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City of Palo Alto(ID # 4831)City Council Staff ReportReport Type: Informational ReportMeeting Date: 6/16/2014Summary Title: 2nd Quarter, FY 2014 Energy Risk Management ReportTitle: City of Palo Alto’s Energy Risk Management Report for the SecondQuarter, Fiscal Year 2014From: City ManagerLead Department: Administrative ServicesThis is an informational report and no City Council action is required.Executive SummaryStaff continues to purchase electricity and gas in compliance with the City’s Energy RiskManagement Policies and Procedures. This report is based on market prices and load andsupply data as of the end of the second quarter of Fiscal Year (FY) 2014, December 31, 2013.The projected cost of the City’s fixed-price electricity purchases for the 36-month periodbeginning January 2014 is 0.6 million higher than the market value of that electricity as ofDecember 31, 2013.The cost of hydroelectricity received from the Western Area Power Administration (Western)over the 12-month period ending December 31, 2013 was less than its market value by 4.2million. Hydroelectric power from the Calaveras Hydroelectric Project (Calaveras) cost 6.0million more than its market value for that same 12-month period.In the second quarter of FY 2014, (October 1, 2013 through December 31, 2013), the keyfindings were that the electric suppliers’ credit exposure is minimal and projected electric andgas reserves are within the reserve guidelines level.There were no exceptions to the Energy Risk Management Policies, Guidelines, or Proceduresto report during the second quarter of FY 2014.BackgroundThe purpose of this report is to inform the City Council of the status of the City’s energyportfolio and transactions executed with energy suppliers as of the end of the second quarterof FY 2014. The City’s Energy Risk Management Policy requires that staff report on a quarterlyCity of Palo AltoPage 1
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.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 andcounterparty credit risk. These are risks that the City is exposed to on a regular basis whenmanaging the supply resources for the electric and gas utilities. The energy risk managementsection’s role is to monitor and mitigate these risks.This second quarter FY 2014 energy risk management report contains information on thefollowing: Electric supplies Fixed price forward electric purchases Electric forward mark-to-market values Credit risk Electric and gas supply rate stabilization reserves adequacy Exceptions to energy risk management policies, guidelines or proceduresDiscussionElectric SuppliesIn order to serve the City’s electric supply demands, the City obtains electricity from:hydroelectric resources (from the Western Area Power Administration and CalaverasHydroelectric Project, referred to as Western and Calaveras), long-term renewable energycontracts (from landfill gas converted to electricity, wind, and solar projects), wholesalepurchases which are carried out via fixed-priced forward market purchase contracts, and theelectric spot market.Figure 1 below illustrates the projected sources of electricity supplies by month for the 36months beginning January 2014, in terms of megawatt hours (MWh) per month as of December2013.City of Palo AltoPage 2
HydroelectricityThe cost of hydroelectricity received from Western over the 12-month period ending December31, 2013 was less than its market value by 4.2 million. Hydroelectric power from the Calaverascost 6.0 million more than its market value for that same 12-month period. Note thatCalaveras provides benefits not reflected in the mark-to-market (MTM) calculation, including,ancillary services (e.g., the ability to regulate energy output when electric grid needs change).Fixed-Price Forward Electricity PurchasesThe City currently has purchased fixed-priced supplies of electricity totaling 165,615 MWh fordelivery between January 1, 2014 and December 2014. The average price for all of the fixedprice purchases is 43.80 per MWh. The City contracted for these purchases with one of itsapproved counterparties: Shell Energy North America (SENA). The 12-month MTM value of theCity’s forward transactions for wholesale power was a negative 0.6 million at the end of thequarter. In other words, the purchase cost (contract price) for these transactions was higherthan the market value as of December 31, 2013. The figures below represent the electricforward volumes (Figure 2) and MTM positions (Figure 3) for each electric supplier by month ofdelivery for all forward fixed-price electricity contracts. The data is shown by delivery monthfor all forward fixed-price electricity contracts over the 12-month period ending December2014.City of Palo AltoPage 3
Gas SuppliesIn order to serve the City’s natural gas needs, the City purchases gas on the monthly and dailyspot markets. There have no fixed-price forward purchases undertaken since the decision wasmade to abandon the gas laddering strategy, purchase all gas on the spot markets, and adjustthe retail gas rate each month to reflect the monthly spot market index price effective July 1,2012. The City purchases all its forecasted gas needs for the month ahead at a priced based onthe published monthly spot market index price for that month. Within the month, the City’s gasoperator buys and sells gas to match the City’s daily needs if the actual daily usage is differentCity of Palo AltoPage 4
from the forecasted daily usage. Those daily transactions are made at a price based on thepublished daily spot market index.Fixed-Price Forward GasThe last delivery of fixed-price forward gas occurred in October 2013.Credit RiskStaff monitors and reports on credit risk using the major credit rating agencies (S&P andMoody’s) scores. The “expected default frequency” (EDF) was developed by Moody’s. The EDFis an estimated probability established by combining information from the equity markets anddata from the company’s financial statements. The EDF calculation indicates the probability ofa counterparty defaulting in the next 12 months. CreditEdge Plus also provides frequentupdates along with early warnings of changes in credit quality of the City’s electric and naturalgas transacting counterparties.The City has executed Electric Master Agreements with nine counterparties: BP, SENA,Powerex, ConocoPhillips, Cargill, NextEra Energy, Turlock Irrigation District, and IberdrolaRenewables. In addition, the City has renewable electricity power purchase agreements (PPA)contracts with Iberdrola Renewables, LLC, Ameresco, Atlantic Power, and Fir Tree as shown inTable 1 below. It is important to note that, for these renewable energy companies, Councilwaived the investment-grade credit rating requirement of Section 2.30.340(d) of the Palo AltoMunicipal Code, which applies to energy companies that do business with the City.ElectricityPalo Alto’s electric counterparty credit exposure and credit ratings are presented in Tables 1and 2. Table 2 shows the counterparty with scheduled deliveries from 1/1/14-12/31/14. Tables1 and 2 show the counterparties’ EDF as of 12/31/13. EDFs range from 0.01 to 35.00. Thelower the EDF value, the less risk there is of a counterparty defaulting.Table 1. Renewable Counterparties Credit Ratings and EDFs as of 12/31/13City of Palo AltoPage 5
Table 2. Credit Exposure and Expected Default Frequency of Electric Suppliers as of 12/31/13Electric and Gas Supply Rate Stabilization Reserve AdequacyThe Electric and Gas Supply Rate Stabilization Reserves (RSRs) help to manage risks associatedwith serving the City’s natural gas and electric customers. Table 3 below summarizes theunaudited supply RSR levels for electricity and natural gas as of December 31, 2013, based ondata from the City’s SAP financial system.Table 3. Electric and Gas Supply Rate Stabilization Reserve Levels for FY 2014(Preliminary unaudited figures from City’s Financial System)* The accounting activity to date reflects what has been booked into the City’s financialsystem. These figures are preliminary until outside auditors have completed their reviewand the Comprehensive Annual Financial Report is produced. There could be significantchanges to the RSR balances based on year-end adjustments that have not been bookedyet.The Electric Supply RSR’s unaudited balance as of December 31, 2013 is 61.6 million, which is 3.6 million below the FY 2014 maximum reserve guideline level. The unaudited Gas Supply RSRbalance as of December 31, 2013 is 4.0 million which is 3.6 million below the FY 2014maximum reserve guideline level. The current estimated Electric RSR balance is well above theimmediate 12-month credit, hydro, and other risks that have been identified, and which areestimated at 5.0 million.ExceptionsThere were no exceptions to the Energy Risk Management Policies, Guidelines, or Proceduresto report during the second quarter of FY 2014.City of Palo AltoPage 6
CreditEdge Plus also provides frequent updates along with early warnings of changes in credit quality of the City's electric and natural gas transacting counterparties. The City has executed Electric Master Agreements with nine counterparties: BP, SENA, Powerex, ConocoPhillips, Cargill, NextEra Energy, Turlock Irrigation District, and .
