HomeMy WebLinkAbout2004-02-02 City Council (5)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:FEBRUARY 2, 2004 CMR: 134:04
SUBJECT:CITY OF PALO ALTO’S
ACTIVITY REPORT FOR
FISCAL YEAR 2002-03
ENERGY TRANSACTION
THE SECOND QUARTER,
This is an information report and no action is required.
BACKGROUND
The purpose of this report is to inform the City Council of the status of the City’s energy
portfolio as of the end of the second quarter of Fiscal Year 2003-04. The City’s risk
management policy requires that staff report to Council on the City’s energy portfolio
composition compared to Council-adopted policy, portfolio performance, and other key
market information.
DISCUSSION
Open Transactions as of December 31, 2003.
Open transactions are commitments that the City has made to purchase either electricity
or gas, but for which supplies have not been delivered.
Electricity. Apart from supplies from Western Area Power Administration and
Calaveras, the City currently holds one long-term position in the energy market with non-
governmental organizations. This is a Quarter 1 and Quarter 4 25 MW purchase for
calendar years 2005 through 2009. The current market value of this transaction is $25.8
million, or a mark to market (MTM)value of $ 5.8 million.
Gas. The current gas portfolio consists of 143 monthly open transactions (transactions
for which gas has yet to be delivered) over the next 36 months. The contract volume of
these transactions is 3.92 million MMBtu with total commitments of $17.6 million. The
current MTM value of these transactions is $3.2 million. The current MTM represents a
$2.5 million increase, largely due to increased prices in the near term. The figure below
CMR:134:04 Page 1 of 6
presents MTM values f~r ~ach m~Sntti for the next 3 years.
open transactions include BP North America and Sempra Inc.
The counterparties for the
Mark to Market Value for Gas Portfolio, by Delivery Month, by Counterparty
750,000
650,000
550,000
4~0,000
350,000
250,000
150,000
50,000
-~0.000
ilSe~npra
~BP ES
The chart below shows the history of the MTM value for the entire gas portfolio since
January 2002. This shows a continued trend of increases in MTM values for the portfolio
over the recent years.
CMR: 134:04 Page 2 of 6
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-10.C i ’
Jan-April- July- Oct-Jan-April- July- Oct-
02 02 02 02 03 03 03 03
The laddered purchasing strategy continues to be implemented, with purchases in the
near-term winter months exceeding 80% of anticipated load. Purchases for the final
quarter of this fiscal year drop to 60%. The chart below presents the purchases made for
each month over the next three years. The figure shows the fixed purchases already
made, purchases for G3 customers (customers on a variable market based rate) already
made, and the remaining volumetric exposure (i.e. not yet purchased).
Purchases vs Load
500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
lOO,OOO
50,000
Forward Month
¯Unhedged
(exposed)
E3 G3
[]Fixed Price
Purchases
CMR: 134:04 Page 3 of 6
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 will force CPAU to use
reserves to cover costs over what is charged to ratepayers on purchases not yet made to
meet load. In compliance with the Risk Management Guidelines, staff monitors the VaR
to ensure that its value is limited to below 10% of the existing supply reserve levels for
both electricity and gas.
5O%
Electricity Net Income Value at Risk History
January 2002 through December 2003
4O%
30%
20%
10%
0%
VaR%
-o-VAR % of Supply Rate
Stabilization Reserve
Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03
Currently, the VaR for the electricity portfolio is 1.8% and that for the gas portfolio is
2.1%. The historic levels of both these values are presented in the following graphs,
along with the values of the reserve levels.
CMR: 134:04 Page 4 of 6
5O%
45%
4O%
35%
3O%
25%
20%
15%
10%
5%
0%
Jan-02
VaR as Percent of Gas-Supply Reserve
Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03
Date
Credit Risk
Electricity. Currently, the City purchases electricity from the Western Area Power
Administration (WAPA) for most of its load. WAPA is a Federal Agency and operates
under the full faith and credit of the United States Government, minimizing the City’s
credit risk. The City does have one transaction with an A- rated counterparty. The
current credit exposure is $5.8 million for a contract for delivery between 2005 and 2009.
Gas. The City has exposure to two counterparties totaling $3.1 million. The first
counterparty is rated AA+, and currently the City has a credit exposure of approximately
$ 880,000. The second counterparty is rated BBB+ and the City’s credit exposure is $2.3
million. This exposure has increased from the $557,000 noted in the First Quarter,
largely due to increases in prices. In both cases the City’s credit exposure is well within
the limits established by the Risk Management Policy and Guidelines.
CMR:134:04 Page 5 of 6
ATTACHMENTS:
Attachment A: Consolidated Mark to Market Report of All Open Gas Transactions
as of December 31, 2003
PREPARED BY:
VAN ORSDOL
Energy Risk Manager
DEPARTMENT HEAD APPROVAL: ~"~ ~ ~~.._~
CAI~ YEATS#
Director, Admi~strative Services
CITY MANAGER APPROVAL :~
Assistant City Manager
CMR: 134:04 Page 6 of 6
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