Metropolitan area, as well as increase the export/scheduling capability from the Palo Verde area, which includes both solar and gas resources. The project will also increase the reliability of the EHV system by completing a 500kV loop that connects the Palo Verde Transmission system, the Southern Navajo Transmission System, and the Southern Four Corners system. 2.7 The Parties agree that joint development, ownership and operation of the Palo Verde Morgan 500kV Transmission Project (Delaney 500kV Switchyard, Sun Valley 500/230kV Substation and associated 500kV Transmission Lines) are 1

5 beneficial to All Parties and their customers. 3. Agreement. In consideration of the premises and the mutual covenants contained herein, the Parties hereby agree as follows: 4. Effective Date and Term. 4.1 This Agreement shall become effective when it has been duly executed and delivered on behalf of all Parties provided that the following events have occurred: Federal Energy Regulatory Commission (FERC) has accepted this Agreement for filing without modification or condition unacceptable to any Party. Upon receipt of fully executed originals of this Participation Agreement, APS shall promptly file this Participation Agreement with FERC In the event FERC requires conditions or modifications to this Participation Agreement to enable it to accept this Participation Agreement for filing, APS shall promptly notify CAWCD and SRP of such conditions or modifications required by FERC. CAWCD and SRP shall, within thirty (30) calendar days of such notice by APS, give written notice to APS whether such condition or modification is acceptable or unacceptable to it If CAWCD and SRP do not provide written notice indicating that FERC s condition or modification is unacceptable within such thirty (30) calendar day period, this Participation Agreement, as amended by FERC s required conditions or modifications, shall be deemed effective as of the date of its execution If CAWCD or SRP gives written notice to APS that FERC s requirement for conditions or modifications is unacceptable to it, the Parties shall meet to prepare a mutually agreeable response to FERC with respect to FERC s required conditions or modifications, and, unless the Parties agree otherwise, this Participation Agreement shall be of no further force or effect unless and until FERC and the Parties have resolved FERC s requirement for unacceptable conditions or modifications in a manner agreeable to All Parties and have amended this Participation Agreement to reflect such resolution. 2

6 4.2 Unless terminated earlier pursuant to Section 25 hereof, this Agreement shall continue in force and in effect for fifty (50) years from the date of execution, provided that the Agreement shall extend automatically for five (5) year periods unless any Party provides a written notice of cancellation six (6) months prior to the expiration of any extension period. Upon receiving written notice of a Party s election to terminate its interest in this Agreement, the other Parties shall have ninety (90) calendar days after receipt of such notice to elect to continue operation of the Palo Verde - Morgan 500kV Transmission Project by providing written notice of such election to the other Parties. 5. Definitions If no Party elects to continue operation of the Palo Verde Morgan 500kV Transmission Project, the Project shall be retired and disposed of as provided in Section herein If any remaining Party elects to continue operation of the Palo Verde Morgan 500kV Transmission Project, the remaining Party shall purchase the Palo Verde Morgan 500kV Transmission Project at the other Parties net book value and assume the rights, titles, interests, and obligations of the Party electing to terminate on the effective date of such termination On the effective date of termination of any Party in accordance with this Section 4.2, the terminating Party shall assign its rights, titles, interest, and obligations in the Palo Verde Morgan 500kV Transmission Project to the remaining Parties. Sections 43.5 and 43.6 shall apply to such transfer. Upon any such assignment and assumption, the terminating Party will be relieved of all future liability under this Agreement arising after the date of such assignment and assumption and relating to matters occurring after such date. Nothing herein will relieve any such terminating Party from any liability under this Agreement arising prior to the date of any such assignment and assumption and relating to matters occurring prior to such date Unless otherwise determined by the Parties, upon termination of this Agreement the disposition of all property comprising the Palo Verde Morgan 500kV Transmission Project shall be liquidated by a third party liquidator. The Parties will use commercially reasonably efforts to maximize the proceeds of the liquidation and all proceeds and all associated termination costs shall be shared by each Party in proportion to its Cost Responsibility Ratio in each Component. 5.1 Accounting Practice: Generally accepted accounting principles in accordance with the FERC System of Accounts and Generally Accepted Accounting Principles (G.A.A.P). 3

7 5.2 Appraisal Procedure: The defaulting Party and non-defaulting Party who has given a Demand Purchase Notice shall first attempt to reach agreement on the Fair Market Value of the interest in the Palo Verde Morgan 500kV Transmission Project to be purchased. If such Parties fail to reach such agreement within thirty (30) calendar days following the receipt of the Demand Purchase Notice, then, within ten (10) calendar days after such thirty (30) calendar day period, the defaulting Party and the non-defaulting Party each shall select from a reputable engineering or consulting firm an individual qualified in matters related to the operation and maintenance of transmission lines and related facilities or the valuation of transmission lines and related facilities and notify the other Party of the persons so selected. A condition precedent to the designation of any appraiser shall be a certification by the appraiser that he or she is aware of the nature and time frame of the evaluation and is capable of performing the service within the time designated The two (2) appraisers thus designated shall designate a third appraiser within ten (10) calendar days after the appointment of the second of the Party appraisers who shall have experience in the valuation of transmission lines and related facilities and who shall not have performed significant work for any of the Parties within three (3) years preceding such appointment. Each of the defaulting Party and the non-defaulting Parties shall be allowed to submit to the appraisers written submissions setting forth their views on the appropriate considerations for determining the Fair Market Value of the defaulting Party s interest in the Palo Verde - Morgan 500kV Transmission Project. The appraisers shall render their decision within ninety (90) calendar days following selection of the third appraiser. The Fair Market Value of the defaulting Party s interest in the Palo Verde - Morgan 500kV Transmission Project shall then be the average of the values submitted by any two (2) of the three (3) appraisers which are nearest to each other (or, if the two (2) extreme values are equidistant from the middle value, the middle value), which average (or middle value) shall be presented to the Parties. 5.3 Capacity: Electrical rating or scheduling capability expressed in megawatts (MW) or kilowatts (KW) 5.4 Capital Improvement(s): Any Units of Property, land or land rights which are added to the Palo Verde - Morgan 500kV Transmission Project, the betterment of land or land rights, the enlargement or betterment of any Units of Property constituting a part of the Palo Verde - Morgan 500kV Transmission Project, the relocation of existing facilities and the replacement of any Units of Property for other Units of Property or the replacement of land or land rights constituting a part of the Palo Verde - Morgan 500kV Transmission Project, the relocation of existing facilities along the line route, irrespective of whether such replacement constitutes an enlargement or betterment of that which it replaces, which 4

8 additions, betterments, enlargements and replacements, in accordance with Accounting Practice, would be capitalized and are not included in the Operating Work or Construction Work. 5.5 Capital Improvement Costs: Subject to Section 15, all costs and expenses to plan, design, acquire, construct, install and equip Capital Improvements, place Capital Improvements in operation, and obtain governmental approvals, certificates, permits and licenses with respect thereto. Capital Improvement Costs shall include, but not be limited to, those categories of costs described in the definition of Construction Costs, applied to Capital Improvements undertaken after the Commercial Operation Date of the Palo Verde - Morgan 500kV Transmission Project. See Appendix G for Overhead Loads Applied to Capital Improvement Costs 5.6 Commercial Operation Date: The date that the Palo Verde - Morgan 500kV Transmission Project can reasonably be expected to operate reliably, as determined by the Project Manager. 5.7 Common Facilities: Those facilities required for a total substation, in general including, but not limited to: site preparation grading, fencing, surfacing; grounding; trenching and conduit; yard lighting; control house and equipment therein (except certain terminal-related equipment); major and minor steel structures; transmission lines, communications and control components; substation service power facilities; water line installation; fire protection system; security monitoring system; site retention basins; perimeter wall; landscaping; irrigation; and power and control cables. 5.8 Component(s): Any component(s) of the Palo Verde - Morgan 500kV Transmission Project described or depicted in Appendix A hereto, including associated land and land rights. 5.9 Construction Agreement: Any agreement entered into by the Project Manager for the design, engineering, construction or installation of any Component of the Palo Verde - Morgan 500kV Transmission Project, including without limitation engineering, design, construction, supervisory, licensing or consulting services in connection with the Construction Work, corridor studies, pre-operational environmental studies or reports, and for any other services or materials necessary or useful in the performance of the Construction Work Construction Costs: The costs associated with Construction Work, including overhead loads, as described in Appendix I, attached hereto Construction Insurance: Policies of insurance to be procured and maintained or caused to be procured and maintained by a Project Manager applicable to Construction Work and in accordance with Sections 20 and 21 hereof Construction Work: All work for the construction of the Palo Verde - Morgan 500kV Transmission Project or any Component thereof, performed pursuant to 5

9 this Agreement, including but not limited to all planning, engineering, design, acquisition, contract preparation and negotiations, contract administration, legal services, regulatory compliance, purchasing, procurement, construction, supervisions, recruiting, training, expediting, inspection, accounting, procurement and maintenance of insurance, acquisition of land or land rights as appropriate, testing and start-up of the Components and associated equipment, preparation of operating and equipment manuals, all reports required by regulatory authorities and the conduct of hearings, conferences and other activities incidental to obtaining requisite permits, licenses and certificates for the construction and operation of the Components and associated equipment, and any other associated work undertaken by the Project Manager that is required by this Agreement or Good Utility Practice Cost Responsibility Ratio (CRR): The percentage cost responsibility ratio for each Party for Construction Work, Operating Work and Capital Improvements for each Component, as determined pursuant to Section 12 and Appendix B hereof Demand Purchase Notice: As defined in Section Demand Sale Notice: As defined in Section Engineering and Operating Committee: The committee established pursuant to Section 8.1 and 8.2 hereof Fair Market Value: The value of property determined on the basis of an armslength transaction between an informed and willing seller and an informed and willing buyer FERC System of Accounts: The Federal Energy Regulatory Commission ( FERC ) Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act, as the same may be modified, supplemented or amended from time to time. References to a specific FERC Account number shall mean the FERC Account number now in effect or the successor to such FERC Account number Final Completion Report: A complete summary of Construction Costs, a description of the Palo Verde - Morgan 500kV Transmission Project and a summary of each Party s contributions to Construction Costs in order to assist each party s unitization of the project Final Billing Report: A complete summary of Construction Costs incurred to date excluding subsequent costs associated with the Construction Project and audit findings Good Utility Practice: Any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry in the Western Interconnection during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known 6

10 at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method, or act to the exclusion of all others, but rather to be acceptable practices, methods, or acts generally accepted in the region Palo Verde - Morgan 500kV Transmission Project: The following facilities as such facilities are more fully described in Appendix A hereto, to be constructed and operated by the Parties: (i) PV Interconnection Facilities (ii) the Palo Verde - Delaney 500kV transmission line; (iii) the Delaney 500kV Switchyard; (iv) the Delaney - Sun Valley 500kV transmission line; (v) the Sun Valley 500kV Substation; (vi) the 500/230kV Transformer at Sun Valley (vii) the Sun Valley - Morgan 500kV transmission line (viii) the Sun Valley 230kV Substation (ix) the Sun Valley Morgan 230kV transmission line; (x) Morgan Interconnection Facilities; and any other system facilities agreed to by the Parties and reflected in a revised Appendix A Operating Agent: The Party responsible for the performance of Operating Work and making Capital Improvements as more particularly described in Section 10 hereof Operating Costs: Subject to Sections 14, all costs and expenses to perform the Operating Work. Operating Costs shall include, but not be limited to: All costs and expenses for operation and maintenance of all facilities installed pursuant to this Agreement, repairs, replacements and reconstruction of such facilities which do not entail the acquisition and installation of any Units of Property All costs of Operating Insurance, including premiums paid, and all costs of enforcing or attempting to enforce applicable insurance policies, payment and performance bonds, contracts and warranties Federal, state and local taxes and payments in lieu of taxes payable for any period of operation during the term of this Agreement, except any tax assessed directly against an individual Party unless such tax was assessed on behalf of any or all Parties for Operating Work Subject to reduction by insurance proceeds provided under Section 20, the costs of discharging or paying any liability or loss, damage or expense, including costs and expenses for attorneys fees and other costs of defending, settling or otherwise administering claims, liabilities or losses against the Parties arising out of workers compensation or employer s liability claims or by reason of property damage or injuries to or death of any person or persons or by reason of claims of any and every character resulting from, arising out of or connected with the ownership of the Palo Verde - Morgan 500kV 7

11 Transmission Project or any Component thereof, the operation and maintenance of the Palo Verde - Morgan 500kV Transmission Project, or the performance or non-performance of Operating Work, whether caused wholly or partially by the negligence of the Parties, or their respective directors, members of governing bodies, officers, employees or agents Payroll and other expenses of the Operating Agent s employees performing Operating Work and making Capital Improvements, including without limitation, properly allocated labor loading charges using the loading method and rates in Appendices G, H, I and J Allowance for the Operating Agent s administrative and general expenses associated with Operating Work and making Capital Improvements; using the Operating Agent s Set Rate and allocation in accordance with Appendices G, H, I, and J The costs of discharging liens (excluding liens placed by one Party under Section 22.1) on the Palo Verde - Morgan 500kV Transmission Project or any Component thereof required to be discharged by the Operating Agent A portion of the load dispatching salaries and expenses as defined by FERC Accounts and incurred by the Operating Agent. Such allocation shall be determined by multiplying the total of such salaries and expenses incurred for load dispatching on transmission systems above 69 kv by a ratio the numerator of which is the total number of the Palo Verde - Morgan 500kV Transmission Project switching stations being dispatched, having power circuit breakers and/or circuit switchers above 69 kv, and the denominator of which is the total number of substations and/or switching stations being dispatched by the Operating Agent and having power circuit breakers and/or circuit switchers above 69 kv in accordance with the following formula: A = B X C D Where: A = Dispatching cost allocable to the Participants B = Dispatching charges above 69 kv as defined in FERC accounts C = Number of substations and/or switching stations on the Palo Verde - Morgan 500kV Transmission Project with power circuit breakers and/or 8

12 circuit switchers above 69 kv. D = Total number of substations and/or switching stations dispatched by Operating Agent with power circuit breakers All other costs properly allocable to the operation and maintenance of the Palo Verde - Morgan 500kV Transmission Project Operating Emergency: An unplanned event or circumstance which threatens or results in a reduction in the transmission Capacity of the Palo Verde - Morgan 500kV Transmission Project or a Component thereof that would otherwise be available to the Parties under normal operating conditions Operating Insurance: Policies of insurance to be procured and maintained or caused to be procured and maintained by the Operating Agent applicable to Operating Work or Capital Improvements in accordance with Sections 20 and 21 hereof Operating Work: All work undertaken by the Operating Agent, in its capacity as such, pursuant to this Agreement and required for the operation and maintenance of the Palo Verde - Morgan 500kV Transmission Project or any Component thereof after the Commercial Operation Date of the Palo Verde - Morgan 500kV Transmission Project, including without limitation actions pursuant to Section 10 hereof, obtaining consulting and legal services for the Palo Verde - Morgan 500kV Transmission Project, engineering, negotiation, contract preparation and administration, planning, purchasing, procurement and maintaining in force the Operating Insurance, repair, maintenance, environmental monitoring, regulatory compliance, supervision, expediting, testing, recruiting and training of operating personnel, preparation of operating procedures and manuals, protection, operation, management, securing, public information services, activities related to securing requisite permits, licenses, approvals and certificates from governmental agencies and authorities, any work undertaken by the Operating Agent pursuant to an interconnection agreement, and any work necessitated by an Operating Emergency, but excluding any work undertaken to make Capital Improvements. Operating Work shall not include legal services, consulting services or other work performed by or for one Party in resolving disputes with any other Party Operating Year: The Operating Agent s fiscal year, as it may be revised from time to time Ownership Ratio: The percentage ownership ratio for each Party for land and land rights and facilities, as determined pursuant to Sections 6 and 12 hereof and Appendix B hereto Party(ies): APS, CAWCD and SRP individually or, as appropriate, collectively with future Palo Verde - Morgan 500kV Transmission Project parties, and their respective successors and permitted assigns hereunder. 9

13 5.31 Permitted Liens: Liens for taxes and assessments not yet delinquent, liens for labor and material not yet perfected or undetermined charges or liens incidental to the performance of the Operating Work, Construction Work or the making of Capital Improvements, liens permitted under the Project Agreements or liens otherwise approved by the Engineering and Operating Committee Project Agreements: This Agreement and any additional agreements between the Parties or any of them and any third party for associated land or land rights, as such agreements are originally executed or as they may thereafter be supplemented or amended, and any other agreements as the Parties agree to designate as Project Agreements Project Insurance: Construction Insurance and Operating Insurance Project Manager: The Party responsible for carrying out Construction Work on the various Components of the Palo Verde - Morgan 500kV Transmission Project, as more particularly described in Section 9 hereof Uncontrollable Forces: Any cause beyond the control of the affected Party which by the exercise of due diligence the Party could not reasonably be expected to avoid and which, by the exercise of due diligence, the Party shall be unable to overcome, including but not limited to acts of God, failure of or threat of failure of facilities, explosions, flood, drought, earthquake, storm, fire, pestilence, lightning and other natural catastrophes, epidemic, war, riot, civil disturbance or disobedience, strike, labor disturbance, dispute or unrest of whatever nature, labor, material or fuel shortage, restraint by court order or public authority and action or non-action by or inability to obtain the necessary authorizations or approvals from any governmental agency or authority, except that, for purposes of this provision, a governmental agency or authority shall not include SRP or CAWCD, except to the extent either of SRP or CAWCD are unable to act due to applicable laws, rules or regulations, a lawful order of any agency having jurisdiction, or contractual obligations Units of Property: Units of property as described in the FERC s List of Units of Property for Use in Connection with Uniform System of Accounts Prescribed for Public Utilities and Licensees in effect as of the date of this Agreement and as such list may be modified, supplemented or amended from time to time. Willful Action: Action taken or not taken by a Party (including the Project Manager(s) and the Operating Agent) at the direction of its directors, members of its governing body, officers or employees having management or administrative responsibility affecting its performance under any of the Project Agreements, which action is knowingly or intentionally taken or not taken with conscious indifference to the consequences thereof or with intent that injury or damage would result or would probably result therefrom. 10

14 Action taken or not taken by a Party (including the Project Manager(s) and the Operating Agent) at the direction of its directors, members of its governing body, officers or employees having management or administrative responsibility affecting its performance under any of the Project Agreements, which action has been determined by final arbitration award or final judgment or judicial decree to be a material default under this Agreement and which action occurs or continues beyond the time specified in such arbitration award or judgment or judicial decree for curing such default or, if no time to cure is specified therein, occurs or continues beyond a reasonable time to cure such default Action taken or not taken by a Party (including the Project Manager(s) and the Operating Agent) at the direction of its directors, members of its governing body, officers or employees having management or administrative responsibility affecting its performance under any of the Project Agreements, which action is knowingly or intentionally taken or not taken with the knowledge that such action taken or not taken is a material default under any of the Project Agreements The phrase employees having management or administrative responsibility means employees of a Party who are responsible for one or more of the executive functions of planning, organizing, coordinating, directing, controlling, and supervising such Party s performance under any of the Project Agreements; provided, however, that with respect to employees of either Party when acting as Project Manager or Operating Agent, such phrase shall refer only to (i) the senior employee of such Party who is responsible for Construction Work, Operating Work and/or Capital Improvements under this Agreement, and (ii) anyone in the organizational structure of such Party between such senior employee and an officer Willful Action shall not include any act or failure to act which is merely involuntary, accidental, or negligent Work Liability: Liability of one or all Parties for damage suffered by anyone other than a Party, whether or not resulting from the negligence of any Party, its directors, members of its governing body, officers, employees or any other person or entity whose negligence could be imputed to such Party, resulting from: The performance or non-performance of Construction Work, Operating Work or the making of Capital Improvements The use or ownership of the Palo Verde - Morgan 500kV Transmission Project. 6 Future Development 6.1 Each Party shall have the right to participate in the future development of additional facilities in association with the Palo Verde Morgan 500kV 11

15 Transmission Project; provided, however, such additional facilities shall not adversely impact the capacity rights or operations of another Party in the Palo Verde-Morgan Transmission Project or any facilities previously developed by a Party in association with the Palo Verde-Morgan Transmission Project pursuant to this Section. 6.2 Unless otherwise agreed to by the Parties, a Party desiring to develop an additional facility in association with the Palo Verde-Morgan 500kV Transmission Project shall provide notice to the other Parties, on the earlier of (i) not less than thirty (30) months prior to the planned in-service date of such facility, or (ii) not less than six (6) months prior to the commencement of engineering and design required for the proposed development of additional facilities. 6.3 Upon receipt of the notice provided pursuant to Section 6.2 herein, each Party shall have ninety (90) calendar days to express notice of its interest in participating in the development of the additional facility and identify its desired level of participation (i.e., Ownership Interest, Capacity Entitlement, etc.). To the extent the aggregate participation interest exceeds the capability of the additional facility, the Parties shall participate in proportion to their existing ownership percentage in the Palo Verde - Morgan 500kV Transmission line. If no other Party expresses an interest to participate in the development of the additional facility, the initiating Party may pursue the development of such facility. 6.4 The incremental capacity created in each Component as the result of the future development of an additional facility in association with the Project shall be allocated only to those Parties with Cost Responsibility in such additional facility; provided however, no Party shall be allocated Capacity Entitlement resulting from the development of such additional facility over a Component in which they do not have an Ownership Interest. 6.5 Within six (6) months of the date of notice provided pursuant to Section 6.2 herein, the Parties shall prepare any supplement, amendment or other documentation necessary to incorporate the additional facility(ies) as a Component, if applicable, and identify the applicable Ownership Interests, Capacity Entitlements, and Cost Responsibilities, as appropriate and in accordance with the procedures developed pursuant to Section herein. 7 Ownership and Title to Palo Verde - Morgan Transmission Project 7.1 Real Property: Upon execution and recordation of the land-related Project Agreements, each Party shall own and have title to an undivided interest in the land and land rights in the percentages shown in Appendix B hereto. 7.2 Initial ownership in and title to the Palo Verde - Morgan Transmission Project and equipment shall be equal to each Party s Ownership Ratio, calculated pursuant to 12

16 Section 12 hereof and as shown in Appendix B hereto. 7.3 Each Party shall accept and hold title to an undivided interest as a tenant in common in the Palo Verde - Morgan Project in accordance with this Section 7 and Appendix B. 7.4 The ownership and title to the Components described in this Agreement and all Capital Improvements shall be deemed to vest simultaneously in the Parties so that the estate of each of them shall be deemed to be concurrent as to time, right and priority. 7.5 At any time as any Party may reasonably demand in writing, the Parties shall jointly make, execute and deliver one or more supplements to this Agreement which shall describe with such particularity and detail as may be appropriate under the circumstances the property and facilities then constituting the Palo Verde - Morgan Project and the rights, titles and interests of each Party therein. The Engineering and Operating Committee may at any time revise Appendix A hereto to further describe the Palo Verde - Morgan Project or any Component thereof. 7.6 In the event any Party transfers or assigns any of its rights, title or interest in and to the Palo Verde - Morgan 500kV Transmission Project in accordance with Section 22 hereof and other terms and conditions of this Agreement, the Parties and any successor shall jointly make, execute and deliver a supplement to this Agreement in recordable form which shall describe with such particularity and detail as may be appropriate under the circumstances the rights, titles and interests of each Party and any successor following such transfer or assignment. 8 Administration and Committees: 8.1 As a means of securing effective cooperation and interchange of information and of providing consultation on a prompt and orderly basis among the Participants in connection with various administrative and technical matters which may arise from time to time in connection with the terms and conditions of this Agreement, the Participants hereby establish the committees described herein. The chairman of each such committee shall be a representative of the Project Manager up to the date the Palo Verde Morgan 500kV Transmission Project is placed into service and thereafter shall be a representative of the Operating Agent. The chairman shall be responsible for calling meetings and establishing agendas. The following committees are hereby established and shall have the functions and responsibilities described herein: An Engineering and Operating Committee, consisting of two (2) representatives appointed by each Party, provided however, that in respect to each matter brought before the Engineering and Operating Committee, only one (1) of such representatives shall have the right to vote thereon. The representatives for each Party shall be authorized to act on behalf of the Party 13

17 designating such representatives regarding the matters assigned to the Engineering and Operating Committee. During construction of the Palo Verde - Morgan 500kV Transmission Project, the Engineering and Operating Committee shall meet with the Project Manager on a quarterly basis, or upon the request of a Party. After the Palo Verde - Morgan 500kV Transmission Project is placed in operation, the Engineering and Operating Committee shall meet at least two times per year with the Operating Agent or more often at the discretion of the chairman or upon the request of a Party. The Engineering and Operating Committee shall have the functions described in Section 8.2 below An Audit Committee consisting of two (2) representatives appointed by each Party, provided however, that in respect to each matter brought before the Audit Committee, only one (1) of such representatives shall have the right to vote thereon. The representatives for each Party shall be authorized to act on behalf of the Party designating such representatives regarding the matters assigned to the Audit Committee. After the Palo Verde - Morgan 500kV Transmission Project is placed in operation, the Audit Committee shall meet at least two times per year with the Operating Agent or more often at the discretion of the chairman or upon the request of a Party. The Audit Committee shall have the functions described in Section 8.3 below. 8.2 The Engineering and Operating Committee shall provide liaison between the Parties and the Project Manager(s) with regard to Construction Work by meeting on a quarterly basis with the Project Manager to: Review the status and schedule of Construction Work; Review and approve, modify or otherwise act upon any change(s) proposed by a Project Manager that is reasonably expected to require a revision of the Commercial Operation Date or to increase the Construction Budget by ten percent (10%) or more (excluding contingencies and allocated project risk funds); Review the status of Construction Costs, including projected versus actual cash flows; Review Construction Work safety reports; and Review and, if necessary, act upon any other significant 14

18 factors involving or affecting the Construction Work or Construction Costs Review and approve, modify or otherwise act upon recommendations of the Operating Agent concerning the performance of Operating Work or the making of Capital Improvements, including but not limited to The annual capital expenditures budget, and annual operation and maintenance budget, and any revisions thereto; The planned outages for scheduled maintenance; Amendments to the appendices included in the Project Agreements The policies for establishing the spare parts inventory and materials and supplies inventory and any revisions thereto; The written statistical and administrative reports, written budgets, and information and other similar records, and the form thereof, to be kept and furnished by the Operating Agent (excluding accounting records used internally by the Operating Agent for the purpose of accumulating financial and statistical data, such as books of original entry, ledgers, work papers and source documents); The policies, criteria and procedures for determining Capacities of facilities and any revisions thereto; The Operating Agent s analysis of the total expenditures caused by an Operating Emergency; The written statement of operating practices and procedures and any revisions thereto; Scheduling practices and procedures, including, the establishment of procedures for dealing with Operating Emergencies or curtailed operations of the Components and any revisions thereto; The establishment of procedures and calculations for determining energy losses of the Components and any revisions thereto; and Develop and maintain procedures to address the interconnection of facilities to the Palo Verde - Morgan 500kV Transmission Project, such procedures must include the following principles, as accepted by FERC: (i) the Parties shall be entitled to compensation from the third party for the Capital Improvement Costs previously incurred in connection with the Common 15

19 Facilities, with such Capital Improvement Costs calculated based on the original installed costs including loading rates, except for land which shall be based upon an appraisal agreed upon by the Parties and the third party; and (ii) cost responsibility for ongoing costs including operation and maintenance costs associated with the new facilities and any Common Facilities will be allocated between the third party and Parties pro rata based upon number of interconnections; and (iii) cost responsibility for Capital Improvements associated with Common Facilities, including but not limited to any Common Facilities resulting from the third party s interconnection will be allocated between the third party and Parties pro-rata based upon the number of interconnections Exercise general supervision as required to consider and resolve matters arising under this Agreement, and perform such other duties as are provided in this Agreement or as may be directed by the Parties senior management Consider and act upon, as required, requests for installation on the property comprising the Palo Verde - Morgan 500kV Transmission Project of any structures, facilities or equipment by any one or more Parties or any third party for its or their own use, which structures, facilities or equipment shall not become a part of the Palo Verde - Morgan 500kV Transmission Project. 8.3 The Audit Committee shall have the following functions: Development of procedures for accounting and auditing Construction Costs, Operating Work costs and Capital Improvements, consistent with the provisions of this Agreement, and Generally Accepted Accounting Principles (G.A.A.P) Audit or cause to be audited the books and records of the Project Manager, Operating Agent, and any other Participant or contractor relevant to the performance of Construction Work and Operating Work and to the construction of Capital Improvements Perform such other duties as may be assigned to it by the Engineering and Operating Committee. 8.4 Within thirty (30) calendar days after the execution of this Agreement, each Party shall designate its representative(s) on the Engineering and Operating Committee and Audit Committee with written notice thereof given to the other Parties. 8.5 Any action or determination of the Engineering and Operating Committee or the Audit Committee must be unanimous. 16

20 8.6 The Engineering and Operating Committee and the Audit Committee shall keep written minutes and records of all meetings and all actions, agreements or determinations made by such committee shall be reduced to writing and shall be signed by a representative of each Party on said committee or an authorized alternate. 8.7 The Engineering and Operating Committee and Audit Committee shall have no authority to modify any of the terms, covenants or conditions of this Agreement except as specifically authorized herein. 8.8 If the Engineering and Operating Committee fails to reach agreement while performing the functions and duties delegated to it in this Agreement, then such disagreement shall be resolved pursuant to the provisions of Section 26 hereof other than referral to the Engineering and Operating Committee meeting. The Project Manager(s) or the Operating Agent, as appropriate, shall take such action as in its discretion is necessary, pending the resolution of any such inability or failure to agree, for the successful and proper construction, operation and maintenance of the Palo Verde - Morgan 500kV Transmission Project as contemplated hereby. 8.9 If the Audit Committee fails to reach agreement while performing the functions and duties delegated to it in this Agreement, then such disagreement shall be referred to the Engineering and Operating Committee. The Project Manager(s) or the Operating Agent, as appropriate, shall take such action as in its discretion is necessary, pending the resolution of any such inability or failure to agree, for the successful and proper construction, operation and maintenance of the Palo Verde - Morgan 500kV Transmission Project as contemplated hereby Each Party shall notify the other Parties promptly in writing of any change in the designation of its representatives on the Engineering and Operating Committee and Audit Committee. A Party may designate an alternate to act as its representative on such Committee in the absence of the regular member or to act on specified occasions with respect to specified matters. Any alternate representative appearing at an Engineering and Operating Committee or Audit Committee meeting shall be deemed to have authority to act on behalf of the Party he or she represents unless the Committee chairman is furnished with written notice to the contrary The Parties jointly shall have the right to establish standing or ad hoc committees. The authority and duties of any such committee shall be set forth in writing by the Parties and shall be subject to the provisions of this Agreement Any reasonable expenses incurred by any member of the Engineering and Operating Committee, Audit Committee or any standing or ad hoc committees in connection with his or her duties on such committee shall be paid and borne by the Party which he or she represents and shall not be included in Construction Costs, Operating Costs or Capital Improvement Costs. 17

21 9 Construction of Facilities. 9.1 APS will serve as Project Manager ( Project Manager ) for all construction activities associated with the Palo Verde - Morgan 500kV Transmission Project, unless and until removed as Project Manager pursuant to Section 27 hereof, which shall include, but not be limited to, performing or causing to be performed the following: Siting work for the Palo Verde Sun Valley 500kV transmission project, Sun Valley Morgan 500kV transmission project Subject to Section , planning, designing, acquiring, constructing, installing and equipping all facilities and equipment necessary to develop and place into operation the Palo Verde - Morgan 500kV Transmission Project Negotiation and execution of an agreement for the interconnection of the Palo Verde Morgan 500 kv Transmission Project into the Morgan 500/230 kv Substation and into the Palo Verde 500 kv Switchyard to be signed by all Parties. 9.2 APS will serve as Project Manager for Palo Verde - Morgan 500kV Transmission Project engineering and Construction Work, which shall include, but not be limited to, performing or causing to be performed, planning, designing, acquiring, constructing, installing and equipping all facilities and equipment necessary to develop and place the Palo Verde - Morgan 500kV Transmission Project into operation. 9.3 The Project Manager shall be solely responsible for performing, or causing to be performed, the Construction Work necessary to terminate the Palo Verde - Morgan 500kV Transmission Project at the Morgan Substation. The Parties shall cooperate with each other in effecting this termination. 9.4 The Project Manager shall on behalf of the Parties: Negotiate and enter into any engineering and Construction Agreement, and purchase and procure such equipment, apparatus, machinery, materials, tools, supplies and services necessary or useful for the performance and completion of the Construction Work. The Project Manager shall cause any critical and major Construction Agreements to contain provisions that require (i) pro-ration of total contract cost in the case of early contract cancellation and (ii) payment of damages in the case of a contractor s non-performance. 18

22 9.4.2 Execute, perform and enforce all Construction Agreements in the name of the Project Manager, acting on behalf of the Parties, in which all Parties shall have undivided interests as tenants in common equal to their respective Cost Responsibility Ratios in each Component Furnish any other Party upon request with copies of all Construction Agreements. The Project Manager shall ensure that the Construction Agreement allows provision of such Construction Agreement to any Party requesting a copy; provided, that any such Party shall agree to comply with the terms of such confidentiality restrictions, except as otherwise required by law. The Project Manager shall include in such confidentiality provisions an acknowledgment by the contractor that, as political subdivisions of the State of Arizona, CAWCD and SRP may be subject to certain disclosure requirements under the Arizona public records law (A.R.S , et seq.) Arrange for placement and maintenance of Construction Insurance pursuant to Sections 20 and 21 hereof Determine which contractors, if any, shall be required to furnish any portion of the Construction Insurance, other insurance and/or performance and/or payment bonds Assist any insurer in the investigation, adjustment and settlement of any loss or claim covered by Construction Insurance Present and prosecute claims against insurers and indemnitors providing Construction Insurance or indemnities with respect to any loss of or damage to any property comprising the Palo Verde - Morgan 500kV Transmission Project or liability of any Party to third parties covered by Construction Insurance or indemnity agreement, and to the extent that any such loss or damage is not covered by Construction Insurance, present and prosecute claims therefore against any parties who may be liable therefore. In the event the cost of repair, replacement or correction of such loss or damage arising out of a single incident or event exceeds $1,000,000, the Project Manager shall not make any settlement of any claims in respect thereof without the written consent and approval of the Parties Subject to the provisions of Section 23 hereof and except as hereinafter provided in this Section 9.4.8, investigate, adjust, defend and settle third party claims against any or all Parties arising out of or attributable to Construction Work, or the past 19