MEMORANDUM UTILITIES DEPARTMENT

Transcription

1 MEMORANDUM 1 TO: FROM: UTILITIES ADVISORY COMMISSION UTILITIES DEPARTMENT DATE: JUNE 4, 2003 SUBJECT: REQUEST FOR THE APPROVAL OF NATURAL GAS SUPPLY PORTFOLIO PLANNING AND MANAGEMENT OBJECTIVES AND GUIDELINES FOR THE GAS UTILITY LONG-TERM PLAN (GULP) REQUEST This report requests the Utilities Advisory Commission (UAC) recommends that the City Council approve three Objectives and four Guidelines for the Gas Utility Long-Term Plan. Approval of the Objectives and Guidelines will guide staff in developing and managing the City s Gas Utility Long-term Plan (GULP). BACKGROUND In 2001 staff began the process of developing a Long-Term Electric Acquisition Plan (LEAP) as a response to the electric energy deficit that will occur when the Western contract expires in December Council approved LEAP objectives in November 2001 (CMR:425:01) and LEAP guidelines in October 2002 (CMR:398:02). In April, 2001 staff outlined for Council a gas commodity purchasing strategy (CMR:196:01). Staff has now begun the process of updating that strategy and developing a plan similar to the LEAP for the gas utility. Like the LEAP, the Gas Utility Long-Term Plan (GULP) will be the vehicle by which the gas commodity portfolio will be managed consistently, transparently, and with input from the public and the Council. Several key differences exist between the electric and gas utilities and the process for these plans. Unlike the electric plan, the need for a gas utility long-term plan is not signaled by a change in a current contract situation such as the Western contract changes. Nor is the gas utility impacted by the hydro availability uncertainty or the need to manage hydro dependent assets. However, due to the lack of long-term gas assets, the gas supply deficit is more 1

2 immediate than that for electric. Three main factors are driving the need for GULP: (1) a need to review and update the current commodity purchasing strategy with public input, (2) the possible need to commit to PG&E assets as part of a PG&E bankruptcy negotiation, and (3) the need to be prepared for possible new regulations imposing minimum asset holdings for core customers. In addition, development of a GULP addresses recommendation #20 in the Assessment of Utility Risk Management Procedures by the City Auditor which reads, CPAU should continue to regularly and actively (a) review the performance of the energy procurement strategy, (b) quantify the risk and cost consequences of alternatives, and (c) communicate the risks and costs of recommended revisions to the City Council. Commodity Purchasing Strategy The gas utility does not have any long-term supply assets and hence is inherently in deficit. The commodity purchasing plan for the pool load (pool load consists of residential, small commercial, and large commercial customers who chose to give up direct access eligibility) is currently driven by a laddering structure. The goal calls for 75% of the forecasted natural gas requirements for the pool be purchased for 0-12 months out, 50% for months out, and 25% for months out. This laddering strategy diversifies purchasing timeframes over a 36 month period at different forward-pricing points thereby avoiding the need to buy all supply requirements within a short-window of time and market prices. The following graph illustrates the current laddering strategy and the deficit the inherent deficit in the gas utility. This 3-year laddering strategy will be reexamined as part of the GULP. Gas Supply Procurement Program for Pool Customers as of March 20, , ,000 Expected Poool Customer Load 400,000 MMBtu/Month 350, , , , ,000 Fixed-price Purchase Goal 100,000 50, % 02/03 75% Goal 50% Goal 25% Goal 0 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 PG&E Bankruptcy 2

3 If PG&E s plan for reorganization is approved, many of PG&E s assets will be regulated by the federal government instead of the State of California. In such a reorganization, Palo Alto has committed, in a memorandum of understanding (MOU) with PG&E, to negotiate a Transportation and Storage Services Agreement (TSSA). The TSSA will outline pipeline capacity and storage reservations that will be available to Palo Alto outside of the normal process for auctioning those assets. GULP will outline which and how much or those assets Palo Alto will be willing to commit to acquire for the long term. Regulatory Pressure Palo Alto, a wholesale customer of PG&E with a core natural gas load, currently enjoys benefits of that status without any minimum regulatory requirements regarding pipeline capacity or storage holdings. There is a relatively strong movement among interested parties on the PG&E system to require customers such as Palo Alto to take on the responsibility of paying for some of those assets that are required to maintain a reliable PG&E system-wide natural gas supply. If such a future scenario arises, GULP will lay the foundation for making these commitments. In addition, the GULP will provide a platform for evaluating potential asset investment opportunities as they arise. The schedule of pieces of the plan that have been acted on or are planned for action by the UAC and/or City Council is displayed below. Completed 1. Approval of energy Risk Management Policies Council approval of risk management policies 2/20/2001 (CMR:130.01) Revised 10/01/02 (CMR:398.02) To Do 2. Approval of planning objectives and guidleines To UAC - May 2003; To Council June 2003 ` 3. Draft GULP To UAC - Summer Final GULP To UAC/Council - Fall Implementation Winter 2003 DISCUSSION Staff proposes the three following GULP Objectives to govern gas supply resource asset acquisition and energy efficiency strategies for the gas utility: Objective 1: Ensure low and stable gas supply rates for pool customers. 3

4 Objective 2: Provide superior financial performance to customers and the City by managing the supply portfolio cost in a competitive manner compared to market cost and a retail supply rate advantage compared to PG&E. Objective 3: Balance environmental, rate, and cost impacts when considering energy efficiency investments. These objectives are consistent with the portfolio objectives approved for the electric utility (CMR:425:01). To facilitate the development of specific recommendations, staff has developed four GULP Guidelines based on the three Objectives. Key themes found in these GULP Guidelines address diversification to minimize risk and stabilize rates, operational flexibility, and opportunities for energy efficiency. Guideline 1: Market Risk Management Manage market risk by adopting a portfolio strategy for gas supply procurement by: A. Diversifying energy purchases for the pool across commitment date, delivery date, duration, suppliers, pricing terms & delivery points; B. Maintaining a prudent exposure to changing market prices by leaving some fraction of the forecasted gas pool needs exposed to near-term market prices; C. Avoiding long term (>10 years) fixed-price commodity contracts. Guideline 2: Asset Acquisition and Management Explore supply, pipeline, and storage acquisition options available to the City which may be assembled to yield reliable supply at fair and reasonable cost, taking into consideration: A. Long-term supply cost for gas deliveries at PG&E Citygate; B. Operational needs including the need for daily balancing during Operational and Emergency Flow Orders; C. Existing and potential regulatory mandates; D. Potential operational streamlining opportunities with other agencies; and E. City s low cost of capital for asset acquisition. Guideline 3: Management of Regulatory and Legislative Matters Serve as an effective voice to protect and enhance the City s position in regulatory and legislative arenas by: A. Intervening in the regulatory and legislative arenas to ensure that the City s gas utility interests are protected and enhanced; and B. Exploring potential joint action with other public agencies. Guideline 4: Gas Energy Efficiency Investments Pursue cost-effective energy efficiency investments by: A. Providing expertise, education and incentives to support cost-effective customer efficiency improvements; B. Demonstrating new efficiency and load management alternatives; and C. Providing rate assistance and efficiency programs to low-income customers. 4

5 Guidelines 1, 2 and 3 apply to Objectives 1 and 2 while Guideline 4 applies to Objective 3. For example, successful management of market price risk will result in stable rates for customers. Asset management will result in good financial performance for the City. These objectives and guidelines are different from those employed by Pacific gas and Electric Company (PG&E) and the City of Long Beach, the only other municipal gas utility in California. Both purchase gas on a more short-term basis. Their asset holdings are somewhat different from each other. In contrast to Palo Alto, PG&E adopts a more short-term purchasing strategy and has regulatory approval to pass on actual purchase cost via retail rates that change on a monthly basis. Rate stabilization is not a PG&E objective. PG&E does hold interstate and intrastate pipeline capacity and storage capacity for its core customers. Long Beach also purchases gas based on a short-term index. Long Beach has an objective of matching the price paid for gas by its nearest IOU, Southern California Gas Company (SOCalGas). Therefore, gas is purchased based on an index that mimics the SoCalGas purchases. Long Beach does use some risk management tools such as gas priced with a ceiling and floor price, but buys mostly on a monthly index. Long Beach does not hold any interstate pipeline capacity but does own storage capacity. POLICY IMPLICATIONS AND UTILITIES STRATEGIC PLAN These three proposed GULP Objectives and Guidelines do not represent any change to existing City policies. The Objectives and Guidelines conform to City s Energy Risk Management Policies. The Guidelines support the Utilities Strategic Plan: 1. Strategy 2 Preserve a supply cost advantage compared to the market price; 2. Strategy 4 Deliver products and services valued by our customers, and continue to build CPAU brand presence; 3. Strategy 6 Maintain stable General Fund transfers, and maintain financial strength; and 4. Strategy 7 Implement programs that improve the quality of the environment. The proposed GULP Guidelines further the City s commitment to the Green Government Pledge by supporting the conservation of energy. RESOURCE IMPACT Implementation of the GULP Guidelines by itself does not have resource impacts. However, implementing the GULP may require re-allocation of current staffing resources since staff may need to manage more assets than it does at the present time. Specific recommendations resulting from application of the GULP Objectives and Guidelines will be brought to the 5

6 UAC and Council as appropriate. ENVIRONMENTAL REVIEW Adopting the proposed guidelines does not constitute a project under the California Environmental Quality Act (CEQA). NEXT STEPS Upon UAC approval of the GULP objectives and guidelines, staff will seek Council approval of the same in June or July An initial review of staff s analysis will be presented to the UAC late summer with a final report and recommendation in the fall. ATTACHMENTS A: Summary of Analysis and Options Considered in Developing the Gas Utility Longterm Plan (GULP) Guidelines PREPARED BY: Karla Dailey, Resource Planner REVIEWED BY: GIRISH BALACHANDRAN Assistant Director of Utilities, Resource Management KARL VAN ORSDOL Energy Risk Manager Administrative Services Department DEPARTMENT HEAD: JOHN ULRICH Director of Utilities 6