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HomeMy WebLinkAbout2015-11-04 Utilities Advisory Commission Agenda Packet NOTICE IS POSTED IN ACCORDANCE WITH GOVERNMENT CODE SECTION 54954.2(a) OR 54956 I. ROLL CALL II. ORAL COMMUNICATIONS Members of the public are invited to address the Commission on any subject not on the agenda. A reasonable time restriction may be imposed at the discretion of the Chair. State law generally precludes the UAC from discussing or acting upon any topic initially presented during oral communication. III. APPROVAL OF THE MINUTES Approval of the Minutes of the Utilities Advisory Commission Meeting held on October 7, 2015 IV. AGENDA REVIEW AND REVISIONS V. REPORTS FROM COMMISSIONER MEETINGS/EVENTS VI. DIRECTOR OF UTILITIES REPORT VII. UNFINISHED BUSINESS None. VIII. NEW BUSINESS 1. Staff Recommendation that the Utilities Advisory Commission Recommend that the City Action Council Approve Design Guidelines for the Net Energy Metering Successor Program 2. Selection of Potential Topic(s) for Discussion at Future UAC Meeting Action 3. Update and Discussion on Impacts of Statewide Drought on Water and Hydroelectric Discussion Supplies IX. COMMISSIONER COMMENTS X. NEXT SCHEDULED MEETING: December 2, 2015 INFORMATIONAL REPORTS - A complete list of informational reports provided to the UAC can be viewed at http://www.cityofpaloalto.org/gov/boards/uac/reports.asp?code=CAPALO_8 and at City Hall, 3rd Floor, Utilities Administration office. Information reports cannot be discussed during UAC meetings, in compliance with Govt. Code Section 54954.2(a)(2 UTILITIES ADVISORY COMMISSION WEDNESDAY, NOVEMBER 4, 2015 – 7:00 P.M. COUNCIL CHAMBERS Palo Alto City Hall – 250 Hamilton Avenue Chairman: Jonathan Foster  Vice Chair: James F. Cook:  Commissioners: Arne Ballantine, Michael Danaher, Steve Eglash, Garth Hall, and Judith Schwartz  Council Liaison: Gregory Scharff Utilities Advisory Commission Minutes Approved on: Page 1 of 11 UTILITIES ADVISORY COMMISSION MEETING MINUTES OF OCTOBER 7, 2015 CALL TO ORDER Chair Foster called to order at 7:05 p.m. the meeting of the Utilities Advisory Commission (UAC). Present: Commissioners Ballantine, Cook, Danaher, Eglash, Chair Foster, Hall, and Schwartz. Absent: Council Liaison Scharff ORAL COMMUNICATIONS None. APPROVAL OF THE MINUTES Director Fong advised that corrections to the September 2, 2015 UAC meeting minutes were submitted with the proposed changes indicated by underscored bold face italic type as follows: "Herb Borock recognized the importance of data and is glad that in this report is the recognition that the City should be doing data, while getting video and telephone “over-the-top”. He does not agree with CTC’s recommendation to provide active Ethernet to small businesses, instead it should be targeting homes. Providing active Ethernet to small businesses may cannibalize the existing “value added resellers” currently licensing dark fiber from the City. Google hired CTC to conduct a study on streamlining cities processes. Herb does not agree with a partnership model. The City should not use the Fiber Fund to pay for drop cables and customer premises equipment. Customers can pay for home connections. Active Ethernet is better than GPON for residents. A wireless survey was recently conducted and less than 10% of respondents thought it was important for the City to provide Wi -Fi service at local parks." Commissioner Eglash moved to approve the minutes from the August 5, 2015 UAC meeting as modified with the changes submitted and Vice Chair Cook seconded the motion. The motion carried unanimously (7-0 with Commissioners Ballantine, Cook, Danaher, Eglash, Hall, Foster and Schwartz voting yes). AGENDA REVIEW AND REVISIONS None. DRAFT Utilities Advisory Commission Minutes Approved on: Page 2 of 11 REPORTS FROM COMMISSION MEETING/EVENTS Commissioner Schwartz said that she put together the program for smart cities week in Washington, DC in September. She taped ones that she felt would be interesting to others on the UAC and will pass those along through Director Fong. She found interesting the items on the internet of things particularly interesting. She said she will make some introductions to staff since we can learn from them. Chair Foster asked if anyone would be att ending the Silicon Valley Leadership Group’s The 2015 Grid of the Future Summit in November, but no commissioner indicated they planned to attend. UTILITIES DIRECTOR REPORT 1. Communications  City Aid to Fire Victims: Last month, the City dispatched an electric utility crew to the Northern California wildland fire area to assist with power restoration efforts at NCPA facilities. Fire crews were also deployed for aid. We thank our staff for their service!  Tree Care During the Drought: The City is working with Canopy and others in the community to inform customers about the City’s efforts to increase public and street tree watering, as well as encourage people to continue watering their own trees. Great resources can be found at cityofpaloalto.org/water 2. Marketing Services Update  PaloAltoGreen Gas: Close to 950 customers are now enrolled in our voluntary natural gas carbon emissions offset program.  Peninsula SunShares Program Wrap-Up: Throughout the Bay Area, almost 1,100 community members registered for this solar group-buy program. The potential renewable energy capacity is approximately equivalent to the carbon sequestered by over 13,000 acres of forest in one year, or the annual greenhouse gas emissions from more than 3,400 passenger vehicles. Palo Alto made up 28% of the total program participation, with 294 residents requesting proposals and of those, 54 signed contracts for a total solar capacity of 236 kilowatts. 3. Quarterly Report  In your packet, the final quarterly report for Fiscal Year 2015 includes operational reliability measures as well as financial summaries for the fiscal year. The quarterly report also provides an update on state legislation as of the end of the 2015 legislative session. Many of the bills that passed are now awaiting the gov ernor’s signature. 4. Events, Workshops and Speaking Engagements  Staff provided several presentations this past month about drought conditions and water resources to businesses, residents and college students.  The City hosted two workshops on water-efficient landscaping during a drought, rainwater and graywater reuse. Utilities Advisory Commission Minutes Approved on: Page 3 of 11  Two additional landscape workshops are scheduled for October, including one this Saturday, and a hands-on planting event at City Hall later in the month. Details at cityofpaloalto.org/workshops UNFINISHED BUSINESS None. NEW BUSINESS ITEM 1: ACTION: Update on the Implementation of the Local Solar Plan and Recommendation to End the PV Partners Program, as Planned, Once the State Legislative Requirements set Forth in the California Million Solar Roofs Bill Have Been Fulfilled Resource Planner Aimee Bailey provided a summary of the written report. Bailey reviewed the Local Solar Plan, which has a goal of generating energy from local solar photovoltaic (PV) systems to account for 4% of the City's needs by 2023. She mentioned the achievements to date including publishing a solar technical potential assessment, participating in the group buy (Peninsula SunShares) program, and expanding the Palo Alto CLEAN (feed -in tariff) program. Bailey stated that the PV Partners Program began in 1999 and funding was expanded in 2006 in compliance with the Million Solar Roofs Act (Senate Bill 1, or SB1) in 2006. She noted that all the rebate funds for the program were reserved for residential customers in Augu st 2014 and that there are limited remaining funds for commercial customers. Bailey said that the program would end when the funding requirements from SB1 were completed, however the Finance Committee asked that staff examine options to continue rebates for residential customers. Commissioner Schwartz asked if there were other methods to lower the cost of solar and asked if staff has projected the costs after the Investment Tax Credit (ITC) was reduced in December 2016. Bailey responded that the solar group-buy program is one way in which lowering the cost of solar can be achieved, and that a solar market and economic potential assessment that is currently underway indicates that even with the reduced ITC, Palo Alto would still be able to achieve the Local Solar Plan goal. Commissioner Danaher said that he was in favor of the most carbon reduction for the least cost and so he fully supports staff's recommendation. Vice Chair Cook noted that the Finance Committee asked that options be evaluated. He aske d what alternatives were examined by staff. Bailey pointed to the discussion of the alternatives examined on page 10 of the written report. Vice Chair Cook noted that the report had a section called “Future of PV Partners”, but that there is no future. Bailey stated that the program will continue until all installations are complete and the funds are exhausted from the large systems that are paid for performance over a five year period after installations. Utilities Advisory Commission Minutes Approved on: Page 4 of 11 Commissioner Hall congratulated Bailey for her very efficient presentation. He asked how the unidentified additional solar PV listed in Table 2 of the report will be achieved. Bailey noted that Net Energy Metering (NEM) is a driver in consumers ’ decisions to install PV. Commissioner Hall said that if the goal is 4% solar by 2023, then the 5% NEM limit would not come into play for a long time. Assistant Director Jane Ratchye said that the 4% goal was based on energy usage in megawatt-hours (MWh) per year and the 5% NEM cap was based on peak demand in megawatts (MW). Commissioner Hall said that the timing and names of the different programs under the Local Solar Program are confusing and that staff should provide a holistic review of all the programs, rather than a piecemeal description of one at a time. Ratchye said that staff would not want to hold up one program that is ready to go until all programs are ready to go. Director Fong added that when any programs are undergoing the review process, an update on the other programs under the Local Solar Plan can be provided at the same time. Commissioner Ballantine said that the poor performance of the thermal solar heating program is disappointing. He noted that a recent study by the DOE showed that it could be more cost- effective. He noted that thermal solar water heating is 80% efficient while solar PV is only 20% efficient. He said that he had read an article about a Montana resident who built a thermal solar water heating system that was economic using low-cost materials purchased at a local hardware store. Commissioner Ballantine asked about progress towards the Local Solar Plan goal of 4% of the City’s energy use. He asked if the goal would change as the market changes and cost decline. Bailey mentioned that the existing and planned programs are counted on to reach the goal. Commissioner Ballantine asked if staff has calculated how much solar could be achieved if every resident put solar on their roof. Bailey said that th e solar technical potential analysis referred to in the report has been done and that 300 MW is technically possible if economics are not an issue. The technical potential took into account all roof area in the City that could possibly accommodate solar PV based on roof tilt, aspect and lack of significant shading. Commissioner Schwartz said that an issue for solar PV penetration is n ot just distributed generation, but distributed financing. She asked if staff has done any studies about why, or why not, consumers put solar on their roofs. She asked if staff has done any market segmentation studies to determine what may actually be installed. Bailey said that the next step beyond the technical potential stud y is to conduct the economic and market potential study, which is currently underway. Commissioner Schwartz advised that these decisions are emotional issues, not just economic issues. Commissioner Eglash said that he completely supports staff's recommendation. However, he noted that the written report makes it sound like we have been hugely successful in implementing solar so far and doesn’t make it abundantly clear that we intend to continue encouraging solar in the City even after the PV Partners Program funding runs out. Bailey confirmed that that is the case. Commissioner Eglash noted that the report does not convey clearly to the reader that the City, despite ending PV Partners, CPAU continues to strongly Utilities Advisory Commission Minutes Approved on: Page 5 of 11 promote solar in the City. He suggested that in future reports, we frame the discussion to focus on the past program successes and look toward the Local Solar Plan as the next step for furthering solar generation in Palo Alto. Director Fong thanked Commissioner Eglash for the feedback and ensured that the report to the Finance Committee would be clearer about that. Chair Foster noted that he strongly suppo rts the development of a community solar program since solar is not available to all, especially renters or customers with shaded roofs. He is pleased to see the other programs that are under development. ACTION: Chair Foster moved that the UAC support staff’s recommendation to end the PV Partners program when the legislative mandates from SB1 are fulfilled. Vice Chair Cook seconded the motion. The motion passed unanimously (7-0) with Commissioners Ballantine, Cook, Danaher, Eglash, Foster, Hall and Schwartz voting yes. ITEM 2. DISCUSSION: Conversion of the PaloAltoGreen Gas Program From an Opt-In to an Opt-Out Program Chair Foster noted that this item is on the agenda due to support for the idea expressed from members of the community. Public Comment Sandra Slater commended the commission for keeping sustainability on the agenda. She said that it's time to move the needle now. She noted that research shows that participation will be much higher if the program was converted to an opt-out program. She said that the program could be changed to make the program supportable by all income levels. Converting the program to an opt-out program is something the City could do that would have an immediate, positive impact. Lisa Van Dusen said that the program is not perfect since it is backed by offsets, but we shouldn't let the perfect be the enemy of the good. We could pay even more by purchasing more aggressive offsets. There could be mechanisms to get out of the program during an "amnesty period" and low income customers on the Rate Assistance Program could be retained as opt-in customers. She said that there was so much staff effort for the PaloAltoGreen (electric) program just to achieve 24% participation and that there would be savings from lower marketing and administration costs in an opt-out program. Chair Foster said that the money paid by PaloAltoGreen Gas (PAGG) program participants fund offsets that pay to convert waste into methane that is burned to produce renewable electricity at a dairy farm in Wisconsin and that this wouldn't be done without the revenue from the offsets. Assistant Director Jane Ratchye indicated that this is correct. She said that the offsets that back this program are very high quality as they are selected only from tho se protocols that have been certified for use in the state’s cap -and-trade auction by the California Air Resources Board. One of the requirements of those protocols is that the offset be “additive”, or from a project that would not have been done without the monetary support from the sale of the offsets. Chair Foster said that he supports an opt-out program and that the additional cost is only $5 to $6 per month for the average resident. Utilities Advisory Commission Minutes Approved on: Page 6 of 11 Commissioner Ballantine noted that there are ongoing costs to maintain an anaerobic digester. He said that people who opt-in are causing something real to happen. The greenhouse gas emissions reductions from those sources would not otherwise happen without programs like PAGG. Vice Chair Cook noted that the PaloAltoGreen (PAG) Electric program was effectively converted to cover everyone via the carbon neutral program and was a great way to transfer the new goal. He asked why PAGG was not made an opt-out program originally. Vice Chair Cook added that Community Choice Aggregation (CCA) programs were successful because they were opt - out programs. Ratchye replied that the carbon neutral electric supply is not the same as PAG and that it was not developed as a transition from PAG. She noted that PAG purchased Renewable Energy Certificates (RECs) for 100% of a residential customer’s load at a cost of 1.5 cents/kWh, or about 12% more than the normal electric rate. On the other hand, the carbon neutral electric supplies consist of about half carbon-free hydroelectric supplies, renewable supplies that are eligible under the state’s Renewable Portfolio Standard (RPS) and that RECs are purchased for the balance of the needs. It is expected that by the end of 2016, the City’s RPS will be 57% and with hydro supplies (given a normal hydro year), no RECs will be needed for carbon neutral electric supplies. She said that the state’s new goal for an RPS of 50% would result in carbon neutrality anyway at no additional cost in a normal hydro year. However, the increased cost of PAGG for participants is 12 cents per therm, or about 12% more than the normal gas rate of about $1 per therm. She said that the additional cost for PAGG was a consideration for making the program an opt-in program like PAG when the program was originally conceived. In addition, the program was just launched in January 2015 (and has yet to roll out a comprehensive marketing campaign for the program) and staff was hoping to determine the community’s appetite for the program. Ratchye agreed that CCAs are successful opt-out programs, but that they are generally no more costly than the alternative from the local utility so participants are not paying any extra to be “slammed” into a CCA. Vice Chair Cook said that our rates are allowed to go up with the carbon neutral e lectric supplies and asked what the threshold is for an opt-out versus an opt-in program. Chair Foster replied that the comparison of PAGG to the carbon neutral plan is different —like apples and oranges—since the carbon neutral electric supplies is not an opt-out, or opt-in, program, but is the electric supply for all customers. The percentage increase in cost to electric rate payers by going carbon neutral is small compared to the percentage increase to a customer by paying for participation in PAGG. He said that PAGG should be compared to the PAG electric program. Chair Foster asked if there is any legal reason that City Council could not adopt an opt-out program. Senior Deputy Assistant City Attorney Jessica Mullan said that a legal analysis would have to be completed and the answer may depend on the program design. Utilities Advisory Commission Minutes Approved on: Page 7 of 11 Commissioner Schwartz asked if the point of the program was to reduce gas use or raise revenue. Chair Foster responded that neither of those options is the point, but that the objective is to reduce greenhouse gas (GHG) emissions associated with customers’ gas use. Commissioner Schwartz said that she agreed that more people will do an opt-out program, but that we need to make sure that participants truly want to participate. We need to provide a very easy way for people to opt-out and not be penalized for any of the months they were enrolled if they don’t want to be. A good outreach campaign could be a good way to increase awareness of the issue and it could have an impact of increasing customers’ awareness. She said that the program could be a bridge for people to become more conscious of using energy and would not just be a way to buy ourselves out of the problem. Commissioner Hall suggested that we not act too hastily, but develop a program like this over time, similar to the carbon neutral portfolio adoption. He said that he suspects that there would be a percentage of consumers that would find out later that they were enrolled in a “voluntary” program and feel cheated. A way forward could be to develop a carbon negative plan and start with a surcharge that would fund a solution to global warming. He said it could be a program that would be broadly advertised to ensure that everyone would be aware of the program. Commissioner Schwartz noted that she had seen an effective “cow power” video, which is an example of how the communication can be done in a playful way that would let people understand that we are in this together , which is a compelling message for many people. She added that it would be a good messaging experiment. Commissioner Eglash thanked the public commenters. He also complimented the UAC for placing the item on the agenda and allowing this discussion to take place. Commissioner Eglash said that when he weighs the advantages and disadvantages of opt-in versus opt-out, he would like to avoid disgruntled customers and any worry about customer satisfaction. The greatest danger of an opt-out plan is potential customer dissatisfaction. We devote a lot of time to customer satisfaction with the utility. He said it is more risky in this respect and as the price becomes significant, the danger becomes worse. He said that, with a full marketing campaign, is it still plausible that people would not be in the program that wo uldn't want to be. He added that perhaps a very successful campaign would result in the same participation of an opt -out and an opt-in program. Commissioner Eglash indicated that he is leaning towards maintaining PAGG as an opt-in program. He added that there should be no action on the item at this time since there is no staff analysis, no fiscal analysis or legal analysis completed at this time. The discussion is conceptual at this point; there is no proposed design for an opt -out program. Chair Foster indicated that he disagrees that the participation rates for opt-in versus opt-out will converge with a great marketing campaign. He added that this is a discussion item on the agenda tonight so no action can be done. Commissioner Schwartz said that customer satisfaction depends on whether you are transparent or not. The fact that CPAU cares about being green will show that an opt-out Utilities Advisory Commission Minutes Approved on: Page 8 of 11 program is consistent with the brand. She added that safeguards to allow folks to opt-out will be consistent with the transparent message. Commissioner Eglash said that many people in Palo Alto take pride in the City’s environmental efforts. He stated that safety, reliability, and low cost are primary considerations and to impose a greener solution that costs extra money is hazardous and must be done carefully. Commissioner Ballantine noted that offset resources are finite and that pressures from supply and demand will eventually bite us as the price for offsets will increase as demand increases. He added that an opt-out program would require sufficient offsets to be supplied . Commissioner Danaher said that the PAGG program has an environmental benefit, a psychological benefit, and a moral benefit. He said that the best idea is to make the program neither opt-in or opt-out, but our gas supply for everyone. He added that an opt-out program still allows people to opt-out easily since it could be very easy to go to the website and opt out. Commissioner Hall said that we could conduct a poll to see what the customers’ response would be to an opt-out program. He said that we should want to have this information before making a decision. Commissioner Schwartz advised against a poll as it would defeat the purpose of communicating the benefits of an opt-out program. Commissioner Danaher added that the poll would only be answered by the small number of people who read and respond to email. Commissioner Foster said that the program could be designed so that anyone who failed to opt-out early enough could still get their money back. He asked if the UAC could make a motion to recommend that the Council direct staff to develop an opt-out program. Director Fong stated that it can be added to the rolling calendar. Mullan added that the item is agendized as a discussion item and that the Commission can add it as a future item to be agendized under Item 4 on this meeting’s agenda. Vice Chair Cook thanked the public commenters. Commissioner Hall added his appreciation of the input from the public commenters, even if some commissioners disagree. ITEM 3. DISCUSSION: Concept & Establishment of UAC Work Plan and Related Subcommittees Public Comment Jeff Hoel said that he doesn't know what this item is about since no materials were provided in advance of the meeting. He said that subcommittees separate from the main group so that private discussions can be conducted. He asked what do subcommittees do and how do they assist the commission. He said a report back to the commission from the subcommittee did not happen last month on the fiber issue. Director Fong stated that this item was put on the agenda at the request of Chair Foster, Vice Chair Cook and Commissioner Eglash. Utilities Advisory Commission Minutes Approved on: Page 9 of 11 Commissioner Eglash acknowledged that this is an unusual item on the agenda. He stated that it was put together with assistance of Chair Foster, Vice Chair Cook, Director Fong, and Sr. Deputy City Attorney Jessica Mullan. The idea of developing a UAC Work Plan is to make sure that the UAC is addressing its highest priority items. This idea stems from the last joint meeting of the Council and UAC when many of the Council members identified five issues that were of interest. A sample work plan could be developed to show the status of these five topics. This is not intended to document what has been agreed on, develop positions, or direct staff resources. The rolling calendar is a list of all items, but does not show the detail on desired outcomes or next steps. One idea is to agendize subcommittee report outs at UAC meetings. The UAC bylaws is silent on a work plan. He noted that the UAC receives a quarterly Utilities update, which often addresses many items on the work plan. He said that if the UAC decides to have a work plan, it needs to develop a process for updating the work plan —it could be by the UAC with input from the subcommittees. It could be done by the Director of Utilities, but he doesn’t want to increase staff's work load. The work plan could be distributed at UAC meetings and made available to the public at the meeting and online. Chair Foster said he was supportive of the idea of the work plan since prioritization is important and he noted that almost all items are driven by CPAU staff. He said that the UAC should own this and not take staff time. Vice Chair Cook agreed that establishing priorities and following through on them is valuable. Commissioner Danaher said that it is important to be organized and that this proposal takes it a step further than the rolling calendar. Commissioner Schwartz asked if the work plan gives the UAC a platform to talk about some of the issues, or even write something up. She asked if this would provide a way to share subcommittee discussions with the public. Commissioner Eglash responded that it was unfortunate that Commissioner Schwartz doesn’t feel like she has that opportunity now. He said that, if there is something to share, the item can be discussed at UAC meetings. For example, the budget subcommittee always reports out at the meeting when the budget is reviewed by the UAC. He added that there is also the possibility of preparing a colleagues memo that could be distributed to the commission and public. He said that it should be part of the job of the subcommittee to report on discussions to the full commission. Commissioner Schwartz said that she would certainly like to share items with fellow commissioners and can use the mechanisms that already exist. She asked what incremental impact a work plan would have. Commissioner Hall agreed that subcommittee report-outs are good and the subcommittees should not go adrift. He expressed concern about implementing any new process that may add burden of time or work for staff. He suggested a mid-course check-in with City Council could be beneficial to discuss progress and make sure the UAC is going in the right direction. Utilities Advisory Commission Minutes Approved on: Page 10 of 11 Commissioner Eglash said that he was not sensing a strong sense of support from the commissioners. Commissioner Ballantine asked if the work plan would only apply to subcommittees. Commissioner Eglash replied that it is independent from the subcommittees—it is to have a central place to manage complex, important items to keep track of them and to remind us of where we are on each item. Usually, a subcommittee is named for most important work items since subcommittees allow for detailed work for a subset of the commission and the work plan allows a single place for the status of the items that are the most important. Commissioner Schwartz stated that, if this would give her a structure for discussing items not on the rolling calendar that she would like to address, she would support it. Chair Foster recommended that the UAC try the work plan and see how it works. He said that there is no downside to trying it for three to six months, and that there seemed to be some logic in the Chair taking responsibility for keeping it updated. Commissioner Eglash agreed with the notion of trying it for several months and then evaluate. Commissioner Danaher asked if the UAC could use the work plan to come up with topics that the UAC wants to have addressed. Mullan said that this is a discussion item on the agenda so that there will be no formal action taken. She noted that any commissioner should consult the City Attorney's Office if there are any questions about the Brown Act. She added that there is a mechanism under the UAC bylaws for a subset of commissioners to prepare a "Commissioners Memo" for discussion by the full commission. She added that the agenda item "Commissioner Comments" is ano ther place that can be used to convey information to the rest of the commission. ITEM 4. ACTION: Selection of Potential Topic(s) for Discussion at Future UAC Meeting Chair Foster requested that solar thermal systems could be added as a discussion item with no staff time required, but just a reminder of past staff memos on the topic being available . Danaher supported adding that item. Commissioner Hall remarked on the drop in gas use noted in the quarterly report provided at the meeting. He asked if the drop in gas usage would have a rate im pact and asked if a response could be added to the Director of Utilities report for an upcoming UAC meeting, or added to a future agenda. Assistant Director replied that every year, the financial plans for all funds are revised with the latest usage forecasts and cost estimates and that this issue would be fully addressed then. Commissioner Hall said he’d like to see a brief discussion earlier than that. Utilities Advisory Commission Minutes Approved on: Page 11 of 11 As an employee of the Santa Clara Valley Water District, Commissioner Hall recused himself for discussion on the last item and left the meeting at 9:20 pm. ITEM 5. DISCUSSION: Update and Discussion on Impacts of Statewide Drought on Water and Hydroelectric Supplies Senior Resource Planner Karla Dailey provided an update on the impact of the drought. She provided a graph showing that the three-year period of 2012 to 2014 was extremely hot and dry. Commissioner Schwartz said that she went to someone's house with a beautiful artificial lawn and that we could take a photo of such a backyard to show what can be done to reduce water usage. COMMISSIONER COMMENTS Commissioner Schwartz noted that at the last UAC meeting, she asked how many people have access to broadband and that she has since determined that everyone in the City has access to broadband. She said that no one in our City cannot get access to the internet. Meeting adjourned at 9:26 p.m. Respectfully submitted, Marites Ward City of Palo Alto Utilities Page 1 of 9 1 MEMORANDUM TO: UTILITIES ADVISORY COMMISSION FROM: UTILITIES DEPARTMENT DATE: November 4, 2015 SUBJECT: Staff Recommendation that the Utilities Advisory Commission Recommend that the City Council Approve Design Guidelines for the Net Energy Metering Successor Program REQUEST Staff recommends that the Utilities Advisory Commission (UAC) recommend that the City Council approve the Design Guidelines for the Net Energy Metering Successor Program (Attachment A). EXECUTIVE SUMMARY Net energy metering (NEM) is a billing mechanism designed to promote the installation of renewable distributed generation by allowing customers to be compensated at the full retail rate for electricity generated by their on-site systems. Under the City’s current rates, NEM customers can reduce, or potentially completely avoid, charges on their electric bill while still remaining interconnected with the electric grid and utilizing grid services. State law requires all electric utilities to offer NEM to customers with eligible renewable distributed generation up to a maximum cap (NEM cap). How to compensate customers who install on-site renewable generation after the NEM cap is reached needs to be determined. As Utilities across the state reach their respective NEM caps, NEM successor programs are a topic of much debate; some wish to continue to provide the same incentives to solar participants, while others want to ensure that customers with no on-site generation are not paying more than their share of the costs to maintain the grid. The City of Palo Alto Utilities (CPAU) expects to reach its NEM cap by mid-2017. The proposed NEM successor program design guidelines will guide staff efforts to develop a NEM successor program. CPAU’s NEM successor program will be developed in coordination with the electric utility’s cost of service analysis (COSA) that is underway. BACKGROUND State law requires all electric utilities to offer NEM to eligible customers with renewable distributed generation (sometimes referred to as customer-sited or behind-the-meter Page 2 of 9 generation), up to a cap. In October 2015 Council formally adopted a NEM cap for Palo Alto of 9.5 MW (Staff Report 6139). As of August 13, 2015, the City is approximately 70% toward meeting its NEM cap as shown in Figure 1 below. To date, all local solar installations utilize NEM and all net energy metered systems are solar photovoltaic (PV) systems1. Figure 1: Summary of NEM Participation (1999 through August 13, 2015) All NEM customers are subject to terms and conditions outlined in the California Public Utilities Code Section 2827, including the ability to receive credit for eligible on-site customer generation at the retail rate, to have the credits roll over month -to-month over a 12-month period, and the option to cash-out any net surplus generation that exists at the end of the 12- month period. NEM customers remain subject to Council-approved changes to their otherwise applicable electric rate schedules, including rate design changes and potential minimum or fixed charges. Assembly Bill 327 (AB 327) directed the California Public Utilities Commission (CPUC) to develop a standard NEM successor tariff no later than December 31, 20152 for the state’s investor- owned utilities (IOUs). For the IOUs, the NEM successor tariff is to take effect either after an IOU has reached its NEM cap or July 1, 2017, whichever occurs first. Publicly-owned utilities 1 In principal, customers may install a variety of distributed energy technologies on -site that would be eligible for NEM. In practice, staff expects the vast majority—if not all—of on-site generation and NEM participation in Palo Alto to be solar PV. 2 http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140AB327 Page 3 of 9 (POUs), whose rates are not regulated by the CPUC, are working with their respective governing bodies and stakeholders to formulate their own NEM successor programs to take affect after their respective NEM caps have been reached. Local Solar Plan On April 22, 2014, the City Council adopted the Local Solar Plan (Staff Report 4608, Resolution 9402), which set the overarching goal of meeting 4% of the City’s total energy needs from local solar by 2023, corresponding to achieving 23 MW of solar installed in the City. Included within the Local Solar Plan is a strategy to develop proper policies, incentives, price signals and rates to encourage solar installation, including the exploration of cost-based rate structures that encourage the development of new solar systems in Palo Alto. 2015 Electric Cost of Service Analysis (COSA) CPAU embarked on an electric cost of service analysis (COSA) that will be completed in Fiscal Year 2016 (FY 2016) in advance of a rate adjustment that staff projects will be necessary on July 1, 2016. Electric rates were last adjusted when a 10% rate increase went into effect on July 1, 2009. The primary goal of the COSA will be to review the allocation of costs to customer classes and the electric rate design to ensure customers are charged according to the cost to serve them. However, the COSA will also include a review of the rate design issues created by increasing numbers of local solar installations, higher EV (EV) penetration, and the potential for building electrification. The COSA is divided into short-term (Phase One) and long-term (Phase Two) work plans for addressing various rate design issues. Short-term rate design issues include, among other things, the need to develop a NEM successor program for solar customers. In September 2015, Council adopted design guidelines for the Phase One work plan (Staff Report 5956). The adopted Phase One COSA Design Guidelines are provided as Attachment B. The COSA Design Guidelines 1 and 7 are relevant to the development of NEM successor design guidelines and the ultimate NEM successor program. These two guidelines are listed below:  Guideline 1: Rates must be based on the cost to serve customers. This is the overriding principle for the cost of service analysis (COSA); all other rate design considerations are subsidiary to this basic premise.  Guideline 7: The COSA should evaluate the impact of rate designs on the economics of local solar for current and future customers and should be coordinated with an analysis of long - term solar policies to be put into effect after the existing net energy metering tariff reaches capacity. DISCUSSION This memo describes a proposed set of secondary design guidelines for the development of a NEM successor program—the NEM Successor Program Design Guidelines. These design guidelines are intended to be supplementary guidelines to the Phase One Electric COSA Design Page 4 of 9 Guidelines and are relevant specifically for eligible customer-sited renewable generation that will be installed after the City’s NEM cap has been reached. Key Challenges and Benefits of NEM There are three primary challenges with NEM. First, given the City’s existing electric rate structures, NEM results in cost-shifting between customer classes. Customers who adopt distributed generation and utilize NEM can reduce or completely avoid costs on their electric utility bills even though they remain interconnected to the grid and continue to use grid services. Second, distributed generation presents challenges for utilities to sustainably recover the fixed costs associated with the electric distribution system. As distributed generation continues to be deployed, the cost-shift from NEM to non-participating customers increases. This results in increasingly higher rates for non-participating customers, which in turn makes adopting distributed generation even more attractive for non-participating customers. This positive feedback loop is often referred to as the “utility death spiral. Again, the overriding principle for rate design is captured in the first Electric COSA Design Guideline (Rates must be based on the cost to serve customers) and any NEM successor rate must be consistent with this principle. Third, an increasing block electricity rate structure, (or tiered rate structure such as the one in use in Palo Alto3), can create situations in which highly efficient, low-energy use NEM customers receive a lower NEM compensation rate than high-energy consuming NEM customers. Low-energy consuming households who conserve and have implemented many home energy efficiency measures may only reach the first or second electricity usage tiers over the course of a month4. For example, if a household that consumes 600 kilowatt hours (kWh) per month installs a solar PV system that is sized to meet all of the household’s electricity usage over the course of the year, the household would, in effect, be compensated at a rate of 11.2 ₵/kWh for the energy generated from their on-site system under the current rate structure5. By contrast, if a higher energy-using household using 1,200 kWh/month installs a solar system of the exact same size as the lower-energy consuming household, the high-energy consuming household is effectively compensated at 17.4 ₵/kWh for the energy generated from their on- site system. Therefore, high-energy use consumers are compensated at a significantly higher rate than low-energy use consumers for distributed renewable electricity, although the value of the output may be equivalent. As a result, NEM combined with tiered rate structures discourages solar adoption by low-energy consumers. It is important to emphasize that the challenges discussed above are amplified by the combination of NEM and the existing tiered electric rate structure. For example, if through the 3 http://www.cityofpaloalto.org/civicax/filebank/documents/8089 4 The average monthly electricity consumption of single-family homes in Palo Alto in 2014 was 621 kWh. Tier 1 is between 0-300 kWh (9.5 c/kWh), Tier 2 is between 301-600 (13 c/kWh), and Tier 3 is for all electricity over 600 kWh (17.4 c/kWh). 5 The average price of electricity for a residential customer using 600 kWh is the sum of 300 kWh times Tier 1 price (9.5 c/kWh) and 300 kWh times Tier 2 price (13 c/kWh), then divided by 600 kWh, or 11.2 c/kWh. Page 5 of 9 upcoming electric COSA, the residential electric utility rate structure were modified to include a minimum charge, the degree of cost-shifting from NEM customers to non-participants may be reduced or averted. As electric rate structures change in the future, the relationship between the rate structure and NEM will be re-evaluated6. Hence, development of a NEM successor program is being carried out in coordination with the electric COSA, and the evaluation and quantification of potential cost-shifts will be performed as a part of the NEM successor program development process. Although NEM has limitations, it also has key benefits . NEM is often described as “rolling back the electricity meter” with generation from an on-site system. This description is especially intuitive, which makes it a relatively easy policy to communicate to utility customers and other stakeholders. Operationally, NEM can and has been implemented with existing metering equipment. Non-standard meters or advanced metering infrastructure (“smart meters”) are not required. And, more broadly, NEM is often viewed as one of the key state policies responsible for the extent of solar deployment that has been realized in California to date7. These policies, and California’s Renewable Portfolio Standard (RPS) mandate, have been very effective in developing the solar PV market and reducing costs of solar over time as shown in Figure 2. Figure 2: Installed prices for residential and small non -residential systems in the U.S.8 Short-Term and Long-Term Considerations The proposed NEM Successor Program Design Guidelines are aligned with the COSA Design Guidelines in addressing short-term rate design issues. Staff anticipates the NEM cap will be met within the coming one to two years. New rules and rates should be ready for customers 6 The key challenges could instead be interpreted as limitations of the existing rate structures rather than limitations of NEM. These rate structure challenges are in turn dependent upon the service territory’s metering infrastructure, customer information system, and billing system. 7 Another key California policy is the Million Solar Roofs B ill (aka Senate Bill 1 or SB1) which required that electric utilities provide rebates to customers installing PV systems until the mandated rebate funds are exhausted. 8 Source of Figure 2 is Tracking the Sun, an annual PV cost tracking report produced by the Department of Energy’s Lawrence Berkeley National Laboratory. (See http://newscenter.lbl.gov/2015/08/12/solar-prices-fell-2015/ accessed October 16, 2015) Page 6 of 9 who install solar systems after the NEM cap is reached . Long-term rate design issues— including, for instance, updated climate protection goals, deployment of advanced metering infrastructure and the rate designs which they enable, and impacts of the trend toward electrification—will be addressed in the second phase of the COSA work plan. The NEM successor program that is in place at that time may be revisited, along with all other rates. Proposed NEM Successor Program Design Guidelines Staff proposes the following NEM Successor Program Design Guidelines: Guideline 1. Evaluate program options that compensate customers fairly and equitably for local renewable energy production. Guideline 2. Consider compensating solar participants at a rate equivalent to the value of solar to Palo Alto via “value of solar tariff”. Guideline 3. Evaluate the impact on the concurrent adoption of on-site generation and other demand-side technologies. Guideline 4. Assess the likely impact on the rate of solar adoption and implications for meeting the Local Solar Plan goal. Guideline 5. Consider the ease of marketing and communicating the program to customers. Guideline 6. Assess technology constraints of program implementation. Guideline 1. Evaluate program options that compensate customers fairly and equitably for local renewable energy production. With tiered electric rates and NEM, the effective compensation that customers receive for their on-site generation is based on their monthly amount of on-site energy consumption as described above. This combination hinders solar adoption by households that have average or low electricity consumption achieved through conservation and energy efficiency measures. Staff will evaluate NEM successor program options that compensate customers fairly and equitably for local renewable energy production. Guideline 2. Consider compensating solar participants at a rate equivalent to the value of solar to Palo Alto via “value of solar tariff”. A “value of solar tariff” is a rate design in which customers are compensated at a specified rate for all generation produced from their on-site systems. On-site consumption is metered separately and charged in full at the applicable retail rate for that customer class. The compensation rate for the on-site generation would be based on the value of local solar energy generation. This value is already calculated using avoided cost models that are utilized in all resource acquisition and financial planning. An advantage of the value of solar tariff design is that it utilizes a standardized and transparent framework for valuing distributed generation that would be updated regularly. Also, similar to the rate established for solar through the Palo Alto CLEAN program, it could also provide the flexibility to incorporate an “adder” reflecting the assessed value of distributed generation, Page 7 of 9 which may be deemed necessary in the near term to continue to promote deployment to achieve the community’s local solar goals. Guideline 3. Evaluate the impact on the concurrent adoption of on-site generation and other demand-side technologies. Residents or businesses may decide to adopt solar PV for a variety of reasons, including a desire to support environmental sustainability, a penchant for early adoption, or financial benefit. Many of the same motivations may also drive the adoption of other advanced energy technologies, such as EVs, energy storage, smart thermostats, building energy management systems, and grid-interactive loads. Under NEM, co-adoption of solar PV and EVs has been notably common9: charging an EV at home drives the household’s consumption into higher rate tiers, which in turn renders generation from a net-metered solar system increasingly valuable (under NEM and current electric rates) and therefore more cost-effective. Staff will evaluate the impact of concurrent adoption of on-site generation and other demand-side technologies under various NEM successor program options in order to assess potential impacts. Guideline 4. Assess the likely impact on the rate of solar adoption and implications for meeting the Local Solar Plan goal. As described in an update on the Local Solar Plan provided to the UAC in October10, after accounting for 8 MW from the PV Partners program, 3 MW through the Palo Alto CLEAN program and 2 MW for new community solar and solar donation programs that are under development, almost 10 MW of additional solar capacity is required to meet the Local Solar Plan’s goal to have 23 MW of solar PV installed by 2023. Staff will evaluate NEM successor program options regarding their likely impact on the ability to meet the Local Solar Plan goal. Guideline 5. Consider the ease of marketing and communicating the program to customers. NEM has been in effect in California for almost two decades11, making it the most established state incentive for solar and other distributed generation technologies. Because all education, marketing and outreach efforts conducted over the past two decades by solar installers, utilities, state agencies, and other stakeholders was conducted while NEM was available, staff anticipates that significant efforts may be required to market and communicate a new set of terms and conditions that comprise the NEM successor program. Of course, that will depend on how different the NEM successor program may be from the original NEM. Furthermore, more generally, customers need an increasingly detailed understanding of all aspects of their energy usage and costs, which makes communications and marketing considerations a primary concern during the program design stage. Staff intends to assess the ease of marketing and communicating to customers during research and development of the NEM successor program. Staff may also recommend additional resources to enhance associated education and outreach efforts, if needed, to ensure customer and stakeholder understanding and awareness. 9 In a recent analysis, installing EV charging equipment in Palo Alto was the strongest indicator for household participation in the PV Partners program for a solar PV rebate. The other indicators incorporated in the analysis were participation in nine distinct other demand-side energy efficiency programs. 10 https://www.cityofpaloalto.org/civicax/filebank/documents/49290 11 The original NEM law in California was adopted in 1995 and took effect the following year. Page 8 of 9 Guideline 6. Assess technology constraints of program implementation. The sixth and final design guideline is to assess all technology constraints for implementing the proposed NEM successor program and alternatives, along with associated staff and budget resource impacts. Potential technology constraints include compatibility with CPAU’s existing customer information and billing systems and metering infrastructure. Advanced metering infrastructure (AMI) is identified as a long-term rate design issue for the electric COSA, and evaluation of time-of-use and other rate structures that AMI enables will be evaluated during Phase Two of the Electric COSA work plan. The NEM successor program will be revisited at that time in coordination with the COSA. NEXT STEPS The tentative timeline for the review and approval of the NEM-related policies anticipates that a NEM Successor program can be considered by Council by the end of FY 2016 as shown below. Tentative Timeline for Review and Approval of NEM Successor Program Policies Description UAC Finance Committee Council NEM cap clarification -- -- Nov. 2015 Design Guidelines for NEM Successor Program Nov. 2015 Dec. 2015 Jan. 2016 Proposed NEM Successor Program March 2016 April 2016 May 2016 RESOURCE IMPACT Adoption of the proposed NEM Successor Program Design Guidelines has no direct impact on budget and staff resources as this work is part of the FY 2016 work plan and will be done by existing staff. Upon adoption of the design guidelines, staff will proceed with the development of a NEM successor program and any associated resource impact of the proposed NEM successor program and potential alternatives will be assessed and included in the staff report when the proposal is brought forward for review and approval. POLICY IMPACT The process of adopting the NEM Successor Program Design Guidelines provides the UAC and Council an opportunity to provide policy guidance to staff for the development of a NEM successor program proposal in coordination with the electric COSA. Fulfilling the City’s NEM legislative mandates and developing an effective NEM successor program will support the Carbon Neutral Plan, the Local Solar Plan, and State and local efforts to promote renewable distributed generation. NEM further supports the City’s broader environmental sustainability goals, including those set out in the 2011 Utilities Strategic Plan and the 2007 Climate Protection Plan. ENVIRONMENTAL IMPACT Adoption of NEM Successor Program Design Guidelines does not meet the California Environmental Quality Act's (CEQA) definition of "project" under California Public Resources Code Sec. 21065, thus no environmental review is required. ATTACHMENTS A. Proposed Design Guidelines for the Net Energy Metering Successor Program B. Adopted Design Guidelines for the 2015 Electric Cost of Service Analysis PREPARED BY: ~IMEE BAILEY, Resource Planner ~ L MONICA PADILLA, Senior Resource Planner -t' .. ANE RATCHYE, Assistant Director, Resource Management VAL~ REVIEWED BY: APPROVED BY: Director of Utilities Page 9of9 Attachment A Presented to the Utilities Advisory Commission for review on November 4, 2015 Design Guidelines for the Net Energy Metering Successor Program 1. Evaluate program options that compensate customers fairly and equitably for local renewable energy production. 2. Consider compensating solar participants at a rate equivalent to the value of solar to Palo Alto via “value of solar tariff”. 3. Evaluate the impact on the concurrent adoption of on-site generation and other demand-side technologies. 4. Assess the likely impact on the rate of solar adoption and implications for meeting the Local Solar Plan goal. 5. Consider the ease of marketing and communicating the program to customers. 6. Assess technology constraints of program implementation.  Attachment B  Approved by Council on September 15, 2015 (Staff Report 6061)  Design Guidelines for the 2015 (Phase One) Electric Utility Cost of Service Analysis    1. Rates must be based on the cost to serve customers.  This is the overriding principle for the  cost of service analysis (COSA); all other rate design considerations are subsidiary to this  basic premise.    2. For this cost of service study, and to the extent feasible, energy charges should be based on  existing rate structures. This includes:  a. A tiered rate design structure for residents  b. A flat general service rate for small non‐residential users  c. A flat demand and energy rate for large non‐residential users    3. The COSA should involve a review of all existing rate schedules for inclusion in the COSA or  retirement.    4. The COSA should take into account the impact of rate designs on electric vehicles and  electric heating customers, and should investigate:  a. the extent to which these customers have different load profiles from other  residential customers; and  b. the extent to which existing rate designs should be adjusted for these differing load  profiles    5. The COSA should evaluate the need for a minimum charge.    6. A hydroelectric rate adjustment mechanism should be evaluated.    7. The COSA should evaluate the impact of rate designs on the economics of local solar for  current and future customers and should be coordinated with an analysis of long‐term solar  policies to be put into effect after the existing net energy metering tariff reaches capacity.    8. A connection fee study should be performed and policies regarding residential transformer  upgrades should be reviewed, either as part of the COSA or as part of a parallel analysis. The  COSA methodology should be coordinated with any potential connection fee changes or  policy changes.    9. The impact of any proposed changes on low income customers should be evaluated    MEMORANDUM TO: UTILITIES ADVISORY COMMISSION FROM: ADMINIST RATIVE SERVICES DEPARTMENT DATE: NOVEMBER 4, 2015 SUBJECT: ENERGY RISK MANAGEMENT REPORT FOR THIRD QUARTER, FISCAL YEAR 2015 REQUEST This quarterly update on risks associated with the purchase of electricity commodities are for the Commission's information only. EXECUTIVE SUMMARY This quarterly update has been prepared to keep the Commission apprised of the major issues that are facing the City with regard to the purchase of energy commodities. ATTACHMENT A. City of Palo Alto's Energy Risk Management Report for the Third Quarter, Fiscal Year 2015 PREPARED BY: APPROVED BY: CI T Y O F City of Palo Alto City Council Staff Report (ID# 5993) PALO ALTO Report Type: Informational Report Meeting Date: 9/15/2015 Summary Title: 3rd Quarter, FY 2015 Energy Risk Management Report Title: City of Palo Alto's Energy Risk Management Report for the Third Quarter, Fiscal Year 2015 From: City Manager Lead Department: Administrative Services Recommendation This is an informational report and no City Council action is required. Executive Summary Staff continues to purchase electricity and gas in compliance with the City's Energy Risk Management Policies, Guidelines, and Procedures. This report is based on market prices and load and supply data as of March 31, 2015, the end of the third quarter of Fiscal Year (FY) 2015. The projected cost of the City's fixed -price electricity purchases is $0.8 million higher than the market value of that electricity as of March 31, 2015 for the 36-month period beginning April 1, 2015. The projected cost of hydroelectricity to be received from the Western Area Power Administration (Western) over the 12-month period ending March 31, 2016 was higher than its market value by $4.1 million. Hydroelectric power from the Calaveras Hydroelectric Project (Calaveras) cost $10.2 million more than its market value for that same 12-month period. In the third quarter of FY 2015, January 1, 2015 through March 31, 2015, the City's credit exposure to fixed price contracts is minimal. The projected electric reserve is below the FY 2015 minimum guideline reserve level and the projected gas reserve is within the FY 2015 guideline reserve level range. There were no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures to report during the third quarter of FY 2015. City of Palo Alto Page 1 Background The purpose of this report is to inform the City Council on the status of the City1s energy portfolio and transactions executed with energy suppliers as of the end of the third quarter of FY 2015. The City's Energy Ri sk Management Policy requires that staff report on a qua rterly basis to Council on: 1) the City's energy portfolio; 2) the City's credit and market risk profile; 3) portfolio performance; and 4) other key market and risk information. The City's Energy Risk Management Policy describes the management organization , authority, and processes to monitor, measure, and control market risks. "Market risks " include price and counterparty credit risk . These are risks that the City is exposed to on a regular basis in procuring electric supplies and to a lesser extent for gas supplies which are purchased n ow at market rates via a monthly index price. The energy risk management section is located in the Treasury Division of the Administrative Services Department. Its ro le is to monitor and mitigate these risks. This third quarter FY 2015 energy risk managem e nt report co ntains information on the following: • Elec t ric Supplies • Hydroelectricity • Fixed -Price Forward Electricity Purchases • Gas Supplies • Credit Risk • Electric Forward Mark-to-Market Values • Electric and Gas Suppl y Operations Reserves Adequacy • Exc eptions to Energy Ri sk Management Policies, Guidelines, or Proced u res Discussion Electric Supplies In order to serve the City's electric supply demands, the City obtains e l ectricity from: hydroelectric resource s {from Western and Calaveras Hyd roe lectric Projects); long-term renewable e nergy contracts (from landfill gas converted to el ectricity, wind, and solar projects); wholesale purchases which are carried out via fixed -priced forward market purchase contracts; and the electric spot market. Figure 1 below illustrates the projected sources and expected purchases of electricity supplies by month for the 36 months beginning April 2015, in megawatt-hours (MWh) per month as of March 31 , 2015. City of Palo Alto Page 2 Figure 1. Electric Resource Balance 140,000 ·.-.-.·.w ind 1 20,000 ~ ::i ·c 100,1000 -::::: :;.::: .• :-;_.::Western --80,000 1 ~ 60,000 ;'(;;~~ Solar 40,000 -calaveras 20,000 0 L") I./') U") r.J') I./') <D <.D \0 "° <.D \0 f' f' f' r--.. f' ,..... 00 rl rl rl rl rl T""!I rl rl rl rl M M M rl rl rl rl M . . . . . ' • I I . . . • l I • I I '-c OD .µ u .0 "-c ~ ...., u ..a "-c Ill) .._. u ..a Q_ :J u Q) Q) Q_ :J u Q) (1) Q_ =-u Q) (LI :J :J <( -, <( 0 0 LL <( -, <( 0 0 lL <( -, <( 0 0 lL Hy:d roelectricity: The projected cost of hydroelectricity received from Western over the 12-month peri od ending March 31, 2016 was higher than its market value of electricity by $4.1 million. Hydroelectric power from Calaveras cost $10.2 million more than the market value of electricity for t he same period. Note that Calaveras provides benefits not reflected in the mark-to-market (MTM) calculation, including, for example, ancillary services (e.g., the abil ity t o regulate energy output when the electric g rid need s change). Fixed -Price Forward Electricity: Purchases Th e City currently has purchased fixed -priced supplies of electricity totali ng 160,450 MWh for delivery between April 1, 2015 and March 3 1, 2016. Th e ave ra ge price for a l l of th e fixe d-price purchase s is $39.74 per MWh. The City contracted for th ese purchases with four of its approved counterparties: Cargill, Powerex, Nex tEra, and Shell Energy North America (SENA). The 12-month MTM value of the City's forward transactions fo r wholesale power was nega t ive $0.80 million at the end of the quarter. In other words, the purchase cost (contract price) fo r these transactions was hi gher than the market value as of March 31, 2015. The figures b e low represent the electric forward volumes (Fi gure 2) and MTM positions (Figure 3) fo r each e le ct r ic supplier by month of delivery for all forward fixed -price e lectricity contracts over the 12-month period e nding March 31, 2016. City of Palo Alto Page 3 3{),000 ~ 25,000 "' 0 = ~ ~ 20,000 ~ Figure 2. Electric Forward Volumes as of 3/31/15 ~5ENA C::Powerex • Nextera Power •Cargill Figure 3. Electrk Mark-to-Market Values a .s of 03/31/15 $0 -($50,000) = = 0 E <t ($100,000) ... .m 8 ~ ($150,000> ~ ($200,000) ts2so,ooo) .,., U"J Ln 11\ .--1 .-I .--1 .--1 .!. > c . c.. ro ~ ::J <I; 2 ~ Gas Supplies lf'I U"I .,., Ln .--1 .--1 .-i ...... e.o 0. tj > ::J "' 0 <I; Vl 0 z .,., "° "° .... .... .--1 0 c .D .... ro .., 0 ~ u. "° .-i .!. ro 2 ISSENA ~ Powerex • Nextera Power •Cargill In order to serve the City's natural gas n ee ds, the City purchases gas on the monthly and d aily spot ma r kets. Th e City purchases all its forecasted gas needs for the month a h ea d at a priced b ase d on the publishe d monthly spot m arket index price for that month. Withi n the month, the City's gas operator buys and sells ga s to match the City's daily needs if the ac tual dai ly usag e is City of Palo Alto Pa ge 4 different from the forecasted daily usage. Those daily transactions are made at an average price based on the published daily spot market index. Credit Risk Staff monitors and reports on credit risk using the major credit rating agencies (S&P and Moody's) scores. The "expected default frequency" (EDF) was developed by Moody's. The EDF is an estimated probability established by combining information from the equity markets and data from the company's financial statements. The EDF calculation indicates the probability of a counterparty defaulting in the next 12 months. CreditEdge Plus© also provides frequent updates along with early warnings of changes in credit quality of the City's electric and natural gas transacting counterparties. The City has Electric Master Agreements with nine counterparties: BP, SENA, Powerex, PacifiCorp Energy, Cargill, NextEra Power, Turlock Irrigation District, Exelon, and Iberdrola. In addition, the City has renewable electricity power purchase agreements (PPA) with Iberdrola Renewables, LLC, Ameresco, sPower, and Centaurus Renewable Energy LLC. Only public renewable entities are shown in Table 1 below. Palo Alto's electric counterparty credit exposure and credit ratings are presented in Tables 1 and 2. Table 2 shows the counterparties with scheduled deliveries of fixed-price short-term contracts from 4/1/15 through 3/31/16. Tables 1 and 2 show the counterparties' EDF as of 3/31/15. EDFs range from 0.01 to 35.00. The lower the EDF value, the less risk there is of a counterparty defaulting. City of Palo Alto Page 5 Table 1. Renewable Counterparties Credit Ratings and EDFs as of 03/31/15 S&P Current Expected S&P Renewable Credit Default Impli ed Counterparty Rating Frequency Rating Ameresco -0.62 B- Iberdrola BBB 0 .04 BBB+. Ameresco has a 0.62 current EDF which is above the recomm ended EDF level. Staff is monitoring Ameresco's EDF and will report back in the next quarterly report on the status of Ameresco's EDF. Electric Forward Mark-to-Market Values Table 2. Credit Exposure and Expected Default Frequency of Electric Suppliers as of 03/31/15 S&P Current Expected Expected Loss Electnc Cost of Value of Total MTM Credrt Default (l\ITM x Expected Counterparty Transaction Transaction Value Ratmg Frequency Default Frequency) Cargill $509 ,026 $509,788 $762 A 0 .04 $(} Power ex $3,007 ,664 $2 ,637,309 ($370,355) AJt.A 0.01 ·--.$0 NextEra $2,394 ,004 $1,974 ,457 ($419 ,547) A-0 .05 --_ _.$()~ SENA $465,039 $455 ,726 ($9,313) AA 0.03 ... --$0 Totals $6,375,733 $5,577,280 ($798 ,453) . -~ -&o It is important to note t h at, for renewable energy companies, Council waived the investment- grade credit rating requirement of Section 2.30.340(d) of the Palo Alto Municipal Code, which applies to energy companies that do business with the City. In addition, the City does not pay for renewable ene rgy until it is received thereby reducing risk. An EDF of 0.08% or b e low indicates supplier's current ex pected default frequency falls with in the investment grade ran ge. An EDF above 0.08% indicates t h e suppl ier may have financial issues that require monitoring. The above table net totals shows no mark-to-market exposure to counterparties and rea so nabl e EDF level s for the City's electric counterparties. There was a small credit exposure with Cargill in this quarter. Electric and Gas Supply Operations Reserves Adequacy The Electric Supply Operations re serve's unaudited balance as of March 31, 2015 is $8.4 m ill ion, which is $4.7 million below the minimum reserve guideline leve l. This is just a temporary situation b eca u se at year-end there will be an a pproved transfer that was in the FY 2016 Electric Financial Pl an from the Hydro Stabilization Re se rve to the Electric Supply Reserve. The unaudited Gas Operations reserve balance as of March 31, 2015 is $9.7 million, which is $1.5 million be low the m axi mum reserve guideline level. The current estimated Electric Supply City of Palo Alto Pa g e 6 Operations reserve balance is above the immediate 12-month credit, hydro, and other risks that have been identified, and are estimated at $4.5 million. Table 3. Electric and Gas Operations Reserve Levels for FY 2015 {Preliminary unaudited figures from City's Financial System) Beginning Unaudited Projected FY 2015 FY 2015 Reserve Changes to Reserve Balance as Minimum Maximum Balance as the of 03/31/15 for FY Guideline Guideline of 07/01/14 Reserves 2015* Reserve Level Reserve Level Fund ($ Millions) ($ Millions) ($ Millions) ($ Millions) ($ Millions) Electric $19.6 ($11.2) $8.4 $13.l $26.1 Gas $9 .9 ($0.2) $9 .7 $5.6 $11.2 *The accounting activity to date reflects what has been booked into the City's financial system . These figures are preliminary until outside auditors have completed their review and the Comprehensive Annual Financial Report is produced. There could be significant changes to the supply operation reserve balances based on year-end adjustments that have not been booked yet. Exceptions to Energy Risk Management Policies, Guidelines, or Procedures There were no exceptions to the Energy Risk Management Policies, Guidelin~s , or Procedures to report during the third quarter of FY 2015. City of Palo Alto Page 7