Meeting Date: January 21, 2002

Subject: Procurement Authorization - Electrical  Power Purchase Agreement

Recommendation

It is recommended that the Commission authorize staff to:

1. Enter into an agreement with Toronto Hydro Energy Services Inc. related to the supply of the Commission's base load electrical power requirements as required for a three-year period commencing May 1, 2002 which represents an expenditure of approximately $45.0M; and

2. Authorize the Chair and one other Commissioner to approve the purchase of the balance of the Commission's electricity requirements for a three-year period, once staff has concluded negotiations with THESI.

Funding

Funds in the amount of $38.5M to cover the total cost of electricity in 2002 are included in the 2002 TTC and Wheel-Trans Operating Budgets and sufficient funds will be included in subsequent Operating budgets as required. The base load electrical power requirements represents an expense of approximately $15.0M per year including the cost for transmission and distribution and is approximately 38.5% of the Commission total electricity consumption.

Background

At its meeting of February 29, March 1 and 2, 2000, City Council approved the execution of a power purchase agreement with Toronto Hydro Energy Services Inc. (THESI) prior to the opening of the de-regulated electricity market in Ontario, provided that (among other things) "contract terms are agreed to by the Chief Administrative Officer"…"and the TTC and others as deemed necessary". The TTC further noted that it would not cross subsidize the City or any of the other agencies, boards and commissions (ABC’s) in this arrangement.

As part of the plan to deregulate the electricity market, Toronto Hydro Corp. was divided into two subsidiary companies, Toronto Hydro Energy Services Inc. (the energy marketing arm) and Toronto Hydro Electric Systems Ltd. (the local distribution arm).

Under deregulation, the wholesale commodity price of electricity will no longer be regulated by the Ontario Energy Board (OEB) and will be free to fluctuate hourly, daily, and seasonally based on supply and demand conditions. The Independent Electricity Market Operator (IMO) will be responsible for setting the standards for, administering and regulating the provincial real-time energy market in which wholesale electricity commodity pricing will be set. The cost of the transmission and local distribution of electricity varies with usage (volume) and the season (i.e. summer or winter), but will continue to be regulated by the OEB.

Under a deregulated market, electricity bills will include a commodity charge, a local distribution charge, a transmission charge, a Debt Reduction Charge, which was implemented in June 2001 to pay down the Ontario Hydro’s "stranded debt" and other miscellaneous charges as appropriate (e.g. administration charge, IMO charge, etc.). The commodity price of the electrical power will make up approximately 55% to 60% of the total cost for electrical energy.

It is expected that electricity de-regulation in Ontario will probably cause electricity prices to increase primarily since the retail price of electricity has been frozen since 1993 and that price is considered insufficient for electricity generation companies to recover costs. In addition, in order to attract private investment it is expected that market forces will act to increase prices to allow investors the potential to earn financial returns beyond cost recovery.

Electricity unlike other types of energy, cannot be stored and therefore must be manufactured and distributed instantaneously to meet demand. However, it is possible to purchase forward priced contracts in electricity either based on a fixed rate, or on a combination of fixed and floating rates to hedge pricing risk. It is considered prudent to establish a fixed rate or rates for the purchase of electricity and to reduce exposure to the spot market due to the potential for volatile pricing in a new market.

Discussion

Since March 2000, staff as part of a negotiating team with representatives from the City and the other major agencies, boards and commissions (ABC’s) have been negotiating with THESI regarding an electrical power purchase agreement. As part of this team, the City retained the services of an energy consultant (Energy Advantage) to advise and assist the City and the ABC's during this process. The City also retained the services of Stikeman Elliot as outside legal counsel to assist during negotiations regarding the form of agreement.

The agreement will consist of two parts, the first is a Master Agreement that provides the overall terms and conditions for the purchase to which the City and the ABC’s including the TTC (the purchasers) would be signatory. In addition, each individual purchaser will sign their own separate Transaction Agreement with THESI that will specify the individual pricing details for the purchase of electrical power. The proposed agreement with THESI is based on a three-year term. This arrangement will be revisited at that time based on the then prevailing market price conditions, as there is the potential in the future for market prices to fall below the contract pricing. Completion of an agreement is required prior to market opening, which is now planned to occur on May 1, 2002.

The first step in negotiating an agreement with THESI was to install additional interval meters to measure and identify the total power consumption or load for the City and the ABC's. In the past, the details of power consumption were not provided by Toronto Hydro to the City and the ABC's. In some cases, the information was unavailable since many sites in the City and ABC's did not have interval meters as they had been charged a general usage or flat rate regardless of power consumption. In 2001 THESI completed the installation of interval meters at locations covering approximately 80% of the City and ABC’s total load to permit the measurement of electricity usage. In the case of the TTC, interval meters now cover approximately 86% of the TTC's electricity consumption.

The information from the meters coupled with the limited historical information available allowed THESI to provide the City and the ABC’s with their energy load profiles, which indicate the changes in energy consumption and power demand on an hourly, daily, weekly, monthly and annual basis (See Appendix A for TTC’s Weekly Peak Load Profile). An analysis of the various energy profiles provided a "Load Shape" or energy usage pattern for the City and ABC's individually and collectively. This was used in a "load driven" purchasing strategy based on purchasing electricity in "blocks" of time that fit into each purchaser’s Load Shape. This approach establishes the optimum method for the City and ABC’s including the TTC, to purchase power from THESI.

Based on the results, the TTC accounts for approximately 23% of the total electrical consumption of the City and ABC’s and is the second largest consumer of electricity next to the City’s Works Department. The TTC’s peak load occurs during the morning and afternoon rush hours, which are also the times of peak demand for electricity in general. As a result, since 77% of the TTC’s energy use is for traction power, there is limited or no opportunity to either reduce energy usage or to shift the period of peak load to a time of the day or week when energy costs would be less expensive.

Part of the analysis of the Load Shape is to establish the "Base Load", which is the minimum constant usage of power for 7 days a week, 24 hours per day over a year. The base load for each purchaser has been established and on average, the City and ABC's aggregate base load accounts for approximately 65% (in kWh) of the City and ABCs’ total consumption. However, the TTC's base load only represents 38.5% of the TTC's total load due to the dramatic changes in energy usage depending on whether traction power is required for service or not. Nonetheless due to the economies of scale, it has been determined that all members of the City and ABC’s will benefit through the purchase of a block of electricity based on the aggregate base load requirements.

The load shape for the remainder of electricity usage will be unique for the TTC and the other purchasers in the negotiating team. The requirements for the purchase of additional blocks of power to cover off the TTC and the other purchasers will vary with the time of day or day of the week (See Sample attached as Appendix B). It may also be beneficial to purchase a small portion of our load at spot market pricing. The negotiations for the remainder of the TTC’s and other purchasers’ electricity requirements are more complex and have only recently commenced and are not expected to be concluded until February 2002.

In the meantime, a price per kWh for the base load portion of the City and ABC’s electricity consumption has now been negotiated with THESI, however THESI's offer is only available for a limited time due to changing market conditions. The price was reviewed by the consultant, Energy Advantage and determined to be acceptable. The City has already accepted this offer on the understanding that it will remain open for acceptance by the ABC’s and the TTC up to January 22, 2002.
Since pricing for the aggregate base load has now been determined, and given that future pricing for electricity for the deregulated market has and may continue to rise prior to market opening, staff recommend that the TTC lock in their base load pricing with THESI along with the City and other ABCs by January 22, 2002.

Based on the TTC's budget of $38.5M for electricity in 2002, this represents a commitment of approximately $15M in 2002, which includes the corresponding regulated distribution charges. Staff will continue negotiations with THESI on the pricing of the balance of the TTC’s electrical energy requirements and on the form of agreement. Once these have been finalized, staff will forward a report for approval of the Chair and one other Commissioner in February or March 2002.

It is expected that the base load pricing will be the least expensive portion of the electricity commodity purchase in $/kWh terms due to the consistent and unchanging nature of a Base Load block of power and to locking-in pricing at an earlier date before market opening. The remainder of the City and ABCs’ (including the TTC’s) energy requirements will be locked in at pricing that is likely to be slightly higher since the load profiles for the balance of the requirements are more variable and also since pricing will probably increase between now and market opening. In any event, the negotiated pricing will be tailored to fit the TTC’s specific load profile.

Justification

The Ontario electricity market will no longer be regulated as of May 1, 2002 and the future price for electricity has already started to increase and is expected to increase further prior to market opening. Entering into an agreement with THESI at this time will ensure the supply of the Commission's base load electrical power requirements at an acceptable fixed rate for the next three years.

Delaying the decision to a later time closer to market opening will probably result in an increase to the cost of electricity to the Commission for its base load requirements. Further, the City and other ABC’s would have to proceed with their agreement with THESI without the TTC, which may result in an increase to the cost of electricity for the City and other ABC’s since the Commission represents approximately 23% of the total power consumption of the City and ABC’s.

January 9, 2002

9-57-57

Attachment – Appendix ‘A’ & ‘B’