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HomeMy WebLinkAboutStaff Report 270-07City of Palo Alto City Manager’s Report TO: FROM: HONORABLE CITY COUNCIL CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE:JUNE 11, 2007 CMR:270:07 ¯ SUBJECT:CITY OF PALO ALTO’S ENERGY RISK MANAGEMENT REPORT FOR THE THIRD QUARTER, FISCAL YEAR 2006-2007 This is an information report and no Council action is required. OVERVIEW Staff has continued to purchase electricity and gas in full compliance with the City’s Energy Risk Management Policies and Procedures. There are no exceptions to report. The total market value for all gas and electricity commodity purchases for the next 12 months is $13.8 million. The City’s credit exposure to wholesale electricity purchases is $11.1 million for electricity, unchanged from last quarter. The credit exposure from purchases of renewable power is $0.6 million. The value of Western hydro is $14.3 million, while the value of Calaveras hydro is negative $3.4 million. The City’s credit exposure in gas is $2.1 million, up from zero last quarter. The City’s price risk exposure from the yet-to-be-purchased portion of its electric and gas portfolio, know as Value at Risk or VAR, is well within current guidelines. Electricity supply reserves are fully adequate for the current risk profile. The gas reserves are considered adequate for the current level of risks although additional reserve levels are recommended. BACKGROUND The purpose of this report is to inform the City Council of the status of the City’s energy portfolio and transactions executed with energy suppliers as of the end of the third quarter of Fiscal Year 2006-07. The City’s Energy Risk Management Policy requires that staff report on a quarterly 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. Table 1 and Table 2 below summarize the current position and exposure of the City with the electricity and gas commodity portfolios, respectively. Table 1 summarizes the electric portfolio in terms of forward purchase volumes, headroom (volume limit less current purchases volumes), and mark to market value (current market price less purchase price). Table 2 summarizes the gas portfolio in terms of transaction volume, market value, mark to market value and limits. CMR:270:07 Page 1 of 11 DISCUSSION Electricity Purchases. As of March 31, 2007, the electric portfolio of long-term contracts consisted of 39 monthly deliveries through December 2009. These deliveries are contracted under 14 separate transactions. Figure 1 below illustrates the sources of electricity supplies by month for the next 36 months. The City currently has purchased supplies of electricity totaling 482,000 MWh for delivery between April 1, 2007 and December 31, 2009. The average price for all of the fixed-price purchases was $49.10 per MWh. The forward purchases have been transacted with three approved counterparties: Coral Energy, Sempra Energy, and British Petroleum. In Figure 1, the Seattle City Light (SCL) volumes represent an "exchange" whereby Palo Alto supplies power to Seattle City Light in the winter months and Seattle provides power to Palo Alto during the summer months. 120,000 Figure 1. Electric Load Resource Balance 100,000 80,000 60,000 40,000 20,000 We stern ~SCL Wind Gen Total Load Calaveras Landfill Gas Gen Forward Market Purchases The MTM value of the City’ s forward transactions for wholesale power remains at $11.1 million. Figure 2 presents the MTM positions for each supplier by month. The MTM value of the City’s forward positions for renewable green power is $0.58 million. The value of Western Hydro is $14.3 million, while the value of Calaveras hydro is negative $3.4 million. The total value of expected output from Calaveras and Western hydro generation is $10.9 million, down from $14.4 last quarter, due to the reduction in expected generation resulting from reduced precipitation. The value of the swap with Seattle City Light is negative $277,000. CMR:270:07 Page 4 of 11 Figure 2. Electric Mark to Market Value by Counterparty $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $- $(200,0~4 Delivery Date Natural Gas. As of March 31, 2007 the gas portfolio consisted of 71 separate transactions. The City currently has purchased supplies of gas totaling 4.33 million MMBtu for delivery between April 1, 2007 and December 31, 2009. The average price for all of the fixed-price purchases was $7.64 °per MMBtu, up from $7.47 last quarter. The forward purchases have been transacted with three approved counterparties: Coral Energy, Sempra Energy and British Petroleum. The current MTM value of gas transactions is negative $2.1 million, up from zero at the end of last quarter. The MTM value by month and by counterparty is presented in Figure 3. The MTM history is presented in Figure 4. CMR:270:07 Page 5 of 11 Figure 3. Natural Gas Portfolio Mark to Market $500,000 $400,000 $300,000 $200,000 .... $I00,000 $- $(Ioo,o $(200,000) Delivery Date 25 2O Figure 4. Mark to Market History CMR:270:07 Page 6 of l 1 Value at Risk The "riskiness" of the energy portfolio is measured through the "value at risk" (or VaR). The VaR measures the risk that adverse market conditions could force CPAU to use reserves to cover costs on future purchases over what is reflected in current rates. Specifically, VaR measures how much projected 12-month net revenue could change in one week due to a potential adverse market change. Staff uses the VaR as one of the key measures of market price risk to CPAU. In compliance with the Risk Management Guidelines, the Utilities staff and the Energy Risk Manager monitor the VaR level relative to the projected end-of-year supply Rate Stabilization Reserve (RSR) levels for both electricity and gas. Currently, the VaR for the electricity portfolio is 2% of the RSR. The VaR for gas moved below the 10% benchmark value for the first time in over 12 months, decreasing from 13% to 7.5% at the end of last quarter. The historic levels of the VaR values for electricity and gas are presented in Figure 5. Figure 5. Value at Risk History 25% 20% 15% 10% 5% O% Gas Electricity CMR:270:07 Page 7 of 11 Credit Risk To manage credit risk, staff reports on major credit rating agency’s (S&P and Moody’s) scores, and, in addition, the "estimated default frequency" (EDF) using the Moody’s KMV CreditEdge© system. The EDF is an estimated probability that a counterparty will default in the next 12 months. Electricity. CPAU’s electric supplier counterparty credit exposure and the supplier credit ratings are presented below. CPAU’s largest exposure, in excess of $11.8 million, is with Coral, a company rated A- by Standard and Poor’s. Coral is a wholly owned subsidiary of Royal Dutch Shell which is rated AAA, the highest rating given. Table 1. Electricity Suppliers - Credit Exposure and Credit Ratings as of March 31, 2007 Counter party BP CoralI Sempra Total Total Credit Exposure $ 105,612 $10,270,939 $ 674,615 $11,051,166 S&P Ranking AA+ BBB+ Previous Quarter Expected Default Frequency .02 .05 Current Expected Default Frequency .02 .05 .02 .02 Expected "Loss" (Exposure Default) $21 $2,054 $134 $2,209 Renewable Electricity. Palo Alto’s contracts for renewable "green" energy include both wind contracts with Pacificorp Power Marketing (PPM), discussed above, as well as contracts to convert landfill gas to electricity with Ameresco, Inc. The credit exposure and EDF ratings for these counterparties are presented below. Table 2. Green Energy Credit Exposure and Credit Ratings as of March 31, 2007 Counterparty Total Credit Exposure Previous Quarter Calculated Expected Default Frequency 0.50 Current Calculated Expected Frequency 0.50 Default Ameresco, Inc.$ 250,021 Pacificorp Power $ 326,829 0.02 0.02 $65Marketing Total $576,850 $1,315 CMR:270:07 Page 8 of 11 Expected "Loss" (Exposure x Default) $ 1,250 Natural Gas. As Table 3 shows, the City has exposure to five counterparties totaling $2.1 million over the next 36 months. As with electricity, this reduction in market exposure is the result of the slow decline in the forward energy prices. Table 3 below calculates the loss which the City would suffer should one of its gas counterparties default. This loss is calculated as the product of Estimated Default Frequency and the MTM value. Table 3. Credit Exposure and Default Ratings of Natural Gas Suppliers (March 31, 2007) Counter party BP ConocoPhillips Coral1 Sempra Total Total Credit Exposure $26,192 0 $ 1,003,393 $1,106,238 $ 2,135,824 S&P Ranking AA+ BBB+ Previous Expected Default Frequency .02 .03 .05 .03 Current Expected Default Frequency .02 .03 .O5 .02 Expected Loss2 (Exposure Default) $5 $0 $501 $ 221 $ 727 x Reserve Adequacy A key premise to the City’s risk management practices centers on the adequacy of supply reserves with respect to the risks undertaken as a result of purchases of gas and electricity commodities. Table 4 below summarizes the current and projected supply reserve levels for gas and electricity as of March 30, 2007. The current formulas for calculating maximum reserve balances are 103% and 75% of purchase costs for electric and gas respectively. The minimum reserve levels are 50% of the maximum levels for both gas and electricitv. CMR:270:07 Page 9 of 11 Table 4. Supply Reserve Levels for Electricity and Gas ($ Millions) Commodity Beginning Reserve Balance as of 6/30/06 Budgeted Reserve Guideline Range for FY 06/07 Unaudited Actual Reserve Balance as of 03/31/07 FY (06-07)* Min Max Electricity $ 64.5 $ 28.5 $ 56.9 $ 62.0 Gas $ 2.8 $ 10.0 $20.0 $ 3.7 * Accounting activity figures to date reflect what has been booked into the City’s accounting system (SAP). These figures are preliminary until outside auditors have completed their review and the CAFR is produced. There could be significant changes to the RSR balances based on year end adjustments that have not as yet been booked. The current reserves for electricity are well above the minimum and well above credit, regulatory and other risks for the next 12 months. Total risks associated with the electric supply reserve for the next 12 months include $5.6 million for credit reserves (using best practice of 50% of largest single exposure); $19.3 million for hydro risk; $0.4 million for market risk of the yet-to-be- purchased positions in the next 12 months; and $4.4 million for possible regulatory and other risks. These risks total $29.7 million. With regard to gas, the current projected reserve levels of $3.7 million are below the minimum level of $10.0 million as set by current policy. Reserve levels are adequate for the current risks they are intended to mitigate, given current market dynamics. Total risks associated with the gas supply reserve include $1.1 million for credit reserves; $0.8 million for unhedged commodities in the next 12 months; and $0.5 million for possible regulatory and other risks; for a total of $2.3 million. However, market prices for gas could quickly increase, and credit risk would therefore increase rapidly. It should be noted that changing market dynamics, international events, and other factors outside the City’s control can have a significant and adverse impact on the adequacy of reserves for both gas and electricity over a short timeframe. CMR:270:07 Page l0 of 11 PREPARED BY: DEPARTMENT HEAD APPROVAL: KARL VAN ORSDOL Energy Risk Manager CARL Y~Y-’EAT~.Director, Administrative Services CITY MANAGER APPROVAL: HARRISON Assistant City Manager CMR:270:07 Pagell ofll