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Long-term service agreements for gas turbines are gaining

favor in the tight turbine market, but facility owners must
carefully negotiate price and coverage to arrive at an
acceptable risk-reward position.

Long-term service agreements - a.k.a. maintenance

agreements, maintenance service agreements, service
contracts, maintenance programs, and various other
designations - are gaining favor as a risk management tool
for the growing fleet of installed gas turbines, especially in
the large power generation market. Siemens-Westinghouse,
for example, expects a 2,070 percent increase in the
number of units covered by long-term service programs,
from 10 in 1998-99 to 217 by 2004. By transferring agreed
risk to the OEM or other provider, LTSAs offer turbine
owners a mechanism for controlling maintenance costs and
maximizing turbine reliability while minimizing the need for
internal resources to manage and perform turbine

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maintenance. The peace of mind is comforting, but it

doesn't come for free, and turbine owners must exercise
care in negotiating a fair price.

LTSAs typically cover parts, parts repair and labor for a

range of planned gas turbine maintenance and inspection
activities over a set period of time or set number of major
outages. Diagnostic and technical support can be included,
along with discounts on unplanned maintenance work if
desired. The LTSA may or may not cover the generator and
the turbine instrumentation. LTSAs are available from the
OEMs (GE, Siemens-Westinghouse, ALSTOM, etc.) and
from certain third-party providers for most frame and
aeroderivative engine models, although only the OEMs
currently offer LTSAs for the newer F, G and H-class
turbines.

Non-OEM gas turbine service and maintenance companies

are spreading their wings into the LTSA side of the
business, primarily with the older, established turbine
models, but with eyes on the more advanced models as
well. One item limiting - at least for the time being - the non-
OEMs' ability to develop LTSAs for the advanced gas
turbine models is their lack of support services for the
directionally solidified and single crystal blades used in
these machines. The choke point is the casting houses and
how quickly the non-OEMs can establish working
relationships that will guarantee timely, effective repair and
supply of advanced blading.

Parts supply is a hot-button issue with respect to LTSAs. As

part of a panel session at Turbo Expo in New Orleans in
June, Ed Sundheim, Manager of International Operations
with GPU Power, outlined some of the key issues turbine
owners must consider in relation to spare parts. First and
foremost, make sure that vendors have sufficient spare
parts; GPU has encountered some problems getting parts,
particularly for the F-class machines. Second, specify who
is supplying the parts - the OEM or a third-party vendor.
Third, review the warranty to determine if parts used in both
preventive maintenance and unscheduled maintenance
activities are covered; the warrantees in some LTSAs are
only applicable to preventive maintenance parts. Fourth,
specify whether only original parts are acceptable or if

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replacement parts can be used. Fifth, for tax reasons,

determine who owns the parts stored on-site. Finally, if the
LTSA covers multiple units, determine if the amount of parts
indicated in the agreement can be refurbished in time to
meet all of the units' scheduled overhauls.

While access to an adequate supply of spare parts is critical

for today's turbine owners, just as important is the price of
these parts. "At gas turbine power plants, major
maintenance accounts for 50-80 percent of lifetime
maintenance expenses," says Mark Voss, Vice President of
Operations with Dynegy Inc. "And of that total, 80 percent or
more is for parts." Dynegy has negotiated a long term
(20+year) Long Term Maintenance Program (LTMP) with
Siemens Westinghouse Power Corp. (SWPC) for the 40
plus 501F gas turbines it purchased in 1999/2000. While the
length of the agreement may seem to prevent Dynegy from
capitalizing on future part price reductions, Dynegy has
built-in protection to ensure their competitive market
position.

Because of the current high cost for spare parts, now may
not be the best time to be signing long-term contracts, and a
plant should always be on the lookout for alternative parts
suppliers. "Why sign a 12-year contract with an escalator
clause when parts prices will likely drop?" asks Grady
Blakley, senior vice president of operations and engineering
with El Paso Merchant Energy. El Paso, which expects
third-party F-class parts will be available within three years,
uses a mix of OEMs, third-party vendors and internal
maintenance capabilities to optimize maintenance costs for
its fleet of turbines.

LTSAs can be tailored depending on the level of risk an

owner wishes to take on, its in-house technical expertise,
and the age, condition, configuration and dispatch of the
affected gas turbine(s). At Northland Power, an independent
power producer based in Toronto, Canada, for example,
although both its Kirkland Lake and Cochrane power plants
are equipped with GE LM2500s, the LTSA in place at
Cochrane has a slightly higher premium because the PH-
model LM2500 turbine is steam-injected, representing a
more complex maintenance profile than the dry PE-model
LM2500 turbines at Kirkland Lake.

Panda negotiated a unique LTSA for the 40 7FA gas

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turbines it has rights to purchase from GE (four have been

delivered, 20 are under specific purchase order for delivery
in the next year-and-a-half, 16 have not been purchased
yet). "Because of the higher firing temperatures and
technical complexities associated with the F-class turbines,
we wanted guaranteed access to the parts and expertise
needed to keep our units operational," says Don Thorpe,
Vice President - Operations with Panda Energy
International. "But our LTSA with GE only includes technical
direction, parts and refurbishment of parts. Labor is not
included other than an on-site GE engineer at each plant
location and a dedicated engineer at our corporate office.
We believe we can handle the labor aspects of the planned
maintenance activities as effectively as GE could, either
with our own resources or by contracting with third-party
vendors."

LTSAs are priced in various ways, including per fired hour,

per start, per planned maintenance event and per calendar
year. Entergy, for example, prices LTSA contracts for
combined-cycle units based on factored fired hours, while
simple-cycle units are based on the number of factored
starts. LTSAs can also be priced on a $/MWh basis, as is
the LM6000 at Northland Power's Iroquois Falls plant.
Panda's LTSAs are priced based on the completion of
planned maintenance outages, including two major
inspections at 48,000 and 96,000 hours, which should carry
the agreement through at least 12 years of operation.

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"Early LTSAs in many cases provided a fixed cost to

perform maintenance based on an assumption of a unit
operating at a high capacity factor," says Dallas Tharpe,
Director of Asset Development with Entergy. "As has been
found in most markets, there can be a change from initial
projected capacity factors to actual. For this reason, LTSAs
must have the ability to consider the effects of both hours
and starts to allow adjustments as market conditions
change."

In determining an acceptable LTSA price, turbine owners

must weigh the cost of managing a self-directed
maintenance program against the cost of the LTSA,
recognizing that the results of this analysis will depend on a
comparison of in-house resources and expertise against the
real ability of the LTSA provider to do the work in the field.
The turbine owner with a large portfolio of gas turbines can
probably negotiate a lower price than an independent
developer with little operating experience. Figure 1
illustrates how an owner and LTSA provider might represent
their costs and arrive at a mutually agreed price. The LTSA
provider, with a fleet of turbines and wholesale-like costs,
should have a lower standard deviation than the self-
managed owner, which must allow for a variation from the
norm to account for unscheduled outages. The differential
between the LTSA provider's cost and those of the turbine

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owner becomes the area of price negotiation.

One key point in this discussion is that, although the

supplier may have a "fleet of gas turbines," it is a fleet under
contract with a service provider who, while experienced at
building turbines, may lack operating experience. "The
LTSA provider is not normally the operator and can easily
miss the interaction between operational decisions and
long-term maintenance costs," says Terry Morgan of Terry
Morgan and Associates LLC, which has experience in LTSA
negotiations for gas turbines and compressor trains. "The
LTSA typically compensates by mandating frequent
inspections, which helps reliability, but hurts availability. This
can be an issue in the oil and gas business, where spare
power is not normally provided. Availability is all that
matters, which requires LTSAs in the oil and gas industry to
be carefully crafted; typically very long-term (to level the risk
of unknown machinery condition and early forced outages);
and often written to include entire field operations, not just
machinery, to further optimize risk and reward
opportunities."

Leverage plays a significant role in LTSA price negotiations.

Dynegy, for example, benefited in its negotiations with
Siemens Westinghouse from extensive gas turbine
operating experience, preliminary reverse engineering
efforts, and by consolidating its LTMP into a fleet agreement

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covering the 40 plus 501F turbines Dynegy purchased from

SWPC.

Calpine, on its way toward building one of the world's

largest fleets of advanced gas turbines, is obviously
planning to exercise leverage on parts and maintenance
costs through its recent purchase of Power Systems
Manufacturing (PSM). PSM is being positioned not only to
provide replacement parts for Calpine turbines, but also to
design and engineer new parts for future turbines.

While there are dozens of items to consider in negotiating

an LTSA (see sidebar), the most important is carefully
defining the contract "scope," which spells out what is and
isn't included. Turbine owners should be aware that LTSAs
typically only cover maintenance items within the defined
scope, such as periodic inspections, repair and overhauls.
Corrective maintenance associated with forced outages and
other unplanned events entails additional expense. There is
some flexibility here, though. Dynegy, for example, has the
right to contract with a third-party vendor for forced outage
maintenance and repair work if SWPC can't deliver within a
defined time period, according to Voss.

Potentially unrecognized, yet possibly most important, is the

win-win relationship that Dynegy formed with SWPC. Voss
noted, "If technical issues arise with any part of the gas
turbines, we need to be able to find solutions as quickly as
possible. This LTMP establishes the team to lead the effort
in solving issues, and provides a willing resource network to
support the effort. Although difficult to measure in dollars,
this relationship will be valuable in maintaining reliable,
efficient, cost-effective machines."

Although maintenance activities within an LTSA are mostly

pre-defined and scheduled, non-scope activities are
acceptable in certain instances. The OEM, for example,
may be more comfortable making aggressive maintenance-
related decisions than the turbine owner. "GE ran one
LM2500 high-pressure gas turbine to about 31,000 hours"
before a major overhaul, says Northland Power's David
Dougall, General Manager, Operations. "We never would
have run it past 25,000 hours." Dynegy worked with SWPC
to approve an inlet fogging system for use on its turbines

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even though SWPC specified evaporative cooling as the

standard package.

Bonus and penalty clauses can be structured into LTSAs,

but not everyone is convinced they're needed or worthwhile.
"Our LTSA doesn't have any bonus or penalty provisions,"
says Panda's Thorpe. "We believe the bonus provisions
would potentially eat into our profit, and the penalty
provisions were not necessary since our LTSA only covers
planned maintenance activities, excluding labor."

One unintended consequence of the trend toward LTSAs is

their impact on gas turbine insurance policies. The
insurance industry views LTSAs as the high-price provider,
according to Rodger Anderson, Manager and Director of
Gas Turbine and Power Plant Technology with Hartford
Steam Boiler Inspection and Insurance, resulting in higher
premiums and deductibles since the underwriters are now
locked into what they consider higher-priced instruments.
Further, "the underwriter is left holding the bag when an
OEM and turbine owner agree to extend the time between
engine overhauls," says Anderson. "While the OEM and
turbine owner are able to share in the upside benefits
associated with delayed maintenance and additional
revenue-generating opportunities, the underwriter is not. If
the underwriters are not permitted to share in the upside of
these types of scenarios, they may consider canceling or
modifying insurance policies where LTSAs are
implemented."

Gauging the demonstrated value of an LTSA is not a simple

matter, primarily because it is impossible to know if, when,
and how significant an unforced outage might be. A rough
estimate of potential savings can be made by examining
avoided costs. "Two years ago, when we looked at what our
cost would have been over the past few years if we were
just dealing with individual depots each time we needed gas
turbine work, we estimated that we were better off with the
GE maintenance agreements," says Dougall. "The
calculation is complicated because we have had fewer
unscheduled engine removals since we started the
maintenance agreement. This might be chance, or it might
be a result of GE's routine 2,000-hour inspections and GE's
intimate knowledge of the maintenance requirements."

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While LTSAS are often plugged as a "win-win" arrangement,

there is an inherent tension at work. The turbine owner
seeks to optimize reliability and availability in order to
maximize revenue generating potential, while the LTSA
provider seeks to stay within the contracted scope of work in
order to maximize margin. This doesn't equate to an
adversarial relationship, but owners must be diligent in
maintaining focus on optimizing the performance and value
of its machines. "We have had to prompt GE about
performance issues, especially if the performance is
undesirable to us but falls within the windows allowed by the
maintenance agreement," says Dougall. "The caution,
therefore, is that gas turbine owners must maintain a certain
level of technical expertise to ensure that the LTSA provider
continuously delivers optimal gas turbine performance."

The turbine owner also may need to closely monitor efforts

by the LTSA provider to "test" alternate maintenance
practices to ensure they have previously been proved on a
fleet-wide basis. "The structure of an LTSA drives the
vendor supplying the program to experiment with advances
in turbine maintenance philosophies to extend part life
between repair or replacement, and thus reduce his cost to
perform the program he has contracted to provide," says
Entergy's Tharpe.

It is important to remember that LTSAs are still in their

developmental infancy, at least with respect to their large-
scale application to the huge number of advanced F and G
class turbines that have come on-line in the last decade and
will come on-line in the next five to ten years. Their true
value, therefore, won't be known for some time. One gas
turbine repair specialist questions the OEMs' ability to
support the level of service guaranteed in the LTSAs, and
believes litigation of gas turbine LTSAs will become rather
commonplace in five years.

Labor availability will require close evaluation in the coming

years. Between the commissioning of new units and
adhering to the inspection schedules of installed units, it
may be difficult for the OEMs and third-party vendors to find
sufficient qualified labor beginning in 2002, according to
Dynegy's Voss.

Only time will tell if these dire warnings are accurate or not,

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but they highlight the importance of spelling out precise

rules for dispute resolution and compensation.

LTSAs represent another arrow in the quiver of generation

owners seeking flexible risk mitigation tools. If not used
properly, however, this arrow can prove dangerous to the
owner as well.

Northland Power has LTSAs in place at three of its plants,

including the Kirkland Lake facility in Ontario, Canada.
Photo courtesy of Northland Power Inc.

Entergy is nearing completion of the 300 MW Warren Power

Project in Vicksburg, Mississippi. Entergy negotiated a long-
term service agreement with GE Power Systems for the
simple-cycle facility, which will use four 7EA gas turbines.
Photo courtesy of Entergy.

Scope

Parts

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Performance

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Ancillary Services

Terms and Conditions

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Special Considerations for Aeroderivatives

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Miscellaneous

Source: Compiled by Ed Sundheim, GPU Power

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