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HomeMy WebLinkAboutStaff Report 426-08City of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE ¯SERVICES DATE:NOVEMBER 3, 2008 CMR:426:08 REPORT TYPE: Informational SUBJECT:City of Palo Alto’s Energy Risk Management Report for the Fourth Quarter, Fiscal Year 2007-2008 This is an informational report and no Council action is required. -OVERVIEW Staff has continued to purchase electricity and gas in compliance with the City’s Energy Risk Management Policies and Procedures. The value of the City’s fixed price electricity purchases is $18.8 million greater than the City’s contract price. The value of the .City’s gas purchases are $13.8 million greater than the contract price. The higher value of these commodities results in credit exposure to the City. The market value of purchases of renewable power is $4.2 million greater than the City’s costs. The market value of electricity from Western hydro is $17.4 million, while the value for Calaveras hydro is negative $1.5 milli0n. Electricity supply reserves are fully adequate for the current risk profile. The gas reserves are cun’ently less than the risk profile and should be increased over time. There is one administrative exception to report. CMR:426:08 Page 1 of 10 t BACKGROUND The purpose of this report is to inform the City Council on 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 2007-08. 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. Appendices A and B summarize the current position and exposure of the City with the electricity and gas commodity portfolios, respectively. Appendix 1 summarizes the electric portfolio in terms ~f forward purchase volumes, headroom (volume limit less current purchases volumes), and mark to market value (current market price less purchase price), Appendix 2 summarizes the gas portfolio in terms of transaction volume, market value, mark to market value and limits. Appendices C and D provide-details on the transactions in the City’s gas and electricity portfolio, respectively. DISCUSSION The City obtains electricity from hydro resources (referred to as Western and Calaveras), renewable landfill gas contracts, wind generation contracts and fixed priced forward market purchase, contracts. Electricity Purchases. The City currently has purchased supplies of electricity totaling 422,650. MWh for deliverybetween July 1, 2008 and March 31, 2010. The average price for all of the fixed-price purchases was $62.62 per MWh, based on transactions with four approved counterparties: Shell Energy North America, Powerex, Sempra Energy, and British Petroleum. Figure 1 below illustrates the sources of electricity supplies by month for the next 36 months in terms of megawatt hours (MWh). CMR:426:08 Page 2 of 10 120,000. Figure 1. Electrical Load and Supplier Portfolio 100,000 ~" 80,000 ,~, 60,000._u 40,000 20,000 ~’~’~Western ’ ~Calaveras r"--’lLandflll Gas Gen Wind Gen ~ Planned Renewables ~ Forward Market Purchases Load The market value (also known as Mark to Market or MTM) of the City’s forward transactions for wholesale power was $18.8 million at the end of the quarter. Figure 2 presents the forward volumes and MTM positions for each electric supplier by mdnth of delivery. Non-Carbon. Emitting Electricity. The City will utilize non-carbon emitting electricity sources, including hydro power, for approximately 80% of the total annual load over the next 36 months. The market value of the City’s forward positions for non-hydro renewable power is $4.2 million, illustrating the value which the City received by malting early purchases of renewable power. The market value of Western Hydro is $t7.4 million, while the MTM value of Calaveras hydro is negative $1.5 million. This means that the costs of Calaveras are greater than the market value of electricity for the next 12 months. Note that the Calaveras project provides other benefits to the City which can not be included in the market value. Therefore, the total value of the Calaveras project is not fully reflected in the market value. CMR:426:08 Page 3 of 10 Figure 2. Electric Forward Volumes and Mark to Market Values Electric Forward Volumes.(MWh) "60,000 50,000 40,000 30,000 20,000 10,000 [] Sempra E3 Powerex I~JP Morgan Chase I~ Shell Electric Forward MTM ($) $3,000,000 $2,500,00O $2,000,000 $1,500,000 $1 ,ooo,ooo $5oo,ooo $- [] JP Morgan Chase Natural Gas. The City currently has purchased supplies of gas totaling 4.5 million MMBtu for delivery between July 1, 2008 and May 2011. The average price for all of the fixed-price purchases was $8.32 per MMBm. The forward purchases have been transacted with four approved counterparties: Shell Energy, Sempra Energy, Powerex and British Petroleum. The forward volumes and market values by month and by counterparty are presented in Figure 3. CMR:426:08 Page 4 of 10 Figure 3. Gas Forward Volumes and Mark to Market Values Gas Forward Volumes 300000 250000 2OOOOO ~-15oooo 100000 50000 0 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Gas Forward Mark to Market Figure 4 presents the Mark to Market history for both gas and electricity. It shows how the City’s purchasing philosophy has enabled it to maintain a portfolio of electricity and gas which is below forward market prices. CMR:426:08 Page 5 of 10 Figure 4. Mark to Market Value of Gas and Electric Portfolio History Mark to Market History 25 -5 Portfolio Value Date 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) usipg the Moody’s KMV CreditEdge© and RiskCalc© systems. The EDF is an estimated probability that a counterpal~cy wilI default in the next 12 months. Electricity. CPAU’s electric supplier counterparty credit exposure and the supplier credit ratings are presented beiow.. CPAU’s largest exposure, in excess of $17.7 million, is with Shell Energy North America, a company rated A- by Standard and Poor’s. This exposure is the result of the City’s purchase price of electricity with Shell being lower than the current market price. Shell is a wholly owned subsidiary of Royal Dutch Shell which is rated AAA, the highest rating given. Shelt Energy recently changed its name and in past reports was referred to as "Coral Energy." CMR:426:08 Page 6 of 10 Table 1. Electricity Suppliers - Credit Exposure and Credit Ratings as of June 30, 2008 Counterparty Shell JP Morgan Chase Powerex Total Credit Exposure $17,729,048 $ 233,554 $ 83,743 Ranking Current Expected Default Frequency 0.05 0.07 Sempra1 Total 1. AAA 0.01 $ 732,643 AA- $18,778,988 =’;~:~ ~’~ ~==:~=~’ Sempra credit supported by Royal Bank of Scotland Expected "Loss" (Exposure x Default Frequency) $ 8,865 $ 163 $ 8 $ 73 $ 9,109 Renewable Electricity. Palo Alto’s contracts for renewable "green" 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. The City’s current exposure in renewable energy is solely with Pacificorp Power Marketing, who’s parent is the highly rated Scottish Power, PLC. Table 2. Renewable Energy Credit Exposure and Credit Ratings as of June 30, 2008 Counterparty Ameresco, Inc. Pacificorp Power Marketing~ Total Total Credit Exposure $ -377,140 $ 4,598,169 $ 4,221,029 Current Calculated Expected Default ,,, Frequency 0.25 0.01 1. Pacificorp Power’Market#~g credit is supported by Scottish Power, PLC. Expected "Loss" (Exposure x Default Frequency) $0 $ 460 $ 460 CMR:426:08 Page 7 of 10 Natural Gas. As Table 3 shows, the City has exposure to five counterparties totaling $13.8 million over th~ next 36 montl~s. 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, 2008) Counter party BP ConocoPhillips Shell Powerex Semprar Total Credit Exposure 1,510,897 0 6,680,234 1,948,555 3,664,810 Total $13,804,496 S&P Ranking AA+ 1. Sempra credit support from Royal Bank of Scotland Current Expected Default Frequency Expected Loss (Exposure x Default Frequency) 453 o 3,340 194 366 $ 4,353 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 cmTent 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 reserve levels for both gas and electricity. CMR:426:08 Page 8 of 10 Table 4. Supply Reserve Levels for Electricity and Gas ($ Millions) (Final unaudited figures) Commodity Beginning Reserve Balance as of 6/30/07 Budgeted Reserve Guideline Range for FY 06/07 Unaudited Actual Reserve Balance ($ Millions) as of 6/30/08 FY (07-08)* Min : Max Eleztricity $ 60.6 $ 28.5 $ 56.9 $ 47.3 Gas $ 6.7 $ 10.0 $20.0 $ 7.4 * Accounting activityfigures 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 Comprehensive Annual Financial Report is produced. There could be significant changes to the RSR balances based on year end adjustments that have not as yet been booked. The data presented in Table 4 and discussed below, are based on unaudited preliminary financial reports. These data are presented here to provide timely information to Council. Council will be informed if the final audited reserve numbers indicate significant differences from the numbers presented here. 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 $4.6 million for credit reserves; $13 million for hydro risk; $7 million for market risk of the yet-to-be-purchased positions in the next 12 months; and $12 million for possible regulatory, operational and other risks. These risks total $36.6 million, or $10.5 million less than the reserve balance as of June 30, 2008. With regard to gas, the current projected reserve levels of $6.6 million are below the minimum level of $10.0 million as set by current policy. Reserve levels are barely adequate for the current risks they are intended to mitigate given current market dynamics. In the long term, the gas supply reserve should be enhanced to reflect market dynamics. Total risks associated with the gas supply reserve include $2.7 million for credit risk, and $5.5 million for unhedged CMR:426:08 Page 9 of 10 commodities in the next 12 months. Therefore, total risks to the gas supply reserve total $8.2 million, or $0.8 million above the reserve balance as of June 30, 2008. As always, changing market.dynamics, intemational 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. Staff monitors these factors as well as the financial condition of the City’s counterparties on an on-going basis. Because this report is based on the economic and financial conditions as of June 30, 2008, it does not address subsequent and on-going issues regarding economic volatility in the credit markets. However, as of October 23, 2008, the City’s exposure to credit risk from the current volatility is. minimal, and a subsequent report to be produced shortly will address this issue in detail. Exceptions One exception was noted during the Quarter. This invoived a recording error during a gas transaction- over a recorded voice line in which the final minutes of the transaction were not recorded. The transaction was supported by contemporaneous notes by the trader and the counterparty." PREPARED BY: ORSDOL DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: KEENE City Manager Appendix A. Electric Portfolio Summary Appendix B. Gas Portfolio Summary Appendix C. Detailed Electric Transaction List. Appendix D. Detailed Gas Transaction List. Services CMR:426:08 Page 10 of 10 oo o ~ ~ m,~ mO~mO00 z z Oz~z zz ZO Z Z 0 ozzz:zzzzzzzzzz~zz -. ~00000O0 , Z 7 Z X Z :7 Z Z ~Z Z Z Z Z z z !Z~Z oooooooooo~olo o~ ZZZZZ zl_zzzzzzzzzzz o n