CITY OF GLENDALE, CALIFORNIA REPORT TO THE: AGENDA ITEM Report: Recommendation to Extend Service Agreement for Real-Time Operations

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1 Joint D City Council l:8l CITY OF GLENDALE, CALIFORNIA REPORT TO THE: Housing Authority D Successor Agency D Oversight Board D October 22, 2013 AGENDA ITEM Report: Recommendation to Extend Service Agreement for Real-Time Operations 1. Motion authorizing the City Manager, or his designee, to execute an amendment to extend the City of Glendale's participation in a service agreement between Alliance for Cooperative Energy Services Power Marketing LLC, the Southern California Public Power Authority (SCPPA), and participating members, for an additional three years COUNCIL ACTION Public Hearing D Ordinance D Consent Calendar D Action Item [8] Approved for calendar Io/ z2-/ t? Report Only D ADMINSTRATIVE ACTION Submitted by: Stephen M. Zurn. General Manager - GWP ~ 1gnature ~ Prepared by: Steven G. Lins, Chief Assistant General Manager Lon L. Peters, Integrated Resources Planning Administrator Approved by: Scott Ochoa, City Manager Reviewed by: Yasmin K. Beers, Assistant City Manager Michael J. Garcia, City Attorney ~ )J~ r ~~ ~~ <1. Bob Elliot, Director of Finance and Administrative Services (: 1'(/

2 RECOMMENDATION It is recommended that the City Council authorize the City Manager, or his designee, to execute an amendment to an existing service agreement with Alliance for Cooperative Energy Services Power Marketing, LLC ("APM") for real-time energy trading, scheduling, portfolio optimization, trading control, credit reporting and settlement functions for Glendale Water & Power (GWP) energy trading operations. The proposed amendment would extend the term for an additional three years. BACKGROUND/ANALYSIS In 2006, The Structure Group was hired to conduct a Market Opportunity Assessment of Glendale's portfolio of assets and power trading activities. The results of the study concluded that Glendale had opportunities in the power and gas markets that could result in minimizing retail rates. Upon evaluation of the City of Glendale's existing system infrastructure and available resources, GWP determined that the most cost-effective solution to capture additional revenue opportunities in real-time and to mitigate market and operational risks was to outsource several functions to a third-party contractor. In 2008, the City of Glendale, as participating member of SCPPA, entered into an agreement with APM for the following services: Real Time Power Trading (24x7), Operations and Portfolio Optimization Transaction and scheduling services: including Scheduling and Bidding; tagging; RT monitoring and logging; and communications and coordination with other agencies Real time wholesale marketing of the City's excess resources Daily Credit services including credit analysis and counterparty monitoring and credit exposure monitoring and management Trading Control Services including trading authority policy; trading control process; Voice recordings; MTM valuations for credit exposure and financial reporting (SAS?O) Settlement services including bilateral power and transmission settlements and RTO/ISO pool settlements; disputing CAISO invoice discrepancies; reporting IT Services including a client website and reports and business continuity in case of unforeseen events In 2008, the City of Glendale executed a three-year contract with APM. Glendale's purchase of services occurs via a master contract through the Southern California Public Authority (SCPPA). SCPPA participants, such as Glendale, signed on to the master SCPPA/APM Service Agreement and then executed a Service Schedule tailored to each participant's specific needs with APM. On October 18, 2011, Council approved an amendment to this agreement extending the term of the agreement for an additional two years. For the past five years, APM has provided real-time energy management and portfolio optimization, trading controls, credit, reliability, and settlement functions for GWP. Until 2011, the annual service fee was $604,325. In 2011, the annual service fee was reduced to $540,000, as a result of discussions with APM and their willingness to reduce their fee consistent with the City's effort to meet the demands of the economic downturn. The current term of the Glendale Service Schedule expires October 31, During the years from , Glendale has increased trading activity, initiated different types of trades due to the Cap-and-Trade and RPS requirements, and added new counterparties which have increased APM's workload. 2

3 The proposed amendment would extend APM's services for three additional years at annual fees of $604,325, $628,500 and $653,325. Compared against a benchmark software licensing cost structure that normally increases at 3-4% per year, over a five-year period ( ), the City will have saved $539,488 for these services. In the past five years, APM has effectively optimized Glendale's resources to capture wholesale opportunities in real-time markets and has helped minimize Glendale's cost to serve load while meeting federal and state (CAISO) regulatory requirements. APM has also been an integral part in keeping GWP staff up to speed on changes in western markets. For example, this has allowed the City to capitalize on the price differentials between the CAISO and the rest of the WECC. Staff recommends an extension of the contract for an additional three years for the following reasons: APM offered a 10.6% reduction in annual fees for the same services in in cooperation with the City's request. Through APM's assigned function to concentrate solely on the supply of resources to the City, they have been able to more accurately dispatch our generation, and re-dispatch in cases where constraints arise. APM has also captured market opportunities both within the California ISO and bilaterally. Going through an RFP and selection process for an alternative provider would take approximately 6-10 months to complete, and another six months to develop, test and implement new system interfaces and procedures. It would require significant staff effort, time and cost to transition to a new provider, at the same time that staff will be implementing a new Energy Trading and Risk Management, (ETRM) solution. APM has been previously vetted through a competitive process conducted by SCPPA. The three additional years will give staff the opportunity to address critical issues associated with emerging markets and other high priority initiatives including ( 1) demand response implementation, (2) California Energy Commission (CEC) regulations for renewable energy, (3) California Air Resources Board (ARB) cap and trade regulations for greenhouse gas allowances and offsets, and (4) implementation of a new ETRM solution. Transitioning to a new vendor while working on these other major projects would risk inefficiencies in GWP day-to-day trading and scheduling operations and put the City at greater risk of non-compliance and lost market opportunities. GWP has developed a positive working relationship with APM staff during the past five years. The synergies that have developed from our shared learning and APM knowledge of GWP's requirements are something that GWP may not be able to replace and not expeditiously or efficiently if an alternative provider were selected. The alternative to moving the functions back in-house would require additional traders in rotating shifts to cover 24x7 operations; a mid-office and back-office staffing sufficient to handle settlement validation and credit risk monitoring, and dedicated IT personnel to support the 24x7 operations. Currently, GWP does not have the infrastructure to inter-face with the CAISO system nor risk management software to capture, validate and retain the volume of real-time transactions. APM is submitting day-ahead bids, performing the shadow settlements process and submitting disputes on GWP's behalf using a sophisticated software system. A significant investment in software would be necessary to support the business opportunities in CAISO. The estimated initial cost of such a transition is $750,000 (including APM's transition fee and software integration) and approximately $1,500,000 in new annual operating costs. This option is not the most economical alternative at this time. 3

4 The City of Pasadena, also a participating SCPPA member and the City of Roseville have recently renewed their contracts with APM for the reason that the benefits of outsourcing the real-time energy trading function outweighs the cost of operating in-house. FISCAL IMPACT GWP Power Management has budgeted funds for FY 2014 for the first year of the contract under Account No , (Fund No. 552, Organization No.921), Project No , and Activity No. UP402. Years two and three will be budgeted under the appropriate fiscal year's annual budget process. The total budget for these services over three years will not exceed $1,886,465. ALTERNATIVES Alternative 1: Council may approve this recommendation. Alternative 2: Initiate a separate Request for Proposal process for the City of Glendale specifically. This alternative would negatively impact trading operations and the implementation of a new ETRM system. Alternative 3: The City Council may consider any other alternative not proposed by staff. CAMPAIGN DISCLOSURE In accordance with the City Campaign Finance Ordinance, the following are the names and business addresses of the members of the board of directors, the chairperson, CEO, COO, CFO, Subcontractors and any person or entity with ten percent (10%) interest or more in the company proposed for contract in this agenda item report: Officers of APM. Inc. Full Name Title Business Address City State Zip Michael T. Steffes President & CEO 4140 W. 99'" St. Carmel IN David H. Claspell Senior Vice 4140 W. 99 '" St. Carmel IN President & CFO Eric Larson Senior Vice 4140 W. 99 n St. Carmel IN President & COO Jeffrey Walker Senior Vice 4140 W. 99 n St. Carmel IN President & CRO H. Annette Stamatkin Senior Vice 4140 W. 99 n St. Carmel IN President & CIO Subcontractors of APM, lnc.:not applicable Full Name Title Business Address City State Zi Ownershi Interest in more than ten percent 10% in APM Inc.: Not a Full Name Title Business Address State Zi EXHIBITS Not applicable. 4

5 MOTION Moved by Council Member, seconded by Council Member that the City Manager is hereby authorized to execute an amendment to extend for up to three years the City of Glendale's participation in an existing Agreement between Alliance for Cooperative Energy Services Power Marketing, LLC (APM), the Southern California Public Power Authority (SCPPA) and participating SCPPA members, for real-time energy trading and associated services for Glendale Water and Power, as described in the General Manager's October 22, 2013 Report to City Council. The amount payable to APM for the extended term shall not exceed $604,325 for the first year of the extension, $628,500 for the second year of the extension and $653,325 for the third year of the extension. The second and third year extensions shall be subject to appropriation of funds by the City Council. Said amendment shall be subject to the approval of the City Attorney. Vote as follows: Ayes: Noes: Absent: Abstain: J:\FJLES\DOCF!LES\F ACTFINDIAMEND ACES.DOC 5 c 1