REPORT TO THE CHIEF ADMINISTRATIVE OFFICER FROM THE DEVELOPMENT AND ENGINEERING SERVICES DEPARTMENT COMPRESSED NATURAL GAS TRANSIT FLEET UPDATE

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1 September 7, 2016 REPORT TO THE CHIEF ADMINISTRATIVE OFFICER FROM THE DEVELOPMENT AND ENGINEERING SERVICES DEPARTMENT ON COMPRESSED NATURAL GAS TRANSIT FLEET UPDATE PURPOSE To update Council on Kamloops Transit's compressed natural gas (CNG) fleet operations, including reviewing the 2013 CNG Transit Fleet business case, and to seek Council's authorization to proceed with replacing Kamloops Transit's remaining conventional with CNG buses. SUMMARY In June 2015, the City replaced 25 of Kamloops Transit's heavy-duty diesel transit buses with CNG buses. Despite lower-than-anticipated diesel prices, the CNG buses have continued to operate at a lower net cost than their diesel counterparts. The operational savings from the first year of running the 25 new CNG buses completely offset the initial increase in debt service fees. The switch to CNG buses has achieved payback for the City in year one, much quicker than the four year payback period projected in the 2013 business case. Based on the success of the Nanaimo and Kamloops CNG pilot programs, BC Transit is expanding the percentage of CNG buses in the provincial fleet program and has advised the City that BC Transit wishes to replace the remaining 19 diesel buses in the Kamloops fleet with new CNG buses. This means that all 44 heavy-duty buses in the Kamloops fleet will be CNG buses by as early as July RECOMMENDATION: That Council: a) Accept the Kamloops Transit compressed natural gas (CNG) fleet update for information; and b) Authorize staff to work with BC Transit to proceed with replacing the remaining 19 conventional buses with CNG buses. COUNCIL POLICY There is no applicable Council policy.

2 COMPRESSED NATURAL GAS TRANSIT FLEET UPDATE September 7, 2016 Page 2 DISCUSSION 2013 Business Case In 2013, BC Transit offered the City the opportunity to replace a portion of its 44 diesel bus conventional transit fleet with a fleet of 25 CNG buses in The construction of a fast-fill fueling station was required to operate the CNG fleet. The project replaced 25 conventional buses prior to the previously scheduled replacement of 30 buses between the operational years of and The capital cost for the fast-fill fueling station and vehicle replacement is being paid as a debt service fee to BC Transit. The 2013 business case indicated that the increase in debt service fees would be more than the operational savings in each of the first two years of operations. In the third year of operation, and for every year thereafter, the operational savings would exceed the debt service fee increase. Staff prepared the 2013 business case to assess the impacts of the proposed CNG fleet. In consultation with BC Transit, the most likely scenario was determined to be that each bus would run 55,000 km/year, diesel prices would increase 5% annually (forecasted as $1.37/L in 2015), and CNG prices would increase 2% annually (forecasted as $8.47/gigajoule [GJ] in 2015). The 2013 business case indicated that the greatest variable is the price of diesel, regardless of the CNG price or kilometres traveled. The 2013 business case projected that operational savings would come from the relative cost of CNG buses compared to diesel. The 2013 business case indicated that operational fuel savings from the early replacement of 25 diesel buses with CNG buses would offset the initial increase in the City's debt service fees within four years. Although the City anticipated incurring initial increased costs to acquire the new fleet of CNG buses, staff expected to have spent less overall on the CNG option by 2019, with anticipated net savings accumulating every year thereafter. Council authorized the commitment to the project in November Update on CNG Fleet Operations The fast-fill fueling station was constructed, and 25 CNG buses have been in full operation since June All of the capital investments required to make the fleet conversion have been completed, and the initial impacts on the debt service fees are now known. Operating costs from the first year of operating CNG buses in Kamloops are now also known. Staff reviewed the 2013 business case and updated the analysis to determine if the 2013 business case's projections held true. The following list identifies how the values for some of the key projections in the 2013 business case were different than the actual values: Diesel was projected to be $1.37/L, but the average diesel price was $0.83/L. The natural gas rate, including distribution costs, was projected to be $8.47/GJ, but the average natural gas price was $9.36/GJ. The CNG fleet maintenance costs were estimated to be $0.79/km, but averaged approximately $0.30/km.

3 COMPRESSED NATURAL GAS TRANSIT FLEET UPDATE September 7, 2016 Page 3 The capital costs for the fast-fill fueling station and to purchase the CNG buses were essentially as expected, but were offset by a $600,000 FortisBC grant, which had been conservatively excluded from debt service fee calculations. BC Transit has committed to changing its lease fee structure beginning April 2017, which was not anticipated at the time of the 2013 business case. The first two list items on the list, the cost of diesel and natural gas, negatively impact the business case analysis, meaning it would take longer to recover the initial investment; however, the last three items on the list are beneficial to cost recovery. Other 2013 business case analysis projections were held the same. The CNG buses are proving to be more cost-effective than their diesel counterparts, even with the unexpected low price of diesel fuel. The analysis indicates that operational fuel savings from the 25 new CNG buses actually offset the initial increase in debt service fees within the first year of operation, two years faster than predicted in the 2013 business case. The move to CNG buses has already resulted in a net financial savings for the City, much quicker than the four-year payback period predicted in the 2013 business case. Estimated Difference in Net Municipal Costs (Costs without 25 CNG Buses minus Costs with 25 CNG Buses) 2015/ / / / Business Case $160,322 $108,616 $(71,655) $(222,706) Updated Analysis $(19,118) $(53,149) $(177,485) $(198,456) Implementation of Additional CNG Buses Based on the success of the Nanaimo and Kamloops CNG pilot programs, BC Transit is expanding the percentage of CNG buses in the provincial fleet program and has advised the City that BC Transit wishes to replace the remaining 19 diesel buses in the Kamloops fleet with new CNG buses. This means that all 44 heavy-duty buses in the Kamloops fleet will be CNG buses by as early as July To meet these target dates, BC Transit will be ordering the new buses in September Converting the remaining fleet to CNG buses means that the heavy-duty fleet in Kamloops will consist of newer buses across the board. The newer buses are pre-equipped with technologies that set Kamloops Transit up as a prime location to implement other future initiatives. For example, all CNG buses come equipped with on board cameras. The CNG fast-fill fueling station has the capacity for the additional buses, and BC Transit believes that no new infrastructure will be required. Also, BC Transit has committed to changing its lease fee structure to a standardized lease fee (SLF) model. With the SLF in place for the operating year , there is no anticipated difference in the debt service fees charged by BC Transit for diesel versus CNG buses. The initial upfront increase in debt service fees the City experienced when implementing the first 25 CNG buses in Kamloops will not occur this time around.

4 COMPRESSED NATURAL GAS TRANSIT FLEET UPDATE September 7, 2016 Page 4 There are no other CNG fast-fill fueling stations in Kamloops or the surrounding area. If the remaining heavy-duty diesel buses are replaced with CNG buses, there would be a higher consequence if the CNG fueling station service was interrupted. City staff are currently working with BC Transit to create a business continuity plan that will ensure transit service can be continued in this type of scenario. Additional details on the implementation of additional CNG buses in Kamloops are provided in a letter from BC Transit dated August 31, 2016 (Attachment "A"). ALTERNATIVES/OPTIONS If Council does not support the plans proposed by BC Transit, notice should be sent to BC Transit immediately. FINANCIAL IMPLICATIONS The replacement of the remaining 19 heavy-duty diesel buses with CNG buses is projected to result in an operational cost savings to the City of approximately $290,000 in These anticipated savings will be incorporated in the 2017 budget process to offset other potential common increases for items such as wages, fuel, parts, or expansion hours. M. Kwiatkowski, P.Eng. Development and Engineering Services Director Approved for Council Consideration: Author: M. Beaulieu, P.Eng., Assistant Transportation Engineer Reviewed by: D. Matkowski, P.Eng., Engineering Manager MB/dla/ts Attachment

5 Attachment "A" August 31, 2016 Deven Matkowski Engineering Manager City of Kamloops Re: Implementation of Additional Compressed Natural Gas Buses in Kamloops Dear Deven, Thank you for your letter of August 3, 2016 addressed to Mr. Pizarro regarding the announcement for additional compressed natural gas (CNG) vehicles in Kamloops. We too share your excitement about the investment in new vehicles and technology for the Kamloops Transit System. Having participated in the pilot program with 25 CNG vehicles, you can attest to the benefits of this technology. As you referenced in your letter, BC Transit supported the City in the preparation of a business case. This was very important for BC Transit to have understanding and alignment established with the City as we entered a pilot program of 50 CNG vehicles located in Kamloops and Nanaimo. Recognizing there was an investment in fueling infrastructure on behalf of the City, one of the key purposes of the pilot program was to validate the operational and financial benefits of this propulsion technology. It was important we entered into this program with clear alignment with our partner. With now well over a year of detailed operational data, BC Transit is confident CNG vehicles will form an increasingly greater percentage of the overall provincial fleet program. The benefits, combined with a clear emphasis of the province to invest in such technology, are such that BC Transit will focus on introducing these vehicles throughout the province where possible. Since no additional investment in infrastructure is required, Kamloops will be one of the first communities to benefit from the additional investment in new CNG vehicles arriving early in One additional benefit Kamloops can expect to see with the introduction of additional CNG buses relates to the recent move to a standardized lease fee (SLF) model in 2017/18. Under this model, the City will see an overall decrease in operating costs as the number of CNG buses increases compared to diesel-fueled buses. I acknowledge and appreciate your concern regarding business continuity risk related to increasing reliance on CNG. As the authority responsible for ensuring the safe and reliable delivery of service throughout the province, we are aware of the inherent risks of a fleet composed by only CNG vehicles. I assure you that the establishment of business continuity plans for each system reliant upon CNG is one of BC Transit s corporate priorities. Among the benefits of the provincial fleet plan is our ability to draw upon resources from throughout the province combining for close to 1,100 vehicles. We have been able to call upon these resources to successfully address critical incidents in a very timely manner to mitigate, and in

6 the majority of cases prevent, any disruption to service. For Kamloops, this plan will be in place before the new CNG vehicles go into service and will be completed in collaboration with City staff. Our partnership with local government staff and elected officials is vital to the success of service provision in your community. Therefore, it is important we are able to address any questions or concerns you have with this direction so we may have alignment on the benefits to your community. If I can be of any further assistance on this or any other matter related to transit in your community, please don t hesitate to contact me. I look forward to working with you to introduce BC Transit s second all CNG conventional fleet in Kamloops. Sincerely, Kevin Schubert Director, Regional Transit Systems Cc: Marvin Kwiatkowski, Development and Engineering Services Director Daniel Pizarro, Senior Regional Transit Manager