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HomeMy WebLinkAboutStaff Report 392-07City of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: ADML\rlSTRATIVE SERVICES DATE:OCTOBER 22, 2007 CMR:392:07 SUBJECT:CITY OF PALO ALTO’S ENERGY RISK MANAGEM~ENT REPORT FOR THE FOURTH 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 ful! compliance with the City’s Energy Risk Management Policies and Procedures. There are no exceptions to report. The City’s credit exposure to wholesale electricity purchases is $9.2 million for electricity, down from $11.1 million from last quarter. The mark to market value of purchases of renewable power is $1.2 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 $0.8 million, down from $2.1 million last quarter. The City’s price risk exposure from the yet-to-be-purchased portion of its electric and gas portfolio, known as Value at Risk or VAR, is well within current guidelines. The gas reserves are increasing and are considered adequate for current risk profile. Electricity supply reserves are fully adequate for the current risk profile. However, it is anticipated that sig~ficant reductions in the reserve will occur next fiscal year as a result of the poor hydro conditions in 2007 and its impact on reducing hydro generation. 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 fourth 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:392:07 Page 1 of 11 DISCUSSION Electricity Purchases. As of June 30, 2007, the electric portfolio of long-term contracts consisted of 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 564,470 MWh for delivery between July 1, 2007 and December 31, 2009. The average price for all of the fixed- price purchases was $53.53 per MWh, up from $49.10 last quarter. 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 -20,C Western Calaveras ~Seattle City ~ Landfill [~Wind tPurchases --*-Load The ~MTM value of the City’s forward transactions for wholesale power declined from $11.1 million at the end of last quarter to $9.2 million. Figure 2 presents the MTM positions for each supplier by month. The MTM value of the City’s forward positions for renewable geen power is $1.3 million. The MTM value of Western Hydro is $11.0 million, while the MTM value of Calaveras hydro is negative $3.4 million. This means that the costs of Calaveras are geater than the value of electricity for the next 12 months. The total value of expected output from Calaveras CMR:392:07 Page 4 of 11 and Western hydro generation is $7.6 million, down from $10.9 million last quarter and approximately 50% of the $14.4 value in January of 2007. This reduction is due to the reduction in generation resulting from the poor hydro conditions in 2007. The value of the swap with Seattle City Light is negative $73,000. Figure 2. Electric Mark to Market Exposure $1,200,000 $1,000,000 $800,000 $600,000 S400,O00 $200,000 $o [] Sempra [] Coral Power Delivery Date Natural Gas. As of June 30, 2007, the gas portfolio consisted of 109 separate deliveries. The City currently has purchased supplies of gas totaling 4.9 million MMBtu for delivery between July 1, 2007 and December 31, 2009. The average price for all of the fixed-price purchases was $7.92 per MMBtu, up from $7.64 last quarter. The forward purchases have been transacted with four approved counterparties: ConocoPhillips, Coral Energy, Sempra Energy and British Petroleum. The current MTM value of gas transactions is $0.8 million. The MTM value by month and by counterparty is presented in Figure 3. The MTM history is presented in Figure 4. CMR:392:07 Page 5 of 11 $200,000 $150,000 $100,000 $50,000 $0 -$50,000 -$1 Figure 3. Gas Forward Mark to Market Exposure 11:3 Sempra [] Powerex [] Coral Energy [D ConocoPhillips -$150,000 Delivery Date Figure 4. Mark to Market History for Gas and Electricity $25 $20 $15 $10 S5 $0 Date of Mark CMR:392:07 Page 6 of 11 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 less than 1% of the RSR. The VaR for gas has continued to stay below the 10% benchmark and is currently at 7% of supply reserve. The historic levels of the VaR values for electricity and gas are presented in Figure 5. 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Figure 5. Value at Risk History Electric % Gas % Date CMR:392:07 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 $9.7 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 June 30, 2007 Counter party BP Total Credit Exposure S&P Ranking Previous Quarter Expected Default Frequency Current Expected Default Frequency Expected "Loss" (Exposure Default) $ -406,187 AA+.O2 .O2 X $0 Coral $9,759,049 A-.05 .05 $4,879 Sempra $ -109,736 BBB+.02 .02 $0 Total $ 9,243,126 $4,879 Renewable Electricity. Palo Alto’s contracts for renewable "geen" energy include both wind contracts with Pacificorp Power Marketing (PPM) 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. Renewable Energy Credit Exposure and Credit Ratings as of June 30, 2007 Counterparty Ameresco, Inc. Pacificorp Power Marketing Total CMR:392:07 Total Credit Exposure $ 218,905 $1,010,536 $ 1,229,441 Previous Quarter Calculated Expected Default Frequency 0.50 0.02 Current Calculated Expected Default Frequency 0.28 0.02 Expected "Loss" (Exposure x Default) $6 $ 202 $ 208 Page 8 of 11 Natural Gas. As Table 3 shows, the City has exposure to five counterparties totaling $0.8 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 (June 30, 2007) Counter party BP ConocoPhillips Coral Sempra Total Total Credit Exposure $0 $0 $ 157,693 $ 703,782 $ 842,598 S&P Ranking AA+ Previous Expected Default Frequency .02 .03 ¯ O5 Current Expected Default Frequency .O2 .O3 .O5 Expected Loss~ (Exposure BBB+.03 Default) 0 $ 0 $ 78 $140 $ 218 x Reserve Adequacy A key premise to the City’s risk management practices centers on ensuring 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 June 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 electricity. ClVIR:392:07 Page 9 of 11 for unhedged commodities in the next 12 months, and $1 million for possible regulatory and other risks. This totals $2.5 million. As always, 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. PREPARED BY: DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: KARL VAN ORSDOL Energy Risk Manager Director, Ad~/~nistrative Services EMILY~SON ..... Assistant City Manager CMR:392:07 Page 11 of 11