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HomeMy WebLinkAboutStaff Report 253-07TO: FROM: HONORABLE CITY COUNCIL CITY MANAGER City of DEPARTMENT: Palo Alto : UTILITIES DATE:MAY 21, 2007 CMR: 253:07 SUBJECT:ADOPTION OF RESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO APPROVING CHANGES TO THE ENERGY RISK MANAGEMENT POLICY THAT WOULD PERMIT THE CITY TO TRANSACT IN CONGESTION REVENUE RIGHTS PRODUCTS AND APPROVING THE EXECUTION OF ONE OR MORE CONTRACTS IN REGARD TO THESE PRODUCTS WITH THE CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION EITHER DIRECTLY OR INDIRECTLY THROUGH THE NORTHERN CALIFORNIA POWER AGENCY RECOMMENDATION The Utilities Advisory Colmnission and staff recommend that City Council adopt a resolution to: 1) Approve changes to Section XI of the City’s Energy Risk Management Policy, to add Congestion Revenue Rights (CRR) products to the list of approved electric portfolio products; and 2) Authorize the City Manager to sign required contracts with the California Independent System Operator (CASIO) and!or Northern California Power Agency (NCPA) to obtain and manage CRRs for the purpose of mitigating the potential electric trmasmission congestion costs’ impact on the City’s retail electric customers. BACKGROUND Following the 2000-2001 wholesale electricity market crisis in California, the CAISO, under the direction and approval of the Federal Energy Regulatory Commission (FERC), has been developing a new electric transmission lnarket design. This new market design, officially named Market Redesign and Teclmology Upgrade (MRTU), is scheduled to start on January 31, 2008. One of the lnain objectives of the MRTU design is to allow the CAISO to more effectively lnanage electric transmission and congestion. To accolnplish this congestion management goal under MRTU, the CAISO will implement a new market pricing mechanism entitled Locational Marginal Pricing (LMP), which will be used to determine the most cost-effective use of resources to resolve power transmission bottlenecks. As a result of the CAISO’s ilnplementation of LMP, the City could be assessed congestion costs when the City’s resources are delivered across the CAISO-controlled transmission grid to serve the City’s load obligations. These CMR:253:07 Page 1 of 3 congestion charges are new costs resulting from MRTU implementation and are additional to the City’s existing contractual energy costs and transmission access charges. As part of the new market design, the CAISO has also developed a tool named Congestion Revenue Rights (CRR), an insurance-like product designed to mitigate transmission congestion costs that Load Ser~,ing Entities (LSE) like the City will be subject to upon the implementation of MRTU. Under MRTU, the CRRs will be allocated, free of charge, to LSEs that pay for the embedded capital improvement cost of the CAISO transmission grid. The City as an LSE is eligible to acquire the CRRs ttn’ough the CAISO allocation process free of charge. It is being proposed that NCPA act on behalf of the NCPA pool members, of which the City is one, for the purposes of requesting and administering the acquired CRRs. BOARD/COMMISSION REVIEW AND RECOMMENDATIONS The attached report, Attaclvr~ent 2, was presented to the Utilities Advisory Colnlnission at its May 2, 2007 meeting. The UAC had some questions to clarify certain technical aspects of the MRTU design and CRR product. Excerpts of the UAC meeting minutes approving the staff recolrnnendation are in Attachment 3. The UAC voted unanimously to approve the staff recommendation. RESOURCE IMPACT Operating under n-ew MRTU paradigm in 2008 is expected to increase costs. These cost elements have been included in the FY 07-07 budget. However, the CRRs that the City anticipates requesting fi-om the CAISO are expected to have a positive value and are expected to reduce the City’s congestion costs under MRTU. Participation in the CRR allocation and management process is expected to reduce the cost of serving the City’s retail electric load. POLICY IMPLICATIONS CRRs are a forna of ’financial product,’ a class of product that is curremly prohibited under Section XI of the Energy Risk Management Policy approved bythe Council in February 2006 (Resolution No. 8591). The prohibition was directed at the purchase of financial derivative energy products, such as financial options and futures, compared to a CRR product which is allocated free of charge to LSEs to protect against congestion costs. Based on this analysis, the Utilities Risk Oversight and Coordinating Committee (UROCC) voted to approve the CRR product on April 16, 2007 and has recommended it for Council approval. Proposed changes to the Risk Management Policy are highlighted in the UAC Report Attachment B. ENVIRONMENTAL REVIEW Adoption of the resolution to change the energy risk management policy and to authorize the City Manager to sign contracts to obtain and manage CRRs does not constitute a project for the purpose of the California Enviromnental Quality Act. CMR:253:07 Page 2 of 3 ATTACHMENTS A: Resolution Approving Changes To The Energy Risk Management Policy That Would Pelanit The City To Transact In Congestion Revenue Rights Products And Approving The Execution Of One Or More Contracts In Regard To These Products With The California Independent System Operator Corporation Either Directly Or Indirectly Through The Northern California Power Agency B: UAC Report of May 2, 2007 with Attachments A and B C: Excerpts of the UAC Meeting Minutes of May 2, 2007 - Draft PREPARED BY:DEBRA LLOYD Resource Plamaer JOE SACCIO Deputy Director of Administrative Services DEPARTMENT APPROVAL: VALE~~ ~. FONG Director of’Utilities CARL YEATS Director Services CITY MANAGER APPROVAL: Assistant City Manager CMR:253:07 Page 3 of 3 ** NOT YET APPROVED** A TTACHMENT A RES OLUTION NO. RESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO APPROVING CHANGES TO THE ENERGY RISK MANAGEMENT POLICY THAT WOULD PERMIT THE CITY TO TRANSACT IN CONGESTION REVENUE RIGHTS PRODUCTS AND APPROVING THE EXECUTION OF ONE OR MORE CONTRACTS IN REGARD TO THESE PRODUCTS WITH THE CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION EITHER DIRECTLY OR INDIRECTLY THROUGH THE NORTHERN CALIFORNIA POWER AGENCY WHEREAS, on July 15, 2002, the City of Palo Alto ("City") adopted Resolution No. 8200 to authorize the Northern California Power Agency ("NCPA") to sign the Metered Sub- system Aggregator Agreelnent ("MSSA Agreement") with the California Independent System Operator Corporation ("CAISO") on behalf of the City, to obtain electric transmission services from the CAISO; WHEREAS, in July 2002, the Council also authorized the Cit) Manager to sign the Scheduling Coordinator Project Agreement between the NCPA and NCPA Power Pool members, including the City, to forlnally obligate the City to perform under the MSSA Agreement; WHEREAS, the NCPA Power Pool members have been receiving transmission services from the CAISO since September 1, 2002; WHEREAS, the CAISO, with the Federal Energy Regulatory Connnission approval, plans to implement a new transmission market design on January 31, 2008, and its stated Objective are to increase electricity and the electric transmission market efficiencies and to improve transmission grid reliability; WHEREAS, the CAISO’s new Market Redesign and Teclmology Upgrade ("MRTU") contemplates a number of changes, including the development of congestion revenue rights ("CRRs"), by which to mitigate transmission congestion costs that load serving entities ("LSEs’), for example, the City, will be subject to upon the implementation of MRTU in January 2O08; WHEREAS, as the LSEs pay electric transmission delivery charges to support the maintenance and upkeep of the CASIO’s electric transmission grid, the CAISO intends to distribute the CRRs without cost to LSEs according to each LSE’s forecasted loads and the location of electric generation and snpply contracts; WHEREAS, the CRRs are a form of "financial product" that are cmTently not approved under Section XI of the Energy Risk Management Policy, which the Council by Resolution No. 8591 adopted in February 2006; 070516jb 0072864 1 NOT YET APPROVED** WHEREAS, the NCPA Power Pool members and the City’s staff, including the Utilities Risk Oversight and Coordinating Committee ("UROCC"), have reviewed MRTU and the CRRs program, and have determined that the benefits of holding CRRs in mitigating electric transmission congestion costs outweighs the detriments associated with not holding them; WHEREAS, the UROCC has approved the concept of holding CRRs and has recommended the Council’s approval of changes to Section XI of the Energy Risk Management Policy, that would add CRRs to the list of approved electric portfolio products; NOW, THEREFORE, the Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. The Council finds that it is both reasonable and p~-adent for the City of Palo Alto to participate in the California Independent System Operator Corporation’s Market Redesign and Teclmology Upgrade and the congestion revenue rights program (either through the CRR Allocation or CRR Auction or as a CRR Holder in the Secondary Registration System) and obtain such CRRs for the purpose of mitigating electric transmission congestion costs, because the benefits of holding the CRRs outweighs any potential risks to the City in not holding them. The Council also finds that in regard to the MRTU and the CRRs program, the City may enter into one or more contracts either directly with the CAISO or indirectly with the CAISO through the NCPA, acting on behalf of the City, to obtain from the CAISO and manage the CRRs in a lnmmer that would mitigate the City’s electric transmission congestion costs that would arise as a result of the implementation of the CAISO’s 2008 MRTU transmission market design. SECTION 2. The Council hereby approves changes to Section XI of the City’s Energy Risk Management Policy, to add congestion revenue rights products to the list of approved electric portfolio products. The Council also hereby authorizes the City Manager on the City’s behalf to sign a contract with the CASIO or, if the Citymust designate an agent to act on its behalf, it hereby authorizes the NCPA on the City’s behalf to sign a contract with the CAISO and it also authorizes the City Manager to sign a contract with the NCPA, in order to obtain from the CAISO and manage the CRRs for the purpose of mitigating the potential electric transmission congestion costs’ impact on the City’s retail electric customers. // // // 070516 jb 0072864 2 ** NOT YET APPROVED**~ SECTION 3. The Council finds that the adoption of this resolution does not constitute a project under the California Environmental Quality Act and the CEQA Guidelines and, therefore, no enviromnent assessment is required. INTRODUCED AND PASSED: AYES: NOES: ABSENT: AB S TENTIONS: ATTEST:APPROVED: City Clerk APPROVED AS TO FORM: Senior Asst. City Attorney Mayor City Manager Director of Utilities Director of Administrative Services 070516 jb 0072864 ATTACHMENT B MEMORANDUM TO: FROM: UTILITIES ADVISORY COMMISSION UTILITIES DEPARTMENT DATE: SUBJECT: MAY 2, 2007 APPROVAL OF CONGESTION REVENUE RIGHTS PRODUCT TO MITIGATE ELECTRIC TRANSMISSION CONGESTION COST REQUEST: Staff requests that the UAC recommend that City Council: 1) Approves changes to Section XI of the City’s Energy Risk Management Policy to allow Congestion Revenue Rights (CRRs) to be included in the list of approved electric portfolio products; and 2) Authorizes the City Manager to sign a contract with the California Independent System Operator (CAISO) or to authorize Northern California Power Agency (NCPA) to execute the necessary agreements to request CRRs from the CAISO on behalf of the City and to manage the CRR for the purpose of mitigating the potential electric transmission congestion costs’ impact of the City’s retail electric customers. BACKGROUND: FolIowing the 2000-2001 electricity market crisis ha California, the CAISO, under the direction and approval of the Federal Energy Regulatory Commission (FERC), has been developing a new transmission market design. The stated objective of the new .design is to increase electricity and transmission market efficiencies and improve transmission grid reliability. This new market design, officially named Market Redesign and Techlaology Upgrade (MRTU), is ptanned to start on January 31, 2008. Implementation of MRTU will bring about many changes in scheduling and setttemems of loads and generation over the CAISO controlled transmission grid. One of the key changes will be an explicit chmge to users of the electricity grid for the cost of congestion associated with delivering energy to meet loads. As part of the new market design, the CAISO has also developed a tool nmned Congestion Revenue Rights (CRR), an insurance-like product designed to mitigate transmission congestion costs that Load Serving Entities (LSE) like the City will be subject to upon the implementation of MRTU in January 2008. DISCUSSION: The CRR product and the allocation process have been designed by the CAISO to protect and compensate loads (customers) from the new incremental congestion costs of the market redesign. These CRRs will be allocated free of charge to LSEs to hold and to manage for their customers. Based on the studies undertaken by Northern California Power Agency (NCPA) on behalf of it.s_members, the value of CRRs that the City has the right to obtain from the CAISO is expected to be positive, though the exact value is highly uncertain. At this time there are no alternative products available to manage this new congestion cost exposure under MRTU. A more complete discussion and the rationale for seeking approval to request and manage CRRs tl~rough NCPA to reduce the impact of transmission congestion costs on the City’s retail electric customers is provided in Attaclmaent A. POLICY IMPLICATIONS CRRs are a form of ~financial product’, a class of product that is currently prohibited under Section XI of the Energy Risk Management Policy approved by Council in February 2006 (Resolution No. 8591). The prohibition was designed mainly for financial derivative products which have considerably more risks, compared to a CRR product which is allocated free of charge to LSEs to protect against congestion costs. Based on this analysis, the Utilities Risk Oversight and Coordinating Committee (UROCC) voted to approve the CRR product on April 16, 2007 and has recommended it for Council approval. Proposed changes to the Risk Management Policy are highlighted in Attactmaent B. RESOURCE IMPACTS The CRRs the_City expects to request tl~rough NCPA are expected to have a positive valne and are expected to reduce the City’s congestion costs. Participation in the CRR requesting and management process is expected to reduce the cost of serving the City’s retail electric load. ATTACHMENTS: A. Presentation - Requesting the UAC to recommend the CRR Product for Council approval B. Proposed Changes to Section XI of the Energy Risk Management Policy Prepared by:Debra Lloyd, Resource Plalmer Shiva Swaminathan, Senior Resource Plalmer Karl Van Orsdol, Energy Risk Manager Approved by: Director of Utilities Carl Yeats Director Services o"m 0 (D 0 © 0 (D0 .< (D 0 o (D 0 0 0 0 0 © © ©o © 0 0 0 0oo d (D [] [] 7~ <E z< [][] 0o9 @ ~~ >~ oO z::: o, E:L. (D 000 (Do ®o ®0~_ 5:5 ~0 o ®~ 0 ~0 RD 0 c 0 <o ©> 69-0 0 0 Z × × 0 .9.0 o ~ ~ I 1 0 0 0 0 o [] ¢) (D © © ~ ~ 0 0 © 0 0© (I) 0 0 0 © 0 0 © @ >. © © X X X O O 0 © F~ 00 _o (D 0 0 © © 0o o o o X 0 © < © ©~o 0 © E @ 0 E~o © r- ~oo o o0 0o~ I < 0 [][] 0 0 00 0 0 0 ®0 0 © < n o ® II Attachment B: Proposed Changes to Section XI of the Energy Risk Management Policy XI.AUTHORIZED TRANSACTING PRODUCTS Products allowed for electric transactions include energy, capacity, transmission, and ancillary services. Products allowed for natural gas transactions include energy, transportation, and storage. The :..~:_l£!._’:.,:~_.’.k.Rlsk Oversight ~l~,.J t..;oo~’(!!.~:~t!u< Committee ~..,:~:::.~:2.,_.,.:::..,: *~ responsible for authorizing aI1 products and commodity types as fu~her detailed in the Energy Risk Management Guidelines. At this time, only physical transacting products f [~U~-’~,"" -,v~.{ ~,:, ~"~~", ~’"b-~.~;-w’,~]"~" "" ’" " ’ * ’ "~ .....~ ...............~ ~ ......~ .- 7"~ :, a.. ,-~ ......~ ~ ¯ ~J:.~<~:~:~.g.{-~‘~><~..~:~:.~:~<~:~>.:~e~5~5~‘-~p.~.:‘~.;.~.{g.;4~>~:.: All transactions must £ollow ce~ain requirements as described tMoughout this Policy. Key dements of CPAU’s transaction policy are as follows: Ai1 transactions must be committed to by authorized transacting personnel. All transactions must be with approved counterparties with executed and Council ’ approved contracts. All transactions must be with counterparties with adequate available credit. All transactions must be committed over recorded phone lines or via electronic mail. All transactions must be Approved Transaction Types. All transactions must be consistent with Risk Management Policy as described in this document, as well as Risk Management Guidelines and Procedures. Failure to observe the above minimum requirements when executing energy transaction is a violation of Policy and is subject to disciplinary action. ATTACHMENT C EXCERPTS FROM UTILITIES ADVISORY COMMISSION MEETING MINUTES OF May 2, 2007: DRAFT CALL TO ORDER Chairman Melton called to order at 12:00 noon the regular scheduled meeting of the Utilities Advisory Commission. Present: Melton, Rosenbaum, Bechtel, Dawes, Keller and Council Liaison, Beecham NEW BUSINESS ITEM 1: ACTION ITEM: Approval of Congestion Revenue Ri.qhts (CRR) product to manaqe electric transmission con,qestion cost exposure Debra Lloyd and Shiva Swaminathan went through the highlights of the slides provided to the Commissioners as part of the UAC report. They explained the need for the CRR product within the larger context of the new transmission market design. Commissioner Dexter inquired about the mechanics of how the product would work and observed that the example provided in the report was helpful; he also requested that staff report back on the performance of these products upon implementation next year. Staff agreed. Commissioner Rosenbaum observed that the cost/value associated with the CRR product at hundreds of thousands of dollars was small compared to the $100 million electric budget. He also requested that it will be helpful for him to see a more comprehensive description of the CRR product. Valerie Fong agreed to share the Council report with Commissioner Rosenbaum. Commissioner Bechtel inquired about information that needs to be provided to the CAISO and regarding electrical losses associated with transmission. Council Member Beecham provided his perspective as the NCPA Commissioner. He outlined the various interventions and filings made by NCPA and City staff on various aspects of this market design at the FERC and US Congress. The final market design, now contemplated for implementation was January 2008, was a product of a highly involved process. Staff recommendation was approved unanimously by a 5-0 vote by the Commissioners. Utilities Advisory Commission Minutes from: Approved on:Page 1 of 1