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HomeMy WebLinkAboutStaff Report 3113 City of Palo Alto (ID # 3113) City Council Informational Report Report Type: Informational Report Meeting Date: 10/1/2012 October 01, 2012 Page 1 of 8 (ID # 3113) Title: 3rd Quarter FY12 Energy Risk Manager Report Subject: City of Palo Alto’s Energy Risk Management Report for the Third Quarter, Fiscal Year 2012 From: City Manager Lead Department: Administrative Services Executive Summary Staff has continued to purchase electricity and gas in compliance with the City’s Energy Risk Management Policies and Procedures. This report is based on market prices and load and supply data as of March 31, 2012. The credit quality for the City’s counterparties improved during the quarter. The cost of the City’s fixed price electricity purchases was $2.0 million less than the market value as of March 31, 2012. The cost of the City’s gas fixed-price purchases was $2.8 million higher than the market value as of March 31, 2012. The cost of renewable power purchases is $8.2 million more than the cost of brown energy over the 12-month period ending March 2013, but $6 million less than a renewable energy market price referent. The cost of hydroelectricity over the 12-month period ending March 2013 is greater than its market value by $2.1 million for Western and $7.7 million for Calaveras. Changing market dynamics, international events, and other factors outside the City’s control, can have a significant and adverse impact on the adequacy of reserves for both gas and electricity over a short timeframe. Staff monitors these factors as well as the financial condition of the City’s counterparties on an ongoing basis. There were no exceptions to Energy Risk Management Policies, Guidelines, or Procedures to report during this period. Background The purpose of this report is to inform the City Council of the status of the City’s energy portfolio and transactions executed with energy suppliers as of the end of the third quarter of Fiscal Year 2012. The City’s Energy Risk Management Policy requires that staff report on a quarterly basis to Council on: 1) the City’s energy portfolio; 2) the City’s credit and market risk profile; 3) portfolio performance; and 4) other key market and risk information. October 01, 2012 Page 2 of 8 (ID # 3113) Discussion To meet the expected load demands, the City obtains electricity from: hydroelectric resources (referred to as Western and Calaveras); renewable landfill gas converted to energy; wind generation contracts; and fixed priced forward market purchase contracts to meet its expected load demands. Staff projects that carbon neutral resources, including hydroelectric, will be 58% of the load over the next 12 months. Figure 1 below illustrates the sources of electricity supplies by month for the next 36 months in terms of megawatt hours (MWh). Fixed Price Forward Electricity Purchases The City currently has purchased supplies of electricity totaling 124,115 MWh for delivery between April 1, 2012 and February 28, 2013. The average price for all of the fixed-price purchases is $44.55 per MWh. The City contracted with six approved counterparties: Shell Energy North America (SENA), Powerex, British Petroleum Energy (BP), JP Morgan Chase, Sumitomo, and ConocoPhillips. The 12-month mark-to-market (MTM) value of the City’s forward transactions for wholesale power was a negative $2.0 million at the end of the quarter. In other words, the contract price was higher than the market value as of March 31, 2012. Figures 2 and 3 represent the Electric forward volumes and MTM positions for each electric supplier by month of delivery for all forward fixed price electricity contracts. The data is shown by delivery month for all forward fixed price electricity contracts. October 01, 2012 Page 3 of 8 (ID # 3113) Figure 2. Electric Forward Volumes as of 3/31/12 Figure 3. Electric Forward Mark-to-Market Values as of 3/31/12 October 01, 2012 Page 4 of 8 (ID # 3113) Renewable Portfolio Standard To date the City has nine Council-approved power purchase agreements for landfill gas and wind renewable resources to meet the City’s renewable portfolio standard of 33% by 2015. The 12-month MTM value of the City’s forward positions for existing, committed landfill gas and wind renewable power is positive $6.0 million when marked against the California Public Utilities Commission’s (CPUC) Market Price Referent (MPR). The MPR represents the cost of comparable long-term contracts with a combined cycle gas turbine facility plus a carbon adder. The MPR is currently the only publicly available approximation of expected long-term renewable energy prices. As an alternative, staff estimates a long-term forward price for renewables based on the most attractive proposals it receives when it issues a request for proposals (RFP). Hydroelectricity The 12-month MTM is negative at $2.1 million for Western and is negative $7.7 million for Calaveras. These negative numbers for Western and Calaveras means that the costs for their power are greater than the expected market value of electricity for the next 12 months. Note that the Calaveras project provides other benefits (e.g., it provides ancillary services including the ability to crank up and down fast, so if the grid needs additional energy it can provide it and it is also an additional revenue source to the City when excess power is available). Therefore, the total value of the Calaveras project is not fully reflected in the MTM value. Fixed Price Forward Natural Gas The City has purchased gas supplies totaling 1.1 million MMBtu for delivery between April 1, 2012 and October 2013. The average price for these fixed-price purchases is $5.05 per MMBtu. The forward purchases have been transacted with five approved counterparties: SENA (Shell Energy), Powerex, JP Morgan Chase, ConocoPhillips, and BP. The gas forward volumes are shown in Figure 4 and the gas MTM values of all fixed price forward natural gas contracts by month and by counterparty are presented in Figure 5. Figure 4. Gas Forward Volumes as of 3/31/12 October 01, 2012 Page 5 of 8 (ID # 3113) Figure 5. Gas Forward Mark-to-Market Values as of 3/31/12 There is a negative MTM for gas forward contracts. Effective 7/1/12, the laddering strategy for gas purchases will no longer be in effect. Previously committed fixed price contracts will disappear over time and costs for gas commodities will more closely track market prices. Ongoing gas purchases will be made based on the monthly and daily market index prices. Credit Risk Staff monitors and reports on credit risk using the major credit rating agencies (S&P and Moody’s) scores. The “expected default frequency” (EDF) is an analytical tool from Moody’s. Two of these analytical tool softwares are KMV CreditEdge Plus© and RiskCalc©. The EDF is an estimated probability established by combining information from the equity markets along with the company’s debt structure as reported on their financial statements. This will provide information on the probability of a counterparty defaulting in the next 12 months. It also provides frequent updates along with early warnings of changes in credit quality. The KMV tools allow staff to carry out “real-time” credit evaluations that include equity pricing and asset value changes that are not reflected in the static and annually-conducted credit issuer rating agencies’ reports. Credit risk continues to be a focus due to the volatility in the credit markets, and the potential impact on Palo Alto’s electricity and gas counterparties. The City has two financially-based counterparties which are JP Morgan Chase and Sumitomo. The banking industry has seen extreme volatility this past year. Both of these companies currently have been trending downward in their expected default frequencies which are indicators of their financial health. There are outstanding contracts with JP Morgan Chase, but not with Sumitomo. October 01, 2012 Page 6 of 8 (ID # 3113) Under the City’s current Risk Management Policy and the City’s Purchasing Ordinance, the City is not permitted to transact with any counterparty which has an S&P rating below BBB-, unless approved by City Council. Some exceptions are made on a case-by-case basis, mainly for renewable energy suppliers. Moody’s KMV EDF numeric ratings correspond to S&P credit categories. The EDF measure of the counterparties must be 0.15% or lower. A 0.15% EDF equals a BBB- rating. As the EDF decreases, the better the credit rating becomes. The City has Electric Master Agreements signed with six counterparties: Sumitomo, JP Morgan Chase, ConocoPhillips, SENA, Powerex, and BP. In addition, the City has renewable electricity contracts with Iberdrola Renewables, LLC (formerly Pacificorp Power Marketing) and Ameresco. Of this group, the City currently has outstanding contracts with two counterparties, as listed in Table 1 below. Electricity and Gas City of Palo Alto Utilities’ electric and gas supplier counterparty credit exposure and supplier credit ratings are presented in Tables 1 and 2 below. There are currently no contracts with a positive forward MTM value this quarter meaning the contract values are greater than the market value. Table 1. Credit Exposure and Expected Default Frequency of Electric Suppliers as of 3/31/12 Table 2. Credit Exposure and Expected Default Frequency of Natural Gas Suppliers as of 3/31/12 Supply Rate Stabilization Reserve Adequacy A key premise of the City’s risk management practices centers on ensuring the adequacy of supply reserves with respect to the risks associated with serving the gas and electric customers. Table 3 below summarizes the current, unaudited supply rate stabilization reserve levels for electricity and gas as of March 31, 2012 based on the City’s SAP financial system. October 01, 2012 Page 7 of 8 (ID # 3113) Table 3. Supply Rate Stabilization Reserve Levels for Electric and Gas for FY 2012 (Preliminary unaudited figures from City’s Financial System) * Accounting activity to date reflects what has been booked into the City’s financial system. These figures are preliminary until outside auditors have completed their review and the Comprehensive Annual Financial Report is produced. There could be significant changes to the RSR balances based on year end adjustments that have not been booked yet. The data presented in Table 3 and discussed below, is based on unaudited preliminary financial reports. The projected reserve balances listed above for gas and electric are impacted by differences in accounting methodologies for the two reserves. All contracts and commitments for purchases of gas for the fiscal year have been entered into the City’s SAP accounting system when the commitment is made, and therefore are included in the projected end of year balance. However, electricity commitments for the remainder of the fiscal year are not entered into the financial system until the month of delivery. Electric Supply Rate Stabilization reserve unaudited balance at 3/31/12 is $64.4 million, which is $2.4 million above the reserve maximum guideline level. The reserve is above the calculated credit, hydro, and other risks for the next 12 months which include: $2.0 million for credit reserves and $0.1 million for hydro risk for a total of $2.1 million. The unaudited Gas Supply Rate Stabilization reserve balance at 3/31/12 is $11.0 million which is $1.7 million above the long-term maximum guideline level. Total 12-month risks to the gas supply reserve are estimated at $4.7 million mainly for the market risk of yet-to-be-purchased positions in the next 12 months. Exceptions There are no exceptions or violations to the Energy Risk Management Policies, Guidelines, or Procedures to report during this period. An exception indicates that processes or procedures have not been fully adhered to in a commodity transaction or its processing. A violation occurs when a risk measure falls outside of an acceptable tolerance band subjecting the City to increased risk. October 01, 2012 Page 8 of 8 (ID # 3113) Prepared By: Mary Figone, Senior Financial Analyst Department Head: Lalo Perez, Chief Financial Officer City Manager Approval: James Keene, City Manager