HomeMy WebLinkAbout2003-12-01 City Council (6)STUDY SESSION
City of Palo Alto
City Manager’s Report
TO:HONOI~ABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:DECEMBER 1, 2003 CMR: 537:03
SUBJECT:STUDY SESSION ON ENERGY RISK MANAGEMENT
This report provides background for the Council’s study session.
BACKGROUND
The deregulated energy markets have posed, and continue to pose, significant challenges for
the City ofPalo Alto’s Utilities in the purchasing of electricity and gas supplies. Annual City
electric and gas commodity purchases total approximately $60 million per year. As a result
of recent and current market conditions, the risks associated with the purchasing of gas and
electricity remain significant. To manage these risks, the Administrative Services
Department has worked with the Utilities Department, the City Manager’s Office, the City
Auditor and the City Attorney, to implement a risk management program. This program has
included the approval of an Energy Risk Management Policy by the Council, the hiring of an
Energy Risk Manager reporting to the Director of ASD, the establishment of a Risk
Oversight Committee, regular reporting of risks and risk management activities to the
Utilities Advisory Commission, and quarterly reports to the Finance Committee.
In 2002, the City Auditor carried out an assessment of the adequacy of utility risk
management and reporting procedures, and issued a number of recommendations. Prior to
the internal audit, the consulting firm of Deloitte and Touche also identified several areas for
improvement. In both reports, enhanced training and education of advisory bodies including
the City Council was recommended.
CMR.5.~7.0.~Page 1 of 2
DISCUSSION
The purpose of this report is to inform Council of the status of the City’s energy risk
management program and to show how the risks associated with the purchase of electricity
and gas supplies are determined. The City’s Risk Management Policy requires that staff
report to Council on: 1) the City’s energy portfolio composition compared to Council-
adopted policy; 2) the performance of the City’s electric and gas portfolios; and 3) other key
market information. This study session is designed to acquaint Council with the key
concepts, tools and best practices used by energy risk managers to protect assets.
Staff will discuss the accomplishment of the risk management program over the last 12
months, present the organizational structure of risk management activities, and highlight the
roles and responsibilities of oversight bodies including the Council, the Utilities Advisory
Commission and the Risk Oversight Committee. Finally, staff will review the City’s risks,
focusing on the concepts of market risk and credit risk. The session will present examples of
these risks, show how they are measured, present a sumlnary of the risks in the City’s energy
portfolio, and discuss their significance.
PREPARED BY:
KARL G. VAN
Energy Risk Manager
DEPARTMENT HEAD APPROVAL:
CITY MANAGER APPROVAL:
CARL YEATS
Director,dstrative Services
Assistant City Manager
CMR:537:03 Page 2 of 2