HomeMy WebLinkAbout2001-02-12 City Council (13)TO:
City of Palo Alto
CityManager’s Report
HONORABLE CITY COUNCIL
FROM:
DATE:
SUBJECT:
CITY MANAGER ¯
FEBRUARY 12, 2001
ADOPTION OF ORDINANCE
DEPARTMENT: UTILITIES
CMR:141:01
AUTHORIZING THE CITY
MANAGER TO ENTER INTO LONG-TERM CONTRACTS FOR
THE SALE AND PURCHASE OF ELECTRIC COMMODITIES
REPORT IN BRIEF
The California energy market is in crisis. The City has remained relatively unscathed - so
far. This is because the City purchases about 85 percent of its power needs from Western
Area Power Administration (Western) at cost-based rates that are significantly below
current market prices. However, if the Pacific Gas and Electric Company (PG&E) files
for bankruptcy or if PG&E gains approval from the Federal Energy Regulatory
Commission (FERC) to increase the wholesale energyrate it charges Western, the cost. of
Western power to the City may soar to current market prices. Current market prices are
orders of magnitude higher than the City’s existing power cost. If market-based contract
pricing becomes a reality, there will be severe and unparalleled strain on the City’s short-
term cash-flow unless retail customer rates are increased substantially in tandem with
wholesale cost increases. A PG&E bankruptcy and other factor~ could reduce the
availability of long-term power Supply contracts in the region. The City must be able to
act i ,rr}mediately in response, to changes in the marketplace. Therefore, staff is
recommending that the Council immediately provide the City Manager with the authority
to negotiate long-term power purchase contracts that would serve to mitigate the potential
price spike of purchasing power in the short-term market. This authority will be
advantageous to the City if it must move swiftly to contract for power supplies in a tight
market. Staff believes that the cost impact of Western prices going up to market is far
worse than purchasing energy under long-term contracts. Purchasing long-term contracts
have significant attendant risks but staff believes that, on balance, the benefit of acting
now and being in a position to purchase power through long-term contracts as needed
outweighs the risk of not acting at all.
CMR: 141:01 Page 1 of 10
RECOMMENDATION
Staff recommends, that the City Council adopt the attached ordinance, to take effect
immediately and valid for one year, authorizing the City Manager or the Director of
Utilities to enter into long-term contracts, either directly or indirectly, for the sale and
purchase of electric commodities. ’ ¯
This authorization is as follows:
1.Quantity of energy will not exceed 75 megawatts.
2.Term of contract will not exceed 10 years.
3.Contracts will have provisions that all. long-i--erm purchases could be sold back to the
same supplier or to the market if the need to consume the energy in Palo Alto does not
arise.
4. The decision to enter long-term contracts will take into account a least-cost planning
approach that. considers the cost and benefits of demand~side management and
conservation.
BACKGROUND
The California energy market is in crisis. For example, in January 2000, electricity for
calendar year 2001 could be purchased for nearly 3 cents/kWh. A year later, in January.
2001, the same product was selling for nearly 20 cents/kWh - a 600 percent increase.
The two largest California investor-owned utilities are on the verge of bankruptcy, the
state has been operating under a continuous Stage 3 Emergency for more than three
weeks, businesses have closed due.to untenable energy price hikes, the natural gas system
is on the brink of collapse as a side-effect of the electricity crisis, and "rolling blackout"
is no longer an arcane term. While the state legislature and the governor are taking steps
to avert a complete meltdown, of the energy system, there is no clear map or decisive
leadership to confidently navigate through this .morass. California can expect high
energy prices and continued market structure uncertainty for several years before the
actionff needed to stabilize the crisis - new power plants, increased conservation,
upgrades to transmission lines, new rules for the market - are put into place.
Chart 1 shows the sources from where the City purchases its electricity. Table 1 shows
the cost of each of these sources of electricity.
CMR:141:01 Page 2 of 10
Chart I
Sources of Pa!o Alto Electricity
~ Calaveras Hydro 8%Western - CVP Hydro 29% ]
Western - PG&E Contract 54%
Source of Palo Alto Energy
for FY01-02
Western - CVP Hydro
Western - PG&E contract
Calaveras
Other
Total PA Energy Cost
Table 1
GWhs
Bought
350
650
90
1 I_____Q0
1,200
Price
C/kWh
1.5
2.2
2,6
10.0
2.7
FY 01-02
Estimated Cost
$5,200,000
14,300,000
2,300,000
11,000,000
$32,800,000
As Chart 1 .and Table 1 indicate, the City purchases most of its electricity through a long-
term contract with Western. Western supplies .this energy from federal hydro dams from
the Central Valley Projects (CVP) and from an energy purchase contract with Pacific Gas
and Electric (PG&E) due to expire in December 2004. (The City will have to replace
this power [approximately 650 GWh; 55 percent of the City’s needs in an average water
year] by entering into new long-term contracts that are effective starting in 2005. Staff
will be making recommendations to the Utilities Advisory Commission (UAC) at its
February 14t~ meeting to enter into long-term contracts for the post 2004 period to fill this
CMR:141:01 .Page 3 of 10
"energy hole".) As indicated in the
cents/kWh for this power.
Table 1, PG&E charges Western about 2.2
An electricity price forecast for the next 10 years is shown below in Chart 2. The graphic
also illustrates the quantum change in t~orward price expectation since the last forecast
was made in January 2000. This Chart shows that market prices are expected to’ decline
from 2002 and should stabilize in the four to six cents/kWh range by 2006.
Chart 2
Forecasted Electricity Market Price in Northern California
24
~.j
January 2001 forecast
January2000 forecast ~ ~ -.e-- --e-- --~
i 12
10
8
4
< 0
o
Year
DISCffSSION
Recent reports indicate that PG&E may seek bankruptcy protection. If that happens,
PG&E may escalate the wholesale rate it charges Western for energy supplied through
contract. Table 2 below shows the potential impact of such an event on the wholesale
cost of power for fiscal year 01-02.
CMR:141:01 Page 4 of 10
Source of Palo Alto Energy
Western - CVP Hydro
Western - PG&E contract*
!Calaveras
Other
Total Energy Cost to PA
*Western average rate (CVP H
Energy
Bought
(GWh)
350
650
90
110
1,200.
Table 2
FY 01-02 Price
Estimated Cost c/kWh
- Optimistic
$5,200,000 1.5
14,300,000 20.0
2,300,000 2.6
11,000,000 10.0
$32,800,000 12.5
FY 01-02
Estimated Cost
Worst Case
Changes
$5,200,000 $0
130,000,000 115,700,000
2,300,000 0
1!,000,000 0
$148,500,000 $115,700,000
,dro + PG&E contract) will increase to 13.5 cents/kWh
These estimates are for one year only and are dependent on market prices, which are
extremely volatile. Regardless of the uncertainty ofthe market price assumption, it is a
given that the cost impacts could be in the tens of millions of dollars if the Western-
.PG&E contract price increases to market.
The City is faced with a few supply-related choices to manage this risk; all of which
involve some level of risk themselves. One choice is to buy long-term (3 tol0 year)
contracts now. A second choice is to purchase power (1 year or less) on the spot market:
A third choice is to take no action now and let the uncertainty resolve itself. That is, wait
until PG&E files for bankruptcy or the Federal Energy Regulatory Commission allows
PG&E to charge market rates to Western and then weigh courses of action.
Under the first choice, if the City enters into a long-term contract, the high cost of energy
in the early years could be spread over a longer period: Chart 3 illustrates this concept.
This strategy is identical to what is being adopted by the state to stabilize retail rates for
PG&E and Southern California.Edison customers. In this case, if the City acquires a
long-term contract and the Western-PG&E contract price does not go to market or is
delayed, the City will sell the excess power in the early years of the long-term contract at
market prices prevailing at that time. The uncertainty associated with this strategy is that
market-prices could be higher or lower, than the purchase price.. Higher market prices
would result in lower rates due to excess revenues, but lower market prices would mean
that the City would sell the power at a loss.
CMR:141:01 "Page 5 of 10
Chart 3
,24
22
20’
104
4 ,
Impact of Long Term Contracts in Stabilizing Rates in the Short Term
Forecast of Electricity Prices
Long Term Contract Price
~below expected Market Prices
,
Levellzed Energy Cdst: 10 Year Contract 2002-2011 ,
Cost of 10 year contract, above expected
market price of electricity in outer years
Year
If the City pursues the second choice of purchasing, power on the spot market it may be
exposed to market prices even higher than expected. In this case the City may have to
raise rates even more than ifit had fixed its wholesale power cost through purchasing
long-term fixed price contracts. Alternatively, if market prices are lower than expected
and the City does not commit to long-term fixed-price contracts the City would not have
to raise rates as much. "
If the City undertakes the third choice, it is. exposed to certain risks. A PG&E bankruptcy
may freeze the availability of long-term contracts and the City may. be exposed to market-
based prices during the time it takes to negotiate a long-term contract. Due to the current
uncertainty surrounding the energy markets, there is a possibility that the long-term
contracts the City is considering will either not be offered in the market place at a
reasonably competitive price or there may be a drying up of the availability of such
products. Due to the state of California purchasing large blocks of energy, the
uncertainty surrounding the financial status of buyers and sellers, and the complete lack
of knowledge of furore market rules, the market for such products for an entity the Size of
Palo Alto is not as liquid as it was a few months ago.
The primary risk management objective for the City is to provide commodity service at.
stable prices. A secondary objective is to provide the lowgs.t price. In purchasing a long-
CMR: 141:01 Page 6 of 10
term contract, market timing ought not tO be a driving force~ Since any purchases/sales
should be driven by overall risk management objectives, staff believes that the most
practical approach to pursue is a hybrid of choices one and three described above (see
Attachment 2 for more detail on cost impacts). A long-term purchase contract provides a
prudent mechanism to hedge the risk of sudden cashflow deficits if PG&E is successful
in effectively dissolving its current contractual responsibilities to provide low cos’t ~nergy
to Western. While a long-term contract could be entered into immediately after such an
outcome becomes a reality, the p.resent i!liquid nature of the market for long-term energy
may delay such a purchase and result in higher cost. As a result buyers should be
prepared to act fast and take advantage of opportunities, that come up..An additional
point that favors the consideration of long-term contracts is that the City has a large
deficit in its energy :needs in the years 2005 and onward and will most likely enter into
long-term contracts very shortly to fill this deficit.
For entering into long-term contracts, staff proposes four guidelines. The first guideline is
that the quantity of energy is not to exceed 75 megawatts. This is based on the equivalent
amount of energy that Western supplies to the City through its PG&E contract. The
second guideline is that the term of the contract will not exceed 10 years. This is based on
an analysis of the optimal period for long-term contracts, taking into account the short-
term and long;term market price factors. The third proposed guideline is ensuring that all
long-term purchases could be sold back to the same supplier or to the market if the need
to consume the energy in Palo Alto does not arise. This guideline provides flexibility to
reduce the financial exposure to the City, if for whatever reason, power is not needed to
be consumed within the City of Palo Alto. In such circumstances, the City could attempt
to maximize cost recovery by selling surplus power into the market. The fourth guideline
provides that the decision to enter long-term contracts will take into account a least-cost
planning approach that considers .the cost and benefits of demand-side management and
conservation.
There is a tremendous amount of.uncertainty in these markets but uncertainty should not
¯ keep the City .from acting. Staff believes that not being fully prepared to purchase any
power immediately would be imprudent given what is known about the potential loss of
low-cost power from Western. Therefore, staff is requesting the authority to purchase up
to 75 megawatts of power for up to ten years to maintain the maximum amount of
flexibility for the City to manage its energy costs. Events that could unfold over the next
few days, weeks and months would determine the exact course of action that staff would
take within the authorities requested in this report. Additionally staff will also be
aggressively ramping up energy conservation efforts to reduce the need for purchasing
power at.high wholesale market prices. Staff will be bringing proposals to the Utilities
Advisory Commission (UAC) at its February 14t~ meeting to discuss an accelerated
program for conservation. While these supply and demand-side strategies do not
guarantee the lowest rate, they do provide for price stability.
CMR: 141:01 Page 7 of 10
RESOURCE IMPACT
The reserve balances in the Electric Fund are shown in Table 3. The projected balances
assume a "business as usual" scenario and do not reflect the potential cost im, pact of
Western energy priced higher than approved tariffs.
Supply Rate Stabilization Reserve
Distribution Rate Stabilization Reserve
Calaveras Reserve
Totals
Table 3
$28,749,000
3,031,000
68,014,000
$99,794,000
$36,600,000
3,000,000
64,800,000
$104,400,000
Current projections indicate that the three primary Electric Fund reserves will end fiscal
year 2000-01 with a balance of approximately $104.4 million. The sufficiency of these
reserves to act as a buffer to avoid abrupt retail rate increases depends on a number of
key variables. These variables include: (1) whether Western energy prices are cost-based
or market based, or somewhere between, (2) the adequacy of existing generation in the
short-term and the extent to which long-term supply contracts are available, (3) spot
market prices and long-term supply contract prices, (4) the quantity of energy that Pal0
Alto may contract for on a long-term basis, (5) the impact of demand.side management
and conservation, and (6) the contract period (three years, five years, or ten years). The
number and Combination of scenarios using these five variables are extensive. Similarly,
the magnitude of rate increases and the possible reserve withdrawal combinations are
extensive and depend on the specific set of assumptions.
To illustrate the potential range of rate increase scenarios, consider the following: If
Western energy remains cost-based, Palo Alto retail rates would increase 20 percent to 30
percent in July 2001. However, if Western energy is priced at the market and Palo Alto
enters into a long-term contract for 50 .megawatts of power, the potential retail rate
increase climbs to approximately 65 percent using some reserves to cushion the full
impact the first .year. In the worst case, if Western energy is priced at the market and
Pal0 Alto has no alternative supplier, Palo Alto’s monthly energy purchase cost could
increase from approximately $2,500,000 per month to approximately $12,000,000 per
month. This $9,500,000 per month cost increase would deplete the Electric Fund Supply
Rate Stabilization Reserve within three to four months and begin to deplete the Calaveras
Reserve. To keep this from happening and to maintain financial integrity in the Electric
Fund, a major retail rate .increase would become necessary. The retail rate increase in
this worst case scenario is approximately 180 percent, while still drawing down heavily
on reserves. So this is the potential range of retail rate increases for.certain scenarios.
CMR:141:01 Page 8 of 10
The recommendations in this report are intended to limit the financial risk to the City and
to help provide some stability to Palo Alto electric rates as the current energy crisis
evolves in California.
POLICY IMPLICATIONS
Staffs recommendations are consistent with the City’s overall utility policy of securing
reliable sources of energy at predictable prices. But, the unprecedented current volatility
in wholesale energy prices, the potential to immediately lose its biggest energy resource
and the uncertainty of the availability of long-term contracts is causing staff to consider
purchasing additional power contracts as a hedge against this loss. Purchasing additional
power may raise the concern that the City is speculating on market prices since this
power may not be consumed within the City under certain conditions. Though the City
has entered into .such transactions before (purchasing 55 megawatts of the Calaveras
hydroelectric plant in the late 1980’s and immediately selling 15 megawatts of the
surplus to the City of Roseville through 2004), the magnitude of the authority being
requested in the report is significant. Staff believes that the actions contemplated under
the authorities requested in this report are clearly hedging transactions since they would
be entered into with the objective of stabilizing power costs and not with the objective of
speculating on the movement of market prices. This approach might also ~uggest that
staffs recommendation could inadvertently cause the City to alter how it manages its
cash reserves (investment portfolio objectives) because the cash flow associated with
energy purchases and sales in the future is less predictable than in the past. However,
staff will negotiate contracts that would permit the City to assign these contracts at or
before the time the energy is intended for consumption in Palo Alto, if the energy is not
necessary for consumption in Palo Alto. This approach would minimize any perceived
risks (hat could be construed to alter the City’s investment portfolio objectives.
ENVIRONMENTAL REVIEW
This ordinance is exempt, from the provisions of the California Environmental Quality
Act p6rsuant 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.
CMR: 141:01 Page 9 of 10
ATTACHMENTS:
A:Ordinance of the Council of the City of Palo Alto Authorizing The City Manager or
the Director of Utilities TO Enter Into Long-Term Contracts For The Purbliase of
Power and Energy (Electric Energy and Capacity) in Anticipation of an Immediate
and Substantial Loss of the City of Palo Alto’s Low-Cost Power Now Furnished by
the Western Area Power Administration, and Declaring the Urgency Thereof to Take
Effect Immediately
B: Additional cost impact analysis
PREPARED BY:
Shiva Swaminathan, Resource Planner
ager Supply Resources
dschun, Assistant D~-ec~or
APPROVED BY:
of Utilities
DirecItor of Admini~ Services
HARRISON
Assistant City Manager
CMR:141:01 Page 10 of 10
ORDINANCE NO.
ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO
AUTHORIZING THE CITY MANAGER OR THE DIRECTOR OF
UTILITIES TO ENTER INTO LONG-TERM CONTRACTS FOR
THE PURCHASE OF POWER AND ENERGY (ELECTRIC ENERGY
AND CAPACITY) IN ANTICIPATION OF AN IMMEDIATE AND
SUBSTANTIAL LOSS OF THE CITY OF PALO ALTO’S POWER
NOW FURNISHED. BY THE WESTERN AREA POWER
ADMINISTATION, AND DECLARING THE URGENCY THEREOF
TO TAKE EFFECT IMMEDIATELY
The Council of the City of Palo Alto does ORDAIN as
follows:
SECTION i. The City Council finds and declares as follows:
A.Since 1964, the City of Palo Alto (~Cit!’i has been
a recipient of power furnished under a contract initially with the
United States Department of the Interior, Bureau of Reclamation,
but now with the United States Department of Energy, Western Area
Power Administration, Central Valley Project, California ("WAPA");
B.In 1967, the United States entered into a Contract
No.~ 14-06-200-2948A with the Pacific Gas and Electric Company
("PG&E") (hereinafter the ~Integration. Contract"), pursuant to which
WAPA provides power and energy (electric capacity and energy) to
the City over PG&E’s transmission system, and which contract will
expire in 2004;
C.In 1985, the City entered into a Contract No. DE-
MS65-85WP59007 with WAPA (hereinafter the "WAPA Contract"),
pursuant to which the City receives a substantial portion of its
power and energy (electric capacity and energy) for resale to its
commercial, and residential customers, and which contract has been
extended until 2024;
D.In September 1996, the electric generation industry
in California was deregulated under the authority of Assembly Bill
1890 in order to foster competition in the electric generation
marketplace for the ostensible purpose~of lowering electric prices
paid by California businesses and consumers, but lower prices have
not yet materialized;
E.Since the summer of 2000, the wholesale price of
electricity has increased over five-fold, and PG&E, the incumbent
electric service provider ~in northern Cal{fornia, has claimed to
have incurred over $6.6 billion dollars in debt to pay for
electricity provided by out-of-state .power suppliers; as a
1
consequence, its financial reserves have been deplet4d and its
creditworthiness has been jeopardized;
F.PG&E has openly speculated about its deteriorating
financial condition and its abilZty to continuously secure
electricity for its wholesale and retail customers in northern
.California, and PG&E has repeatedly informed the public that it may
seek protection from its power supplier-creditors, who remain
unpaid, under the United States bankruptcy laws;
G.If PG&E should file for protection from its
creditors under the applicable bankruptcy laws, the City could
expect PG&E as a debtor to seek the approval of the bankruptcy
courtto be relieved of its obligations under certain contracts,
including the Integration Contract;
H.If PG&E is permitted to reject the Integration
Contract, the City will lose access to its major source of firming
energy, and it is substantially likely that the City will be forced.
to secure alternative sources of electricity (and potentially
transmission) at prices substantially higher than the City now pays
in accordance with the aforementioned contracts;
I.Energy suppliers soon may no longer be required~to
continue selling energy to local distribution companies (like PG&E)
serving customers in the State of California;
J.PG&E is authorized under federal law to seek a
unilateral increase in the price of firming energy under the
Integration Contract, and it has informed the United States and
others, including the City, that it may immediately seek the
approval of the Federal Energy Regulatory Commission ("FERC") to
substantially increase the price of firming energy, in which event,
the cost to the City to procure power will sharply escalate;
, K. In view of the precarious financial condition of
PG&E and the grave implications of a bankruptcy filing by PG&E as
well as a filing by PG&E at the FERC and the dire consequences of
the City’s immediate loss of its source Of power, the City Manager
and the Director of Utilities seek the authority to immediately
secure electricity (and/or as necessary, transmission) from one or
more qualified, reliable power suppliers and others in order to
preserve the public health, safety and welfare of its residential
and commercial electric utility customers;
L.The foregoing conditions constitute an immediate
threat to the health and safety of the residents of the City of
Palo Alto, because the electricity supply could be. reduced,
impaired or substantially.increased in price so as to threaten and
irreparably harm basic residential and business customers. The.
2
adoption of this ordinance is necessary to immediately address
emergency that the City of Palo Alto faces.
the
SECTION 2. The City Council hereby authorizes the City
Manager or the Director of Utilities, for a period of one year
after the adoption of this ordinance to, directly or indirectly,
negotiate .one or more contracts for power (electric energy and
capacity) with qualified power suppliers in incremental quantities
up to 75 megawatts and for terms of up to ten years and, as
necessary and appropriate, to take all reasonably necessary steps
to ensure the continued availability of reasonably priced in-state
transmission. The terms and conditions of the power supply
contracts and other related contracts shall be approved as to form
by the City Attorney, and the funding of power purchases and other
related purchases under those contracts and the arrangement for
payment thereof shall be approved-by the Director of Administrative
Services. Any contract for a term longer than three years shall be
approved by the City .Attorney as to substance, based upon the
advice of the Director of Administrative Services and the City
Auditor.
SECTION 3. The provisions of Section 2 30.120 of Chapter
2.30 of Title 2 of the Palo Alto Municipal Code, setting a maximum
term of three years for commodities contracts, is hereby suspended
with respect to the purchase of electric commodities authorized
under section 2 of this ordinance.
SECTION 4. The City Council hereby finds that ~his
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 adoptionof this
ordinance.
//
II
II
//
//
//
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3
SECTION 5. This ordinance was adopted as an urgency
ordinance bya four-fifths vote, and it shall become effective upon
the date of its adoption. This ordinance shall be of no further
force and effect as of March I~ 2002, unless it is earlier repealed
Or extended by the City Council.
INTRODUCED:
PASSED:
AYES:
NOES:
ABSTENTIONS:
ABSENT:
ATTEST:APPROVED:
City Clerk
APPROVED AS TO FORM:
Mayor
Senior Asst. City Attorney
APPROVED:
City Manager
Director of Utilities
Director of Administrative
Services
4
ADDITIONAL COST IMPACT ANALYSIS
This attachment provides more information regarding the cost impacts of the following
strategies: .-
1.Do nothing, that is, purchase all power on the spot market
2.Purchase 25 MW for a period of 10 years
.3.Purchase 50 MW for a period of 10 years
4.Purchase 75 MW for a period of 10 years
Chart A1 below shows the City’s estimated wholesale cost ofenergy based on the above
four strategies. These four strategies are compared to the expected wholesale market
price.
Chart A1
|_i
Palo Alto Energy Rates with Different Long Term Blbck Purchase Strategies
- Assumes Worst Case, Western-PG&E Contract Priced at Market
[] Expected Market Energy Prices
mPalo Alto Energy Rates, Worst Case - Do Nothing Strategy
[] Palo Alto Energy Rates, Worst Case - 25 MW/10 year purchase at 6.5 cents/kWh
BPalo Alto Energy Rates, Worst Case - 50 MW/10 year purchase at 6.5 cents/kWh
[] Palo Alto Energy Rates, Worst Case - 75 MW/10 year purchase at 6.5 cents/kWh
Present"F~’ 01-02 FY 02-03 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08
This chart illustrates the following:
1.Regardless of the strategy followed, in all cases the City’s supply rates will increase
from the present rate of 2.5 cents/kWh.
CMR:141:01 ATTACHMENT B
2.Regardless of the strategy followed, in most cases City’s supply portfolio costs should
remain below the expected market price. This is because the CVP-Hydro portion of
the Western contract is assumed to stay at cost-based below market rates. The next
chart compares Pale Alto’s supply portfolio costs with three market, price scenarios.
3 The do-nothing strategy has the worst rate impact in the first year and the best rate
impact in the last year. ’ "
4. Among the three long-term purchase contract strategies, purchasing 75MW results in
the lowest rate increase in the starting years but the highest rate increase in the last
years.
5. Entering into long-term contracts results in less dependence on spot. market purchases
and reduces the volatility of average portfolio rates.
Chart A2 answers the question of how the long-term purchase strategy for three different
contract quantities would fare under varying market prices. The following conclusions
can be drawn from this chart.
Chart A2
Long Term Impact of lO-Year Market Purchases: Years 2006 to 2011
8.0
7.5 -,- [] Expected Market Energy Prices
7.o - ¯ Expected Palo Alto Energy Rate - 25 MW Purchase
6.5 -- []Expected Pale Alto Energy Rate- 50 MW Purchase~6.o [] Expected Palo Alto Energy Rate -75 MW Purchase
5.13 --
4.5 --
4.0 --
3.5
3.0
2.5
2.0
Expected Market Prices (5.5
cents)
Low Market Prices (4 cents)High Market Pdces (7;5 cents)
Market Price Scenario
1.If the long-term market price drops to 4 cents (middle of chart) purchasing 50 or
75MW would result in energy rates above market
2.In all market scenarios, purchasing 25 MW would result in below market rates.
CMR: 141:01 " ATTACHMENT B