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HomeMy WebLinkAbout2003-04-21 City Council (9)15 TO: FROM: DATE: SUBJECT: HONORABLE CITY COUNCIL CITY MANAGER DEPARTMENT: UTILITIES APRIL 21, 2003 CMR:221:03 FINANCE COMMITTEE RECOMMENDATION FOR ADOPTION OF A RESOLUTION AUTHORIZING THE CITY MANAGER TO ENTER INTO AGREEMENTS WITH WESTERN AREA POWER ADMINISTRATION TO TEMPORARILY REDUCE THE CITY’S CONTRACT 1L~TE OF DELIVERY IN 2003 AND/OR 2004 BY UP TO 40 MW AND TO SPEND UP TO $20,000,000 ON FIXED PRICE FORWARD PURCHASES FOR REPLACEMENT WITH CREDITWORTHY COUNTERPARITES HAVING BBB+ OR BETTER CREDIT RATINGS; AND WHEN CONTRACT GETS TO $15,000,000 IN A 12-MONTH PERIOD STAFF WILL REPORT TO COUNCIL RECOMMENDATION Staff recommends the City Council adopt the attached resolution authorizing the City Manager to execute one or more a~eements to temporarily reduce the amount of the City’s Western Area Power Administration Comlnercial Firm Power contract in 2003 and!or 2004 by up to 40 MW, and to spend up to $20,000,000 on fixed price forward purchases for replacement. COMMITTEE REVIEW AND RECOMMENDATIONS The Committee voted unanimously (4-0) to approve the amended as follows: staff’ s recommendation, staff recommends the City Council adopt the attached resolution authorizing the City Manager to e~ecute one or more agreements to temporarily reduce the amount of the City’s Western Area Power Administration Commercial Fima Power contract in 2003 and/or 2004 by up to 40 MW, and to spend up to $20,000,000 on fixed price forward purchases for replacement with creditworthy counterparties having BBB+ or better credit ratings. Furthem~ore, if purchases from counterparties exceed $15,000,000 in a 12 month period, staff must report that to Council after the fact. CMR:221:03 Page 1 of 2 ATTACHMENTS A; B; Resolution of the Council of the City of Palo Alto Approving For a Limited Period of Time A Reduction in the Contract Rate of Delivery Authorized Under Contract Number DE-MS65-85WP59007 With the United States Department of Energy, Western Area Power Administration CMR:136:03 /,~ PREPARED BY: TOM KABAT Senior Resource Originator DEPARTMENT APPROVAL: CITY MANAGER APPROVAL: CH Director of Utilities Assistant City Manager CMR:221:03 Page 2 of 2 RESOLUTION NO. RESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO APPROVING FOR A LIMITED PERIOD OF TIME A REDUCTION IN THE CONTRACT RATE OF DELIVERY AUTHORIZED UNDER CONTRACT NUMBER DE-MS65- 85WP59007 WITH THE UNITED STATES DEPARTMENT OF ENERGY, WESTERN AB~A POWER ADMINISTRATION WHEREAS, the City of Palo Alto ("City"), a municipal utility and a chartered city, is a "Preference Customer" of the Western Area Power Administration ("Western") of the United States Department of Energy; WHEREAS, the City’s existing 175 Hegawatt Commercial Firm Power Contract Rate of Delivery with Western ("WAPA contract") will expire on December 31, 2004; WHEREAS, the City has entered into a letter of agreement for excess capacity 03-SNR-00543 with Western ("LOA agreement") in furtherance of Western’s excess capacity marketing program; WHEREAS, the City wishes to negotiate a reduction in its capacity entitlement under the WAPA contract and concurrently enter into one or more fixed-price capacity contracts for the period of time that the reduction is in effect; ~EREAS, the City intends to coordinate its decisions tb reduce capacity under the WAPA. contract, acquire excess capacity under the LOA agreement, and negotiate one or more fixed-price capacity contracts with counterparties to maximize value to the City; WHEREAS, the Council’s Finance Committee approved staff’s recommendation that the City negotiate and execute one or more letters of agreement with WAPA to reduce capacity acquired by the WAPA contract in 2003 and 2004 by 40 HW and spend up to $20 million on fixed-price forward contracts with investment grade- rated energy suppliers, provided that staff shall report to the Council energy purchases in excess of $15 million in any twelve- month period during 2003 and 2004; NOW, THEREFORE, the Counci! of the City of Palo Alto hereby RESOLVE as follows: SECTION i. The Council hereby authorizes the City of Palo Alto to negotiate and execute one or more letters of agreements with the Western Area Power Administration for the voluntary and temporary reduction in the aggregate of up to 40 megawatts of capacity under its Commercial Firm Power Contract Rate of Delivery in Contract Number DE-MS65-85WP59007 for calendar 030414 syn 0072248 years 2003 and 2004. The City Manager is hereby authorized to sign on behalf of the City of Palo Alto one or more of these letters of agreement with the Western Area Power Administration, consistent with Section 2 of this resolution. SECTION 2. This authorization is expressly limited as fol!ows: The City Manager may execute one or more agreements to temporarily reduce the amount of the City’s Western Area Power Administration Commercial Firm Power contract in 2003 and/or 2004 by up to 40 HW, and to spend up to $20,000,000 on fixed price forward purchases for replacement with Creditworthy counterparties having BBB+ or better credit ratings. If purchases from counterparties exceed $15,000,000 in a 12-month period, staff must report that to Council after the fact. SECTION 3. The Council finds that the adoption of this resolution does not constitute a project under the California Environmental Quality Act and no environmental assessment is required. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST:APPROVED: City Clerk Mayor APPROVED AS TO FORM: Senior Asst. City Attorney City Manager Director of Administrative Services Director of utilities 030414 syn 0072248 TO:HONOtL~.BLE CITY COUNCIL ATTENTION: FROM: DATE: SUBJECT: FINANCE COMMITTEE CITY MANAGER APRIL 1, 2003 ADOPTION OF A RESOLUTION DEPARTMENT: UTILITIES CMR: 136:03 AUTHORIZING THE CITY MANAGER TO ENTER INTO AGREEMENTS WITH WESTERN AREA POWER ADMINISTRATION TO TEMPORARILY REDUCE THE CITY’S CONTRACT RATE OF DELIVERY IN 2003 AND/OR 2004 RECOMMENDATION Staff recommends the City Council adopt the attached resolution authorizing the City Manager to execute one or more a~eements to temporarily reduce the amount of th? City’s Western Area Power Administration Commercial Firm Power contract in 2003 and!or 2004 by up to 40 MW, and to spend up to $20,000,000 on fixed price forward purchases for replacement. BACKGROUND The City and Western Area Power Administration (Western) are currently operating under a !75 Megawatt Commercial Firm Power (WCFP) contract expiring December 31 2004. That contract, commonly known as the City’s Western contract, is an extremely valuable asset that a!lows the City to serve its electricity loads at cost-based prices. Over the years, the City and Western have developed several ancillary agreements which allow both entities to maximize the benefits of their long-terln relationship¯ In March 1996, the City and other Western utility customers began voluntary temporary changes in their Western WCFP contract rates of delivery. Attached to this staff report (Attachment A) is a copy of a prior agreement entered into by the City to effect a temporary WCFP capacity reduction¯ The City has undertaken three such transactions in the past seven years to save at least two million dollars. The value derived in the most recent undertaking of this tb~pe of transaction in FY 2000-2001 was about $1 million. ¯. . ~Pagelof6CMR. 1 ~ 6.0.~ During the energy crisis of 2001, the City chose not to renew its temporary reduction agreement. The energy markets have improved and stabilized to the point where staff believes it is prudent for the City to again pursue a temporary reduction in its contract rate of delivery. DISCUSSION The City, through its various Western contracts, has access to more lower cost Western energy products, like Western’s excess capacity, than it can utilize for its own load. If the City does not utilize these low cost products, the benefits of these low-cost products flow to other Western utility customers. Staff believes that this represents a missed oppo~mnity for the City. To take advantage of potential contract flexibility, staff is recommending negotiating an agreement to effect a temporary reduction in the W CFP contract. Such a reduction could result in two broad benefits. First, it could generate cost savings in the form of a credit from Western on the City’s WCFP bill. Second, and more sig~nificant from a financial perspective, it could allow the City to utilize more of the low priced Western Excess Capacity (WEC) energy for its benefit; benefits that currently bypass the City and flow to other Western utility customers. Purchasing additional Western’s excess capacity energy was approved by Council on March !7, 2003 (CMR: 179:03). Western Capacity Reduction (WCR) becomes feasible if Western will once again provi@ a to-be-a~’eed-upon financial credit every month on the City’s Western bill, for the duration of the a~:eement. The term is to be negotiated and would end by 12/31/2004 or earlier. Realized benefits will depend on many variables including: 1. Availability of Western’s excess capacity product; 2. Speed at which staff can get the mTangements in place; 3. StafFs success at securing Western approval; 4. Difference between fixed fo~-,~.’ard market prices and the price of Western’s excess capacity energy; 5. Duration of a~’eement(s). Based on staff estimates, City of Palo Alto Utilities savings are expected to be between $400,000 and $500,000 in 2003, assuming the transaction is completed for June delivery. These estimates of savings with the fixed price fol~vard purchases in place are not very sensitive to spot market price changes. The range of savings takes into account a sensitivity test of 50% changes in market prices in both upward and downward directions. CMR:136:03 Page 2 of 6 It should be noted that if CPAU in unable to secure June delivery, the potential savings could be reduced by roughly $200,000. There are risks associated with this recommendation. These risks include market risk and credit risk. T he following i s a discussion o f e ach o f these risks a nd also discuss risk oversight and reporting issues. Market Risk: Staff proposes to purchase a replacement volume of energy at a fixed price from a supplier to replace the amount of energy associated with the reduced capacity from the negotiated WCR. That purchase would be brokered by the Northern California Power Agency and would occur as soon as possible (within 24 hours) after consumrnating the WCR. This would maintain CPAU’s energy portfolio in the same position before and after the WCR. This minimizes market price risk of the transaction due to a possible increase in prices occurring between the time of the execution of the reduction a~eement and the execution of the purchase agreement. The movement in prices within the 24 hour period required to render this set of transactions profitless is quite large, roughly $38 per M\Vh. Price movement history indicates that the probability of this large price movement within the 24 hours required at most to execute these transactions is less than 0.0001% (i.e. one chance in one-n£illion). o Credit Risk: The forward price purchase to eliminate market price risk creates a credit risk with the selling counter party. That credit risk is the risk that the seller would default on the sale during a higher price period. That default would leave CPAU x~ulnerable to purchasing replacement energy from the spot market to the extent that WEC was not available at that time to replace the defaulted purchase. That scenario requires three adverse events to occur simultaneously: higher prices, counter party default, and Western excess capacity unavailability. For durations under 19 months, the default rate published by Moody’ Investor Services is beta,~,een 0.09% and 0. ! 5% for counter parties rated BBB+ or better. The City will specify to NCPA that it requires a BBB+ rating for all of the counter parties NCPA contracts with to supply this purchase contract. Based on this estimate and a two month unwinding period with the counterparty, a 95% probability exists that CPAU’s credit risk would be less than $9,720. Risk Oversight and Reporting: If a WCR contract were negotiated, its execution and any related risk mitigating purchases would be subject to the City’s Energy Risk Management Policies, Guidelines and Procedures, which include biannual reporting to Council. The WCR contract will be reviewed and approved by the CMR:136:03 Page 3 of 6 Energy Risk Manager prior to execution. The Energy Risk Manager will also review the operational logistics surrounding the transactions prior to their execution to ensure that all policies and procedures, including the anti-speculation policy, are adhered to fully. If WCR is executed, staff would make the necessary volume of forward market fixed price purchases to maintain electric portfolio price risk within established guidelines. Staff will implement any offsetting fixed price purchases utilizing NCPA as an agent to execute the required purchases in accordance with the authority delegated to the City Manager or his/her designee for energy and capacity term transactions greater than one month in term and not exceeding three years. [CMR 135:03] In order to capitalize on the potential benefits associated with this transaction ahead of other competing Western customers, Council authorization to the City Manager is essential. This would enable staff to move quickly enough to secure a share of this transaction. Several potential hurdles exist to consummating this transaction. Several of these hurdles are out of the City’s control. These include a) Western not cooperating with interested customers to execute the required agreement(s) for changing rates of delivery; and b) Western prohibiting implementation of previous terms that make the arrangement attractive to CPAU; under any of these cases, the City Manager would not execute a WCR contract with Western and there would be no resulting transactions. ALTERNATIVES TO STAFF RECOMMENDATION Council could decide to authorize the execution of a temporary reduction of contracted rate of delivery for no more than t 2 months rather that the up to 19 months recommended by staff. This would require staff to return to Council in 2004 if staff wanted to pursue similar opportunities in 2004. A shortened term would further reduce the credit risk with the supplier and allow CPAU the chance to shop for suppliers during the second half of the period. Maintaining a 19-month contracting period would secure the second year of the arrangement for CPAU to streamline workload. RESOURCE IMPACT Net savings, that is benefits over and above the cost to CPAU, from its participation in the WCR program are estimated at about $2,000,000 through 2004. While under most circumstances these transactions create savings for CPAU, a very small but potential does exist that under a rare and worst-case scenario the transaction could result in either a breakeven or loss outcome. As discussed above, a 5% chance exists that the City’s loss CMR: 136:03 Page 4 of 6 due to credit exposure will be ~’eater than $9,720. In addition there is a one chance in one million that market risk will result in a breakeven outcome. Approval of the recommendation should help the City to realize maximum benefit from its longstanding relationship with Western. No budget adjustments are required to effect these a~-eements. POLICY IMPLICATIONS The approval of this contract is consistent with existing policies. It is also consistent with the following strategies o f t he C ouncil-approved Utilities Strategic Plan [ CMR 4 18:00 " 9and 4_~2:0-]: Strategy 2: Preserve a supply cost advantage compared to the market price; Strategy 3: Streamline and manage business process to allow the City of Palo Alto Utilities to work efficiently and cost-effectively. This recommendation also supports the second of the City’s Energy Risk Management Objectives listed in the Council-approved Energy Risk Management Policies [CMR 400:02]: "Preserve a Supply Cost Ac~vama~e , whereby "Wholesale transactions are effected to maximize the value of assets for the benefit of CPAU’s retail customers. CPAU will take actions to: (b) enhance revenue by taking advantage of flexibility inherent in CPAU contracts and resources... ENVIRONMENTAL REVIEW Changing CPAU’s or other customers’ Western CRDs does not influence the United States Bureau of Reclamation’s operation of the Central Valley Project and the associated flows on rivers. Changing the CPAU’s Western CRD does not constitute a project for the purposes of the California Environmental Quality Act. ATTACHMENTS A. Resolution Authorizing The City Manager To Enter Into Agreements With Western Area Power Administration To Temporarily Reduce The City’s Contract Rate Of Delivery In _00~ And 2004 B. Most recent expired Western CRD reduction Letter of Agreement 00-SNR-00277 July 1, 2000- June 30, 2001 CMR: 136:03 Page 5 of 6 PREPARED BY: TOM KABAT Senior Resource Originator DEPARTMENT HEAD: ULRICH ector of Utilities’ CITY MANAGER APPROVAL: EMI! ~N Assistant City Manager CMR: 136:03 Page 6 of 6 RESOLUTION NO. RESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO APPROVING FOR A LIMITED PERIOD OF TIME A REDUCTION IN THE CONTRACT RATE OF DELIVERY AUTHORIZED UNDER CONTRACT NUMBER DE-MS65- 85WP59007 WITH THE UNITED STATES DEPARTMENT OF ENERGY, WESTERN AREA POWER ADMINISTRATION ADMINISTRATION WHEREAS, the City of Palo Alto ("City"), a municipal utility and a chartered city, is a "Preference Customer" of the Western Area Power Administration ("Western") of the United States Department of Energy; WHEREAS, the City’s existing 175 Hegawatt Commercial Firm Power Contract Rate of Delivery with Western ("WAPA contract") will expire on December 31, 2004; WHEREAS, the City has entered into a letter of agreement for excess capacity 03-SNR-00543 with Western ("LOA agreement") in furtherance of Western’s excess capacity marketing program; WHEREAS, the City wishes to negotiate a reduction in its capacity entitlement under the WAPA contract and concurrently enter into one or more fixed-price capacity contracts for the period of time that the reduction is in effect; WHEREAS, the City intends to coordinate its decisions to reduce capacity under the WAPA contract, acquire excess capacity under the LOA agreement, and negotiate one or more fixed-price capacity contracts with counterparties to maximize value to the City; NOW, THEREFORE, the Council of the City of Palo Alto hereby RESOLVE as follows: SECTION i. The Council hereby authorizes the City of Palo Alto to negotiate and execute one or more letters of agreements with the Western Area Power Administration for the voluntary and temporary reduction of its Commercial Firm Power Contract Rate of Delivery under Contract Number DE-MS65-85WP59007 for calendar years 2003 and 2004. The City Manager is hereby authorized to sign on behalf of the City of Palo Alto one or more of these letters of agreement with the Western Area Power Administration. /! !! !! 030327 syn 0072248 SECTION 2. The Council finds that the adoption of this resolution does not constitute a project under the California Environmental Quality Act and no environmental assessment is required. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: City Clerk APPROVED AS TO FOR~: Senior Asst. City Attorney APPROVED: Mayor City Manager Director of Administrative Services Director of Utilities 030327 syn 0072248 Department of Energy Western Area Power Administration Sierra Nevada Customer Service Region 114 Parkshore Drive Folsom, California 95630-4710 JUL Lelfer of Agreement 00-SNR-00277 Mr. JohB Ulrich Director of Utilities City of Palo Alto Post Office Box 10250 Palo Alto, CA 94303 Dear Mr. Ulrich: Certain Central Valley Project preference customers, including the City of Palo Alto, hereinafter referred to as Returning Customers, have the ability to return a portion of their CVP power contract rate of delivery to the Sierra Nevada Region on a temporary basis. This power is made available to the Sierra Nevada Region for reallocation to other existing CVP preference customers, hereinafter referred to as Continuing Allocation Customers. As of July 1, 2000, the current arrangements with the Returning Customers will terminate. Palo Alto is willing to continue returning aportion of its CRD on a temporary basis in exchange for the consideration described in Paragraph 3 below. The Continuing Allocation Customers will compensate the Sierra Nevada Region for the costs associated with this arrangement. The Sierra Nevada Region and Palo Alto agree to the following terms and conditions: Term: This Letter of Agreement will become effective on July 1, 2000, and shall remain in effect through June 30, 2001. 2.Palo Aito’s Temporary CRD Reduction: 2.1 Under Electric Service Contract DE-MS65-85WP59007 between Palo Alto and the Sierra Nevada Region, Palo Alto will reduce its original CRD by 3 MW, from 175 MW to 172 MW, during the term of this LOA. As a result of Palo Alto returning a portion of its CRD, the Sierra Letter of Agreement 00-SNR-00277 2,2 Nevada Region wilt have full use of 3 MW for temporary allocations to the Continuing Allocation Customers. Exhibit A to Contract DE-MS65-85WP59007 will be revised to reflect Polo Alto’s CRD, which will be comprised of Polo Alto’s original CRD less the reduction provided for hereunder. Additionally, Appendix A to Scheduling Contract DE-MO65-85WP59098 will be modified to. reflect Palo Alto’s reduced energy entitlement and maximum coincident allocation. 3.Payment Provided to Palo Alto By the Sierra Nevada Region: In exchange for Polo Alto’s returning a portion of its CRD, Polo Alto will receive a cost adjustment of 28 mills per kilowatthour for the energy associated with the capacity returned at a 60 percent load factor. Therefore, Polo Alto will receive a monthly cost adjustment of $36,792.00 on its power bill for the term of this LOA. 4.No Adverse Impacts: The temporary reduction of Polo Alto’s CRD shall not constitute a waiver of Polo Alto’s contract right to its power allocation, nor shall it constitute an agreement by Polo Alto to a permanent decrease in its power allocation. Additionally, the temporary reduction in CRD will in no way prejudice Palo Alto’s application for future allocations, including those made part of the 2004 Power Marketing Plan. 5.Requests for Additional Power: If the Sierra Nevada Region requests more power to allocate on a temporary basis, the Sierra Nevada Region and Polo Alto may mutually agree to an additional amount of power in excess of the 3 MW provided hereunder. Should Polo Alto agree to return an additional portion of its CRD, this LOA will be modified or replaced as necessary. Monthly Cost Adjustments: 6.1 To provide Polo Alto’s monthly cost adjustment, the Sierra Nevada Region and Polo Alto shall use the provisions provided in Contract DE-MS65-85WP59007 and the General Power Contract Provisions, including the use of net billing and bill crediting. 6.2 In the event that the Sierra Nevada Region cannot credit Polo Alto’s power bill because the credit would exceed the collection amount, Page 2 Letter of Agreement 00-SNR~00277 the Sierra Nevada Region may establish a trust account and provide disbursements to Palo Alto from such trust account as appropriate. The Sierra Nevada Region will use payments from the Continuing Allocation Customers as a source of funding for the trust account. 7.General Power Contract Provisions: The General Power Contract Provisions effective July 10, 1998 are attached hereto and made a part hereof, the same as if they had been expressly set forth herein. If you are in agreement with the terms and conditions written above, please indicate your approval by signing and dating both originals of this LOA, and return one to Peggy Muir, N6205, at this office. Sincerely, Howard Hirahara Power Marketing Manager Attest :.,~ :By: Approved -,oPro~ed // /: , City Attorney By: Title: Address: CtTY OF PALO ALTO Date: Page 3 Exhibit A, Revision 3 ¯ Contract DE-MS65-85WP59007 City of Palo Alto Exhibit A (Contract Rate of Delivery) This Exhibit A, Revision 3, made to be effective under and as a part of Contract DE-MS65-85WP59007, shall become effective July 1, 2000; shall supersede Exhibit A, Revision 2; and shall remain in effect until either superseded by another Exhibit A, July t, 2001, or upon termination of the Contract, whichever occurs first. Effective July 1, 2000, Palo Alto’s CRD of 175 MW will be temporarily reduced by 3 MW to 172 MW in accordance with Lel¢er of Agreement 00-SNR-00277. The temporary reduction provided under Section 2 above shall not constitute a waiver of Palo Alto’s right to its Long-Term Firm Power allocation nor an agreement by Palo Alto to a permanent decrease in its Long-Term Firm Power allocation. The temporary reduction in CRD will not prejudice Palo Alto’s application for future.allocations, including those made part of the 2004 Power Marketing Plan. CITY OF PALO ALTO WESTERN AREA POWER ADMINISTRATION By: Address: Date: