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HomeMy WebLinkAbout2003-07-15 City CouncilManager’s Rep r TO:HONORABLE CITY COUNCIL FROM:CITY MANAGER DEPARTMENT: UTILITIES ATTENTION: FINANCE COMMITTEE DATE: SUBJECT: JULY 15, 2003 CMR:345:03 REQUEST FOR THE APPROVAL OF NATURAL GAS SUPPLY PORTFOLIO PLANNING AND MANAGEMENT OBJECTIVES AND GUIDELINES FOR THE GAS UTILITY LONG-TERM PLAN (GULP) RECOMMENDATION The Utilities Advisor’ Commission (UAC) and staff recommend that the City Council approve three objectives and four guidelines for the Gas Utility Long-Term Plan (GULP). Approval of the objectives and guidelines will guide staff in developing and managing the City’s Gas Utility Long-term Plan. DISCUSSION Staff proposes the three following GULP objectives to govern gas supply resource asset acquisition and energy efficiency strategies for the gas utility: Objective 1: Objective 2: Ensure low and stable gas supply rates for pool customers. ("Pool" customers are natural gas customers who do not have access to a supplier other than the City. "Non-pool" customers are customers who either choose to take natural gas service on rates based on monthly varying market based prices, based on a fixed price for a fixed term or elect to take service from another supplier. Currently, approximately 75% of the City’s natural gas demand is comprised of pool customers. No customer is taking service from a supplier other than the City.) Provide superior financial performance to customers and to the City by managing the supply portfolio cost in a competitive manner compared to market cost and a retail supply rate advantage compared to PG&E. CMR:345:03 Page 1 of 4 Objective 3:Balance environmental, rate, and cost impacts when considering ener~ efficiency investments. These objectives are consistent with the portfolio objectives approved for the electric utility (CMR:425:01). To facilitate the development of specific recommendations, staff has developed four GULP guidelines based on the three objectives. Key themes found in these GULP guidelines address diversification to minimize risk and stabilize rates, operational flexibility, and opportunities for energy efficiency. Guideline 1: Market Risk Management - Manage market risk by adopting a portfolio strategy for gas supply procurement by: A. Diversifying energy purchases for the pool across commitment date, deliveR’ date, duration, suppliers, pricing terms and deliver5,’ points; B. Maintaining a prudent exposure to changing market prices by leaving some fraction of the forecasted gas pool needs exposed to near-term market prices; C. Avoiding long-term (>10 years) fixed-price commodity contracts. Guideline 2: Asset Acquisition and Management - Explore supply, pipeline, and storage acquisition options available to the City which may be assembled to yield reliable supply at fair and reasonable cost, taking into consideration: A.Long-term supply cost for gas deliveries at PG&E Citygate; ("PG&E Citygate" is any point at which the PG&E natural gas backbone transmission system connects to the local transmission and distribution system. The Citygate is not one specific, physical location. It is a virtual trading point on PG&E’s natural gas system.) B.Operational needs including the need for daily balancing during Operational and Emergency Flow Orders; C.Existing and potential regulatory mandates; D.Potential operational streamlining opportunities with other agencies; and E.City’s low cost of capital for asset acquisition. Guideline 3: Management of Regulator’ and Legislative Matters - Serve as an effective voice to protect and enhance the City’s position in regulatory and legislative arenas by: A. Intervening in the regulatory and legislative arenas to ensure that the City’s gas utility interests are protected and enhanced; and B. Exploring potential joint action with other public agencies. Guideline 4: Gas Energy Efficiency Investments - Pursue cost-effective energy efficiency investments by: CMR:345:03 Page 2 of 4 A.Providing expertise, education and incentives to support cost-effective customer efficiency improvements; B.Demonstrating new efficiency and load management alternatives; and C.Providing rate assistance and efficiency progams to low-income customers. Guidelines 1, 2 and 3 apply to objectives 1 and 2 while guideline 4 applies to objective 3. For example, successful management of market price risk will result in stable rates for customers. Asset management will result in good financial performance for the City. BOARD/COMMISSION REVIEW AND RECOMMENDATIONS The Utilities Advisory Commission (UAC) reviewed this recommendation and approved it unanimously at its June 4, 2003 meeting. There were no comments from the public. The UAC urged staff to investigate opportunities to invest in long-term assets like pipeline capacity, gas storage and gas producing wells. Since these comments were within the purview of the proposed Objectives and Guidelines no action was taken on these comments. POLICY IMPLICATIONS These three proposed existing City policies. Management Policies. GULP objectives and guidelines do not represent any change to The objectives and guidelines conform to City’s Energy Risk The guidelines support the Utilities Strategic Plan: 1.Strategy 2 - Preserve a supply cost advantage compared to the market price; 2.Strategy 4 - Deliver products and services valued by our customers, and continue to build CPAU brand presence; 3.Strategy 6 - Maintain stable General Fund transfers, and maintain financial strength; and 4.Strategy 7 -Implement programs that improve the quality of the environment. The proposed GULP Guidelines further the City’s commitment to the Green Government Pledge by supporting the conservation of energy. ATTACHMENTS A: Minutes from UAC June 4. 2003 meeting CMR:345:03 Page 3 of 4 B:UAC Report dated June 4, 2003 titled, "Request for the Approval of Natural Gas Supply Portfolio Planning and Management Objectives and guidelines for the Gas Utility Long-Term Plan (GULP)" C:GULP Attachment A PREPARED BY: Karla Dailey Resource Planner i DEPARTMENT HEAD: CITY MANAGER APPROVAL: Di EMI! .tRISON Assistant City Manager Page 4 of 4 UTILITIES ADVISORY COMMISSION MEETING MINUTES JUNE 4, 2003 DRAFT EXCERPT Gas Utility Long-Term Plan (GULP) Ulrich: Thank you Mr. Chairman. The request that you have before you is an action item for the approval of the natural gas supply portfolio planning and management obj ectives, and the guideline for the gas utility long-term plan known by the acronym GULP. Karla Dailey wilt have a brief presentation that you see up on the screen. Then we will ask for your questions and your approval of this item. Dailev: Thanks John. This is a very quick presentation and nothing that is not in the report in your packet. Objectives and guidelines, I just noticed an error on the cover sheet here, there is more than one guideline. Let me go ahead and get into it. What are the reasons that we are doing this? The first one is just a need to review our commodity purchasing strategy. It has been in place over two years and although we think of it often we haven’t really sat down and done some analysis on whether our strategy is the right one given all of the objectives that utilities has. The second reason has to do with some negotiations that are going on associated with PG&E bankruptcy case. One outcome in a list of many of that proceedings is that Palo Alto may be asked to commit to some pipeline and storage assets with PG&I~. So we want to be proactive and know which of those assets we might be interested in committing to before we are asked to make such a decision. The third reason is a regulatory one. At this point in time Palo Alto is not required to hold any assets. But there is a movement among some interested parties that would require any customers who have the status of core, which means non-core customers could have their gas diverted in an emergency situation to us. That might require us to hold some those kinds of assets. Proactively, we would like to know what we may want to hold if we were required to take some action by a regulatory mandate. The fourth reason is just the desire to have a platform for evaluating opportunities as they arise - having some systematic way to evaluate an asset or make a decision when it comes up. There are three proposed objectives. The first one is to insure !ow and stable rates for the pool customers. The non-pool customers are the large customers who have opted not to be part of our pool; we set their rates based on whatever rate option they choose. It’s a straight pass through. They have control over whether thev want to have stable costs or costs that va~, with the market. So this GULP objective just applies to the pool. The second objective is to manage our supply costs in a competitive manner with the market. And to maintain a retail advantage compared to PG&E. The third objective has to do with energy and efficiency. What we have said here is to strike a balance between the environment, rate impacts and cost impacts when we are considering such investments. Draft 6/4/03 UAC Minutes Page I of 7 There are four guidelines. The first has to do with market risk management. I divided these up into three bullets. Diversity, is a guideline. We want to maintain diversity. We want to maintain some appropriate level of market exposure and we will avoid long term fixed price commodity contracts. That mainly has to do with an issue - liquidity - at this point. Once you go out a certain number of years there aren’t enough players in the market to have a liquid market for those types of products. This is just a reminder of our current strategy, this slide was done a couple of months ago but the idea is still the same. Our current strategy is that in the near 12 months we will have locked in 75% of our expected needs through fixed price contracts. Fifty percent for the next 12 months, and then 25 percent for the third 12 months. There was a management decision to fix the price of a hundred percent of our 2002 - 2003 needs. That is reflected in that graph. If I were to update that graph today, the first month would be July and we’re at a 75 percent goal for the fiscal year of 03-04, today looking at that graph. This is the strategy we will be reviewing: Do these percentages make sense? Does the timing make sense? Does a three-year term make sense? All these components of the strategy will be under review. The second guideline has to do with asset acquisition. We will just explore assets such as storage and pipeline capacity to see if it makes sense in our whole supply portfolio. We will take into consideration the long-term supply costs for our gas that is delivered - operational needs, regulatory mandates and we will look into potentially teaming up with another agency. Also keep in mind the City’s low cost of capital for assets acquisitions, which may make a difference in some cases. The third guideline has to do with regulator?, and legislative matters, and this isn’t really any different than what we do now. We intervene where we need to, to protect the City’s interests. And we are always on the lookout for someone to team up with. So we will keep that high on our radar screen as well. Unfortunately on the gas side there aren’t usually as many opportunities as electric, because there aren’t very many gas utilities in California. Often our interests are different than other parties that are intervening in a proceeding. The fourth guideline addresses energy efficiency investments. We will provide expertise and incentives to support efficiency improvements. We’ll demonstrate efficiency and load management alternatives and provide low-income rate assistance. The schedule. Obviously we are coming to you today in June with the objectives and guidelines. These objectives and guidelines are scheduled to go to finance committee in July and the Council in August. That schedule slipped a little bit from our original goal because of other conflicts and overloaded agendas. We are proceeding with the analysis nonetheless, and are still hoping to get a draft of the analysis to you this summer, although it will probably be late summer at this point. And then a final sometime in the fall. That’s all I have. Carlson: Any questions? Go ahead Dexter. Dawes: I am fascinated by the asset-acquisition comments coming out of the PG&E reorganization. I cannot remember hearing about these opportunities. I view them as opportunities to cement our infrastructure, if you will. I am aware of, for instance, the huge discrepancies between the Henry Hub gas and the California border and the Palo Alto Citygate Draft 6/4/03 UAC Minutes Page 2 of 7 prices that are not so much now as they were a year or two or three ago. But they were very substantial - on the order of 50 to 100% was my recollection. If there is any information you can give about the opportunities that are available here, I would be very interested in hearing about them. I view this again as an opportunity to lock in low-cost public transportation and storage facilities, which are vitally important to the City. That is one comment. The second comment has to do with the long term commitments to supply. I had mentioned in the past and will do so now - I hope we would not foreclose opportunities to actually buy producing wells if they become available at attractive prices. Again, I think that on a long supply basis, to own the assets -- obviously at prices that are attractive to us -- is something we should do. On the basis that our strong suit is low cost-of-capital, which you have mentioned, and it is a very powerful one in the utility business. And lack of having to pay any taxes is a very big item in comparison to IOUs that would be or other regulated companies or unregulated companies supplying us. So the opportunity to avail ourselves of long term asset acquisition even in the supply end, I think, could be extremely attractive. Just so our antennas are open and our minds are open to these. But I would like some input on the first issue. Dailev: Let me respond to your second issue first. Definitely on the list of things we are looMng at is an interest in production or some sort of reserves. As you probably know, SMUD just made an acquisition. Oh, you didn’t know that? Yes, SMUD just took an interest in some reserves, so we have made contact with some of the analysts at SMUD who pushed that deal through and are trying to see how it applies to Palo Alto. The guideline in here really refers to long term fixed price contracts, not long term assets. I think those two things are fairly different so we won’t be shutting out opportunities as you discussed. What may result from the PG&E bankruptcy would be the possibility to reserve California or PG&E system assets before some sort of open-season. We are talking about pipeline capacity from the California border to the Ci~gate. PG&E storage that is in-state wil! not address any sort of basis differential between Henry Hub and the California border. I don’t foresee buying capacity to the Henry Hub. We would possibly look at buying capacity up to Canada or in the Southwest, the San Juan Basin or something of that nature. I am sort of putting the cart before the horse, because the analysis hasn’t been done. The most obvious assets are in state and just moving the delivery point a little farther -- for at least part of our supply -- a little further away from the city gate, closer to the wellhead. Dawes: Henry Hub was just as an example of the price differentials. I also mentioned from state border to our City Gate was a pretty big number at one point, too. I don’t know where they sit now. but to freeze those long-term is a long-term objective that we should have in mind. Dailev: Right, right. We did sign a memorandum of understanding with PG&E. That has to do with -- if their plan gets approved through this whole bankruptcy proceeding, they will have this other entity that manages all their pipeline and storage assets, and we may be able to make a reservation ahead the open season on those assets. There are a lot of"if’s" in that scenario, but it is one possible outcome. Dawes: So PG&E will be forced to do a lot of asset sales to successfully reorganize? It sounds like that is what is coming out of this whole arrangement. Draft 6/4/03 UAC Minutes Page 3 of 7 Dailev: They are not talking about selling their assets, they are talking about allowing us to make reservations of their assets ahead of the open season. They are not divesting assets, they are just filling them up. They are filling the bus, more or less. Dawes: Are these at fixed prices in the furore? Or is it just the fact that we will be able to get storage, but we’ll set the price at market at some future date that we need it? Dailev: As far as I can see, we would know the price at the time we committed so, yes, it would be, it would be a fixed price for some amount of pipeline capacity for some term. Dawes: Long term? Dailev: Probably five to ten years, at least. Dawes: Hopefully, ten or longer. Thank you. Carlson: Commissioner Ferguson. Ferguson [placing a second and larger "Big Gulp" cup on the dais]: Thank you. I understand the talk about buying capacity, but my next question goes to the number of different gas pipelines. Is there an opportunity here to diversify the number of different physical ways to get gas to the Bay Area? Dailev: To the Bay Area or to Palo Alto? Ferguson: To Palo Alto or to the Bay Area. I understand there may be a limitation to Palo Alto. But just as we have had an opportunity to strengthen the Hetch Hetchy pipelines and perhaps build a fourth pipeline, does this asset purchase increase the number of ways physically to get gas closer to us? Dailev: I will make an attempt at this. I don’t think we are talking about additional pipelines being built into the Bay Area. We might be able to diversify our supply cost by being subjected to different base in prices and different delivery point prices. But we are not talking about physically adding more pipeline capacity in California. Fer~uson: So this plan doesn’t eliminate any physical chokeholds on us? Dailev: No, and I don’t think... Ferguson: We are still exposed to the same earthquake risks and physical risks? Dailev: No, it doesn’t eliminate that. I am not sure that is a big concern right now. There is a lot of capacity in California, it’s not a major issue for gas. Draft 6/4/03 UAC Minutes Page 4 of 7 Bechtel: Karla, what would be the impact, probably in our commodity cost, of doing nothing of purchasing assets. I am sure there are number of people who really don’t have the City’s resources to purchase anything, as we do. What if we did nothing? What would be the impact? Dailev: In a sense, doing nothing is what we have done for the last few years. We used to have some storage that was part of a bundled rate with PG&E. When that was unbundled we immediately declined to take it, it was just not cost-effective. We didn’t take any of it. Also, we have not traditionally held pipeline capacity, with the exception of the piece of Redwood that we ovv~a, which we got at a very cheap rate. It was a no-brainer to take that. At least historically speaking, those were good outcomes. We had lower supply costs than we would have, and in most cases, than if we would have held those assets. Just because that’s true today doesn’t mean that a decision for the future is to continue to do nothing. We certainly recognize that. When we do this analysis, I’m not actually doing the analysis. Another person in our group is, which is good because they don’t have all the biases and the history that I do. He is looking at a very blank page, and very open-mindedly at all the possible futures and what the best portfolio of assets to hold, given all those potential futures, would be. Bechtel: I guess you are really saying that you don’t know what the outcome would be? Perhaps we are planning ahead. I am hoping this is what we are doing, we are anticipating various scenarios that would happen to us, one of which would be nothing, to consider the range of options of acquiring something in the future. I am assuming that the study includes all those features and then we will get a chance to look at it. But that brings up the point.., how fast would we have to react? Let’s sa~ the PG&E bankruptcy is resolved, the PUC or someone has a plan of reorganization. Are we looking at fast decisions here? Or is this open season on acquiring going to be a year long, six months, two years? Can you give me some feel what sort of time pressure we might be under? Dailev: John might be able to respond better to how quickly the bankruptcy might be resolved. Ulrich: You are asking questions about filling in all the spaces around the guidelines that we’re asking you to approve. You are moving into how to make these guidelines work to our advantage, and we are not that far along in this process, as Karla is trying to point out. Franklv I would very much ask [that we be] moving on from bankruptcy and talking about something else. because of the implications this has with our electric business. Peel free to ask what you like, but I am making a suggestion that we focus on these guidelines for approval things that you think that we missed, or are not covered here, so we have thoroughly good long range plan when it’s put together. Rosenbaum: Just to follow-up, I assume the timing on GULP going to the finance committee and to the Council is some months away? Ulrich: Yes. Draft 6/4/03 UAC Minutes Page 5 of 7 Rosenbaum: Apparently that’s fine from a timing standpoint, you don’t sense anything happening that would require any other action? Ulrich: Going beyond whether we sense something or not, one of the real stren~hs we have here in Palo Alto is I have your phone numbers. We can set a meeting and get people together rather quickly and also go to the City Council if those are the kinds of things that need to be done. That wilt be our contingency plan. Move this as fast as we have to if we get something that tells us there’s an opportunity that we need to take advantage of. Rosenbaum: Thank you. [Commissioner Ferguson adds a third and still larger cup labeled "Super Big Gulp" on the dais]. Carlson: Any more questions? Go ahead Dexter. Dawes: On Attachment A, which is the thing we would be recommending to City Council, and under guideline one, section B, it says, "maintaining a prudent exposure to changing market prices by leaving some fraction of the forecasted gas pool needs exposed to near term market prices." Then, under balancing objectives, under A, it says "maintain large spot power and short term market exposure." Are we prudent or are we large? Dailev: That’s not recommended objective, this is a comparison. All these tables in attachment A show the recommended objective in bold and for comparison purposes, the objectives that are different. We are just trying to show here .... Dawes: I got it. These were comparative purposes only. Dailev: Great. Carlson: Any other questions? In that case. lets have a motion to approve. Bechtel: Mr. Chairman, I move that the UAC recommends that the City Council approve the three objectives and four guidelines for the gas utility long term plan. I guess that’s the end, we don’t need the second sentence. Carlson: Do we have a second? Ferguson: I’ll second. Carlson: Any discussion? All in favor say aye. Fer~uson [placing on the dais a fourth giant-size cup labeled "Double Big Gulp"]: Yes, this has gotten better as we’ve talked. Mr. Chairman, can I vote twice on this? Ulrich: I would suggest that the video camera take a close up of Mr. Ferguson, so that it can record his nonverbal comments accurately. Draft 6/4/03 UAC Minutes Page 6 of 7 Carlson: So we have a program already designed for us! Dailev: Did you have to buy all those? Ferguson: No, it was a gift. Ulrich: I hope you enjoyed gulping the drinks. Ferguson: Good Hetch Hetchy water. I vote aye. All: Aye. Carlson: Any opposed? Unanimously approved. Very good job, thank you very much. Ulrich: Thank you. You can see from the staff report the thoroughness that the group has spent putting this all together. And particular thanks to Karla. Carlson: Dexter, you had one more question. Dawes: One more thing I had written dovv~ and forgot to say but it is illustrative only, it goes with the ~no long term contracts." What I had opined or suggested before my note says "Maintain an opportunistic approach. If a good deal comes by, take it." Remember the WAPA contract of 1964, which was sort of average at the time, but we learned to love it at the end. I was unaware that SMUD had bought reserves but I think gas is going to get very scary here over the next ten or fifteen years. If we can buy into a gas field. I think we should look at very seriously. Beecham: To answer that. we are going to have to look at our policies in the city for purchasing commodities and length of time and quantity, to make sure we are fitting in with the rules that we have with the city. Or go and attempt to have those changed. Rosenbaum: Just one comment. I am disappointed that we chose the acronym GULP for gas, when it seems to me more appropriate for water. But it does seem to work very well. I have to compliment the staff on coming up with something that we’ll always remember. I am waiting for the next project that we have. And Mr. Dawes is still asking for a name for our giber to the Home Project. So maybe in the next month the staff can come up with some nice names for that project. Ulrich: We will put tremendous effort and intellectual thought, and try to meet your expectations. Dawes: As you may have heard, I have a suggestion. Ulrich: Yes. we do recall and it is in the record. Since you have not copyrighted it, we may be willing to steal it ve~~ quickly. (END OF EXCERPT) Draft 6/4/03 UAC Minutes Page 7 of 7 ATTACHMENT B Draft 6/4/03 UAC Minutes Page I of 7 MEMORANDUM 1 TO:UTILITIES ADVISORY COMMISSION FROM: UTILITIES DEPARTMENT DATE:JUNE 4, 2003 SUBJECT:REQUEST FOR THE APPROVAL OF NATURAL GAS SUPPLY PORTFOLIO PLANNING AND MANAGEMENT OBJECTIVES AND GUIDELINES FOR THE GAS UTILITY LONG-TERM PLAN (GULP) REQUEST This report requests the Utilities Advisory Commission (UAC) recommends that the City Council approve three Objectives and four Guidelines for the Gas Utility Long-Term Plan. Approval of the Objectives and Guidelines will guide staff in developing and managing the City’s Gas Utility Long-term Plan (GULP). BACKGROUND In 2001 staff began the process of developing a Long-Term Electric Acquisition Plan (LEAP) as a response to the electric energy deficit that will occur when the Western contract expires in December 2004. Council approved LEAP objectives in November 2001 (CMR:425:01) and LEAP guidelines in October 2002 (CMR:398:02). In April, 2001 staff outlined for Council a gas commodity purchasing strategy (CMR:196:01). Staff has now begun the process of updating that strategy and developing a plan similar to the LEAP for the gas utility. Like the LEAR the Gas Utility Long-Term Plan (GULP) will be the vehicle by which the gas commodity portfolio will be managed consistently, transparently, and with input from the public and the Council. Several key differences exist between the electric and gas utilities and the process for these plans. Unlike the electric plan, the need for a gas utility long-term plan is not signaled by a change in a current contract situation such as the Western contract changes. Nor is the gas utility impacted by the hydro availability uncertainty or the need to manage hydro dependent assets. However, due to the lack of long-term gas assets, the gas supply deficit is more immediate than that for electric. Three main factors are driving the need for GULP: (1) a need to review and update the current commodity purchasing strategy with public input, (2) the possible need to commit to PG&E assets as part ofa PG&E bankruptcy negotiation, and (3) the need to be prepared for possible new regulations imposing minimum asset holdings for core customers. In addition, development of a GULP addresses recommendation #20 in the Assessment of Utility Risk Management Procedures by the City Auditor which reads, "CPAU should continue to regularly and actively (a) review the performance of the energy procurement strategy, (b) quantify the risk and cost consequences of alternatives, and (c) communicate the risks and costs of recommended revisions to the City Council." Commodiff Purchasing Strategy The gas utility does not have any long-term supply assets and hence is inherently in deficit. The commodity purchasing plan for the pool load (pool load consists of residential, small commercial, and large commercial customers who chose to give up direct access eligibility) is currently driven by a "laddering structure". The goal calls for 75% of the forecasted natural gas requirements for the pool be purchased for 0-12 months out, 50% for 12-24 months out, and 25% for 24-36 months out. This laddering strategy diversifies purchasing timeframes over a 36 month period at different forward-pricing points thereby avoiding the need to buy all supply requirements within a short-window of time and market prices. The following waph illustrates the current laddering strategy and the deficit the inherent deficit in the gas utility. This 3-year laddering strategy will be reexamined as part of the GULP. Gas Supply Procurement Program for Pool Customers as of March 20, 2003 500,000 ...............iI Expected Poool Customer 450,000 ..................1 ........, ........ 400,000 ........./’~- ....i ....) .... / \350,000 ...../ ....\ -- - Fixed-price / ~ 300.000 250,000 ~ 200,000 ~5o.ooo N--// .......X / " 100.000 x ~ ................~ 100% 02/03 ’~ 50,000 "~ -~ 75% Goal .........~ ....~0~]~ Goal PG&E Bankruptcy IfPG&E’s plan for reorganization is approved, many of PG&E’s assets will be regulated by the federa! government instead of the State of California. In such a reorganization, Palo Alto has committed, in a memorandum of understanding (MOU) with PG&E, to negotiate a Transportation and Storage Services Agreement (TSSA). The TSSA will outline pipeline capacity and storage reservations that will be available to Palo Alto outside of the normal process for auctioning those assets. GULP will outline which and how much or those assets Palo Alto will be willing to commit to acquire for the long term. Regulatory Pressure Palo Alto, a wholesale customer of PG&E with a core natural gas load, currently enjoys benefits of that status without any minimum regulatory requirements regarding pipeline capacity or storage holdings. There is a relatively strong movement among interested parties on the PG&E system to require customers such as Palo Alto to take on the responsibility of paying for some of those assets that are required to maintain a reliable PG&E system-wide natural gas supply. If such a future scenario arises, GULP will lay the foundation for making these commitments. In addition, the GULP will provide a platform for evaluating potential asset investment opportunities as they arise. The schedule of pieces of the plan that have been acted on or are planned for action by the UAC and/or Cit)~ Council is displayed below. 11. Approval of energy Risk Management Policies 12. Approval of planningI objectives and guidleines 13. Draft GULP 4. Final GULP 5. Implementation Completed ICouncil approval of risk management policies 2/20/2001 (CMR:130.01) Revised 10/01/02 (CMR:398.02) To Do ITo UAC - May 2003; To Council June 2003 ITo UAC - Summer 2003 ITo UAC/Council - Fall 2003 IWinter 2003 I ! DISCUSSION Staff proposes the three following GULP Objectives to govern gas supply resource asset acquisition and energy efficiency strategies for the gas utility: Objective 1: Ensure low and stable gas supply rates for pool customers. Objective 2: Objective 3: Provide superior financial performance to customers and the City by managing the supply portfolio cost in a competitive manner compared to market cost and a retail supply rate advantage compared to PG&E. Balance environmental, rate, and cost impacts when considering energy efficiency investments. These objectives are consistent with the portfolio objectives approved for the electric utility (CMR:425:01). To facilitate the development of specific recommendations, staff has developed four GULP Guidelines based on the three Objectives. Key themes found in these GULP Guidelines address diversification to minimize risk and stabilize rates, operational flexibility, and opportunities for energy efficiency. Guideline 1: Market Risk Management - Manage market risk by adopting a portfolio strategy for gas supply procurement by: A. Diversifying ene~oy put’chases for the pool across commitment date, delivery date, duration, suppliers, pricing terms & delivery points; B. Maintaining a prudent exposure to changing market prices b3’ leaving some~fi’action of the forecasted gas pool needs exposed to near-te~vn market prices, C. Avoiding long term (> ] 0 years) )qxed-price commodio~ contracts. Guideline 2: Asset Acquisition and Manao, ement - Explore suppl3; pipeline, and storage acquisition options available to the City which may be assembled to yield reliable supply at fair and reasonable cost, taking into consideration. ~. Long-term supply cost for gas deliveries at PG&E CiO.’gate; B. Operational needs including the need for daily balancing during Operational and Emergenqv Flow Orders, C. Existing and potential regulator3, mandates," D. Potential operational streamlining opportunities with other agencies, and E. CiO; ’s low cost of capital for asset acquisition. Guideline 3: Management of Re~oulatorv and Legislative Matters- Se~a,e as an effective voice to protect and enhance the CiO, ’s position in regulatory and legislative arenas by. A. Intervening in the regulator3’ and legislative arenas to ensure that the Cio; ’s gas utility interests are protected and enhanced; and B. Exploring potentialjoint action with other public agencies. Guideline 4: Gas Energy Efficiency Investments - Pursue cost-effective ene~Loy ejficiency investments by: A. Providing expertise, education and incentives to s upport c ost-effective customer e~ciency improvements; B. Demonstrating new ~fciency and load management alternatives, and 4 C. Providing rate assistance and efficiency programs to low-income customers. Guidelines 1, 2 and 3 apply to Objectives 1 and 2 while Guideline 4 applies to Objective 3. For example, successful management of market price risk will result in stable rates for customers. Asset management will result in good financial performance for the City. These objectives and guidelines are different from those employed by Pacific gas and Electric Company (PG&E) and the City of Long Beach, the only other municipal gas utility in Califomia. Both purchase g as o n a m ore s hort-term b asis. Their asset holdings are somewhat different from each other. In contrast to Palo Alto, PG&E adopts a more short-term purchasing strategy and has regulatory approval to pass on actual purchase cost via retail rates that change on a monthly basis. Rate stabilization is not a PG&E objective. PG&E does hold interstate and intrastate pipeline capacity and storage capacity for its core customers. Long Beach also purchases gas based on a short-term index. Long Beach has an objective of matching theprice paid for gas by its nearest IOU, Southern California Gas Company (SOCalGas). Therefore, gas is purchased based on an index that mimics the SoCalGas purchases. Long Beach does use some risk management tools such as gas priced with a ceiling and floor price, but buys mostly on a monthly index. Long Beach does not hold any interstate pipeline capacity but does own storage capacity. POLICY IMPLICATIONS AND UTILITIES STRATEGIC PLAN These three proposed GULP Objectives and Guidelines do not represent any change to existing City policies. The Objectives and Guidelines conform to City’s Energy Risk Management Policies. The Guidelines support the Utilities Strategic Plan: 1. Strategy 2 - Preserve a supply cost advantage compared to the market price; 2. Strategy 4 - Deliver products and services valued by our customers, and continue to build CPAU brand presence; 3. Strategy 6 - Maintain stable General Fund transfers, and maintain financial strength; and 4. Strategy 7 - Implement programs that improve the quality of the environment. The proposed GULP Guidelines further the City’s commitment to the Green Government Pledge by supporting the conservation of energy. RESOURCE IMPACT Implementation of the GULP Guidelines by itselfdoes not have resource impacts. However, implementing the GULP may require re-allocation of current staffing resources since staff may need to manage more assets than it does at the present time. Specific recommendations resulting from application of the GULP Objectives and Guidelines will be brought to the UAC and Council as appropriate. ENVIRONMENTAL REVIEW Adopting the proposed guidelines does Environmental Quality Act (CEQA). not constitute a project under the California NEXT STEPS Upon UAC approval of the GULP objectives and guidelines, staffwill seek Council approval of the same in June or July 2003. An initial review of staff’s analysis will be presented to the UAC late summer with a final report and recommendation in the fall. ATTACHMENTS A:Summary of Analysis and Options Considered in Developing the Gas Utility Long- term Plan (GULP) Guidelines PREPARED BY: REVIEWED BY: Karla Dailey, Resource Planner ~. RISH BALACHANDRAN ......... -~ Assistant Di of Utilities, Resource ement KARL VAN ORSDOL Energy Risk Manager Administrative Services Department DEPARTI ’IENT HEAD: 2H r of Utilities A~achment A Summ_ary of Analysis and Options Considered in Developing the Gas Utility Long-term Plan (GULP) Guidelines.. Guideline 1: Market.Risk Management Manage market risk by adopting a portfoi!o strategy for ga# supply procurement by: A. " Diversifying energy purchases for the pool across commitment date, delivery date, duration, suppliers, pricing terms & delivery points; B. Maintaining a prudent exposure to changing market prices by le:aving some fraction of the forecasted gas pool needg exposed to near-term market prices; C. Avoiding long term (> l O years) fixed-price commodity contracts. Balancing Objectives Low & Stable, Competitive Rates Energy Pool Rates Efficiency A. Maintai~ large s~ot (short-term) market - -+ + exposure B. Purchase all gas via long-term fixed-price resources (>10 years) C. Manage market risk by adopting a portfolio strategy for gas supply procurement +, stable, but may not be low -, the longerthe term, the greater the chance ofdiverging from market rates ++ + () means the alternative helps achieve (hinders)the obj ectlve; quantity of + (-).indicates to what extent Objective is helped (hindered) - bold indicates the recommended guideline Unlike the electric utility, the gas utility has no long-term committed resources (Western Base Resource and the Calaveras hydroelectric plant have 20-30.year term commitments) Diversifying energy purchases as recommended reduces market price risk and facilitates the maintenance of stable and competitive rates. One alternative is to purchase al! needs on the short-term ("spot") energy markets. This would achieve the objective of maintaining competitive rates, but wonld likely lead to volatile costs and, therefore, volatile retail rates. Another alternative is to lock in all gas needs at very long-term fixed-prices. Rates would be stable but would not follow market prices. This could lead to low rates (if thelocked-in prices turned out to be lower than market prices) or uncompetitive high rates (if the locked-in prices were higher than market prices). In addition, gas prices become less liquid past three Attachment A to five years resulting in a large bid-ask spread. Maintaining adequate market price-based resources to meet load is important so that the .City can maintaha a flexible portfolio with sufficient short-term resources so costs are not very diffe}en{ from market costs at any tim~. - In accordance with the commodity pricing policy, the GULP commodity purchasing plan wil! apply to pool customer needs.only. Gas for customers with market based rates (G3), fixed- term rate’customers (Gll), and custom contract customers (Gi2) will be purchased in accordance with pre-appr0¥ed purchasing plans for those customers. Guideline 2: Asset Acquisition and Management- Explore supply, pipeline, and storage acquisition options available to the City which may be assembled to yield reliability of supply at fair and reasonable cost, taking into consideration: A. Long-term supply cost for gas deliveries at PGdd?, Citygate; B. OperatT"onal needs including the need for daily balancing during Operational and Emergency Flow Orders; C. Existing and potential regulatory mandates; D. Potential operationa! streamlining opportunities with other agencies; and E.’ City’s low cost of capital for asset acquisition. !Balancing Objectives A. Hold no pipeline or storage asset rights B. Purchase all gas at the wellhead and transpofi 100% of gas needs with City-m~’,ed pipeline assets. Hold storage to meet all winter pealdng loads. C. Assemble a mix of pipeline and storage options taking into consideration virfual pipeline capa’city and st~3rage Low &-Stable Competitive Rates Pool Rates ++ +, stable, but -, the longer the term of may not be low commitment, the greater the chance.of diverging from market rates; credit risk is higher ++ Energy Efficiency + (-) means the alternative helps achieve (hinders) the objective; quantity of+ (-) indicates to what extent Objective is helped (hindered) bold indicates the recommended guideline .- Currently the City holds pipeline capacity equivaIent to the year-round base load requirement and has a contract for winter swing gas needs in the form of "virtual storage." That is, the City pays a reservation fee for the right to buy or sell gas at daily market prices. alternative is to hold no assets, real or Virtual, and rely on the PG&E Citygate hadex for 2 Attachment A 100% of gas needs. The CitY’ s current allocation of Redwood pipeline capacitY is at below market rates, so rejecting ~hat capacity would not be in the best interest of the city. Acclu .lXixtg the ri.ghts tO other.as.sets may prove to further.the objective~ ofiow and stabierates and competitiveness. In~dditi~n, regulatory mandates may require the City to hold pipeline and storage assets as a customer with core load. An0thek. alternative-~could be to_. buy all gas at the wellhead and hold enoUgh pipeline and storag.ecapacity tomeet ! 00% of the City gas iequirement.ou every day of the year. With an average summer usage of. 6,000 MMBtu per day and a peak wixtter day usage of-30,000 .MMBtu, such a commitment would leave large, amounts 0fpipeline capacity undemtilized for much of the year. In adaiti0n, costs for that.capacity wouldbe locked in for ldng terms (probably.1..0 years or mo~e) this may lead to total costs above or below the market. The GULP process will ..include evaluating pipeline capacity alternatives and storage alternatives that may be incorporated into a total gas portfolio management package. Virtual pipelineand storage Capacity will also be evaluated for cost effectiveness and operational flexibility. Regulatory mandates may be imposed that would require Palo Alto to hold some amount of those assets. Several r~,miatory scenarios wilt be developed with a determined response to each possibil.ity. When managing such _assets, some sharing with other-agencies may prove viable. These relationships will be explored as part..of the GULP. Guideline3: Managementof Regulatory Matters - Serve as an effective voice to protect and enhance the City’s position in regulatory and legislative arenas by: A. Intervening in the regulatory and legislative arenas-to ensure that the City’s gas utility interests are protected and enhanced," and B. Exploring potential joint action with other public agencies. Balancing Objectives Low & Stable Competitive Energy Pool Rates Rates Efficiency A. Stop spending funds on regulatory advocacy B. Protect rights via regulatory arena ++ participation + (-) means the alternative helps achieve (hinders) the objective; quantityof+ (-) indicates to what extent Objective is helped. Oaindered) bold indicates the recommended guidel.ine It is recommended to actively participate in the regulatory arena, relying, on consultant help, to advance the City’s interests. These activities may include joint action with other similarly Att~chm~it A positioned agencies. Guideline 4: Gas Energy Efficien_cv Investments -Pursue cost-effec~.,eene~-gy e.,ficienc); investments by:. A. Providing expe’rtise, education and incentives to support cost-effective customer eJ~ciency improvements; B. "Demonstrating new efficiency and load management alternatives; and C. Providing rate assistance and efficiency programs to low-income customers. Balancing Objectives Low & Stable Competitive Energy Pool Rates Rates Efficiency ++++ A. Spend nd supplemental funds on energy efficiency " B. Fund cost-effective energy efficiency programs + (-) meansthe alternative helps achieve (hinders) the objective; quantity of + (-) indi,’cates to what extent Objective is helped (hindered) bold indicates the recommended guideline Urdike the electric utility, there is no State requirement for Public Benefits programs. In 1996, Council approved a gas fund revenue atloc.ation of 1% for efficiency progralns (CM2t~:209:96). This funding level has b~en adequate, and a variety of residential and commercial: .gas efficiency programs have been offered. Currently, several, commercial programs are in effect including boiler and water heater replacement rebates. A washing machine rebate for residential customers is also underway. Supplemental funding will be recommended .when high value opportunities present themselves to offset high-cost gas supply with less expensive conservation or peak shaving strate~es as seen during the 2000-01 energy crisis: 4