HomeMy WebLinkAboutFIN 07-21 Report to
Executive Committee
Report Number: FIN 07-21
Date: May 3, 2021
From: Stan Karwowski
Director, Finance & Treasurer
Subject: Commodity Price Hedging Agreements Report
-File: F-5000-001
Recommendation:
It is recommended that Report FIN 07-21 from the Director, Finance & Treasurer regarding
commodity price hedging agreements be received for information.
Executive Summary: The primary purpose of a commodity price hedging agreement is to
provide price stability and cost certainty by fixing some portion of future commodity prices.
Using hedging allows for the option to lock in favourable pricing for commodity commitments
when long-term contracts are not practical or available. 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 133
municipalities. It buys energy commodities at varying percentages of their total volume through
forward price hedge contracts, rather than being subject to 100 per cent of the price volatility
through the spot market.
The City has elected to continue with hedging 65 per cent of both the City’s natural gas and
electricity requirements while the remaining 35 per cent is purchased at fluctuating spot market
prices.
Report FIN 07-21 May 3, 2021
Subject: Commodity Price Hedge Agreements Report Page 2
Natural Gas
The 2021 natural gas budget is $341,457. To protect the City’s budget plan, the City has
entered into the LAS Natural Gas Procurement Program for the period November 1, 2020 to
October 31, 2021 at the hedge price of 10.1¢/m3.
Electricity
The 2021 hydro budget for all City operations including streetlights is $2.14 million. To protect
the City’s budget plan, the City has entered into the LAS Electricity Procurement Program
hedged purchase price is $24.64/MW (program fees included), which equates to a per kWh
contracted price of 2.464¢/kWh, for the period of January 1, 2021 to December 31, 2021. This
results in an expected commodity cost of 14.243¢/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
per cent of the City’s municipal natural gas and electricity requirements at the prices contained
in this report with the remaining 35 per cent of the City’s energy consumption being purchased
at spot market prices for the 2021 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 - 2020 (actuals) - $279,977
2021 Contract Price - November 1, 2020 - October 31, 2021 - 10.1¢/m3
Hedged Volume - 65%
The LAS 2021 hedged purchase price for the purchase only portion of natural gas increased
by 7.45 per cent (or 0.7¢/m3) from the 2020 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 2021,
this charge increased from 5.87 cents per cubic metre to 7.83 cents per cubic metre. The
savings from the hedge purchase price partially offset the increase in the federal carbon price
for natural gas.
Report FIN 07-21 May 3, 2021
Subject: Commodity Price Hedge Agreements Report Page 3
LAS Electricity Procurement Program - Enrolled January 2011
Commodity Expenditure - 2020 (actuals) - $1.75 million
Current Contract Price - January 1, 2021 - December 31, 2021 - 2.464¢/kWh
Total Average LAS 2021 Commodity Rate - 14.243¢/kWh which includes: 65% Hedge
Price + 35% Average Hourly Ontario Energy Price + Average Global Adjustment
The LAS 2021 hedged purchase price portion increased by 0.98 per cent (or 0.02¢/kWh) from
the 2020 rate. It is estimated that a cost avoidance of 0.757¢/kWh should be realized,
compared to the average Time of Use rates of 15.0¢/kWh. As of November 1, 2020, the LAS
hedge price has increased by only 1 per cent compared to the Time of Use (TOU) rates which
have increased 23 per cent during the same time period.
Additionally, LAS hedged a block of off-peak power for municipal streetlight accounts that is
expected to provide a rate of 13.251¢/kWh.
However, due to an increase in the Global Adjustment Rate and decrease in the Ontario’s
Average Hourly Energy pricing, an increase to the overall cost of electricity is expected of
4.69¢/kWh or 49.09 per cent compared to the 2020 all-inclusive rate.
Treasurer’s Statement:
The objectives of the LAS bulk hedging procurement programs are generally synonymous with
our municipal objectives:
1. Facilitates Budgeting – purchasing blocks of energy commodities will produce stable prices
for budgeting;
2. Competitive Pricing – provides savings on required purchases; and
3. Maximize Purchasing Power – pooling requirements with 133 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.
Report FIN 07-21 May 3, 2021
Subject: Commodity Price Hedge Agreements Report Page 4
Prepared By: Approved/Endorsed By:
Original Signed By: Original Signed By:
Ray Rodrigues, CPPB Stan Karwowski, MBA, CPA, CMA
Manager, Supply & Services Director, Finance & Treasurer
Recommended for the consideration
of Pickering City Council
Marisa Carpino, M.A.
Chief Administrative Officer
Original Signed By: