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HomeMy WebLinkAbout2001-02-20 City Council (21)TO: FROM: City of Palo Alto City Manager’s Report 15 HONORABLE CITY COUNCIL CITY MANAGER DEPARTMENT: UTILITIES DATE:FEBRUARY 20, 2001 CMR:147:01 SUBJECT:ADOPTION OF ORDINANCE AUTHORIZING THE CITY MANAGER TO ENTER INTO LONG-TERM CONTRACTS FOR THE SALE AND PURCHASE OF ELECTRIC COMMODITIES RECOMMENDATION Staff and the Utilities Advisory Commission (UAC) recommend that the City Council adopt the attached ordinance, to take effect immediately and remain in effect 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. BACKGROUND At the February 12, 2001 Council meeting, staff presented.a proposal to authorize the City Manger or Director of Utilities to enter into long,term power supply contracts (CMR:141:01, Attachment B). After the staff presentation, two UAC Commissioners expressed concerns that: (1) the maximum quantity of energy was set too high; (2) there was a high risk that long-term prices might fall; (3) there had not been sufficient public process and discussion; and (4) a companion pricing policy for retail customers should be tied to the wholesale purchase strategy. Based upon these concerns, the Council directed staff to discuss the recommendations with the UAC at its February 14 meeting and to report back to the Council at its February 20, 2001 meeting. COMMISSION REVIEW AND RECOMMENDATIONS At the February 14, 2001 UAC meeting, staff made several presentations that sought to address the concerns raised by theUAC members. The presentations focused on the risk inherent both in acting and not acting; ’ the need for additional flexibility in order to act quickly, if necessary, in this uncertain, environment; the conceptual plan for purchasing smaller quantities of power for different terms and at different times that would result in a CMR:147:01 Page 1 of 3 diversified portfolio and; the rate impacts of purchasing power for shorter periods of time and for quantities less than 75 MW. Following the staff presentation, the UAC asked numerous questions of staff and outlined its concerns in detail. The ensuing discussion clarified several questions that were not fully explained in the original CMR (CMR 141:01). These questions included: the cost or premium paid by the City if staff is unable to act without delay; the potential for ..PG&E to go bankrupt; the strategies staff would actually follow in determining the amount of power to purchase; the timing of such purchases; the estimated rate impacts of several purchase strategies; the actions that the Western Area Power Administration could take and staff’s reaction to those actions and; the market forces pushing prices up or down. The outcome of this dialogue between the UAC, staff, and the public was that the staff recommendation (CMR: 141:01) with three modifications recommended by the UAC was approved unanimously by the Commission. Staff agrees with the recommended modifications. The attached revised ordinance addresses modification number one below. Staff will return to Council with recommended changes to address modification number two. The City Attorney will advise Council if and how it could proceed to implement modification number three. The modifications are: .1.Lower the authorized quantity of energy from 75 megawatts to, 50 megawatts. Also, the energy contracts portfolio shall be diversified across time, quantity, and price. Staff should endeavor to make each necessary purchase for a quantity less than 50 megawatts and the contract start dates should be staggered within the authorization period. Protect the City from potential economic loss if Palo Alto’s large retail customers are able to purchase power from alternative energy suppliers while the City has previously committed to long-term power supply contracts on their behalf. Such protection may involve changes to customer choice under the electric Direct Access Program, retail pricing policies, and utility rules and regulations. Add Council committee oversight and concurrence prior to signing long-term contracts. The oversight committee should be composed of a subset of the Council,- with at least one UAC member in an advisory rolel RESOURCE IMPACT CMR:147:01 Page 2 of 3 The resource impact of the proposed action is discussed in CMR: 141:01 (Attachment B). POLICY IMPLICATIONS The policy implications are described in CMR: 141:01. .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 Purchase of Power and Energy (Electric Energy ~d Capacity) in Anticipation of an Immediate and Substantial Loss of the City ok’ Palo Alto’s Power Now Being Furnished by the Western Area Power Administration, and Declaring the Urgency Thereof to Take Effect Immediately B. CMR 141:01, "Adoption of Ordinance Authorizing the City Manger to Enter Into Long-term Contracts for the Sale and Purchase of Electric Commodities". PREPARED BY: Girish Balachandran, Manager Supply Resources Randy B~dschun, Assistant Director APPROVED BY: JOHN ULRICH Director of Utilities EM] 3N Assistant City Manager CMR: 147:01 Page 3 of 3 ATTACHMENT 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 BEING 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!’) 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 WAPAprovides 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 California, 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 010215 syn 0071977 consequence, its financial reserves have been depleted and its creditworthiness has been jeopardized; F.PG&Ehas openly speculated about its deteriorating financial condition and its ability to continue to 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 court to 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; 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 010215 syn 0071977 2 adoption of this ordinance is necessary to immediately address the emergency that the City of Palo Alto faces. SECTION 2. The City Council hereby authorizes the City Manager or the Director of Utilities to, directly or indirectly, enter into and execute a portfolioof contracts for power (electric energy and capacity) with qualified power suppiiers, for different quantities of power of up to 50 megawatts and for different terms of up to ten years, and on differing terms and conditions, to permit the City to effectively mitigate the risk of volatile market prices. The City Manager or the Director of Utilities may take all reasonably necessary steps to ensure the continued availability of ,.reasonably priced in-state transmission. The terms and conditions of the power contracts and other related contracts shall be approved as to form and substance 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. The City Attorney shall approve as to form and substance contracts for terms longer than three years, based upon the advice of the Director of Administrative Services and the City Auditor and following the review and approval ~of those contracts by a committee appointed by the Council. SECTION 3. The authority grantedunder this ordinance to the City Manager, the Director of Utilities and the City Attorney will expire on March i, 2002. No contract entered into and executed by the City Manager or the D~rector of Utilities and the City Attorney under this authority may extend beyond March I, 2012. SECTION 4. 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 5. The City 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. // // // // 010215 syn 0071977 3 SECTION 6. This ordinance was adopted as an urgency ordinance by not less than a 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 010215 syn 0071977 ATTACHMENT "B" TO: FROM: HONORABLE CITY COUNCIL CITY MANAGER DEPARTMENT: UTILITIES DATE:FEBRUARY 20, 2001 CMR:141:01 SUBJECT:.ADOPTION OF ORDINANCE 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 FederalEnergy Regulatory CommisSion (FERC) to increase the wholesale energy rate 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 factors could reduce the availability of long-term power supply contracts in the region. The City must be able to act immediately 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.Contractswill have provisions 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. 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 uncertaintyfor several years before the actions 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 1 Sources of Palo Alto Electricity Source of Palo Alto Energy for FY01-02 Westem- CVP Hydro Western - PG&E contract Calaveras Other Total PA Energy Cost Table 1. GWhs Price C/kWhBought. 350 650 90 11o 1,200 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) atits February 14th 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 Table cents/kWh for this power. 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 forward 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 /\ I \ /\ ]~ January 2001 forecast anuary 2000 forecast Year DISCUSSION Recent reports indicate that PG&E may seek bankruptcy protection. If that happens, PG&E may escalate the wholesale rate it charges Westem for energy supplied through contract. Table 2 below shows the potential impact of such an event on the wholesale cos.t of power for fiscal year 01-02. CMR: 141:01 Page 4 of 10 Source of Palo Alto Energy Bought (GWh) Western - CVP Hydro 350 Western - PG&E contract*650 Calaveras 90 Other 110 Total. Energy Cost to PA 1,200 *Western average rate (CVP H Table 2 FY01-02 - Price Estimated Cost C/kWh - Optimistic i $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- Changes Worst Case $5,200,000 130,000,000 2,300,000 11,000,000 $148,500,000 Cdro + PG&E contract) will increase to 13.5 cents/kWh $0 115,700,0013 0 $115,700,000 These estimates are for one year only and are dependent on market prices, which are extremely volatile. Regardless of the uncertainty of the 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 yeaf or less) on the spot market. A third choiceis to take no action now and let the uncertainty resolve itself. Thatis, 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 .’ 18 16. 14- 12. 10- 8- 6- 4- 2- 0 Impact of Long Term Contracts in Stabilizing Rates in the Short Term ~ Forecast of Electricity Prices Long Term Contract Price ~below expected Marke! Prices Levellzed Energy Cost: 10 Year Contract 2002-2011 Cost of 10 year contract, above expected F 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 if it 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 future 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 lowest 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 purchased/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 cost energy to Western. While a long-term contract could be entered into immediately after such an outcome becomes a reality, the present illiquid 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 yea~s 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 Cifij 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 14th 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 impact of Western energy priced higher than approved tariffs. Table 3 Supply Rate Stabilization Reserve Distribution Rate Stabilization Reserve Calaveras Reserve Totals $28,749,000 3,031,000 68,014,000 $99,794,OOO $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 Palo 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 themarket 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 Palo 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 suggest 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 that 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 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. 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 Conlx.acts For Th5 "PtlrStiase ~f 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 ~anager Supply Resources Randy Ba~dsehun, Assistant DireCt’or. APPROVED BY: Direc~o; of Admini~ Services Assistant City Manager ..CMR:141:01 ’ Page 10 of 10