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HomeMy WebLinkAboutStaff Report 4077 City of Palo Alto (ID # 4077) City Council Staff Report Report Type: Informational Report Meeting Date: 10/7/2013 City of Palo Alto Page 1 Summary Title: Energy Risk Management Report for the Third Quarter of FY 2013 Title: City of Palo Alto Utilities Energy Risk Management Report for the Third Quarter of Fiscal Year 2013 From: City Manager Lead Department: Administrative Services This is an informational report and no City Council action is required. 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 the end of the third quarter of Fiscal Year (FY) 2013, March 31, 2013. The cost of the City’s fixed price electricity purchases is $0.5 million higher than the market value of that electricity as of March 31, 2013 for the 36-month period beginning April 2013. The cost of hydroelectricity received from the Western Area Power Administration over the 12- month period ending March 31, 2013 was less than its market value by $3.3 million. Hydro power from the Calaveras Hydroelectric Project cost $6.4 million more than its market value for that same 12-month period. The cost of the City’s gas fixed-price purchases is $0.2 million higher than the market value as of March 31, 2013. No new fixed-price purchases of natural gas are being made and the delivery of the existing fixed-price purchases will end in October 2013. At this time, the credit risk exposure to the electric suppliers is $48 which is negligible and there is no credit exposure to the natural gas suppliers. City of Palo Alto Page 2 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 FY 2013. 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. Discussion The City’s Energy Risk Management Policy describes the management organization, authority, and processes to monitor, measure, and control market risks. “Market Risks” include price and counterparty credit risk. These are risks that the City is exposed to on a regular basis when managing the supply resources of the gas and electric utilities. The role of energy risk management is to monitor and mitigate these risks. This third quarter FY 2013 energy risk management report contains information on the following:  Electric and Gas Loads  Fixed price forward electric and natural gas purchases  Electric and Gas forward mark-to-market values  Renewable Portfolio Standard Hydroelectricity  Credit Risk  Electric and Gas Supply Rate Stabilization Reserves Adequacy  Exceptions to Energy Risk Management Policies, Guidelines, or Procedures To serve the City’s electric supply needs, the City obtains electricity from: hydroelectric resources (referred to as Western and Calaveras); renewable landfill gas converted to electricity; wind; fixed-priced forward market purchase contracts, and the spot electricity market. Staff projects that carbon neutral resources, including hydroelectric, will supply 61% of the City’s needs from April 1, 2013 to March 31, 2014. City of Palo Alto Page 3 Figure 1 below illustrates the projected sources of electricity supplies in terms of megawatt hours (MWh) by month for the 36 months beginning in May 2013. Fixed-Price Forward Electricity Purchases The City currently has purchased fixed-price supplies of electricity totaling 272,970 MWh for delivery between April 1, 2013 and April 30, 2014. The average price for all of the fixed-price purchases is $40.67 per MWh. The City contracted for these purchases with two approved counterparties: Shell Energy North America and Powerex Corporation after seeking price indicatives from all seven of its pre-approved counterparties. The 12-month mark-to-market (MTM) value of the City’s forward transactions for wholesale power was a positive $0.8 million at the end of the quarter. In other words, the contract price was higher than the market value as of March 31, 2013. If there is a negative MTM that means the original price of the contact is higher than the current market price. If the original contract price is lower than the current market price then there would be credit exposure to the city since the counterparty could potentially find another buyer of the energy. 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. City of Palo Alto Page 4 Renewable Portfolio Standard Palo Alto’s renewable electricity portfolio consists of production from hydro resources and power purchase agreements for landfill gas, wind, and solar photovoltaic resources to meet the City’s renewable portfolio standard of 33% by 2015. Energy deliveries have not yet commenced from the solar photovoltaic projects under contract. The cost of renewable power purchases is City of Palo Alto Page 5 projected to be $5.4 million more than the cost of wholesale renewable (“brown”) energy over the 12-month period ending April 30, 2014, based on market prices and renewable energy generation forecasts as of March 31, 2013. The renewable forward price is based on the most attractive proposals staff received in response to its September 2012 request for proposals (RFP). Hydroelectricity The 12-month MTM is positive $3.3 million for Western and negative $6.4 million for Calaveras. Note that the Calaveras project provides benefits not reflected in the MTM calculation. This includes, for example, the ancillary service of increasing energy output if the grid needs additional energy and additional revenue for the City when excess power is available. Fixed-Price Forward Natural Gas The City has purchased fixed-price gas supplies totaling 440,740 Million British Thermal Units (MMBtu) for delivery between April 1, 2013 and October 31, 2013. The average price for these fixed-price purchases is $4.72 per MMBtu. These forward purchases have been transacted with Powerex Corporation and JP Morgan Chase, both approved counterparties. Figure 4 shows the City’s projected natural gas needs for FY 2013 and FY 2014. The gas forward volumes are shown in Figure 5 and the gas MTM values of all fixed-price forward natural gas contracts by month and by counterparty are presented in Figure 6. The last fixed-price contract expires after delivery in October 2013 and at that time the City’s MTM will be zero. City of Palo Alto Page 6 Figure 4. Natural Gas Actual Metered Load Over 2 Years City of Palo Alto Page 7 Credit Risk Staff monitors and reports on credit risk using the major credit rating agencies (Standard and Poor’s (S&P) and Moody’s) scores. The “expected default frequency” (EDF) is an analytical tool from Moody’s. The EDF is an estimated probability of a counterparty defaulting in the next 12 months which is established by combining information from the equity markets and data from the company’s financial statements. CreditEdge Plus© also provides frequent updates along with early warnings of changes in credit quality for some of the approved public counterparties. The City has Electric Master Agreements signed with six counterparties: BP, SENA, Powerex, Sumitomo, JP Morgan Chase, and ConocoPhillips. Of this group, the City currently has outstanding contracts with two counterparties, as listed in Table 2 below. In addition, the City has renewable electricity power purchase agreements (PPAs) with Iberdrola Renewables, LLC, Ameresco, and Trina Solar and as shown in Table 1 below. It is important to note that these renewable companies received Council-approved waivers from the investment-grade credit rating requirement of Section 2.30.340(d) of the Palo Alto Municipal Code, which applies to energy companies that do business with the City. City of Palo Alto Page 8 Table 1. Renewable Counterparties Credit Ratings and EDFs as of 3/31/13 Electricity and Gas Palo Alto’s electric and gas supplier counterparty credit exposure and supplier credit ratings, as of March 31, 2013, are presented in Tables 2 and 3. When the expected loss is calculated the Current EDF become 0.0001 for calculation purposes. As shown, there is a $48 credit exposure to the electric suppliers. This amount is negligible. On the natural gas suppliers’ side, there is a zero credit exposure because the gas was purchased at a higher amount than the current market value. Table 2. Credit Exposure and Expected Default Frequency of Electric Suppliers as of 3/31/13 Table 3. Credit Exposure and Expected Default Frequency of Natural Gas Suppliers as of 3/31/13 Supply Rate Stabilization Reserve Adequacy The Electric and Gas Supply Rate Stabilization Reserves help to manage risks associated with serving the gas and electric customers. Table 4 below summarizes the current, unaudited supply rate stabilization reserve levels for electricity and gas as of March 31, 2013 based on the City’s SAP financial system. City of Palo Alto Page 9 Table 4. Supply Rate Stabilization Reserve Levels for Electric and Gas for FY 2013 (Preliminary unaudited figures from City’s Financial System) * The 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 Electric Supply Rate Stabilization reserve’s unaudited balance as of March 31, 2013 is $68.6 million, which is $5.6 million above the FY 2013 maximum reserve guideline level. The City Auditor’s recommendation regarding how the rate stabilization reserve balances are determined by the Utilities Department will be discussed by Utilities staff in future reports. The current estimated Electric rate stabilization reserve balance is above the immediate 12- month credit, hydro, and other risks that have been identified and which are estimated at $8.0 million. The unaudited Gas Supply Rate Stabilization reserve balance as of March 31, 2013 is $5.1 million which is $1.0 million above the FY 2013 minimum reserve guideline level, but below the maximum reserve guideline level. Exceptions There are no exceptions or violations to the Energy Risk Management Policies, Guidelines, or Procedures to report during this period.