HomeMy WebLinkAboutStaff Report 224-07City of Palo Alto
City Manager’s Report
16
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: UTILITIES
DATE:MAY 7, 2007 CMR:224:07
SUBJECT:ADOPTION OF ORDINANCE OF THE COUNCIL OF THE CITY OF
PALO ALTO AUTHORIZING THE CITY MANAGER TO PURCHASE A
PORTION OF THE CITY’S ELECTRICITY REQUIREMENTS FROM
CERTAIN PREQUALIFIED ELECTRICITY SUPPLIERS UNDER
SPECIFIED TERMS AND CONDITIONS DURING CALENDAR YEARS
2007 THROUGH 2022, INCLUSIVE
RECOMMENDATION
Staff recolmnends that Council approve the following:
Authorize the City Manager to negotiate and sign new, amended, or restated Master
Agreements with the following electricity suppliers:
a.ConocoPhillips Company;
b.Coral Power, LLC;
c.Sempra Energy Trading Corporation;
d.BP Energy Company;
e.JP Morgan Ventures Energy Corporation;
f.Powerex Corporation; and
g.Pacific Sulmnit Energy, LLC
o Anthorize the City Manager or his designee, to execute nmltiple transactions under the
Master Agreements with one or more of the above suppliers to procure electricity
supplies and related services sufficient to meet the City’s forecasted electricity load, with
the date for delivery of the electricity for each transaction not to exceed 36 months from
the date the transaction is executed. The delivery date for any transaction will not extend
beyond December 2022, and the maximum aggregate transaction limit under each Master
Agreelnent shall be $75 million.
CMR:224:07 page 1 of 7
BACKGROUND
The City’s 40-year contract with Western Area Power Administration (Western) expired at the
end of December 2004. This contract was replaced with the new Western Base Resource contract
in January 2005. The energy delivered under the new contract was approximately 40% of the
energy provided under the prior contract, resulting in the need to purchase new supplies in 2005
to meet approximately 55% of the City’s electricity load during an average hydrological year. In
addition, the energy provided under the new contract varies with changing hydro conditions.
A large portion of the deficit has since been met through long-term renewable contacts. The
remaining energy needs are met through market purchases. This remaining energy deficit is
highly variable and dependent on hydro conditions, with the deficit as high as 50% in a dry
hydro year and with the potential for surpluses in a wet year.
Council has previously approved the City’s Long-tern1 Electric Acquisition Plan (LEAP)
objectives, guidelines and implementation plan (CMR:425:01, CMR398:02, and CMR:354:03).
The LEAP objectives are to serve electricity loads of the City at competitive and predictable
costs. The City meets these objectives by procuring electricity supplies in a diversified,
systematic fashion over a rolling 36-month period. To implement the "laddered electricity
purchase strategy" and to facilitate obtaining competitive price quotes from suppliers, the City
established Master Agreements with a set ofpre-qualified suppliers.
The July 2002 Assessment of Utility Risk Management Procedures by the City Auditor made
recommendations to improve the City of Palo Alto Utilities’ (CPAU) energy procurement
process. The Auditor’s report recommended that Master Agreements with suppliers be approved
by the Council with clearly defined dollar, volume and duration limits and with clearly defined
transaction types that staff is authorized to execute under the agreements (recommendation #4).
The Auditor’s report also recommended that the process of securing Master Agreements be
undertaken in an open and competitive mamaer (recolnmendation #6).
The City cun’ently procures electricity supplies from three suppliers (BP Energy, Coral Power,
and Sempra Energy) under Master Agreements that were approved by Council in January 2004
[Ordinance #4812]. An additional Master Agreement with Duke Energy Marketing, LLC was
approved in 2004 but that counterparty has since withdrawn from the Western energy markets
and is, therefore, no longer transacting with the City.
DISCUSSION
The current Master Agreements were approved by the Council for transactions with deliveries no
later than December 31, 2011. By the end of December 2008, the existing Master Agreements
will no longer be in accord with the City’s 36-month laddered purchase strategy. In addition, the
exit of Duke Energy Marketing, LLC increased the need for additional suppliers to ensure
competitive pricing and diversification of purchases across multiple creditworthy suppliers.
Finally, new regulations to meet resource adequacy standards create the need to purchase
capacity-related products that were not contemplated in the original Master Agreements. To that
end, an RFP was issued in June 2006 to solicit interest from new and existing suppliers to sign
Master Agreements with the City to enable future procurement of electricity supplies required to
CMR:224:07 Page 2 of 7
meet the City’s electricity needs. The supplier selection process for the RFP is provided in
Attachlnent A. The seven proposed Master Agreements were negotiated under terms and
conditions acceptable to the City. The Master Agreements with BP, Coral and Sempra approved
under Ordinance 4812 remain valid, however, a number of amendments were negotiated during
the process. Due to each agreement’s multiple page count, staff has elected to not attach copies
to this CMR in an effort to save paper. However, the Master Agreements are available for review
in the Office of the City Clerk.
Description of a Master Agreement
The proposed Master Agreements are based on the 2000 Edison Electric Institute (EEI) Master
Power Purchase and Sale Agreement. A Master Agreement is similar to a blanket purchase
order, and includes the general terms and conditions that govern transactions. The Master
Agreement consists of a Base Contract and a Cover Sheet, which lists special provisions
negotiated between the City and the supplier. Addendums to the Master Agreements include
Schedule P, which defines energy and capacity products.
Executing a Master Agreement does not commit the City to execute any transaction nor is it a
promise of business by the City or by the supplier. Each transaction for part of the City’s
monthly, annual, or multi-year electricity requirements is completed through subsequent
competitive bidding, as evidenced by a completed Transaction Confirmation document.
Each Master Agreement may be terminated at any time by either party according to the terms of
the agreement. Termination of the Master Agreement cancels the supplier’s ability to bid on
further transactions until a new Master Agreement is executed. Any transaction executed under
the Master Agreement prior to ternaination will remain in place until the final electricity delivery
date, unless an event of default has transpired. In the event of default by a supplier, the City has
the option to terminate the remaining transactions that were executed under the Master
Agreement.
The City may suspend the privilege of solicitation to bid on individual transactions with any
supplier due to counterparty credit or transaction limits, a supplier credit downgq’ade event,
supplier default or suspected default, or where inclusion in the solicitation would not comply
with the law or City policies, guidelines, rules or procedures. If the number of eligible suppliers
dwindles to an unacceptable level, the City reserves the right to conduct an RFP for new Master
Agreements.
Staff intends to conduct another RFP to solicit new suppliers within 5 years, well before the 2022
term limit on these Master Agreements. This provides the City with the flexibility to execute one
or more long-term transactions with Council approval if the laddering strategy is revised to
include longer-term purchases. If a recommendation is made to make purchases outside of the 36
month purchase plan, the transaction(s) will have a specific cost limit and transaction time limit
to be approved by Council at that time. That cost may be in addition to the $75 million per
supplier limit in the attached Ordinance.
All transactions under the Master Agreements wilt be executed by staff in accordance with the
Energy Risk Management Policies, Guidelines, and Procedures. These procedures are monitored
CMR:224:07 Page 3 of 7
by the Energy Risk Manager and the Utilities Risk Oversight and Coordination Committee to
ensure that risks inherent in the energy industry are managed prudently. Staff provides Council
with an update of all executed transactions under the Master Agreements in the quarterly Energy
Risk Management reports.
Limits of Authorization
The proposed limits and parameters for Council’s authorization to the City Manager include the
following:
o
o
4.
5.
6.
Delegation of authority, in accordance with the Palo Alto Municipal Code, to the City
Manager to purchase and, incidental to purchase, sell electricity to meet the City’s retail
load requirements within a 3-year period from the date the transaction is executed.
Requirement that all transactions are consistent with Council-approved Energy Risk
Management Policies (CMR: 128:06) and internal energy risk management guidelines and
procedures.
Regular reporting of all transactions in excess of $65,000 to Council (per the Energy Risk
Management Policies and Guidelines).
Authorization of transactions to be executed under Council-approved Master
Agreements.
A maximum total dollar amount of $75 million for aggregated electricity transactions for
any single Master Agreement.
Requirement that comlnodity products allowed for purchase or sale incidental to purchase
must be "authorized transacting products" as defined in the Council-approved Energy
Risk Management Policies.
All other transactions lie outside of the authority delegated to the City Manager and will require
Council approval, including:
Any transactions with a term beyond 3 years from the date of transaction;
Any transaction beyond the limitations listed above; or
Any transactions costing more than the limits specified above.
In no event shall any transaction with either BP Energy Company or Sempra Energy Trading
Corporation exceed 4 years.
Collateral
Of the seven Master Agreements, two require that the City post collateral in the form of cash or a
Letter of Credit for assurances under certain circumstances. Such a circumstance would occur in
the rare event that the City purchases a high portion of its forward electricity supply with one of
the counterparties after which forward prices fall to such a level that the value of the transactions
versus the cost is negative. Much of the risk of this occurrence can be managed through sound
counterparty diversity practices and monitoring of the value of each transaction executed per
supplier. The other event in which the City may be required to post collateral would be if the
City’s credit rating is downgraded by either Standard and Poor’s or Moody’s Investor Services.
While neither of these events is likely, the contract requires that the City be prepared to promptly
offer credit collateral assurances. A separate City Manager’s Report (CMR) detailing these
CMR:224:07 Page 4 of 7
issues recommended a plan for implementing a credit facility for posting Letters of Credit
(CMR: 108:07). The costs associated with developing this facility will be covered by the relevant
enterprise funds.
ALTERNATIVES
Council could elect to not approve one or more of the proposed contracts. However, doing so
would limit the ability of staff to competitively bid and diversify electricity supplies.
Council could elect to approve the contracts with different contract limits. Lower limits could
reduce the ability of staff to competitively bid and diversify electricity supplies or could require
staff to return to Council to increase the limits on certain Master Agreements within the terms of
the Master Agreements thereby delaying transactions. Staff does not recommend higher limits at
this time. Should higher limits be necessary due to unforeseen circumstances, staff believes that
there would be adequate time to request a change in contract limits from Council.
RESOURCE IMPACT
The cost of the transactions executed under the Master Agreements are a function of the electric
market prices and the City’s forecasted and actual volume of electricity needs.
Currently, electricity can be purchased for between $60 and $90 per megawatt-hour (MWh) for
deliveries during the next several years. The City’s expected market purchases are about 300,000
MWh per year, which translates to an mmual commodity cost of about $18 million to $27
million. Since electricity prices are volatile and the amount of electricity to be purchased under
the Master Agreements is dependent on hydro conditions, it is conceivable that the .market
purchase cost could double from expected levels. The table below is an illustration of anarket
purchase cost under various scenarios.
Projected Electric Market Purchase Cost ($M)
FY 08:09
Expected Hydro and Market Prices $23.0 $25.0 $26.0
Change in Market Purchases Cost Under High Prices + $ 0.5 + $ 3.5 + $ 5.0
and Expected Hydro
Change in Market Purchase Cost Under Dry Hydro + $ 0.5 + $ 9.5 + $ 9.0
Conditions
Total Purchase Cost Under $24.0 $38.0 $ 40.0
Dry Hydro & High Market Prices
As shown in the table above, the expected electricity market purchase cost for the next several
years is between $23 and $26 million!year. The cost estimates are relatively certain for the
current fiscal year since a large portion of the electricity has already been purchased at fixed
prices and the fiscal year is nearly over. Costs for FY 07-08 and FY 08-09 are less certain as less
electricity has been purchased in advance, and future electricity prices could rise above
expectations and supply from hydro could fall below expectations.
CMR:224:07 Page 5 of 7
The following table summarizes the City’s historical electricity purchase costs and projected
costs for the next several years. As of March 20, 2007, transactions worth $24 million have been
entered in with existing suppliers for deliveries during the period April 2007 though December
2009.
Electricity Procurement Summary as of 3/20/07 - Cost ($M) and Volumes (MWh)
FV04-05 FY05-06 FY 06-07 FY 07-08 FY 08-09 FY 09-10
SM SM ~ $M ’ SM ~ : SM : SM
BP Energy
Company
Coral Power LLC
S empra
Duke
TOTAL
$
$
$
$
3.6
2.5
4.4
10.5
$
$
$
$
3.5 $2.7
13.9 $6.7
3.4 $10.0
2.7 $-
23.5 $ 19.3
$
$
$
$
$
0.9
5.8
6.3
13.0
$
$
$
$
6.1 $
$
$
6.1 $
2.0
2.0
BP Energy 54,160 46,080 14,655 -
Company
Coral Power LLC 91,100 307,425 162,145 134,425 138,515 55,225
Sempra 47,560 86,660 157,855 93,300 -
Duke 86 400 38,840 ---
TOTAL 225,060 487,085 366,080 242,380 138,515 55,225
While the City has selected seven suppliers with whom to sign Master Agreements, it is
conceivable that only a few suppliers may ultimately provide the most competitive prices, and
some may merge or leave the industry, resulting in transactions being concentrated among fewer
qualified suppliers. Staff recommends a maximum transaction limit of $75 million for the term
of each Master Agreement. This limit gives staff the flexibility it needs in case electricity costs
increase above expectations or if some of the suppliers are unable to continue to do business with
the City or do not offer the best prices. It also sets a monetary limit on the transactions that is
less than the total anticipated three-year purchase cost.
Approval of the recommendation will not impact the FY 06-07 budget. Transactions with
deliveries extending beyond the approved budget horizon are contractual commitments,
supported by Electricity Fund retail revenues with retail rates determined by Council.
POLICY IMPLICATIONS
Authorizing the City Manager to buy and sell electricity to meet City load under these Master
Agreements conforms to existing Council-approved Energy Risk Management Policies
[CMR: 128:06]. This recommendation is consistent with the Council-approved Utilities Strategic
Plan to 1) preserve a supply cost advantage compared to the market price; and 2) streamline and
manage the business process to allow the City of Palo Alto Utilities to work efficiently and cost-
effectively.
Further, the recommendation supports the Council-approved Utilities’ Electricity Supply
Portfolio Planning and Management Objectives and Guidelines for Long-terrn Electric
Acquisition Plan (LEAP) [March 2007 CMR: 158:07].
CMR:224:07 Page 6 of 7
ENVIRONMENTAL REVIEW
Adoption of the ordinance approving Master Agreements and delegating electricity procurement
responsibilities to the City Manager under certain limitations does not constitute a project for the
purposes of the California Environmental Quality Act.
ATTACHMENTS
A: RFP Evaluation Process
B: Ordinance of the Council of the City of Palo Alto Authorizing the City Manager to Purchase
a Portion of the City’s Electricity Requirements from Certain Prequalified Electricity
Suppliers Under Specified Terms and Conditions During Calendar Years 2007 through 2022,
Inclusive
PREPARED BY:
MONICA PADILLA
Resource Planner
SHIVA SWAMINATHAN
Senior Resource Planner
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
VALERI~ 0._ F(EEo. l,G
Director ot’Utilities
Assistant City Manager
CMR:224:07 Page 7 of 7
CMR: - ATTACHMENT A
ATTACHMENT A: Electric Agreement RFP Selection Process Summary
The City of Palo Alto issued RFP # 118076 on June 9, 2006 to solicit and execute Master
Agreements with multiple suppliers to enable furore procurement of power supplies
required to meet the City’s electric load needs. Bid packages were mailed to 29 potential
suppliers. The nine suppliers responding to the RFP were evaluated by a team comprising
staff from Utilities, Purchasing, Administrative Services and the City Attorney’s Office.
The selection was based on supplier ability to competitively and reliably transact with the
City and supplier responsiveness in agreeing to meet City’s contractual provisions. The
responses were evaluated based on four broad criteria categories.
Financial: Financial strength, clarity of financial statements, organizational
transparency of the supplier/entity providing c, redit support, overall furore
outlook, expected longevity in the industry were ranked by top, middle, and
bottom third (A, B, C).
Credit: A minimum requirement is the supplier must be investment grade. Quality,
nature, and extent of credit support, rating agencies credit ratings, credit
contractual provisions, risk limits based on proposed terms, and magnitude of
credit risk were ranked by top, middle, and bottom third (A, B, C).
Contract Provisions: Several terms must be met as a minimum requirement: Choice
of law is California; Venue of dispute is Santa Clara County; and One-way
termination applies. Overall contractual provisions beyond the minimum
required in addition to flexibility/ease of negotiation were ranked top, middle
and bottom third (A, B, C).
Performance/Capabilities: Experience in California, relevant physical assets and
capabilities, and past performance with Palo Alto or other municipal entities
were ranked by top, lniddle, and bottom third (A, BI C).
Two suppliers, Constellation Energy Commodities Group, Inc., and Morgan Stanley
Capital Group, Inc., did not meet the City’s minimum contract requirements (namely
one-way terlnination) and were eliminated from the process. All three of the City’s
existing suppliers, BP Energy Company, Coral Power LLC, and Sempra Energy Trading,
elected to extend the Master Agreements currently in place. The City amended these
three Agreements adding updated bankruptcy language and updated language to reflect
upcoming regulatory and legislative changes in the industry. These three suppliers and
the other four suppliers that responded to the RFP met the City’s minimum credit and
contractual criteria.
CMR:Page 1 of 2
CMR: - ATTACHMENT A
Composite results of the team’s evaluation are summarized in Table 1 below.
Table 1: Electric Master Agreement RFP Evaluation Summary
Contract’ Performance
Provisions / Reference
BP Energy Corporation A A B A
ConocoPhillips Company A A A A
Coral Power LLC A A A A
JP Morgan Ventures Energy Corp.A B B A
Pacific Summit Energy, LLC A A A B
Powerex Corporation A B A A
Sempra Energy Trading Corp.B A B A
A-
A
A
B+
A-
A-
B+
Staff strives to ensure that the City has at least three qualified bidders to obtain
competitive pricing and to diversify suppliers, some counterparties do not offer all natural
gas products that the City needs, and the industry regularly experiences vendors exiting
the business or consolidating. These characteristics dictate securing a set of three to seven
agreements. Managing more than seven contracts becomes unduly burdensome. All seven
qualifying suppliers were able to agree to negotiate final agreements acceptable to the
City.
CMR:Page 2 of 2
NOT YET APPROVED
A TTACHMENT B
ORDINANCE NO.
ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO
AUTHORIZING THE CITY MANAGER TO PURCHASE A PORTION
OF THE CITY’S ELECTRICITY REQUIREMENTS FROM
CERTAIN PREQUALIFIED ELECTRICITY SUPPLIERS UNDER
SPECIFIED TERMS AND CONDITIONS DURING CALENDAR
YEARS 2007 THROUGH 2022, INCLUSIVE
The Council of the City of Palo Alto does ORDAIN as
follows:
SECTION i. The City Council finds, as follows:
A.Between November 2001 and August 2003, the Council
by minute orders approved the following: (i) four primary energy
portfolio objectives ("Objectives"), noted in staff report
CMR:425:01, including the objective to ensure low and stable
electric supply rates for customers; (2) long-term electric
acquisition plan development and management guidelines ("LEAP
Guidelines"), noted in staff report CMR:389:02, which requires the
diversification of energy purchases based on factors such as dates
and terms of commitment, suppliers, prices and fuel sources; and
(3) the LEAP Implementation Plan, noted in staff report
CMR:354:03, which requires approval of master agreements with
suppliers for terms of up to three years.
B.In accordance with the LEAP Guidelines and the
implementation of the City’s short-term electric purchase
laddering strategy, noted in staff report CMR:331:04, the City
must annually purchase and, incidental to purchases, sell
electricity to meet the needs of its electric customers by
contracting for terms varying from less than one month to three
years. The City’s Energy Risk Management Policies, noted in staff
report CMR:128:06, provide that the City will purchase only that
quantity of electricity meeting its load requirements at the time
a transaction is executed.
C.By Ordinance No. 4812, adopted January 5, 2004, the
City has entered into one or more purchase t~ansactions, costing in
the aggregate $19 million, which are scheduled for delivery in the
2007 - 2009 period. These transactions will be governed by the
new, amended, or restated Edison Electric Institute contracts (each
an "EEI Contract") .
D.In June 200~, the City conducted an RFP process for
electricity purchases and BP Energy Company, Coral Power, L.L.C.,
Sempra Energy Trading Corporation, ConocoPhillips Company, J.P.
Morgan Ventures Energy Corporation, Pacific Summit Energy L.L.C.
and Powerex Corporation have been determined to possess the minimum
070420 syl 0072801
NOT YET APPROVED
financial and legal qualifications and business experience required
of suppliers eligible to do business with the City.
E.The City intends to purchase electricity from one or
more of these pre-qualified suppliers for delivery during calendar
years 2007 through 2022, inclusive, provided the supplier with whom
the City negotiates specific transactions continues to be qualified
and otherwise eligible to do business with the City.
SECTION 2. The Council hereby authorizes the City Manager
to negotiate and sign new, amended, or restated EEI Contracts with
the suppliers referred to in section I.D above, and further
authorizes the City Manager or his designee, the Director of
Utilities,to negotiate one or more individual transactions,
including,but not limited to, negotiating contracts, addenda,
confirmations and transactions for resou-rce adequacy. The
authorization shall extend to individual transactions executed
under any number of EEI Contracts with the referenced suppliers;
provided, however, (a) the maximum expenditure under any EEI
Contract shall not exceed $75 million in the aggregate and, with
respect to outstanding transactions for $19 million referred to in
Section I.C, the respective amounts will not be applied against the
maximum expenditure established herein; and (b) the maximum term of
any transaction shall not exceed three years, commencing on the
date of execution of the transaction. The sentence preceding
notwithstanding, the City may enter into a transaction greater than
three years with any supplier referred to in Recital D, excepting
BP Energy Company and Sempra Energy Trading Corporation, with whom
any transaction shall not exceed four years, if the Councfl grants
prior approval to such transaction.
SECTION 3. No EEI Contract and any related transaction
entered into with any qualified supplier, executed by the City
Manager or his designated representative and approved as to form by
the City Attorney, under the authority of this ordinance shall
extend beyond December 31, 2022.
SECTION 4. The Council hereby finds that this ordinance is
exempt from the provisions of the California Environmental Quality
Act pursuant to Section 15061(b) (3) of the California Environmental
Quality Act Guidelines, because it can be seen with certainty that
there is no possibility of significant environmental effects
occurring as a result of the adoption of this ordinance.
//
//
//
//
070420 sy3 0072801
NOT YET APPROVED
SECTION 5. This ordinance shall be effective on the
thirty-first day after the date of its adoption.
INTRODUCED:
PASSED:
AYES:
NOES:
ABSTENTIONS:
ABSENT:
ATTEST:
City Clerk
APPROVED AS TO FORM:
Mayor
APPROVED:
Senior Asst. City Attorney City Manager
Director of Administrative
Services
Director of Utilities
070420 sy~ 0072801
3