HomeMy WebLinkAbout2003-12-15 City Council (10)City of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: UTILITIES
DATE:
TITLE:
DECEMBER 15, 2003 CMR: 471:03
ANNUAL PERFORMANCE REPORT ON CUSTOMER SALES
CONTRACTS
This is an informational report and no Council action is required.
BACKGROUND
As part of the oversight function of the City of Palo Alto Utilities (CPAU) energy risk
management program, Council approved electric and gas retail sales contract reporting
guidelines (CMR 324:00). The guidelines were established to ensure that staff
implemented proper oversight, review and approval, and performance reporting of all
retail sales contracts. The guidelines state that, "Staff shall prepare performance reports
on the economics of sales contracts. The performance reports will contain, at a
minimum, an analysis of the cost recovery and revenue impact." This is the third annual
performance report to the Council on customer sales contracts.
DISCUSSION
In response to deregulation, the City of Palo Alto Utilities (CPAU) began offering long-
term electric sales contracts in 1997 to large commercial customers. Also, in 2001 CPAU
introduced fixed-term commodity gas rate contracts G-11 (one or two years) and G-12
(custom contracts could be for any term) to large commercial customers eligible for
direct access. Such gas customers elect among three options: (1) forfeit their Direct
Access option and elect service under CPAU’s Rate G-7 (standard full service rate); (2)
retain their Direct Access option and receive service under either Rate G-3 (monthly
price change) or sign up for a contract rate (G-11 or G-12); or (3) purchase their gas from
an alternative supplier. To reduce exposure to risk, CPAU does not enter into fixed-price
wholesale purchase contracts to cover the gas requirements of these customers until they
make a selection and commitment.
CMR:471:03 Page 1 of 4
At the end of FY 2001/2002, there were 10 large commercial gas customers; however, six
of them opted to be charged under G-3 when their contracts expired at the beginning of
FY 2002/2003. Four customers remained until their term expired. For 2003-04, only two
customers signed-up for fixed term contracts under Rate Schedule G-11. With lower gas
market prices at the time their contracts expired, most of the customers elected to receive
gas service under CPAU’s Rate Schedule G-3. The G-3 commodity price is based upon
the monthly market price and is merely a monthly pass-through of the supply cost to the
customer.
Performance of Fixed-Term Gas Rates
The gas fixed-term rates (G-11, G-12) are full service commodity and distribution rates.
However, only the gas commodity charge component of the rate is fixed. All other
elements of the rates - administrative, distribution, local transportation charges, etc. can
be changed by Council at any time. Fixed-term rates are structured to recover all
commodity costs on a total class basis. The fixed term commodity charge is calculated on
the forward wholesale market price at PG&E Citygate. To offer a uniform price for all
quaiiQving customers, the fixed commodity charge is based on the load shape of the entire
customer class. The charge also includes CPAU’s current supplier volumetric fee.
Due i.o the fact that the retail commodity rates are hedged by buying gas to match the
indix:idual customer projected load shape for the term of the fixed-term rate, differences
in the actual and projected individual load shapes result in over-and-under collecting on
an individual customer basis. Therefore, a risk premium is included in the commodity
rate to offset the differences, in accordance with the Commodity Pricing Policy.
Table 1 shows the FY 02-03 performance of all fixed-term gas customer contracts,
including those that expired at the beginning of the fiscal year. The commodity net
revenue figure of the contracts is $586,536, which will be transferred to the Supply Rate
Stabilization Reserve. This is the result of canceling high priced wholesale gas contracts
and replacing with lower priced contracts.
CMR:471:03 Page 2 of 4
Table I
FY02-03 Performance of Individual Fixed-Term Gas Contracts
Date StartCustomer Contract Term MonthExecuted
A June 13 24-mo Aug 01
B June 15 24-mo July 01
C June 29 24-mo Aug 01
D July 20 12-mo Aug 01
E July 20 12-mo Aug 01
F July 20 12-mo Aug 01
G July 20 24-mo Aug 01
H July 25 12-mo Oct 01
I August 23 12-mo Nov 02
J Sept 19 12-mo Oct 01
TOTA!~
Less allocated cost of transmission on PGE system
GRAND TOTAL Commodity Net Revenue/(Cost)
Actual Load
Through
Sept.
Therms
497,412
160,525
448,980
18,473
52,092
32,527
1,571,639
332,686
340,212
107,916
Contract
Pdce
($/therm)
$0.597
$0.573
$0.508
$0.499
$0.499
$0.499
$0.491
$0.492
$0.493
$0.370
Actual Cost
$162,903
$29,057
$150,291
$5,288
$14,781
$9,141
$509,489
$94,946
$143,755
$30,271
$1,149,922
Actual
Revenue
$296,955
$91,981
$228,082
$9,218
$25,994
$16,231
$771,675
$163,681
$165,143
$39,929
$1,808,889
Expected
Net
Revenue
(Cost),
$134,052
$62,924
$77,791
$3,930
$11,213
$7,090
$262,186
$68,735
$21,388
$9,658
$658,967
($72,431)
$586,536
Customers A and I are the only two remaining contract customers. Customer A signed
another contract in August 2003 and customer I signed a new contract in November
2002. Contracts for customers D, E, and F expired July 31, 2002. Contracts for
customers H and J expired September 30, 2002. Contracts for customers B and C expired
June 30, 2003 and July 31, 2003 respectively. Usage and revenue for customer I include
figures for July and August 2002 and new contract data starting November 2002.
Termination of Gas Rate Schedule G-7
Reserves are necessary to counterbalance the risks and uncertainties facing the Utilities.
In the Gas Fund, one of the risks is that large commercial, industrial, or institutional
customers may decide to switch from their current rate schedule (G-3 or G-11) to Gas
Rate Schedule G-7. If this happens, the Utility would be obligated to immediately
purchase additional wholesale gas supplies at likely higher market prices. These higher
costs could potentially reduce the Supply RSR by approximately $3 million. To eliminate
this risk, staff will be proposing to terminate Gas Rate Schedule G-7. At present, there are
no customers served under the G-7 rate because customers prefer alternative Gas Rate
Schedules G-3 and G- 11. Its termination will not affect the bills of any customer but it
will eliminate the risk of negatively impacting the Supply RSR and other ratepayers.
CMR:471:03 Page 3 of 4
POLICY IMPLICATIONS
Offering customer sales contracts for fixed periods and prices supports the Utilities
Strategic Plan objective to "Enhance customer satisfaction by delivering valued products
and services." It also supports the Plan’s strategy to "Deliver products and services for
competitive markets".
PREPARED BY:
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
Assistant Director of Utilities
Assistant City Manager
CMR:471:03 Page 4 of 4