Report to: General Committee Report Date: April 30, 2007

SUBJECT: Authorization to enter into a one year contract to procure electricity from retailers for the Town of Markham’s street light energy account.

PREPARED BY: V. Sawler, Manager, MECO x 7523

A. Laver, Manager, Utilities & Contracts, x 3400

R. Lyew, Financial Services, x 2229

K. Newson, Manager, Purchasing, x 4711

RECOMMENDATION:

THAT the report entitled, “Authorization to enter into a one year contract to procure electricity from retailers for the Town of Markham’s street light energy account,” be received;

THAT a one year contract to permit the Town of Markham to move its street light energy account from the Regulated Price Plan (RPP) to the spot market be awarded to Constellation New Energy for $1,000.00 and be funded through the street light energy account, 720-720-5930;

THAT Staff be authorized and directed to do all things necessary to give effect to this resolution;

AND FURTHER THAT the Mayor and the Clerk be authorized to execute the contract, as required, in a form satisfactory to the Town Solicitor.

EXECUTIVE SUMMARY:

A review of the purchase of electricity from the RPP or the spot market has identified annual savings of approximately $300,000 by switching the street light energy account to the spot market price. The Town of Markham currently purchases electricity under the RPP from PowerStream and switching to the spot market price will require that the Town of Markham sign a contract with a retailer. Current regulations prevent PowerStream from offering the spot market price for street lights. The annual savings will mitigate the financial impact of the expected annual increase of $228,000 in the distribution rate, resulting from the rate harmonization and cost allocation plan submitted to the Ontario Energy Board by PowerStream.

FINANCIAL CONSIDERATIONS:

Not applicable

1. Purpose 2. Background 3. Discussion 4. Financial

5. Others (Environmental, Accessibility, Engage 21st, Affected Units) 6. Attachment(s)

PURPOSE:

The purpose of this Report is to obtain authorization to move the Town of Markham’s street light energy account from the Regulated Price Plan (RPP) to the spot market in order to mitigate the financial impact associated with the Ontario Energy Board’s requirement that PowerStream harmonize fixed and variable distribution rates across their service territory commencing in November 2007. In addition to PowerStream’s rate harmonization plan that would see an approximate increase of $14,000 per month on the street light account alone, PowerStream intends to blend 25% of cost allocation results with the harmonized rates for a total monthly increase of approximately, $19,000, or an annual increase of $228,000. It is anticipated that moving the street light energy account to the spot market will save an estimated $300,000 per year.

BACKGROUND:

The Town of Markham has historically relied on Government fixed-price programs for the procurement of electricity for all of its accounts. It has become apparent to Markham that the current program called the Regulated Price Plan (RPP) differs from previous programs in that:

a) It does not “fix” the price against market impacts as previous programs had but merely defers the spot market cost of electricity until subsequent terms, and,

b) It uses the Municipality’s purchases of electricity to subsidize the electricity rates of residential and small commercial customers that use less than 750 kWh per month. These are not just Markham’s residential and commercial customers but those across all of Ontario.

Effective November 1, 2006 the RPP electricity rate changed such that for each account the first 750 kWh is priced at 5.5 cents/kWh and the balance at 6.4 cents/kWh. The net affect is that a little less than 2% of the energy consumed by Markham’s largest accounts, which includes its street lights, is fixed at 5.5 cents/kWh with the balance at 6.4 cents/kWh. This results in an average price to Markham of approximately 6.39 cents/ kWh. Comparatively, the underlying spot market cost for the period when street lights operate for electricity in 2005, 2006 and year-to-date 2007 is approximately 3.9 cents/kWh. This is largely the result of a surplus of electricity supply in the off-peak hours that is supplied by very inexpensive nuclear and water generation stations. It should be noted however that the OEB will post new RPP rates in mid-April and that there has been some speculation that the RPP rates will decrease on May 1, 2007. Even if there is a decrease in the RPP rates, it is expected that the Town of Markham would still realize substantial savings by moving to the spot market.

Markham’s street lights consume approximately 13-million kilowatt hours annually. The total annual cost of power to Markham is expected to be approximately $1.4 million for 2007 at the existing RPP prices. Approximately 55% of this is the energy commodity cost based on the current bill. For 2006, the commodity cost was approximately 60%, as the RPP rate was higher and only decreased on November 1, 2006. The remaining 40-45% is for transmission, distribution, debt retirement, IESO charges, etc. which are regulated by the Ontario Energy Board.

OPTIONS/ DISCUSSION:

WattsWorth Analysis Inc. (WattsWorth), a professional services company that assists large energy users in Ontario understand the electricity market, reduce costs and manage risk, has presented to the Town of Markham, an opportunity to save approximately $240,000 over the current RPP rates by utilizing the spot market for its street light account. In addition, by moving the street light account to a retailer to access the spot market price, the current monthly RPP administration charge of $0.25 per connection allowable under the Standard Supply Service Code, Section 3.1.1 would be eliminated. With approximately 20,000 street light connections, that represents an additional savings of $60,000 for a total estimated annual savings of $300,000.

The cost to Markham will be a fixed cost of $1,000.00 to Constellation New Energy, the retailer that WattsWorth will engage to provide a pass through of the spot market price to the Town of Markham for its street light energy account. WattsWorth is owned by approximately 70 utilities across Ontario, of which, PowerStream Inc. is one, and has offered its insight to Markham for the street light accounts at no cost. This opportunity is one component of a more comprehensive energy procurement strategy that WattsWorth has designed for other cities, including, Richmond Hill, Burlington, London, Mississauga, etc., some of which have saved in excess of 19% per year for the past three years by developing a strategy to address all of their Town energy accounts. For street lighting alone, the savings are much higher, i.e., upwards of 30%. Current market conditions have created an opportunity for Markham to exit the RPP at no cost and begin to realize these savings with no investment in capital or change to consumption patterns.

Although the spot market is volatile and changes from hour to hour, the risk to Markham of the spot market price exceeding the RPP rate is very low. The second risk mitigating mechanism is a series of rate caps that the Ontario government imposes on all of OPG’s generators. These rate caps fix the cost of up to 70% of the spot market’s price at 4.82 cents per kWh. The difference between the actual hourly spot market price and the rate cap is returned to Ontario electricity consumers as either the Provincial Benefit or the OPG Rebate. The benefit to Markham is that while the street lights use electricity primarily during off-peak hours when the market price is lowest, they would still qualify for the rebates which are based on the market in total.

WattsWorth has clarified through meetings and communications with the Ontario Energy Board and PowerStream Inc. that Markham can opt out of the RPP at the exit fee rate (Variance Settlement Amount), which is currently $0, and will have the option to re-enter the RPP program at no cost if it determines that the RPP is the best procurement option in the future. The Variance Settlement Amount is updated monthly by the OEB. The VSA reflects the consumer’s share of any accumulated variance between the actual price paid to generators and the forecast price paid by price plan consumers. If consumers have been paying more for electricity than was paid to generators, this amount will be a credit. If consumers have been paying less, it will be a charge. The variance account that tracks the difference is held by the Ontario Power Authority.

Staff from the Markham Energy Conservation Office (MECO), Asset Management, Finance and Purchasing have reviewed this opportunity and recommend moving the street light energy account to the spot market for the following reasons:

· Electricity for street lights is consumed primarily during off peak hours when electricity prices are lowest

· There is no cost to exit from the RPP at present

· There is little to no risk associated with this move as the Town can opt back into the RPP at any time

· This will help offset electricity cost increases in 2007 due to PowerStream’s rate harmonization plan.

Staff will continue discussions with WattsWorth to identify whether similar savings opportunities may be achieved through developing enhanced energy procurement strategies for other Town energy accounts.

FINANCIAL TEMPLATE: (external link)

Not applicable

RECOMMENDED

BY: ________________________ ________________________

Allan Seabrooke, Director Jim Sales, Commissioner,

Strategic Services Community & Fire Services

________________________

Steve Andrews, Director

Asset Management

ATTACHMENTS:

Summary chart of estimated 2005 & 2006 street light energy savings based on the spot market price versus the RPP – WattsWorth Presentation to Town of Markham on Power Procurement, March 21, 2007.