HomeMy WebLinkAboutStaff Report 13889
City of Palo Alto (ID # 13889)
City Council Staff Report
Meeting Date: 4/18/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: Policy and Services Committee, City Auditor and Staff Recommend
Approval of the Power Purchase Agreement Audit Report
From: City Manager
Lead Department: City Auditor
Recommended Motion
The Policy and Services Committee, City Auditor, and City staff recommend that City
Council approve the Power Purchase Agreement Audit report.
Executive Summary
Baker Tilly, in its capacity serving as the Office of the City Auditor, performed an
assessment of the City's process for evaluating, entering into, and managing power
purchase agreements (PPA) focusing on the effectiveness of internal controls and
validating the accuracy and compliance of PPA billing. This assessment was conducted
in accordance with the FY2021 Audit Plan approved by City Council.
Through the audit activity, the Office of the City Auditor identified three (3)
recommendations. The City of Palo Alto Utilities (CPAU) concurred with each finding
and has drafted action plans for each item.
The Policy & Services Committee approved the report on a two out of three majority
vote at the November 9, 2021 meeting (ID #13681; Minutes; Video). In accordance
with the City Council Policies and Procedures, this item is scheduled as an action item,
due to the lack of a unanimous vote of approval from the Committee.
The Office of City Auditor will perform periodic follow up procedures to validate that
corrective actions have been implemented.
Background
The City of Palo Alto offers its residents and businesses a suite of utility services,
including electricity, natural gas, water, sanitary sewer and commercial fiber optics. To
continue to provide reliable and affordable services, specifically electricity, the CPAU has
entered into multiple PPAs. To ensure CPAU continues to meet its mission, power needs
and mitigate risks, the Office of the City Auditor conducted an assessment focused on
City of Palo Alto Page 2
current PPA management practices.
The Office of the City Auditor included an audit activity related to the adjustment in the
FY2021 Audit Plan approved by City Council. The objectives of this review were to:
1) Gain an understanding of the City’s process for evaluating and entering into Power
Purchase Agreements;
2) Evaluate the effectiveness of internal controls in the management of agreements
and;
3) Validate the accuracy of and compliance of billing.
Discussion
The attached report summarizes the analysis, audit findings, and recommendations.
Timeline, Resource Impact, Policy Implications
The timeline as well as resource impacts on staff for implementation of corrective action
plans is identified within the attached report. All corrective actions are scheduled to be
implemented by FY 2023.
Stakeholder Engagement
The Office of the City Auditor worked primarily with CPAU and engaged with additional
stakeholders, including the City Manager’s Office and City Attorney’s Office, as
necessary.
Environmental Review
The Council’s approval of the Power Purchase Agreement Audit report does not meet
the definition of a “project” under Public Resources Code 21065, therefore California
Environmental Quality Act review is not required.
Attachments:
• OCA - PPA Assessment Report (Final Draft - City Council)
1
City of Palo Alto
Office of the City Auditor
Power Purchase Agreement
Assessment
April 4, 2022
2
Executive Summary
Purpose of the Audit
The purpose of the audit was to gain an understanding of the City's process for evaluating and entering into
power purchase agreements (PPA), evaluate the effectiveness of internal controls and the management of
agreements and validate the accuracy of and compliance of billing.
Report Highlights
Finding Page # Description of Finding
There is no formal
documentation of staff
review of vendor
compliance with PPAs
15 Palo Alto’s PPA procurement process identified that while energy delivery is
closely monitored, other PPA terms are informally monitored through meetings
and status updates. There is no formal process that documents vendor
compliance with PPAs. Vendor compliance or performance issues may not be
documented appropriately, resulting in delayed or inadequate communication
throughout the City about PPA non-compliance.
There is no formal review
or approvals of changes
to front office models.
16 Review of front office models identified that changes made to the front office
model do not require approvals. Figures are vetted periodically by senior
management as the figures are often reported to City Council and other senior
stakeholders. If changes are not reviewed and approved by a second
user/reviewer, there is an increased likelihood of inaccurate reporting.
CPAU staff does not
audit NCPA’s validation
of vendors’ invoices,
contract rates and
payments
17 The City of Palo Alto Utilties (CPAU) delegates its PPA settlements processes
to Northern California Power Agency (NCPA), but does not have a process in
place to validate NCPA settlement processes that include the verification of
invoice calculations, contract rates, and matching All Resources Bill (ARB)
amounts on behalf of the City.
Key Recommendations to the City Manager:
The City should work towards documenting vendor performance
monitoring via a formal procedure by which vendors are periodically
assessed for PPA compliance and general performance.
The front office model file should be altered to allow for a second
reviewer and approver to document a second review and approval of
any changes.
The City should implement a formalized process that would allow
CPAU to validate vendor invoices and rate calculations completed by
NCPA. This process should be incorporated before payment, allowing
the CPAU to validate rates to contractual requirements and confirm
accuracy before payment.
3
Table of Contents
Executive Summary ........................................................................................................................................................... 2
Purpose of the Audit ..................................................................................................................................................... 2
Report Highlights ........................................................................................................................................................... 2
Introduction ......................................................................................................................................................................... 5
Objective ........................................................................................................................................................................... 5
Background ..................................................................................................................................................................... 5
Scope ................................................................................................................................................................................. 5
Compliance Statement .................................................................................................................................................. 5
Organizational Strengths ............................................................................................................................................. 6
Detailed Testing & Analysis ........................................................................................................................................ 7
Methodology & Approach ............................................................................................................................................ 7
Audit Testing ................................................................................................................................................................... 8
Contract Analysis & Review .......................................................................................................................................... 11
Introduction ................................................................................................................................................................... 11
PPA Overview ............................................................................................................................................................... 11
Approach & Analysis .................................................................................................................................................. 13
Audit Results ..................................................................................................................................................................... 14
Finding #1 - No formal documentation of staff review of vendor compliance with PPAs ........................ 14
Finding #2 - No formal review or approvals of changes to front office models. ......................................... 14
Finding #3 – No CPAU audit of NCPA’s validation of vendors’ invoices, contract rates and payments
.......................................................................................................................................................................................... 14
Appendices ........................................................................................................................................................................ 15
Appendix A: Risk and Control Matrix ..................................................................................................................... 15
Appendix B: Contract Listing ................................................................................................................................... 19
Appendix C: Contract Analysis Graphs ................................................................................................................. 21
Appendix D: Agreement List and Samples ........................................................................................................... 23
Appendix E: Management Response ...................................................................................................................... 25
4
Index of Tables
Table 1 – Power Purchase Agreements ..................................................................................................................... 23
Table 2 – Selected Sample ............................................................................................................................................. 24
Index of Graphs
Graph 1 – Annual kWh supplied by each contract from 2017-2020. ......................................................................... 12
Graph 2 – Annual spending associated with each contract from 2017-2020. .......................................................... 12
5
Introduction
Objective The purpose of the audit was to gain an understanding of the City's process for evaluating
and entering into power purchase agreements (PPA), evaluate the effectiveness of internal
controls in the management of agreements and validate the accuracy of and compliance of
billing.
Background The City of Palo Alto Utilities (CPAU) offers its residents and businesses a suite of utility
services, including electricity, natural gas, water, sanitary sewer, and commercial fiber
optics. The CPAU's mission statement is to "provide safe, reliable, environmentally
sustainable and cost-effective services." To continue to provide reliable and affordable
services, specifically power, CPAU has entered into multiple PPAs. These agreements
support the City's power needs. However, disruption in power supply and unmitigated risk
can result in the CPAU's inability to meet its customer's needs and impact the reliability of its
services.
In 2013 the City of Palo Alto set out on a mission to cut carbon emissions 80% below their
1990 levels by 2030. In order to achieve their goal, the City shifted away from buying market
energy, which contains fossil energy sources and entered into PPAs for energy produced
from renewable sources like wind, solar and biogas. The City currently has fifteen (15) large
scale PPAs in place where they purchase power generated from a renewable or carbon
neutral source. The City also started a CLEAN Program for community
members/organizations to install solar panels and sell the energy back to the City.
The fifteen (15) large scale PPA contracts are made up of five (5) biogas contracts (natural
gas produced from landfills), six (6) solar contracts, two (2) wind contracts, and two (2)
hydroelectric contracts. For more information on each contract such as term length, rate,
generation type, annual production, annual spend, and Palo Alto's percentage share please
see Appendix B.
To ensure CPAU continues to meet its mission, power needs and mitigate risks, the Office
of the City Auditor (OCA) conducted an assessment that would focus on current PPA
management processes. This decision was in conjunction with a broader, Citywide audit
plan detailing the potential risks facing each department. The purpose of the assessment
was to identify and prioritize risks to develop the annual audit plan.
During the FY2021 risk assessment, the OCA identified a risk related to the contract
management of purchased power. With the CPAU entering into multiple agreements
representing a significant expenditure for the City, it is important to monitor PPAs to ensure
both parties comply with contractual requirements, meet state and local regulations, and are
financially sound, ensuring reasonable and adequately billed costs.
In order to properly assess the CPAU's PPA management process, the OCA reviewed three
(3) operational areas of PPAs that included procurement and contracting, contract
management, and invoicing/payments. For additional details, please review the Detailed
Testing & Analysis section.
Scope The scope of this engagement includes the City’s active PPAs and related processes.
Compliance
Statement
This audit activity was conducted in accordance with the Annual Audit Plan.
The audit activity was not performed in compliance with the generally accepted government
auditing standards (GAGAS). The audit activity was not performed in compliance with
GAGAS for one primary reason:
6
- The City of Palo Alto Office of the City Auditor has not undergone an External Peer
Review in the required 3 year cycle as required by Standards.
o Note – the Office of the City Auditor will undergo a peer review at the
conclusion of FY22.
We planned and performed the activity to obtain sufficient, appropriate evidence to provide a
reasonable basis for our recommendations based on our objectives. We believe that the
evidence obtained provides a reasonable basis for our findings and conclusions based on
our audit the objectives.
Organizational
Strengths
During this audit activity, we observed certain strengths of the City. Key strengths include
the following:
The City Attorney’s Office is thoroughly involved in the drafting and finalization of the
PPA agreements, as well as with the Commercial Operation Deadline (COD) process
to ensure that all legal requirements are met prior to and during project start up.
The CPAU is highly knowledgeable and experts in their field. Individuals that
engaged with the OCA displayed a thorough understanding of processes and
practices associated with their roles. In addition to developing and managing key
processes, they exhibited expertise and knowledge of the power industry, current
trends, and best practices.
The City has a energy risk management structure that includes policies, guidelines,
and procedures first developed in the wake of the City’s issues with Enron. A
component of the energy risk management structure is the City’s Utilities Risk
Oversight and Control Committee, a cross-departmental body comprised of staff
from Utilities, ASD, Public Works, the City Manager’s Office, and the City Attorney’s
Office that meets regularly to oversee the City’s risk management program.
The City employs a structured Front Office / Back Office / Middle Office structure for
all of its energy transactions intended to ensure that the different aspects of the
transaction process are carried out by independent parts of the organization, and
that there are internal controls and oversight in place.
The City has been actively procuring renewable power for roughly 20 years, and
over that time City staff (Utilities, ASD, and the Attorney’s Office) has developed
expertise with the PPA solicitation, negotiation, and management process.
The team at CPAU was very proactive and involved in the engagement that allowed for clear
communication and support for audit team. CPAU was always available to provide additional support and
hands on explanations on the billing/invoice processes.
The Office of the City Auditor greatly appreciates the support of the CPAU in conducting
this audit activity.
Thank you!
7
Detailed Testing & Analysis
Methodology &
Approach
The objective is to assess the current PPA processes, evaluate the effectiveness of current
controls and validate billings.
To evaluate controls and billing accuracy, audit testing was conducted on a sample of active
PPAs. Testing areas were identified based on results of the risk assessment documented
within the Risk and Controls Matrix (RCM). Additional information regarding the testing
approach and methodology can be found in the Audit Testing section.
In addition, a contract analysis was conducted that reviewed all the current agreements
against best practices and other peer contracts. Additional information regarding the contract
analysis can be found in the Contract Analysis and Review section.
In order to properly evaluate PPAs and CPAUs operational areas that covered procurement
and contracting, contract management, and invoicing/billing, the specific approach included
the steps noted below.
Audit Planning
Conduct research and gather information to understand the current environment
Assess audit risk
Develop an audit planning memo and program
Conduct kick-off meeting with key stakeholders
Control Review and Testing
Gather information to understand the environment under review
Conduct interviews with key process owners and management
Assess risks and identify controls in place
Quantify and analyze PPA spend by contract
Perform testing of key controls around energy procurement/contracting, contract
management, and invoice processing
Benchmark active PPA terms and conditions against other Baker Tilly client PPAs
and industry best practices
Reporting
Develop findings and recommendations based on supporting evidence
Validate documented findings
Develop and validate a draft audit report
Finalize report with management responses
Review and finalize report with the City Council and/or appropriate Council
Committee
8
Audit Testing
Introduction In order to achieve the objectives of the engagement, the OCA developed an audit testing
approach and methodology that would test the design and operational effectiveness of
controls and identify control gaps and unmitigated risks around PPA procurement and
contracting, contract management, and invoicing/billing.
Approach &
Methodology
In order to evaluate CPAU's control environment, the OCA developed a Risk and Controls
Matrix (RCM) based on documentation and stakeholder interviews. The RCM was developed
to document known risk, and mitigation practices based on CPAU's information and identify
opportunities and improvement areas. The RCM was developed with the emphasis on the
three focus areas that include procurement, contract management, and billing/invoices. The
matrix documents 33 risks that cover each of the focused operational areas. In addition, the
RCM was used to facilitate the risk assessment and note the risks for the current PPA
processes, identify control gaps, and determine key risk and control areas for audit testing.
The detailed RCM can be found in Appendix A.
The OCA evaluated the RCM and, based on an understanding of the current state, key risks
were identified for testing. In addition to prioritizing high risks, gaps were identified and noted
for further observation during testing. As a result of the RCM, ten (10) work papers were
created to test controls in CPAU's current PPA management processes. Below is a
description of each of the work papers that were developed for testing.
T1- Invoices
Work paper T1 tested various controls associated with risks related to invoicing. The work
paper evaluated the potential risk of duplicate payments, overpayment, incorrect charge
amounts, unapproved payments, and applications for Renewable Energy Credits (REC). In
order to test the controls, the work paper verified the following items:
Generation data is tracked, and REC quantities are reconciled to generation totals
from invoices.
Invoiced rates correspond to approved rates
The payment amount matches the invoice amount demonstrating payment accuracy
Payments can be traced to and match entries in the GL
There are no duplicate payments.
Payment amounts are traceable to approved All Resources Bills (ARB)
T2- Payment Packages
Work paper T2 tested the risk and control associated with the processing of the ARB. The
ARB was identified as the detailed bill package that includes details utilized to develop the
Payment Claim Voucher (PCV) which is utilized for the approval and processing of
payments. In order to test the controls, each approved package was reviewed for
documented approval, and amounts were reconciled to ensure they matched.
T3- PPA Contract Assurance
Work paper T3 reviewed contracts to ensure they contained contracts assurance language
related to energy provisions and contract performance.
T4- Purchasing
Work paper T4 tested controls associated with the procurement of PPAs. The work papers
evaluated the potential risk of outdated vendor evaluation criteria and weights, selection of
vendors without proper evaluation, and unsatisfied Commercial Operations Deadline (COD).
In order to test the controls, the work paper verified the following items:
9
A completed Commercial Operation Deadline (COD) was approved as part of the
PPA procurement process by requesting a complete COD and reviewing the
documents provided.
A Resource Integration Checklist was used as part of the procurement process by
requesting the checklist and reviewing the provided documents.
The RFP was evaluated based on assigned weights and shortlist by requesting
documentary support and evaluating the documents provided in response.
T5- Annual Reporting
Work paper T5 addressed the CPAU's annual reporting requirements. The work paper
examined the potential risk of non-compliance to State RPS requirements and environmental
impacts/changes. In order to test the controls, the work paper verified the following items:
RPS requirements are addressed within the report.
Report review and approval is documented.
Vendor compliance is addressed within the report.
T6- Front Office Models
Work paper T6 evaluated front office models to validate if they are current, updated, and
relevant. Front office models are developed for new contracts and extend out to the full
length of the contract. Models include costs and are updated to track and manage budgets
and needs. In order to test the controls, the work paper reviewed models to ensure they were
updated and changes were approved. In addition, the model amounts were compared to the
invoice amounts for reasonableness.
T7- Staff Reports
Work paper T7 evaluated staff reports to determine if the appropriate approvals were
obtained for entering into a new or updated contract with a vendor. Reports were validated to
ensure resolutions were included with approval from the Utility Risk Oversight and
Coordinating Committee, Utilities Advisory Committee, City Council Finance Committee, and
City Council.
T8- Vendor Evaluation
The purpose of work paper T8 is to determine if vendor reliability and/or viability has been
evaluated. The work paper addressed the potential risk of financially unstable vendors,
unreliable vendors, and maintaining high-risk vendors. In order to validate vendors, the work
paper reviewed evaluation documentation.
T9- Other Reports
Work paper T9 validated the Integrated Resource Plan, annual RPS, and Carbon Neutral
Plan status report. The work paper ensured that the Utilities Director approved the report and
provided to the City Council.
T10- Billing and Adjustments
Work paper T10 evaluated controls related to the billing and adjustments. The risks
addressed in the work paper include inaccurate adjustments, unapproved payments,
inaccurate ARB amounts, and invoice amounts that do not match. In order to test the
controls, the work paper verified the following items:
The ARB estimated amount and approved PCV amount match.
Adjustment amounts are appropriate and accurately applied to the estimated
amount.
The amount from the summary report matches the recalculated amount based on
the application of adjustments.
If the payment amount matches the ARB amount demonstrating payment accuracy.
If payment amounts are traceable to approved All Resources Bills.
10
Sampling
Methodology
CPAU provided a list of all active PPAs managed by the City. Understanding the generation
type, dollar amount, and perceived risk/complexity, five (5) of twenty-one (21) contracts were
judgmentally selected for the assessment. The contracts selected include Shiloh, San
Joaquin, Elevation Solar, Calaveras, and Western. Refer to Appendix B for a summary of the
active PPAs.
Based on the contract selection, a list of the volumes and settlement months was provided to
conduct transactional sample selection for invoicing and payment testing. The OCA focused
testing on transactions covering the period 01/01/2020 to 12/31/2020, and selected three (3)
transactions from each contract. The selected samples can be found in Appendix D.
11
Contract Analysis & Review
Introduction As part of this audit, an overall contract analysis was performed to review the PPAs entered into by
CPAU and ensure they are in alignment with industry standards. The PPAs were reviewed for standard
contract language and structure compared to others in the industry.
PPA
Overview
The PPA contracts entered into by CPAU are all physical PPAs. A physical PPA is where the customer
(Palo Alto) and the developer agree on a set price per kWh or MWh, and the customer purchases the
energy for use in the same power grid. CPAU's physical PPAs are set up in two different ways: 1) CPAU
is an off-taker 2) CPAU acts as a joint owner. Fourteen of CPAU's contracts are those in which they act
as an off-taker. The developer or seller develops the facility, maintains, operates, and provides the City
with an agreed-upon percentage of the energy produced. The City then pays for the energy supplied at
the agreed-upon rate. This structure has several benefits, including locking in a fixed rate over the
contract's life, performance guarantees, only pay for energy provided, dependable budgeting, etc.
The Calaveras PPA is set up where the City and other project participants act as owners instead of
simply being off-takers. This contract dates back to 1982 and is a "Third Phase" agreement between
Northern California Power Agency (NCPA) member parties for the construction operation and financing of
the North Fork Stanislaus River Hydroelectric Development Project. Since some NCPA members act as
owners, it was set up as a take-or-pay agreement described below.
Section 6.3.3 of the City’s Facilities Agreement with NCPA states, "Third Phase Agreements shall be
written as "take-or-pay" ("hell-or-high-water") agreements to the greatest extent possible, so as to
insulate NCPA and all Members who are not Project Participants from liability arising from the NCPA
Project. Third Phase Agreements shall obligate Project Participants to treat all Project Costs as operation
and maintenance expenses of their respective Electric Systems, and shall pledge the Project
Participant's obligation to raise electric rates and/or increase Revenues upon demand of NCPA so as to
pay such Project Costs."
This development provided roughly 8% of the power CPAU used in 2020 and 18% in 2019. Since the
Project Participants are acting as owners, there is a different risk environment. The take or pay structure
adds the risk of incurring project costs but not receiving energy, which is similar to the risk incurred by
any utility that owns a generating resource. In addition, since party members are responsible for the
project's operational costs, there is the risk of physical damage, maintenance costs, and unexpected
issues.
Both PPA structures used by CPAU have their own risks. Each agreement needs to align with the
community's overall goals, risk tolerance, and available resources. All of these contracts align with the
City's goals of reducing carbon emissions and promoting clean energy. Information on the annual spend
and production is shown in the graphs below. Both graphs show the historical time frame of 2017-2020
and the information was taken from files provided by CPAU. Additionally, a summarized list the PPAs and
related details can be found in Appendix B.
12
Graph 1 – Annual kWh supplied by each contract from 2017-2020.
This information was pulled from the "Supplier Invoices and REC Tracking" document provided by CPAU.
Graph 2 – Annual spending associated with each contract from 2017-2020.
This information was taken from the "Supplier Invoices and REC Tracking" document provided by CPAU. The annual cost
information for Calaveras and Western (WAPA) was not included in the "Supplier Invoices and REC Tracking" document and was
therefore taken from the "PPA Invoice Payments 1-19 to 4-21" file provided. This document did not include the annual spend for
2017 or 2018, so there are no values on the graph for Calaveras or Western for that time frame.
0
100,000,000
200,000,000
300,000,000
400,000,000
500,000,000
600,000,000
KI
L
O
W
A
T
T
H
O
U
R
Annual Production
2017 2018 2019 2020
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
Annual Spend
2017 2018 2019 2020
13
Approach &
Analysis
Our benchmarking approach focused on the terms and conditions within each contract to ensure the City
is not leaving itself open to unnecessary risks. Some of the significant risks associated with PPA
contracts relate to development, price, liquidity, volume, profile, and balancing. Our research of industry
standards led us to the following list of risk-reducing clauses typically included in a PPA contract to
reduce the previously mentioned risks.
Development Guarantees
Performance/Production Guarantees
Force Majeure Clause
Audit Clause
Insurance Clause
Operation and Maintenance
During our analysis, it was determined that the agreements entered into by the City contain many of the
risk mitigation clauses found in other contracts around the industry. The contracts lay out development
guarantees and repercussions for the developer if specific project goals/deadlines are unmet.
Performance/Production Guarantees are established within each contract and are nuanced toward the
specific energy or project type. The contracts contain force majeure language and lay out the events if
necessary. Insurance clauses are in place to ensure the production facility contains a large policy to
cover major physical damages that would affect the production. The City's contracts put the operations
and maintenance responsibilities on the seller, except for Calaveras.
It is important for a community to vet the other partner on the agreement along with these standard
contract clauses. Having a financially sound and experienced production partner helps ensure that the
partner can remedy an issue with little risk of bankruptcy if any unforeseen problems occur. The City
does this by putting restrictions on who a project can be transferred to, who can lend money for the
project, and through questioning during the RFP process. Overall, the contracts appear to contain similar
clauses used across the industry.
14
Audit Results
Finding #1 - No
formal
documentation
of staff review
of vendor
compliance
with PPAs
The OCA's review of the Palo Alto PPA procurement process identified that vendors are informally
monitored through meetings and status updates. For Western, the project's performance is monitored
via weekly email updates from the supplier (Western Area Power Administration) and via monthly
meetings with NCPA. Calaveras operations and performance are also discussed with NCPA staff and
other member agencies at the monthly meeting. For the City's solar, wind, and landfill gas PPAs, the
performance of these resources is monitored on a quarterly basis, when staff compare each resource's
actual output to its projected level.
However, there is no formal process that documents vendor compliance with PPAs. Although
documenting PPA compliance can be difficult given the nuances and complexity of PPAs, documented
PPA compliance reviews should be performed periodically. Otherwise, vendor compliance or
performance issues may not be documented appropriately, resulting in delayed or inadequate
communication throughout the City which poses a greater risk of maintaining a relationship with the
vendor for a longer than ideal period of time.
We recommend the City implement a formal vendor performance monitoring procedure by which
vendors are periodically assessed for PPA compliance and general performance.
Detailed reviews of specific PPAs, vendors, or issues should be conducted on a as needed basis.
Each PPA should be reviewed in detail once every five years.
Finding #2 - No
formal review
or approvals of
changes to
front office
models.
The OCA's review of front office models identified that changes made to the front office model do not
require approvals. There is version control on the document used to track front office models, and few
people are allowed to change the document. Also, the figures are vetted periodically by senior
management as the figures are often reported to City Council and other senior stakeholders.
However, if changes are not reviewed and approved by a second user/reviewer, there is an increased
likelihood of inaccurate reporting.
Changes to front office models that significantly affect planning should be reviewed and approved, and
the review and approval should be documented. We recommend the front office model file be altered
to allow for a second reviewer and approver to document a second review and approval of any
changes.
Finding #3 –
No CPAU audit
of NCPA’s
validation of
vendors’
invoices,
contract rates
and payments
The OCA identified during process interviews that CPAU does not have a process in place to validate
NCPA settlement processes that include the verification of invoice calculations, contract rates, and
matching ARB amounts on behalf of the City.
NCPA owns processes that include rate calculation and proper invoicing, but the City does not conduct
a periodic check to monitor NCPA's processes for accuracy. Without proper rate review processes,
payments for amounts charged at incorrect rates could be processed, and inaccurate financial
reporting may occur.
We recommend a formalized process that would allow CPAU to validate vendor invoices and rate
calculations completed by NCPA. This process should be incorporated before payment, allowing the
CPAU to validate rates to contractual requirements and confirm accuracy before payment
15
Appendices
Appendix A: Risk and Control Matrix
Below is the RCM that was developed and utilized to identify gaps and developing testing criteria.
Risk
Ref.
Process Sub-Process Risk Risk Description Control
#
Control Description
1 RFP Needs
Assessment
Over purchase of
renewable energy
An inaccurate needs assessment can result in the
overstatement or understatement of needs
resulting in either an over-commitment or under-
commitment outlined in contracts. This can result
in the City being placed in the position to fill gaps.
C1 Development of the Integrated
Resources Plan (every 5 years) and/or
the annual RPS and Carbon Neutral
Plan status report to the City Council
and approval from the Utilities
Director.
2 RFP Needs
Assessment
Inadequate
budget
An inaccurate needs assessment can result in the
overstatement or understatement of budget
needs.
C1 Development of the Integrated
Resources Plan (every 5 years) and/or
the annual RPS and Carbon Neutral
Plan status report to the City Council
and approval from the Utilities
Director.
3 RFP RFP
Development
Weak/Inaccurate
RFP
An RFP is issued that is not adequately vetted
and developed with the review and validation of
specifications the City needs to be achieved.
C2 Content is developed with
coordination with the City Attorney that
drafts the pro forma PPA to send with
the RFP.
4 RFP RFP
Development
Unapproved RFP An Unapproved RFP is distributed without
validation of legal and performance
specifications.
C2 Content is developed with
coordination with the City Attorney that
drafts the pro forma PPA to send with
the RFP.
5 RFP Vendor
Management
Unreliable Vendor The city is partly dependent on unreliable energy
providers.
Gap There is not currently a process by
which PPA vendors are periodically
vetted for reliability
6 RFP Vendor
Management
Fraudulent
vendor
High risk vendors are maintained in the RFP
distribution list and receive opportunities to bid on
City projects.
Gap There is not currently a process to
document review of PPA vendor
reliability or compliance with relevant
laws and PPA terms.
7 RFP Evaluation Improper
evaluation of
vendors
Outdated vendor evaluation criteria and weights
are used leading to the selection of an unqualified
vendor.
C3 Evaluation criteria and weights are
developed/decided based on each
RFP.
8 RFP Evaluation Unqualified
vendor selection
Vendor selected from outdated criteria or not
properly evaluated.
C4 Proposals are ranked based on
criteria by the RFP evaluation team
that results in a short list.
9 RFP Evaluation Financially
unqualified
vendor
Vendor financial and credit clearance not
completed and financially unviable vendor is
chosen to provide services.
C5 Energy Risk Manager completes
financial/credit evaluation.
16
Risk
Ref.
Process Sub-Process Risk Risk Description Control
#
Control Description
10 RFP Selection Unapproved PPA
executed
Vendor PPA executed without proper review and
approval(s).
C6 Staff report and resolution seeking
approval of PPA(s) from the Utilities
Risk Oversight and Coordinating
Committee (UROCC), Utilities
Advisory Committee, City Council
Finance Committee, and City Council.
City Council approval is required for
PPA execution.
11 Contract
Management
Forecasting Inaccurate
forecasting
Inaccurate forecasting of generation supplies,
requirements and costs leading to inadequate
budgeting and other related planning.
C7 Front office models are developed for
new contracts that extend out to
contract length and include associated
costs. Models are updated based on
any changes.
12 Contract
Management
Forecasting Inaccurate
forecasting
Inaccurate and unapproved updates to the front
office models.
Gap Changes made to the front office
model do not require approvals.
13 Contract
Management
Consents Unapproved
consents
Unapproved vendor financing consents are
signed adding unapproved City liabilities.
C8 Standard consent form developed by
City is utilized with a legal redline
process.
14 Contract
Management
Contractual
Guarantees
Non-compliance
to contractual
development
timelines
Projects are delayed due to non-compliance with
contractual development timelines.
C9 Quarterly/monthly project
development reports are provided by
the developers/suppliers. The Senior
Resource Planner validates if they are
meeting contractual deadlines and
criteria.
15 Contract
Management
Contractual
Guarantees
Unsatisfied
Commercial
Operations
Deadline (COD)
criteria
Commercial Operations Deadline criteria are not
met prior to Commercial Operations
commencement.
C10 Senior Resource Planner works with
the City Attorney’s Office to ensure
checklist is met.
16 Contract
Management
Contractual
Generation
Guarantees
Vendor non-
compliance with
generation
requirements
Vendors do not meet generation requirements. C11 The Senior Resource Planner reviews
generation data to ensure contractual
requirements are met.
Performance assurances are placed in
contracts.
17 Contract
Management
REC-
Renewable
Energy
Credit
Generation totals
do not match
REC quantities
Invoice totals do not match REC quantities
transferred by suppliers.
C12 Generation data is tracked from
supplier invoices. REC quantities are
reconciled to generation totals from
invoices.
17
Risk
Ref.
Process Sub-Process Risk Risk Description Control
#
Control Description
18 Contract
Management
RPS Non-compliance
to RPS
requirements
RPS requirements are not met annually. C13 Annual report provided to CA Energy
Commission. The Resource Planner
tracks the requirements and compiles
the report. The report is reviewed by
the Senior Resource Planner and
NCPA.
19 Contract
Management
RPS
Reporting
Non-compliance
to RPS reporting
requirements
Annual reporting requirements are not met. C13 Annual report provided to CA Energy
Commission. The Resource Planner
tracks the requirements and compiles
the report. The report is reviewed by
the Senior Resource Planner and
NCPA.
20 Contract
Management
General Unacceptable
environmental
impacts/changes
in law and
regulations
Suppliers are unable to meet legal and/or
environmental requirements.
C14 The City Attorney’s Office is
responsible for incorporating
environmental laws into new and
amended PPA’s. The CPAU monitors
compliance and brings compliance
issues to the City Attorney’s Office for
assistance.
21 Contract
Management
General Enforceability of
contracts
Weak legal constraints do not allow for feasible
contract enforcement.
C15 Use and application of appropriate
legal clause and constraints to support
City objectives.
22 Contract
Management
General Price volatility Adverse market price fluctuations leading to
unforeseen increased energy costs.
C16 Fixed price contracts address market
fluctuation risks.
23 Contract
Management
General Production
volume
Sufficient volume is not produced and needs to
be procured at additional unforeseen costs to the
City.
C17 Forecasting and estimates for
potential needs.
24 Contract
Management
General Balancing market
changes
Market price changes from execution to
agreement close changing cost expectations from
those originally procured.
C16 Fixed price contracts address market
fluctuation risks.
25 Invoicing All
Resources
Bill (ARB)
Inaccurate ARB The All Resources Bill (ARB) is not accurate
leading to inaccurate billings and payments.
C17 The Resource Planner validates the
ARB through review and development
of the Payment Claim Voucher.
26 Invoicing All
Resources
Bill (ARB)
Totals do not
match invoices
Vendor invoices do not match the relevant
ARB(s) causing an inadequate audit trail of
services provided versus related payments.
C18 The Business Analyst conducts review
to ensure totals match invoices from
the G/L entries.
27 Invoicing All
Resources
Bill (ARB)
Inaccurate rates
are charged
Rates that are not in accordance with the contract
rates are charged and paid.
Gap NCPA reviews contract rates upon
invoice payment, but CPAU staff does
not audit NCPA’s review.
18
Risk
Ref.
Process Sub-Process Risk Risk Description Control
#
Control Description
28 Invoicing All
Resources
Bill (ARB)
Duplicate
payments
Duplicate payments are made Gap NCPA checks for duplicate payments,
but CPAU staff does not audit NCPA’s
review.
29 Invoicing All
Resources
Bill (ARB)
Overpayments Vendor overpayment. Gap NCPA checks for overpayments to
vendors, but CPAU staff does not
audit NCPA’s review.
30 Invoicing Verification of
Charges
Unapproved
payments
Unapproved payments are made. C19 Payment packages are sent to
management for review and approval
before processing.
31 General General Severe weather
event
The potential risk of severe weather events
causing disruption in service and meeting
contractual obligations.
C20 There are related contract assurances
in place in most modern PPAs.
32 Solar General Equipment
delivery delays
Delay in completion of project. C21 There are financial penalties and
assurances language in most modern
PPAs.
33 Solar General Completion delay
/ No completion
Project startup delays in development resulting in
the City not obtaining the power needed based on
projected timeline.
C21 There are financial penalties and
assurances language in most modern
PPAs.
19
Appendix B: Contract Listing
Below is summary content of the current PPAs in place with the City.
Contract
Number Agreement Name
Execution
Date
Commercial
Operation
Date Contract Length
Generation
Type Contract Rate
Palo Alto's
Percentage
Share
Overall
Category
C04-075 Santa Cruz 11/9/2004 2/2/2006 20th Anniversary
of COD Gas
$51/MWh
1.5% annual
escalation
50% RPS
C04-076 High Winds 11/9/2004 12/1/2004
23 and a half
years (July 1,
2028)
Wind $57.60/MWh 12.35% RPS
C05-003 Ox Mountain
(Half Moon) 1/19/2005 4/1/2009 20 years after
COD Gas
$52/MWh
1.5% annual
escalation
50% RPS
C05-068 Keller Canyon 8/8/2005 8/1/2009 20 years after
COD Gas $59/MWh 50% RPS
C05-110 Shiloh 10/11/2005 6/1/2006 15 years after
initial delivery date Wind $62.95/MWh 16.66% RPS
C10-027 San Joaquin 5/3/2010 4/20/2014 20 years after
COD Gas
$91.33/MWh
1.5% annual
escalation
also contains
increases for
emission controls
100% RPS
C12A-087 EE Kettleman
Land 6/27/2014 8/11/2015
25th anniversary
of COD
option for 5 year
extension
Solar $77.00/MWh 100% RPS
C13A-061 Frontier Solar 7/10/2013 6/7/2016 30 years after
COD Solar $69.00/MWh 100% RPS
C13A-062 Western
Antelope 7/10/2013 12/31/2016
25th anniversary
of COD
option for 5 year
extension
Solar $68.77/MWh 100% RPS
C13A-063 Elevation Solar 7/10/2013 12/31/2016
25th anniversary
of COD
option for 5 year
extension
Solar $68.77/MWh 100% RPS
C14A-028 Hayworth 6/14/2014 12/22/2015
27th anniversary
of the COD
extension options
Solar
$68.72/MWh yrs
1-13
$68.22/MWh yrs
14-27
100% RPS
20
Contract
Number Agreement Name
Execution
Date
Commercial
Operation
Date Contract Length
Generation
Type Contract Rate
Palo Alto's
Percentage
Share
Overall
Category
increases for
extension terms
SF81-003 Calaveras 7/21/1982 N/A
Until Bonds
mature or are
redeemed
Hydro
Varies depending
on annual budget
put together by
NCPA
22.92% Carbon
Neutral/RPS
N/A Johnson
Canyon 10/19/2009 5/12/2013 20 years after
COD Gas
$109/MWh
1.5% annual
escalation
100% RPS
N/A Western 10/26/2000 N/A
20 years (initial
service date is
1/1/2005)
Hydro Fluctuates based
on market rate 12.31%
Carbon
Neutral
(WAPA)
N/A Rosamond Solar 5/28/2019 Not operational 25th anniversary
of COD Solar $34.02/MWh 100% RPS
21
Appendix C: Contract Analysis Graphs
Below are graphs developed from the contract analysis.
Note: The graph shown above represents the annual kWh supplied by each contract from 2017-2020. This information was pulled from the "Supplier Invoices
and REC Tracking" document provided by CPAU.
0
100,000,000
200,000,000
300,000,000
400,000,000
500,000,000
600,000,000
KI
L
L
A
W
A
T
T
H
O
U
R
Annual Production
2017 2018 2019 2020
22
Note: The graph above represents the annual spending associated with each contract from 2017-2020. This information was taken from the
"Supplier Invoices and REC Tracking" document provided by CPAU. The annual cost information for Calaveras and Western (WAPA) was not
included in the "Supplier Invoices and REC Tracking" document and was therefore taken from the "PPA Invoice Payments 1-19 to 4-21" file
provided. This document did not include the annual spend for 2017 or 2018, so there are no values on the graph for Calaveras or Western for that
time frame.
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
Annual Spend
2017 2018 2019 2020
23
Appendix D: Agreement List and Samples
Below are tables outlining the current agreements by power source and the sample selected for testing.
Table 1 – Power Purchase Agreements
Type Name/Location Contract Date Amount
Hydroelectric Western Area Power
Administration
1/1/2004 – 12/31/2024 Take or Pay-
Hst. $10
million/year
Calaveras 7/2/1982- Bonds Mature Varies
Wind High Winds 12/1/2004 – 6/30/2028 Up to $78.4
million
Shiloh I 6/1/2006 – 12/31/2021 Up to $75
million
Landfill Gas Santa Cruz 2/2/2006 – 2/1/2026 Up to $13.9
million
Ox Mountain 4/1/2009 – 3/31/2029 Up to $61.8
million
Keller Canyon 8/1/2009 – 7/31/2029 Up to $21.7
million
Johnson Canyon 5/14/2013 – 5/13/2033 Up to $30
million
San Joaquin 4/24/2014 – 4/23/2034 Up to $122.4
million
Solar (Large Scale) EE Kettleman Land 8/17/2015 – 8/16/2040 Up to $116
million
Hayworth Solar 12/22/2015 – 12/21/2042 Up to $130
million
Frontier Solar 7/20/2016 – 7/19/2046 Up to $99
million
Elevation Solar C 12/2/2016 – 12/1/2041 Up to $226
million
Western Antelope Blue Sky
Ranch B
12/2/2016 – 12/1/2041 Up to $125
million
Rosamond Solar 1/1/2023 – 12/31/2047 Up to $101
million
Solar (CLEAN Feed-in
Tariff)
Unitarian Universalist Church of
Palo Alto (UUCPA)
7/3/2018 – 7/2/2043 Up to $20
million
275 Cambridge Parking Garage 3/19/2018 – 3/18/2043
445 Bryant Parking Garage 7/19/2017 – 7/18/2042
475 Cambridge Parking Garage 3/19/2018 – 3/18/2043
520 Webster Parking Garage 8/2/2017 – 8/1/2042
Solar Star Palo Alto I (HP
Headquarters)
8/23/2019 – 5/31/2033
24
Table 2 – Selected Sample
Contract Number Partner Date Generation (MWh) Charges
SF81-003 Calaveras 2020-03-01 4,182.616 $965,391
SF81-003 Calaveras 2020-07-01 5,524.528 $964,159
SF81-003 Calaveras 2020-10-01 4,299.668 $924,196
C13A-063 Elevation
Solar
2020-03-01 7,578.482 $521,172
C13A-063 Elevation
Solar
2020-09-01 8,958.425 $616,071
C13A-063 Elevation
Solar
2020-12-01 5,538.420 $380,911
C10-027 San Joaquin 2020-01-01 2,558.688 $279,337
C10-027 San Joaquin 2020-04-01 2,629.826 $287,103
C10-027 San Joaquin 2020-09-01 2,314.246 $256,441
C05-110 Shiloh 2020-04-01 5,040.000 $364,147
C05-110 Shiloh 2020-08-01 10,176.000 $652,675
C05-110 Shiloh 2020-11-01 2,163.000 $158,961
NA Western 2020-04-01 42,830.887 $1,348,036
NA Western 2020-07-01 48,779.731 $999,732
NA Western 2020-10-01 14,536.857 $573,955
25
Appendix E: Management Response
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree and Target Date and
Corrective Action Plan
Finding 1: There is no formal documentation of staff review of vendor compliance with PPAs
The OCA recommends that the City implement a formal vendor
performance monitoring procedure by which vendors are periodically
assessed for PPA compliance and general performance.
Detailed reviews of specific PPAs, vendors, or issues should be
conducted on a as needed basis. Each PPA should be reviewed in
detail once every five years.
Resource
Management Division
Concurrence: Agree
Extensive risk management practices are in place for PPA
management. The Utilities Risk Oversight Coordinating
Committee. (UROCC), which includes City Manager, Utilities,
Attorney’s Office, and Public Works representation,
establishes risk management practices for entering into and
managing PPAs. An ASD risk manager has a role in
monitoring risk. The City’s Attorney’s Office and Utilities staff
have built up extensive experience with PPA terms, which
has been recognized by vendors and other agencies. CPAU
along with experienced NCPA partner staff monitor its
vendors’ compliance with PPA energy delivery terms daily
(the most important item to monitor). Other periodic reviews
include: CPAU Front Office staff also review monthly
performance reports from the vendor of its landfill gas
projects. CPAU Back Office staff also produce monthly
reports tracking the output of renewables projects relative to
staff’s expectations. And CPAU Front Office staff actively
participate in quarterly stakeholder meetings held by WAPA
for Western customers. CPAU staff agrees that it would be
worthwhile to more formally document these ongoing reviews
of vendor compliance with PPA terms periodically.
Target Date: December 31, 2021
Action Plan: CPAU staff intends to develop a checklist all
vendor PPA obligations. The renewable energy contract
managers will use this checklist to document compliance
reviews. The contract managers will also review this list and
discuss any non-compliance issues with the Electric Front
Office team (which includes utility management) on at least a
quarterly basis and share reports with the UROCC.
26
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree and Target Date and
Corrective Action Plan
Finding 2: There is no formal review or approvals of changes to front office models
Changes to front office models that significantly affect planning should
be reviewed and approved, and the review and approval should be
documented. We recommend the front office model file be altered to
allow for a second reviewer and approver to document a second review
and approval of any changes.
Resource
Management Division
Concurrence: Agree
CPAU staff agree that, while the likelihood is very low, there
is a slight possibility that errors made in updating the Front
Office models could lead to planning/budgeting errors that
could impact electric rates. Although CPAU staff would note
that such errors would most likely be caught long before they
have an impact on the budget or rates. The Electric Front
Office team currently sends out a “Monthly Electric Front
Office Report” to over a dozen individuals across multiple City
departments that details the supply cost impacts of any
significant changes to the Front Office models. And the
annual electric supply budget, after being developed by the
Electric Front Office team, is reviewed by Back Office staff,
ASD staff, and management before being considered for
adoption by the City Council.
Target Date: August 31, 2021
Action Plan: In the future, whenever a Resource Planner
makes a change to any of the supply contracts in the electric
Front Office models that has a materially significant impact
(at least $1M over the prompt 36-month period,
approximately 0.2% to 0.3% of total utility costs), a Senior
Resource Planner must review and complete a documented
approval of the change before it is accepted.
27
Recommendation Responsible
Department(s)
Agree, Partially Agree, or Do Not Agree and Target Date and
Corrective Action Plan
Finding 3: CPAU staff does not audit NCPA’s validation of vendors’ invoices, contract rates and payments
The OCA recommends a formalized process that would allow CPAU to
validate vendor invoices and rate calculations completed by NCPA. This
process should be incorporated before payment, allowing the CPAU to
validate rates to contractual requirements and confirm accuracy before
payment.
Resource
Management Division
Concurrence: Agree
Target Date: Completed*
Action Plan: Invoice/contract rates are now being checked
internally prior to monthly payment approval and these
checks are being documented. Staff will also perform a
documented annual audit on a sample of PPA invoices
received during the year to verify the accuracy of NCPA’s
billing.
*The OCA will perform procedures to verify that this is
complete.