HomeMy WebLinkAbout2003-12-09 City Council (2)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
ATTN:FINANCE COMMITTEE
FROM:CITY MANAGER DEPARTMENT: UTILITIES
DATE:
SUBJECT:
DECEMBER 9, 2003 CMR:465:03
ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO
APPROVING ELECTRIC MASTER AGREEMENTS WITH
ARIZONA PUBLIC SERVICE
COMPANY, CORAL POWER,
MARKETING AMERICA LLC;
TRADING CORPORATIONFOR
COMPANY;BP ENERGY
LLC; DUKE ENERGY
AND SEMPRA ENERGY
THE PROCUREMENT OF
ELECTRICITY AND AUTHORIZING THE CITY MANAGER TO
TRANSACT UP TO $75 MILLION WITH EACH SUPPLIER
UNDER THESE AGREEMENTS
REPORT IN BRIEF
The City of Palo Alto will need significant additional supply resources to meet its future
electricity needs since, starting on January 1, 2005, its main supplier will provide
substantially less energy than it currently supplies. The Council has approved the Long-
term Electric Acquisition Plan (LEAP), which sets out how those additional supplies will
be purchased; and the LEAP implementation plan, which directed staff to enter into
Master Agreements with qualified suppliers. In order to implement LEAP, staff needs
the authority to transact under such Master Agreements. Staff requests Council’s
approval to execute Master Agreements with five suppliers that meet all the City’s
rigorous qualification requirements. These suppliers were selected as a result of a
Request For Proposals process that was open to electricity suppliers who sought to do
business with the City. Staff further requests that Council authorize staff to transact
under these Master Agreements so that it can purchase electricity on a competitive basis
under certain limitations set forth in the attached ordinance.
CMR:465:03 Page 1 of 12
RECOMMENDATION
Staff recommends that Council approve the following:
Approve and authorize the Mayor to execute Master Agreements with the
following suppliers who have been deemed qualified to do business with the City
with respect to electricity purchases and sales for the period January 2004 through
December 2011, under the terms discussed in the report:
a. Arizona Public Service Company;
b. BP Energy Company;
c. Coral Power, LLC;
d. Duke Energy Marketing America, LLC;
e. Sempra Energy Trading Corporation.
Authorize the City Manager or his designee to manage these Master Agreements,
and to execute one or more electric commodity transactions in accordance with the
terms of the contract. This includes authorizing the City Manager or his designee
to execute multiple transactions under the Master Agreements with one or more of
the above suppliers to procure electric supplies sufficient to meet the City’s
forecasted electric load, with the date for delivery of the electricity for each
transaction not to exceed 36 months from the date that the transaction is executed.
In addition, the date for delivery of the electricity for any transaction will not
extend beyond the term of the Master Agreements specified in the attached
ordinance. The maximum aggregate transaction limit under each Master
Agreement shall be $75 million.
BACKGROUND
The City will experience a significant electricity supply resource deficit with the
expiration of its current 40-year Western Area Power Administration contract at the end
of 2004. In October 2000, Council approved the 20-year Western Base Resource
contract, (CMR:378:00) which will replace the existing Western contract.
Due to the changed Western contract, the projected energy shortfall in the year 2005 and
beyond is expected to be about 650 million kilowatt-hours per year or about 55% of the
City’s electricity energy needs during an average hydrologic year. This deficit is highly
variable and dependent on hydro conditions, with the energy deficit as high as 70% in a
very dry hydro year and as low as 20% in a very wet year. This annual production
variability is illustrated in Figure 1.
CMR:465:03 Page 2 of 12
Fig 1" Variability of Existing Generation Portfolio After December 2004
140,000
120,000 ~
Palo Alto Load
10o,000’
80,000
60,000
40,000
20,000
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
More than two years of staff work, Utilities Advisory Commission and public input, and
Council approval of policies, guidelines and plans have all focused toward proactively
responding to this energy deficit and preparing the Long-term Electric Acquisition Plan
(LEAP).
The City Council approved four Primary Portfolio Planning Objectives on November 13,
2001 (CMR:425:01) to guide the development of strategies to fill this energy deficit. The
City Council approved seven LEAP Guidelines on October 21, 2002 (CMR:398:02). On
August 4, 2003, the City Council approved the LEAP Implementation Plan
(CMR:354:03). These approved objectives, guidelines and implementation plan are
provided for reference as Attachment B to this report.
The July 2002 Assessment of Utility Risk Management Procedures by the City Auditor
made recommendations to improve the City of Palo Alto Utilities’ (CPAU) energy
procurement process. The Auditor’s report recommended that all Master Agreements
with suppliers be approved by the Council with clearly defined dollar, volume and
duration limits (Recommendation No. 4); and with clear definition of the types of
transactions staff is authorized to execute under the agreements. The Auditor’s report
also recommended that the process of securing Master Agreements itself be undertaken in
a more open and competitive manner (Recommendation No.6).
CMR:465:03 Page 3 of 12
Electrici _ty Portfolio
The post-2004 electricity supply portfolio consists of the electricity supply sources listed
below:
o
°
Western Base Resource Contract - This 20-year contract (2005 through 2024) is
the primary source of supply. The energy source is hydroelectric power; thus, the
output varies each month and each year according to hydrologic conditions. The
contract provides about 35% of the City’s needs in an average hydrologic year.
Calaveras Hydroelectric Project - The City owns a fraction of this project with
other members of the Northern California Power Agency (NCPA). As with the
Western Base Resource, its output is dependent upon hydrologic conditions. The
City’s share of the project provides about 12% of its annual needs in an average
hydrologic year.
Seattle City Light (SCL) Contract - This contract, which expires in 2014, is a
seasonal exchange of energy. The City receives electric energy from SCL in
summer months and returns energy to SCL in winter months.
Coral Contract - On November 13, 2001, the City Council approved the purchase
of 25 MW of energy [CMR:425.01] to be delivered around the clock in the months
of January through March and October through December for 5 years (2005
through 2009). Staff executed the purchase from Coral Energy Resources, L.P.
on August 13, 2002. The contract provides about 10% of the City’s needs during
the contract term.
Block Purchases - The City Council approved the purchase of three, 25 MW
blocks of energy for delivery for the 2005 through 2007 period [CMR:354:03].
Staff plans to execute these approved purchases under the proposed Master
Agreements. The blocks will supply about 26% of the City’s needs in 2005, 15%
of the 2006 needs, and about 11% of the needs in 2007.
The City is evaluating other long-term supplies as outlined in the LEAP implementation
plan including a 25 to 50 MW share of a natural gas-fired generation plant, renewable
supplies to meet the LEAP Guideline (new renewables equal to 10% of the portfolio by
2008 and 20% of the portfolio by 2015), locally-sited generation, and implementation of
energy efficiency programs.
The balance of the City’s projected needs will be purchased from the market as needed to
meet demand requirements. Staff plans to execute these market purchase transactions
under the proposed Master Agreements. In addition to the electricity purchased in
advance for its customers, electricity supplies must be purchased or sold as required to
match actual loads to supplies previously purchased. These "operational balancing"
transactions are completed by NCPA to balance load within the month.
CMR:465:03 Page 4 of 12
Assuming that new renewables account for 10% of the total need (the goal for 2008) and
that no other new long-term resources are in place, the deficits in the first three years of
the post-2004 period are shown in the chart Figure 2 below.
Fig. 2: Load/Resource Balance - 2005-2007:
33% deficit in an average hydrologic year
100,000
80,000
60,000
40,000
0
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jut-07
Since the City has not yet purchased the Council-authorized block purchases, the amount
of energy remaining to be purchased includes the energy associated with those purchases.
Including those block purchases, the amount of the energy deficit depends to a great
extent on the hydrologic year type. In dry years, the deficit increases, while there will be
an energy surplus in wet years in some months. Given projected annual demand of about
1,105,000 Megawatt-hours per year (MWh/yr), the estimated energy deficit in an average
hydrologic year is about 365,000 MWh/yr, or about 33% of expected load. In a dry year,
the deficit increases to about 610,000 MWh/yr (55% of expected load) and a wet year is
expected to yield an energy surplus of about 195,000 MWh/yr (18% of expected load).
DISCUSSION
To prepare for the significant energy deficits in the future, improve opportunities for
competitive pricing, diversify purchases across multiple creditworthy suppliers, and
comply with audit recommendations, a Request for Proposal (RFP) was issued in June
2003 to solicit interest from suppliers to sign Master Agreements with the City to enable
future procurement of electricity supplies required to meet the City’s electric load needs
for up to 10 years. The supplier selection process for the RFP is provided in Attachment
C. The five proposed Master Agreements were negotiated under terms and conditions
CMR:465:03 Page 5 of 12
acceptable to the City. (The Master Agreements are available for review in the office of
the City Clerk.)
Description of a Master Agreement
A Master Agreement is similar but not identical to a blanket purchase order. A Master
Agreement details all of the contractual terms that govern transactions that are completed
under the agreements. The Master Agreement consists of a base contract and special
provisions specified in the cover sheet. Executing a Master Agreement does not commit
the City to any transaction. Each transaction for part of the City’s monthly, annual, or
multi-year electricity requirements is completed through subsequent competitive bidding
and memorialized as an executed transaction, as evidenced by a completed confirmation.
Executing a Master Agreement is not a promise of business by the City or by the
supplier. It serves only to qualify suppliers to bid on individual transactions solicited by
the City.
Each Master Agreement may be terminated at any time by either party according to the
terms of the agreement. Termination of the Master Agreement cancels the supplier’s
ability to bid on further transactions during the term contemplated by the RFP. Any
transaction executed under the Master Agreement prior to termination will remain in
place until the final electricity delivery date, unless an event of default has transpired. In
an event of default by a supplier, the City has the option to terminate the remaining
transactions for electricity yet to be delivered that were executed under the Master
Agreement. The supplier can also terminate any remaining transactions in the event of
default by the City.
The City may suspend solicitation to bid on individual transactions with any supplier due
to counterparty credit limits or transaction limits, a supplier credit downgrade event,
supplier default or suspected default, or where inclusion in the solicitation would not
comply with law or City policies, guidelines, rules or procedures. While the City has
selected five suppliers with whom to sign Master Agreements, it is foreseeable that only a
few suppliers may ultimately provide the most competitive prices, and some may merge
or leave the industry, resulting in most transactions being concentrated among a few
qualified suppliers.
If the number of eligible suppliers dwindles, the City may terminate the Master
Agreements as per contract terms and conditions and concurrently conduct an RFP for
new Master Agreements to cover the period after the effective date of termination of the
Master Agreements then in place.
All transactions under the Master Agreements will be executed by staff in accordance
with the Energy Risk Management Policies, Guidelines, and Procedures. These
procedures are monitored by the Energy Risk Manager, and ensure that risks inherent in
CMR:465:03 Page 6 of 12
the energy industry are managed prudently. The Energy Risk Manager will provide
Council an update of all executed transactions under the Master Agreements on a semi-
annual basis as part of energy risk management reporting.
Projected Costs
Currently, electricity can be purchased for between $25 and $65 per MWh for deliveries
during the next several years, depending on the month and hours of the day. However,
prices could increase dramatically as during the 2001 energy crisis, when prices reached
over $200/MWh for certain months. Since electricity prices are volatile, it is conceivable
that the prices could double from current levels over the terms of the Master Agreements.
The City’s estimated electric purchase costs for the post-2004 energy deficit depends on
the hydrologic year type and the market cost of energy. The table below shows the
estimated total cost of all transactions under the Master Agreements in the case of
average, dry and wet hydrologic year types for energy costs of $45/MWh and $60iMWh.
Estimated Annual Aggregate Cost Scenarios
For the Annual Energy Supply Deficit/Surplus
.... ....Energy Cost--$45~Wh Energy Cost=- $60/MWh
Average Hydro Year $16 million $22 million
Dry Hydro Year $28 million $37 million
Wet Hydro Year $25 million $34 million
The expected cost for electricity in an average hydrologic year over the 2005 through
2011 period in which the Electric Master Agreements would be in use is about $16
million/year, or a total aggregate cost for electricity over the seven years of between $80
and $110 million. However, if electric costs increase by 20% so that costs average $20
million per year over the 7-year period, the aggregate cost could be $140 million. If there
were a dry hydrologic year, the costs could increase even more. For example, if two of
the seven years were dry years, the costs over 7 years could be $130 to $170 million.
In a wet year, it is expected that there would be an overall supply surplus. In addition,
the LEAP Guidelines state that hydrologic risk (the risk of varying output from the
hydroelectric-based resources) should be managed by planning for an average year on a
long-term basis. Thus, in accordance with the LEAP Guidelines, staff would purchase
sufficient supplies in advance to close the average year deficit. If the hydrologic year
turned out to be wet, those purchases as well as the surplus emanating from the increased
output from the Western contract and the Calaveras Hydroelectric Plant would be sold to
balance supplies with customer needs.
CMR:465:03 Page 7 of 12
Limits of Authorization
The proposed limits .and parameters for Council’s authorization to the City Manager
include the following:
Authority to be delegated to the City Manager to buy and sell electricity to meet
the City’s retail load requirements within a 3-year period from the date the
transaction is executed ("rolling 36 month forward period").
All transactions must be consistent with Council-approved Energy Risk
Management Policies [CMR:400:02].
o All transactions in excess of $65,000 to be reported on a quarterly basis to Council
as part of regular reporting (per the Energy Risk Management Policies and
Guidelines).
The maximum total dollar amount of aggregated electricity transactions for any
single Master Agreement is $75 million. This limit gives staff the flexibility it
needs in case electricity costs increase above expectations, variations in
hydrologic year types, and if some of the suppliers are unable to continue to do
business with the City or do not offer the best prices.
All transactions that lie outside the authority delegated to the City Manager require
Council approval.
Additional limitations on transactions with the suppliers are imposed under the internal
energy risk management guidelines. These internal guidelines contain counterparty
credit limits that limit transaction term and risk exposure depending upon the
creditworthiness of the suppliers. For example, the guidelines provide transaction limits
in terms of annual volume, annual cost, and transaction term for each supplier. Thus,
staff is constrained by these guidelines regarding transacting with each approved supplier.
These guidelines act as an additional level of control below the higher-level limitations
that staff recommends Council impose under the Master Agreements.
ALTERNATIVES
The aggregate cost of all transactions to be executed under the Master Agreements is
expected to be between $80 million and $110 million. Therefore, the request for City
Manager authority of a maximum of $75 million per Master Agreement may appear
much larger than necessary. Unfortunately, the actual quantities and cost for the
electricity required to meet load is not known at this time. If all five suppliers offer
competitive prices, remain creditworthy and in good standing, electricity costs do not
deviate greatly from expectations, and the hydrologic years over the term of the
CMR:465:03 Page 8 of 12
agreements are neither dry nor wet, the City could transact for an average of less than $30
million with each supplier.
However, the total volume and cost of transactions in a wet year or a dry year will be
significantly higher than in a normal hydrologic year. Market costs for electricity could
also increase significantly. Finally, over the terms of the agreements, one or more of the
suppliers may cease to remain in business, may have their creditworthiness downgraded
such that Palo Alto will not enter into any new transactions, or may consistently not offer
the best prices. In accordance with Risk Management Policies and Guidelines, staff is
responsible for monitoring credit limits with each supplier. Therefore, it is likely that
transactions will not be evenly split between the five suppliers and that Palo Alto will do
more business with two or three suppliers. Thus, the transaction limit of $75 million per
Master Agreement will allow staff the necessary flexibility to secure supplies to meet the
City’s electric needs in an efficient and cost-effective fashion while limiting the City’s
risk.
RESOURCE IMPACT
The transactions executed under the Master Agreements will commit the City to pay for
energy deliveries needed to meet the electricity demand of City electric customers up to
the limits described in the ordinance, budget constraints, and risk limits set according to
the Council-approved Energy Risk Management Policies. These costs are a function of
electric market prices and the City’s forecasted and actual volume of electricity needs.
The expected cost for electricity given current market prices for calendar year 2005
depends on hydrologic year as shown in the table below:
Resource
Western Base Resource
Calaveras hydroelectric project
Coral Purchase (Years 2005-2009)
Purchases under the Master Agreements
Total Estimated Costs
Average Year
$10,000,000
9,500,000
4,000,000
16,500,000
$40,000,000
Dry Year
$10,000,000
9,500,000
4,000,000
27,500,000
$51,000,000
Wet Year
$10,000,000
9,500,000
4,000,000
25,000,000
$48,500,000
The cost for transactions expected under the Master Agreements 8-year term is shown in
the following table. The cost depends on the hydrologic year and on how much energy
would be purchased under these Master Agreements if they were used to enter into
transactions during 2004 through 2006 for energy for delivery through 2011.
CMR:465:03 Page 9 of 12
Expected Cost in an Average Hydrologic Year at Current Market Prices
Year
2004
2005
2006
2007
2008
2009
2010
2011
Total
Annual Cost
$ 6,750,000
16,500,000
16,500,000
16,500,000
11,500,000
6,500,000
6,500,000
1,500,000
$82,250,000
Basis (Note that term of Coral purchase is 2005-2009)
Prior to Base Resource Contract - Purchase small deficits in
some months, sell small surpluses in other months
Expect to purchase entire expected deficit for year
Expect to purchase entire expected deficit for year
Expect to purchase entire expected deficit for year
Purchase energy so that deficit is -10% of load
Purchase energy so that deficit is -20% of load
Purchase energy so that deficit is -30% of load
Purchase energy so that deficit is -40% of load
Note that these cost estimates are for currently expected market prices ($45/MWh) and
average hydrologic conditions. Costs could increase substantially if market prices for
electricity increase and in other hydrologic year types.
When a transaction is executed under the Master Agreements to buy electricity at a fixed
price for delivery at a future date, the electricity is not paid for until the time of delivery.
Staff carefully monitors current year costs against adopted budget and future year costs
against long-term financial plans. Approval of the recommendation will not impact the
current FY 03-04 budget. Transactions with deliveries extending beyond the approved
budget horizon are binding commitments, supported by electric retail revenues with retail
rates determined by Council.
POLICY IMPLICATIONS
Authorizing the City Manager to buy and sell electricity to meet City load under these
Master Agreements conforms to existing Council-approved Energy Risk Management
Policies (CMR:400:02).
The recommendation does not deviate from Utilities’ historic practice of securing
electricity commodity supplies to meet the needs of the City’s electric customers. It
responds to Utilities’ need to purchase energy in the post-2004 period when supply
deficits increase dramatically. The City Auditor’s Assessment of Utility Risk
Management Procedures, issued in July 2002, identified the need to have clarity for the
authority to complete the required transactions. The recommended action is responsive
to the City Auditor’s recommendations.
This recommendation is consistent with the Council approved Utilities Strategic Plan to
1) preserve a supply cost advantage compared to the market price; and 2) streamline and
CMR:465:03 Page 10 of 12
manage business process to allow the City of Palo Alto Utilities to work efficiently and
cost-effectively.
Further, the recommendation supports the Council-approved Utilities’ Electric Portfolio
Planning Objectives [CMR:425:01], LEAP Guidelines [CMR:398:02] and LEAP
Implementation Plan [CMR:354:03]. These include the following Objectives, Guidelines
and Implementation Plan elements relevant to Master Agreements:
Objective 1: Ensure low and stable electric supply rates for pool customers
Objective 2: Provide superior financial performance to customers and to the City by
maintaining a supply portfolio cost advantage compared to market cost
and a retail supply rate advantage compared to PG&E.
Guideline 3: Market Risk Management - Manage market risk by adopting a portfolio
strategy for electric supply procurement by:
A. Diversifying energy purchases for the pool across commitment date,
start date, duration, suppliers, pricing terms and fuel sources;
C. Maintaining a prudent exposure to changing market prices by: 1)
procuring resources at fixed price for at most 90% of expected load
for 2 or more years out, assuming average hydro conditions; and 2)
procuring resources at fixed price for at most 75% of expected load
for 5 or more years out, assuming average hydro conditions.; and
D.Avoiding contract-based fixed price energy purchases (except for
contracts for renewable resources for durations greater than 10 years.
Implementation Plan Element for Short- and Medium-Term Portfolio #2: Seek
Council approval of a set of master agreements with suppliers by
summer or fall 2003 with the authority to transact for terms of up to 3
years out. Any transactions outside this limit will be brought to the
UAC and Council for approval.
ENVIRONMENTAL REVIEW
Adoption of the ordinances approving Master Agreements and delegating electric
procurement to the City Manager under certain limitations does not constitute a project
for the purposes of the California Environmental Quality Act.
ATTACHMENTS
A:Ordinance of the Council of the City of Palo Alto Authorizing the City Manager to
Purchase a Portion of the City’s Electricity Requirements from Certain Prequalified
Electricity Suppliers Under Specified Terms and Conditions During Calendar Years
2004 through 2011, Inclusive
B: Council-approved Electric Supply Objectives, LEAP Guidelines and LEAP
Implementation Plan
CMR:465:03 Page 11 of 12
(2: Electric Master Agreement RFP Evaluation Process
PREPARED BY:
V. PADILLA
Resource Planner
KARL VAN ORSDOL
Energy Risk Manager
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
JO
of Utilities
HARRISON
Assistant City Manager
CMR:465:03 Page 12 of 12
***NOT YET APPROVED***
ORDINANCE NO.
ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO
AUTHORIZING THE CITY MANAGER TO PURCHASE A PORTION
OF THE CITY’ S ELECTRICITY REQUIREMENTS FROM
CERTAIN PREQUALIFIED ELECTRICITY SUPPLIERS UNDER
SPECIFIED TERMS AND CONDITIONS DURING CALENDAR
YEARS 2004 THROUGH 2011, INCLUSIVE
The Council of the City of Palo Alto does ORDAIN as
follows:
SECTION I. The City Council finds, as follows:
A.In 1967, the United States entered into a contract
No. 14-06-200-2948A with Pacific Gas and Electric Company
(~Integration Agreement"). Under this contract, the Western Area
Power Admini.stration (~Western") provides electric capacity and
energy to the City of Palo Alto (~City") over PG&E’s transmission
system. It will expire in December 2004.
B.In 2000, the city entered into a contract No. 00-
SNR-0033 with Western (~Base Resource Contract"). Under this
contract, the City will receive less electric capacity and energy
than is currently made available under the existing power purchase
agreement. It will begin in January 2005 and will expire in
December 2024.
C.On November 13, 2001, the Council by minute order
approved four primary energy portfolio objectives ("Objectives"),
including the objective to ensure low and stable electric supply
rates for customers, and it also adopted Ordinance No. 4724,
authorizing a five-year purchase of energy and capacity during the
2005-2010 period. The City executed that purchase on August 13,
2002 with Coral Power, L.L.C. (the ~2002 Coral Purchase").
D.On October 21, 2002, the Council by minute order
approved seven electric portfolio planning and management
guidelines to guide staff in developing and managing the city’s
long-term electric acquisition plan (~LEAP Guidelines"). One of
the LEAP guidelines is to diversify energy purchases according to
severa! factors, including, but not limited to, dates and terms of
commitment, suppliers, prices and fuel sources.
E.On August 4, 2003, the Council by minute order
approved the LEAP Implementation Plan and it also adopted
Ordinance No. 4801, authorizing the purchase of energy and
capacity during the 2005-2007 period. One element of the
implementation plan is to gain approval for a set of master
agreements with suppliers with the authority to transact for terms
of up to three years.
031113 d 0072336 1
***NOT YET APPROVED***
F.In accordance with the City’s LEAP Guidelines and
Implementation Plan, the City must annually purchase and,
incidental to purchases, sell electricity to meet the needs of its
electric customers by entering into one or more contracts with
terms varying from less than one month to five years. The City’s
Energy Risk Management Policies provide that the City will
purchase only as much electricity as is needed to meet its load
requirements established at the time a transaction is executed.
G.A portion of the City’s electricity demands are
supplied by existing contracts, including the Base Resource
Contract, contract for output derived from partial ownership in
the Calaveras Hydroelectric Plant with the Northern California
Power Agency, an energy exchange contract with Seattle City Light,
and a 25 MW purchase of power for five years starting in 2005.
The balance of the City’s electricity needs must be purchased from
suppliers at market-based prices.
H.The balance of electricity the City needs depends on
the output from the Base Resource Contract and the Calaveras
Hydroelectric Plant, which depends on hydrologic conditions. After
2004, the City will be required to purchase about one-third of its
total electricity needs in an average hydrologic year. In a dry
year, the City must purchase about one-half of its annual needs.
In wet years, the City may have a surplus of electricity and could
afford to sell about one-fifth of its projected annual needs.
I.The cost for the City’s market-based electricity
purchases and incidental sales depends on the price offered by
suppliers, the projected annual electricity customer requirements,
and the output from the hydroelectric-based supply resources. The
annual cost could fall within the range of approximately $16
million to $22 million per fiscal year during an average
hydrologic year. Costs during a dry year could fall between $27
million and $37 million per fiscal year. Total aggregate
transactions derived from purchases and incidental sales of
surplus electricity could be between $25 million and $34 million
per fiscal year during a wet year.
J.In June 2003, the City initiated a Request for
Proposals process in order to prequalify a number of electricity
suppliers, based on their financial and legal qualifications and
business experience, who are eligible to sell electricity to and
purchase electricity from the City.
K.Arizona Public Service Company, BP Energy Company,
Coral Power, L.L.C., Duke Energy Marketing America L.L.C., and
Sempra Energy Trading Corporation each possess the minimum
financial and legal qualifications and business experience in
order to be eligible to do business with the City.
031113 d 0072336
***NOT YET APPROVED***
L.The City intends to purchase electricity from one or
more of these pre-qualified suppliers for delivery during calendar
years 2004 through 2011, inclusive, so long as the supplier with
whom the City negotiates a specific purchase transaction continues
to be qualified and otherwise eligible to transact with the City.
SECTION 2. The Council hereby authorizes the Mayor to sign
the Edison Electric Institute standard form contract, or
equivalent, or in the case of Coral Power, L.L.C., the amended and
restated contract, and it also authorizes the City Manager or his
designated representative, the Director of Utilities, to negotiate
one or more individual transactions thereunder, with Arizona Public
Service Company, BP Energy Company, Coral Power, L.L.C., Duke
Energy Marketing America L.L.C., and Sempra Energy Trading
Corporation. The authorization shall extend to individual
transactions executed under the referenced standard form contract,
provided, that: (a) the maximum expenditure under any standard form
contract and any and all separate transactions thereunder with any
of the named suppliers shall not exceed $75 million in the
aggregate; and (b) the maximum term of any transaction shall not
¯ exceed a term of three (3) years, commencing on the date the
transaction is mutually agreed to by the parties, or a term of five
years, in the case of the 2002 Coral Purchase, commencing on the
date delivery of the transaction begins. The City may enter into a
transaction greater than three years, provided that transaction
receives the prior approval of the Council.
SECTION 3. No standard form contract and any transaction
entered into thereunder with any qualified electricity supplier
executed by the City Manager or his designated representative and
approved as to form by the City Attorney under the authority of
this ordinance shall extend beyond December 31, 2011.
SECTION 4. The Council hereby finds that this ordinance is
exempt from the provisions of the California Environmental Quality
Act pursuant to Section 15061(b) (3) of the California Environmental
Quality Act Guidelines, because it can be seen with certainty that
there is no possibility of significant environmental effects
occurring as a result of the adoption of this ordinance.
//
//
//
//
//
031113 d 0072336
3
***NOT YETAPPROVED***
SECTION 5. This ordinance shall be effective on the
thirty-first day after the date of its adoption.
INTRODUCED:
PASSED:
AYES:
NOES:
ABSTENTIONS:
ABSENT:
ATTEST:
City Clerk
APPROVED AS TO FORM:
Mayor
APPROVED:
Senior Asst. City Attorney City Manager
Director of Administrative
Services
Director of Utilities
031113 cl 0072336
Attachment B: Council Approved Electric Supply Objectives and Guidelines
The Ci_ty Council approved four Primary_ Portfolio Planning Objectives on November 13,
2001 [CMR:425:01].
Objective 1:Ensure low and stable electric supply rates for customers.
Objective 2:Provide superior financial performance to customers and the City by
maintaining a supply portfolio cost advantage compared to market
cost and the retail supply rate advantage compared to PG&E.
Objective 3:Enhance supply reliability to meet City and customer needs by
pursuing opportunities including transmission system upgrades and
local generation.
Objective 4:Balance environment, local reliability, rates and cost impacts when
considering renewable resource and energy efficiency investments.
The CiW Council approved seven LEAP Guidelines on October 21, 2002 [CMR:398:02].
Guideline 1: Electric Portfolio Dependence on Western
While maintaining the flexibility to adopt favorable ’custom products’ offered by
Western, manage a supply portfolio independent of Western beyond the Base
Resource Contract.
Guideline 2: Hydro Risk Management
Manage hydro production risk by:
A. Planning for an average hydro year on a long-term basis;
B. Diversifying to renewable and!or fossil generation technologies; and
C. Maintaining adequate supply rate stabilization reserve.
Guideline 3: Market Risk Management
Manage market risk by adopting a portfolio strategy for electric supply procurement
by:
A. Diversifying energy purchases across commitment date, start-date, duration,
suppliers, pricing terms and fuel sources;
B. Targeting additional thermal plant ownership/investment commitment at -25 MW
but in no event more than 50 MW;
C. Maintaining a prudent exposure to changing market prices by:
1. Procuring resources at fixed price for at most 90% of expected load for 2 or
more years out, assuming average hydro conditions; and
2.Procuring resources at fixed price for at most 75% of expected load for 5 or
more years out, assuming average hydro conditions; and
Attachment B to CMR:465:03 Page B-1
D.Avoiding contract-based fixed price energy purchases (except for contracts for
renewable resources) for durations greater than 10 years.
Guideline 4:Reliable and Cost Effective Transmission Services
Ensure the reliability of supply at fair and reasonable transmission cost by:
A. Supporting, through political and technical advocacy and!or direct investment, the
upgrading of Bay Area transmission to improve reliability and relieve congestion;
B. Participating in transmission market design to ensure that market design results in
workable competitive markets and equitable cost allocation;
C. Pursuing the option of forming and/or joining a Public Power Transmission
Control Area to increase control over transmission operations and related costs;
and
D.Ensuring PG&E honors the Stanislaus Commitments by providing to us firm-
transmission rights or equivalent.
Guideline 5: Local Generation
Monitor the potential of local generation options to meet customer needs, improve
local reliability, minimize congestion and wheeling charges, and stabilize/reduce
costs.
Guideline 6: Renewable Portfolio Investments
The City shall continue to offer a renewable resource-based retail rate for all
customers who want to voluntarily select an increased content of renewable energy.
In addition to the voluntary program, the City shall invest in new renewable resources
to meet the City’s sustainability goals while ensuring that the retail rate impact does
not exceed 0.5 C/kWh on average. Pursue a target level of new renewable purchases
of 10% of the expected portfolio load by 2008 and move to a 20% target by 2015,
contingent on economic viability. The contracts for investment in renewable
resources are not to exceed 30 years in term.
Guideline 7: Electric Energy Efficiency Investments
Offer quality Public Benefits programs, utilizing funds collected through the 2.85%
Public Benefits charge embedded in electric retail rates, to meet the resource
efficiency needs of customers. Additional funding for cost-effective programs will be
recommended as appropriate. Pursue these investments by:
B. Providing expertise, education and incentives to support cost-effective customer
efficiency improvements;
C. Demonstrating renewable and/or alternative generation technologies and new
efficiency alternatives; and
D. Providing rate assistance and efficiency programs to low-income customers.
Attachment B to CMR:465:03 Page B-2
The City Council approved the LEAP Implementation Plan on August 4, 2003
[CMR:354:03].
Implementation Plan - Long-Term Portfolio
Acquire renewable energy resources to meet LEAP Guideline 6. The first step is
to issue a Request for Proposals (R~P) to potential suppliers. NCPA is
coordinating this activity as many of its members have an interest in acquiring
new renewables for the post-2004 period. The RFP was issued on March 11, 2003
with responses due in mid-April. Depending on the responses to the RFP, staff
will request UAC and Council approval to execute long-term contracts for
renewable supplies.
Implementation of the Palo Alto Green program, a green pricing product available
on a volunteer basis to customers who wish to purchase a greater fraction of green
resources. This program was reviewed and approved by the UAC at its February
2003 meeting and was approved unanimously by the Council Finance Committee
on March 4, 2003. It is expected to go to the Council for approval on April 21,
2003
Continue implementation of Public Benefits programs, which is funded by
collecting a fee equal to 2.85% of the electric retail rate. These funds are partially
used to demonstrate renewable resources or alternative technologies and to assist
customers in pursuing efficiency improvements.
Staff will continue to evaluate additional opportunities for investment in efficiency
improvements. As appropriate, additional funding for cost-effective efficiency
programs will be recommended.
o While continuing to monitor opportunities for participation in gas-fired generation
as they arise through staff’s contacts in the market and at NCPA, prepare an RFP
to formally announce to the market Palo Alto’s interest in investing in thermal
generation resources or its "look alike" (i.e. tolling contracts).
Monitor technology costs and opportunities for smaller renewable technologies,
cogeneration and gas-fired generation that can be located within Palo Alto and/or
at customer sites. A study funded by the California Energy Commission, Palo
Alto, and other municipal utilities is currently underway to identify sites within
Palo Alto that have high value to the electrical distribution system.
Continue to discuss gas tolling options with suppliers. Gas financial instruments
will allow staff to most effectively use tolling contracts, therefore, staff will
investigate using these products and, if attractive, will pursue approval from the
Attachment B to CMR:465:03 Page B-3
o
°
10.
11.
Council to add these products to the list of approved products in the Energy Risk
Management Policies.
Pursue any low-cost, high value prospects to acquire supply-related resources that
may arise from time to time. Staff monitors on an ongoing basis any opportunities
such as availability of additional below-market hydroelectric production or access
to additional power or transmission due to ownership of existing assets.
Refine the analysis and collect additional market information to evaluate scenarios
when various portfolio elements would have value. Staff will solicit current
market information on specific products such as hydro hedges. Additional
analysis will include sensitivity analysis and stress testing of the portfolios.
Monitor and participate in regulatory and legislative initiatives related to
transmission market design, support Bay Area transmission upgrades, and pursue
alternatives to increase reliability at a reasonable cost
Maintain adequate reserves by recognizing the degree of uncertainty the City faces
in the future. Evaluate modifying the policy or targets to make certain that the
Supply Rate Stabilization Reserve is adequate to ensure stable rates in an
environment of uncertainty and consider potential guidelines such as being able to
maintain stable rates in the event of two dry years in a row.
Implementation Plan - Short- and Medium-Term Portfolio
To reduce short-term cost variability and to ladder the purchase commitments,
while leaving sufficient flexibility to commit to long-term resources, three fixed-
price, 25 MW block purchases are recommended for execution in year 2003:
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Block 1 on-pk X X X X X X X
(2005-2007)off-pk X X X X X X X
Block 2 on-pk X X X X
(2005-2006)off-pk
Block 3 on-pk X X X X X X X X X X X X
(2005)off-pk
At current market prices, the expected cost of the first two blocks of power is as
follows:
a. about $16.4 million for Block 1 (4.3 C/kWh);
b. about $4.5 million for Block 2 (5.57 C/kWh); and
c. about $6.3 million for Block 3 (5.1 C/kWh).
Attachment B to CMR:465:03 Page B-4
Seek Council approval of a set of master agreements with suppliers by summer or
fall 2003 with the authority to transact for terms of up to 3 years out. Any
transactions outside this limit will be brought to the UAC and Council for
approval.
o Develop short-term hedging strategies and operations plans with the objective of:
a. Clearly identifying and capturing supply needs and supply portfolio risks;
b. Whenever possible, utilizing simple tools to manage risks and utilizing NCPA
resources and expertise; and
c. Managing the electric portfolio to achieve the portfolio objectives with
streamlined operations to minimize overhead costs and to act expeditiously,
while maintaining the appropriate level of oversight and control.
Evaluate, design, and pilot a customer demand-response program. If such a
program makes sense, develop and implement a customer demand-response
program to protect against high congestion costs and to be part of new capacity
reserve requirements that are likely to be imposed.
Attachment B to CMR:465:03 Page B-5
ATTACHMENT C: Electric Master Agreement RFP Selection Process Summary
The City of Palo Alto issued RFP #150884 on June 13, 2003 to solicit and execute
Master Agreements with multiple suppliers to enable future procurement of electric
commodity and related services required to meet the City’s electric load needs. Bid
packages were mailed to 25 potential suppliers. An evaluation team comprising staff
from the Utilities and Administrative Services Departments and the City Attorney’s
Office was established to evaluate proposals. Ten suppliers responded to the RFP.
The first level of evaluation was to screen out suppliers not meeting the City’s
creditworthiness criteria. The City requires that the supplier, if publicly rated, or its
parent have an investment grade or better credit rating as defined by a rating of BBB- and
above by S&P or Baa3 by Moody’s. Two proposals were rejected as a result of the
screening criteria. Table 1 is a summary of the screening process.
Table 1: Electric Master Agreement Credit Rating Screening
Coral Power, LLC
BP Energy Company
Sempra Energy Trading
Occidental Power Services
Duke Energy Trading
Arizona Public Service
UBS AG
Constellation Power
Avista Energy
Calpine Energy Services
Supplier
rated
no
no
no
no
yes
yes
yes
no
no
no
Parent
Rated
yes
yes
yes
yes
N/A
N/A
N/A
yes
yes
yes
S&P
Rating
A-
AA+
A-
BBB+
BBB-
BBB
AA+
A-
BB+
none
Moody’s
Rating
A1
Aal
Baal
Baa2
Baal
Baa2
Aa2
Baal
Bal
Caal
Pass
Screen
yes
yes
yes
yes
yes
yes
yes
yes
no
no
The remaining eight proposals were evaluated and ranked based on the following criteria:
1. Acceptance of all Required Contract Provisions
a. Credit assurances in the event of a supplier credit downgrade
b. Provision for setoffs with affiliates
c. Provision for netting of payments
d. Annual submission of audited financial statements
e. State of California as governing law
f. Venue of dispute resolution in Santa Clara County
g. Provision for one-way termination payment
h. Revocation by the Federal Energy and Regulatory Commission of the
supplier’s trading license is an event of default.
2. Acceptance of Preferred Contract Provisions
a. Cross default limit to be set at $20,000,000
Attachment C to CMR:465:03 Page C-1
b. Credit assurance from City is not applicable.
c. Collateral threshold for the City is not applicable.
d. City downgrade event is applicable if the City’s utility revenue bond falls
below investment grade or if the City Council no longer has legal authority
to set rates.
e. Counterparty Credit Assurance is applicable.
f. Counterparty Collateral Threshold is applicable.
g. Unlimited parent guaranty, if guaranty is required.
3. Financial Strength
Clarity of financial statements, net worth and financial outlook.
4. Credit
Quality, nature, and extent of credit support, ability to meet/exceed City’s credit
guidelines, rating agencies credit ratings, credit contractual provisions, risk limits
based on proposed terms, and magnitude of credit risk.
5. Past Performance and Experience
Experience in California, past performance with Palo Alto and the Northern
California Power Agency.
No proposals were rejected as a result of the ranking, which served to only to rank the
proposals. However, suppliers not accepting all required contract provisions in their
proposals were contacted for clarification regarding the City’s requirement that the
provisions must be accepted in order for the City to sign a Master Agreement. As a result
of such discussions, staff decided not to continue negotiations with UBS AG,
Constellation Power Source, and Occidental Power Services, Inc. as those three suppliers
indicated they would not accept certain required provisions.
The evaluation team was able to negotiate final agreements acceptable to the City with
the remaining five suppliers:
1.BP Energy Company
2.Arizona Public Service Company
3.Duke Energy Marketing America, LLC1
4.Sempra Energy Trading Corporation; and
5.Coral Power, LLC.
~ As a result of reorganization at Duke Capital Corporation, the original supplier submitting a proposal, Duke
Energy Trading & Marketing LLC was replaced ~vith Duke Energy Marketing America, LLC xvith a parent guaranty
from Duke Capital Corporation. Duke Capital Corporation is rated BBB by S&P.
Attachment C to CMR:465:03 Page C-2