HomeMy WebLinkAbout2000-07-17 City Council (14)TO:
ATTENTION:
City of Palo Alto
C ty Manager’s Report
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
FROM:CITY MANAGER DEPARTMENT: UTILITIES
DATE:JULY 17, 2000 CMR 324:00
TITLE:PROPOSED ELECTRIC AND GAS SALES CONTRACT
GUIDELINES, AMENDMENTS TO UTILITIES RULE AND
REGULATION 5, AND COMMERCIAL AND INDUSTRIAL
FIXED-TERM CORE GAS COMMODITY SERVICE RATE
REPORT IN BRIEF
Energy deregulation has led to increased customer expectations for new commodity pricing
products and a need to manage risk for the City. Specifically, customers are interested in
sales contracts as a method to stabilize energy expenses at their facilities. The City is
interested in offering sales contracts as a means to manage risk by having customers commit
to purchase energy from the City for a specified term.
This report proposes guidelines to ensure staff implements sales contracts in a consistent and
impartial manner. This report also proposes the use of custom contracts and fixed-term
commodity service rates.
CMR:324:00 Page 1 of 8
RECOMMENDATIONS
Staff recommends Council approve the following:
1. Guidelines for oversight, review, approval and performance reporting of sales contracts.
2. Resolution to modify Utilities Rule and Regulation 5 (Contracts), to implement proposed
guidelines.
3. Resolution to adopt the Commercial and Industrial Fixed-term Core Gas Commodity
Service (Utility Rate Schedule G-8), to offer customer choice to fix their commodity gas
rate for up to two years.
BACKGROUND
Recognizing an opportunity to retain customers who have a choice ofenergy supplier
through the City’s Direct Access program, Council approved the use of sales contracts in
1997 (CMR:370:97). Additionally, Council approved Rule andRegulation 5, rifled Contracts.
This delegated authority to negotiate terms and conditions, including commodity prices, to
the City Manager and provided general guidelines for implementing contracts. The City
Manager approved two sales contracts, in 1997 and in 1999.
The City Council, at its January 11, 1999 meeting, raised anumber of concerns regarding
Council oversight of electric and gas utilities activities relating to risk management and the
use of sales contracts. Specifically, Council expressed concern that the use of sales contracts,
without sufficient oversight, could lead to inconsistencies in rate setting and potential
increased rates for non-contract customers. Council gave direction to staff on a number of
issues related to the use of sales Contracts, as well as asking the City Attorney to respond on
these issues.
Submit guidelines for entering into sales contracts to the Utilities Advisory
Commission (UAC) and Council for review and approval.
Establish a procedure for senior management to provide oversight to ensure that sales
contract guidelines are being followed.
°Provide the UAC and Council with a periodic review of the economics of existing
contracts.
Report on the issues involved in making sales contracts available for examination by
the Council.
CMR:324:00 Page 2 of 8
Recommend changes to the Municipal Code to make clear that the duties of the UAC
include advising the Council on both sales contracts and risk management activities.
Address the apparent inconsistency between entering into sales contracts and the City
Charter provision that Council will set utility rates and it can not delegate this
authority.
In response to Council, staff prepared an informational report in July 1999 (CMR:315:99)
which discussed staff’s activities and progress in developing a risk management program for
the gas and electric (energy) utilities. At that time, staff indicated it would retum to the
Council with proposed sales contract guidelines and pricing policies as part of a
comprehensive energy risk manhgement program. Progress made since this time on the
various Council directives since July 1999 includes:
Clarification of Council Rate Setting Authority: On December 1,3, 1999, Council
adopted a resolution approving a change to Utilities Rule and Regulation 5 to amend the
City Manager’s authority related to the pricing of sales contracts (CMR:444:99). The
amended rule makes clear Council’s authority to approve the pricing terms either by
exercising approval of utility rate schedules or specific prices applicable to contracts. To
conform to the modified rule, Council ratified the two existing sales contracts.
Commodity Pricing Policy: Council approved the Commodity Pricing Policy
(CMR:387:99) at its February 22, 2000 meeting. The Commodity Pricing Policy
establishes principles to guide staff when developing commodity rates for both standard
tariffs and sales contracts. This policy was directly responsive to Council’s concerns
regarding how rates would be calculated for contract versus non-contract customers.
DISCUSSION
Deregulation has led to increased expectations on the part of customers for new and
innovative products and services. Market research of key customers in Palo Alto and the
experience from other utilities have indicated that the City should offer a range of commodity
pricing products that meet varying customer needs in order to be competitive and retain
customers. The use of standardized and custom sales contracts, in conjunction with existing
standard rates, is an effective means for balanc.ing customers’ need for low rates and!or rate
stability.
Sales contracts are also an effective tool for managing the City’s risk under conditions where
CMR:324:00 Page 3 of 8
Direct Access is an option for customers. Since large customers are eligible to choose
alternate gas and electric suppliers, the City cannot assume it will be able to retain those
customers in the future. Therefore, purchasing future supplies for those customers creates
risks for the City. Sales contracts can thus be an important tool to achieve the City’s
objectives for revenue stability and management of risk.
Sales Contract Options
Staff proposes to use two forms of commodity sales contracts: fixed-term rates and custom
contracts. Pricing for both forms of contracts will be set in accordance with the Commodity
Pricing Policy.
Fixed-term Rates
Fixed-term rates are standard rates in which the commodity portion of the rate is fixed for
a defined period of time (term). The commodity component of the fixed-term rate will be
based on the City’s projected commodity cost and set within a Council-approved price range.
The commodity charge will vary depending on the term selected and the date on which
service would begin. Fixed-term rates will be updated and offered to customers on a periodic
basis.
Fixed-term rates are full service rates that include both commodity and distribution-related
services. All applicable non-commodity components of fixed-term rates (distribution, public
benefit, and administrative charges) will not be fixed and will change in accordance with
Council-approved revisions to such charges.
Customers requesting service under a fixed-term commodity rate schedule will be required
to complete and sign a Fixed-term Commodity Service Agreement and adhere to the terms
and conditions of Utilities Rule and Regulation 5 and the conditions set forth in the
applicable rate schedule.
Current wholesale gas prices and the attractiveness of direct access for gas customers,
necessitate the immediate need for gas commodity fixed-term rates for large customers. Staff
recommends Council adopt the attached Commercial and Industrial Fixed-term Core Gas
Commodity Service Schedule (G-8). At this time, fixed-term rates will only be offered for
a 12- or 24-month term. Staff does not foresee the same immediate need to offer fixed-term
commodity rates for electric customers. If necessary, staff will return to Council with a
proposal to implement an electric commodity fixed-term rate for July 2001.
CMR:324:00 Page 4 of 8
Custom Contracts
Because it is impossible to foresee every customer’s need, customized contracts are
necessary to provide customers with rate options which best reflect their load characteristics
or meet their individual needs for price stability. Customers wanting a custom contract will
be required to sign and adhere to the terms and conditions of the Energy and Energy Services
Contract. Attached to the contract will be the Confirmation Schedule containing the specific
contract price and terms of service, which shall be confidential. All rates developed for
custom contracts will follow the Commodity Pricing Policy.
Guidelines
Guidelines for oversight, review, approval, pricing, and performance reporting of sales
contracts and fixed-term commodity rates are necessary to ensure staff is implementing
contracts as directed by Council. Staff recommends the following guidelines:
Oversight: The City Manager shall establish an oversight function, independent of
the Utilities Department, to ensure sales contracts are implemented in accordance with
Council approved policies and guidelines. The independent oversight function will
report directly to the City Manager and will be made up of staff from the City
Manager’s Office, Administrative Services Department and/or outside consultants.
B.Review and Approval:
In advance of offering fixed-term commodity service rates, the UAC shall review
the methodology underlying the calculation of the commodity risk premium.
Council shall establish a range of commodity prices for electric and gas fixed-term
commodity service rate schedules.
Council shall approve all custom contracts. A confidential confirmation schedule
shall include specific contract provisions such as price, term and service, and shall
not be released to the public with out the consent of all parties to the contract.
The City Manager shall have the authority to designate a rate for a customer under
a fixed-term commodity service contract within the Council-approved range. The
City Manager may delegate such authority to the Director of Utilities.
CMR:324:00 Page 5 of 8
o The City Manager shall have the authority to develop and modify any contract
boilerplates, agreements, and/or forms needed to implement sales contracts. The
City Manager may delegate such authority to the Director of Utilities. All forms
and boilerplates shall be reviewed and approved by the City Attorney.
Pricing:
1.Pricing for fixed term rates and custom contracts will adhere to the principles set
forth in the Council approved Commodity Pricing Policy.
Do
Only the commodity portion of the price will be fixed under custom contracts or
fixed-term rates. All administrative, distribution-related, public benefit, tax, and
non-bypassable charges and expenses will be set by Council and will be
equivalent to corresponding charges contained on applicable full-service rate
schedules. Council may change such charges during the term of the contract.
Performance Reporting: Staff shall prepare performance reports on the economics of
sales contracts. The performance reports will contain, at a minimum, an analysis of
cost recovery and revenue impact. The UAC will receive a minimum of two reports
per year in the first two years of offering contracts and annual reports thereafter. The
Council shall receive annual performance reports.
Modifications to Rule and Regulation 5 (Contracts)
Further modifications to Utilities Rule and Regulation 5 are necessary to implement the
proposed sales contract guidelines for fixed-term commodity rates and custom contracts. A
revised Rule and Regulation 5 is attached.
UTILITIES ADVISORY COMMISSION REVIEW AND RECOMMENDATIONS
At the February 2, 2000, Utilities Advisory Commission (UAC) meeting, staff presented a
draft of the proposed sales contract guidelines and fixed-term commodity service rate
schedules for electric and gas. The UAC supported staff’s proposal with modifications. Staff
has included the UAC’s recommended modifications in the proposed guidelines and fixed-
term commodity service schedules.
CMR:324:00 Page 6 of 8
RESOURCE IMPACT
Adoption of the proposed sales contract guidelines will enable the Electric and Gas Utilities
to better manage the risks inherent in conducting business, thus mitigating potential negative
fiscal impacts. The proposed fixed-term rate schedule is intended to maintain existing
revenues.
POLICY IMPLICATIONS
Implementation of the proposed rate schedule and sales contract guidelines is consistent with
the Commodity Pricing Policy, Utilities Transfer Policy and existing City policies.
TIMELINE
Upon approval of the proposed guidelines, adoption of the resolution to modify Utilities Rule
and Regulation 5, and adoption of Schedule G-8, the effective date for Schedule G-8 will be
September 1, 2000. Custom contracts will be available at customers’ request upon approval
of the proposed sales contract guidelines and modifications to Utilities Rule and Regulation
5.
ENVIRONMENTAL REVIEW
Approval of the guidelines does not constitute a project under the California Environmental
Quality Act and, therefore, is exempt from the environmental assessment requirement.
ATTACHMENTS/EXHIBITS
1. Revised Utilities Rule and Regulation 5 (CONTRACTS).
2. Proposed Commercial and Industrial fixed-term Core Gas Commodity Service -
Utility Rate Schedule G-8.
3.Resolution to modify Utilities Rule and Regulation 5 and adopt Commercial and
Industrial Fixed-term Core Gas Commodity Service (Utility Rate Schedule G-8).
PREPARED BY:Monica V. Padilla, Resource Planner
Lucie Hirmina, Rates Manager
REVIEWED BY:Randy Baldschun, Assistant Director Utilities Administrative Services
Girish Balachandran, Supply Resource Group Manager
CMR:324:00 Page 7 of 8
DEPARTMENT HEAD APPROVAL:
ULRICH
of Utilities
CITY MANAGER APPROVAL: ~. ~)/O_~(~
EMILY HARRISON
Assistant City Manager
cc: Utilities Advisory Commission
CMR:324:00 Page 8 of 8
RESOLUTION NO.
RESOLUTION OF THE COUNCIL OF THE CITY OF PALO
ALTO AMENDING UTILITY RULE AND REGULATION 5
PERTAINING TO CONTRACTS AND ADOPTING NEW UTILITY
RATE SCHEDULE G-8 OF THE CITY OF PALO ALTO
UTILITIES RATES AND CHARGES PERTAINING TO
COMMERCIAL AND INDUSTRIAL FIXED-TERM CORE
COMMODITY GAS SERVICE
The Council of the City of Palo Alto hereby RESOLVE as
follows:
SECTION I. Pursuant to Section 12.20.010 of the Palo
Alto Municipal Code, Rule No. 5 (Contracts) of the Palo Alto
Utilities Rules and Regulation Commercial Rates and Charges is
hereby amended to read in accordance with Sheet Nos. 1 through 4.
Schedule G-8 (Commercial and Industrial Fixed-term Core Gas
Commodity Service) is hereby adopted, to read in accordance with
Sheets G-8-1 and G-8-2, attached hereto and incorporated herein by
reference. The foregoing Utility Rate Schedules, as amended and
as adopted, shall become effective September I, 2000.
SECTION 2. The Council finds that the revenue derived
from the authorized adjustments of the general natural gas service
rates shall be used only for the purposes set forth in Article
VII, Section 2, of the Charter of the City of Palo Alto.
SECTION 3. The Council finds that the adoption of this
resolution does not constitute a project under the California
Environmental Quality Act, California Public Resources Code
section 21080, subdivision (b) (8).
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:APPROVED:
City Clerk Mayor
APPROVED AS TO FORM:City Manager
Senior Asst. City Attorney Director Of Administrative
Services
000712 syn 0071901
Director of Utilities
CONTRACTS
RULE AND REGULATION 5
A.TYPES OF RETAIL SERVICE CONTRACTS
For electric, gas, water, sanitary sewer, or fiber optic services in large quantities or under
special conditions, CPAU may require a suitable written agreement for new or existing
customers. Contracts may apply to standard service offerings under tariff rates or to non-
standard service offerings. The following is a list of services that may be the subject of a
contract. Additional services may apply at the discretion of the Director of Utilities.
1.ENERGY AND ENERGY RELATED SERVICES
(A) Energy and Energy Services Contracts (custom)
(B) Fixed-term Commodity Service Agreement
2.DISTRIBUTION AND DISTRIBUTION RELATED SERVICES
(A)
(B)
(0
(D)
(E)
(F)
(G)
(H)
(I)
(J)
Line extensions
Temporary service
Special facilities
Special metering and/or billing services
Stand-by service
Loans and leases for efficiency improvements
Transmission
Special billing services
Loans and leases for customer system improvements
Loans and leases for distributed generation services
3.FIBER OPTIC SERVICE
CONTRACT GUIDELINES
Contracts between the City and its Customers shall be based on the following guidelines:
1.ELIGIBILITY
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. 1 dated 12-14-’1999 CITY OF PALO ALTO
UTILITIES
Effective 9-1-2000
Sheet No. 1
CONTRACTS
RULE AND REGULATION 5
(A)Commercial and industrial customers are eligible to enter into contract with
CPAU.
(B)The same pricing, terms, and conditions for one customer will be made
available to other customers of similar size, service and load characteristics.
2.ENERGY AND ENERGY RELATED SERVICES
(A)Pricing for contracts under the Fixed-term Commodity Service Agreement
and Energy and Energy Services Contract will be set by Council and in
accordance with the following Commodity Pricing Policy principles and
priorities:
(1)Direct Cost Recovery. All direct costs of providing commodity service
will be recovered in commodity rates.
(2)Risk Management. Since the supply of gas and electricity is
unpredictable, generation output, market prices, and market demand
must be carefully managed to match approved risk limits. All risks
will be insured, to the extent practicable and contract terms will
protect CPAU from unanticipated events. To the extent CPAU takes
a risk to provide commodity products, the customer will pay for that
increase in risk.
(3)Indirect Cost Recovery. To the extent practicable, it is an objective to
recover all indirect costs of commodity service from commodity
customers.
Nondiscrimination. All customers within a customer class shall be
treated in a fair and impartial manner and be entitled to acquire
commodities at the same or substantially similar terms and
conditions.
(6)Non-subsidization. To the extent practicable, costs will be allocated to
customers and customer classes according to how those costs are
incurred. Thus, commodity rates will not be established in a manner,
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No. 2 dated 12-’14-1999 CITY OF PALO ALTO
UTILITIES
Effective 9-1-2000
Sheet No. 2
CONTRACTS
RULE AND REGULATION 5
(B)
(c)
(D)
(E)
which permits one class of customers to be subsidized by another.
Only the commodity portion of the rate will be fixed under custom contracts
or fixed-term rates. Administrative overhead, general fund transfer,
distribution services, Public Benefit, taxes and non-bypassable charges will
be set by Council and equivalent to corresponding charges contained on
applicable full-service rate schedules. Council may change such charges
during the term of the contract
The ~Confirmation Schedule attached to the Energy Services Contract
providing price and term information shall be kept confidential and only
released upon the Customer’s Written request.
Customers wanting service under a standard contract are required to
complete, sign and adhere to the terms and conditions of the Fixed-term
Commodity Service Agreement.
Customers wanting a custom commodity contract are required to complete,
sign and adhere to the terms and conditions of the Energy and Energy
Services Contract.
3.DISTRIBUTION AND DISTRIBUTION RELATED SERVICES
(A)
(B)
Pricing for standard services under Distribution and Distribution Related
Services will be set in accordance with existing distribution rates for the
existing customer class.
Pricing for non-standard services under Distribution and Distribution
Related Services will be set to recover all costs.
4.FIBER OPTIC SERVICES
CITY OF PALO ALTO UTILITIES
Issued by the City Council
CITY OF PALO ALTO
UTILITIES
Effective 9-1-2000
Original Sheet No. 3
(A)
CONTRACTS
RULE AND REGULATION 5
Customers requesting fiber optic services are required to complete, sign and
adhere to CPAU’s Dark Fiber License Agreement or other authorized
appropriate agreement.
Pricing for Fiber Optic Services shall be set at a minimum to recover all
costs.
CONTRACT APPLICATIONfREQUEST PROCEDURES
In general, the following application procedures are applicable to service contracts:
(A)
03)
(C)
(D)
Depending on the type of service contract, Customers shall request
consideration for a special contractual agreement in writing to the Director
of Utilities or his/her designee(s).
Customer shall complete all necessary forms and/or agreements.
Customer shall pay, all applicable fees or deposits.
If applicable, customer shall comply with the City’s insurance requirements
(END)
CITY OF PALO ALTO UTILITIES
Issued by the City Council
CITY OF PALO ALTO
UTILITIES
Effective 9-1-2000
Original Sheet No. 4
COMMERCIAL AND INDUSTRIAL FIXED-TERM CORE GAS COMMODITY SERVICE
UTILITY RATE SCHEDULE G-8
A. APPLICABILITY:
This schedule applies to large commercial customers who use at least 250,000 therms per year per
service address.
~B.TERRITORY:
Co
Within the service area of the City of Palo Alto and on land owned or leased by the City.
RATE S:Cents
Per Therm
1.Commodity Charge ......................................................................................................20.0 - 65.0¢
2.Administrative Fee .......................................................................; ............................................0.4¢
3.Transportation Charges:
PG&E Local Transportation .............................................................................................1.6¢
Palo Alto Local Distribution .............................................................................................8.5¢
D. SPECIAL CONDITIONS:
Service under this schedule is subject to discontinuance in whole or in part, for operational reasons
or if the City experiences supply or capacity shortages. The City will exercise reasonable diligence
and care to furnish and deliver continuous service and a sufficient quantity of gas to customers, but
does not guarantee continuity of service or sufficiency of quantity. The City shall not be liable for
any damage caused by interruption of service, if the interruption of service is caused by an act of
God, fire, strikes, riots, war or any other cause that is beyond the City’s control.
Customers who choose to be charged under this rate schedule are required to sign a Fixed-term
Commodity Service Agreement with the City and adhere to rules and regulations set forth in CPAU
Rule and Regulation No. 5 (Contracts).
The Commodity Charge shall be fixed for a 12- or 24-month term. The other components of the
rate, Administrative Fee and Transportation Charges may be modified periodically with the
Council’s approval.
CITY OF PALO ALTO UTILITIES
Issued by the City Council
CITY OF PALO ALTO
UTILITIES
Effective 9-1-2000
Original Sheet No. G-8-1
COMMERCIAL AND INDUSTRIAL FIXED-TERM CORE GAS COMMODITY SERVICE
UTILITY RATE SCHEDULE G-8
(Continued)
10.
The Commodity Charge component of this rate and the term will be set at the time when the
customer signs the Fixed-term Commodity Service Agreement. The commodity charge will fall
within the range set forth in C. 1. and will be for gas delivered to PG&E City Gate.
The Administrative Fee is equal to the allocable administrative and overhead costs incurred by the
City in providing the gas service.
PG&E Local transportation charge is equal to the cost of transporting gas from PG&E City Gate to
the Palo Alto City Gate.
Total monthly charge = therms used during the month X (Commodity Charge + Administrative Fee
+ PG&E Local Transportation Charge + Palo Alto Local Distribution Charge).
Eligible customers may request to switch to a fixed-term commodity rate schedule at any time during
a fixed-term rate offering. The customer must remain on the fixed-term rate for the term indicated
on the Fixed-term Commodity Service Agreement, providing the customer continues to receive
distribution services from the City.
A customer may request service under this schedule for more than one account or meter if the
accounts are located on one site. A site shall be defined as one or more utility accounts serving
contiguous parcels of land with no intervening public right-of-ways (e.g. streets) and have a common
billing address.
A customer may renew the contract with a 30-day advance notice. The commodity charge for the
renewed contract will be based on the published fixed-term commodity charge at the time the
contract is renewed. Customers electing not to renew the contract will be returned to a published
applicable full-service gas rate schedule of their choice at the termination of the contract period.
{End}
CITY OF PALO ALTO UTILITIES
Issued by the City Council
CITY OF PALO ALTO
UTILITIES
Effective 9-1-2000
Original Sheet No. G-8-2