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PICKERING
Report to
Council
Report Number: FIN 07-20
Date: May 25, 2020
From: Stan Karwowski
Director, Finance & Treasurer
Subject: Commodity Price Hedging Agreements Report
Recommendation:
It is recommended that Report FIN 07-20 from the Director, Finance & Treasurer
regarding commodity price hedging agreements be received for information.
Executive Summary: The Commodity Price Hedging Policy FIN 060, approved by
Council per Resolution #88/10, requires a Report to Council at least once each fiscal
year with respect to any and all commodity price hedging agreements in place
containing, at a minimum, all information required by Section 6(1) O. Reg. 653/05, as
amended, as well as:
1. A statement about the status of the agreements during the period of the Report,
including a comparison of the expected and actual results of using the
agreements.
2. A statement by the Treasurer that all of the agreements entered during the period
of the Report are consistent with the municipality's statement of policies and
goals relating to the use of Commodity Hedging Price Agreements; and
3. Such other information as Council may require.
The City has entered into hedging agreements for the commodities of natural gas and
electricity procurement through Local Authority Services Ltd. (LAS), which is a wholly
owned subsidiary of the Association of Municipalities of Ontario (AMO).
Financial Implications: The LAS Hedge Procurement Program currently includes
134 municipalities. It buys energy commodities at varying percentages of their total
volume through forward price hedge contracts, rather than being subject to 100 percent
of the price volatility through the spot market.
The City has elected to continue with Hedging 65 percent of both the City's natural gas
and electricity requirements while the remaining 35 percent is purchased at fluctuating
spot market prices.
Report FIN 07-20 May 25, 2020
Subject: Commodity Price Hedging Agreements Report Page 2
Natural Gas
The 2020 natural gas budget is $375,298. To protect the City's budget plan, the City
has entered into the LAS Natural Gas Procurement Program for the period November 1,
2019 to October 31, 2020 at the hedge price of 9.40/m3.
Electricity
The 2020 hydro budget for all City operations including streetlights is $2.27 million. The
LAS Electricity Procurement Program hedged purchase price is $24.40/MW (program
fees included), which equates to a per kWh contracted price of 2.44¢/kWh, for the
period of January 1, 2020 - December 31, 2020. This results in an expected all-inclusive
commodity cost of 9.5530/kWh.
Discussion: Volatile shifts in utility pricing create significant challenges in
maintaining utility budgets. This uncertainty in energy pricing can impact decision
making and cost controllability for the City. The LAS Hedge Procurement Program
stabilizes energy pricing, which assists in maintaining the Council approved budget
every year. The City has hedged 65 percent of the City's municipal natural gas and
electricity requirements at the prices contained in this report with the remaining 35
percent of the City's energy consumption being purchased at spot market prices for the
2020 term. This spot market exposure provides cost savings opportunities to the City
compared to the current Regulated Price Plan (RPP) for eligible accounts, in addition to
the price stability provided by the hedge purchase price.
LAS Natural Gas Hedge Procurement Program — Enrolled April — 2006
Commodity Expenditure — 2019 - $346,515
2019 Contract Price - November 1, 2019 - October 31, 2020 — 9.4¢/m3
Hedged Volume — 65 percent
The LAS 2020 hedged purchase price for the purchase only portion of natural gas
decreased by 11.3 percent (or 1.20/m3) from the 2019 rate. In October 2018, the
Province cancelled its Cap & Trade program. In response, the Federal Government
implemented a carbon pricing program in Ontario in 2019. As part of this program, a
carbon charge applies to fossil fuels sold in Ontario, including natural gas. This charge
will increase annually each April. In April 2020, this charge increased from 3.91 cents
per cubic metre to 5.87 cents per cubic metre. The savings from the lowered hedge
purchase price have partially offset the increase in the federal carbon price for natural
gas.
Report FIN 07-20 May 25, 2020
Subject: Commodity Price Hedging Agreements Report Page 3
LAS Electricity Procurement Program — Enrolled January — 2011
Commodity Expenditure — 2019 — $2,096,338
Current Contract Price — January 1, 2020 — December 31, 2020 — 2.44¢/kWh
Total Average LAS 2020 Commodity Rate — 9.5530/kWh which includes: 65
percent Hedge Price + 35 percent Average Hourly Ontario Energy Price + Average
Global Adjustment
The LAS 2020 hedged purchase price portion increased by 0.08 percent (or 0.04¢/kWh)
from the 2019 rate. It is estimated that an all-inclusive cost avoidance of 4.8470/kWh
should be realized, compared to the average Time of Use rates of 14.4¢/kWh.
Additionally, LAS hedged a block of off-peak power for municipal streetlight accounts
that is expected to provide a rate of 8.4220/kWh. However, due to a decrease in the
Global Adjustment Rate and increase in the Ontario's Average Hourly Energy pricing, a
decrease to the overall cost of electricity is expected of -1.67¢/kWh or -20.64 percent
compared to the 2019 all-inclusive rate.
Treasurer's Statement:
The objectives of the LAS bulk hedging procurement programs are generally
synonymous with our municipal objectives:
Facilitates Budgeting — purchasing blocks of energy commodities will produce stable
prices for budgeting;
Competitive Pricing — provides savings on required purchases; and
Maximize Purchasing Power — pooling requirements with 134 municipalities and over
170 participating organizations can leverage better pricing than individual purchasing.
The LAS Natural Gas and Electricity Procurement Program has provided the City with a
sound commodity hedging strategy for its natural gas and electricity purchases. This
benefits the City when prices fall and protects the City as much as possible when prices
rise. Annual price stabilization and price benefits from bulk procurement along with
individualized support, advice and consumption data reports, provides the City with a
means to monitor its usage and more accurately forecast its annual utility budgets.
Attachments: None
Report FIN 07-20 May 25, 2020
Subject Commodity Price Hedging Agreements Report Page 4
Prepare • By:
Ray Ra • riges, CPPB
Manager, Supply & Services
Approved/Endorsed By:
Stan Karwowski, MBA, CPA, CMA
Director, Finance & Treasurer
Recommended for the consideration
of Pickering City Council
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Tony Prevedel, P.Eng.
Chief Administrative Officer