The URL can be used to link to this page

Home My WebLink About7/28/1999 - STAFF REPORTS (15) DATE: July 28, 1999 TO: City Council FROM: Procurement Manager and Director of Facilities APPROVE PURCHASE OF NATURAL GAS FOR THE CITY'S COGEN PLANTS RECOMMENDATION: That City Council authorize contracting with Sempra Energy Sales for the natural gas commodity requirements for the City's two cogeneration plants for a period of time not to exceed 42 months, service to begin at 12:01 a.m. October 1, 1999, pricing to be the Natural Gas Intelligence (NGI) Southern California Border Index price; unless in response to recommendation from Sempra, the City Manager is able to better the City position at any time during the life of the agreement by (1) locking in winter price protection for the months of November, December, January and February if a winter unit price of$2.65 per MMBtu or lower becomes available; or(2) locking in a year-round unit price, if a year-round fixed unit price of$2.25'per MMBtu or lower becomes available. BACKGROUND: Deregulation of the natural gas industry has resulted in opportunities to save substantial amounts of money on the purchase of natural gas for facilities such as the City's cogeneration plants, where usage is predictable and constant year round. The City has utilized this opportunity to save over$200,000 compared with prices charged by "The Gas Company" over the past two years. The City's partner in attaining this saving was Enron. Three different pricing structures were utilized to realize these savings. The first twelve months utilized a flat price for twelve months ($2.32 per MMBtu). The savings for this twelve month period accounted for approximately$150,000. However, when it came time for the contract to be renewed (Fall 1998) fixed price options for the next twelve months were artificially high. The best option available was to lock in winter protection(pricing historically increases during winter months due to high usage in other parts of the country). Enron promised to advise the City when the optimal time had come to again lock in twelve month unit pricing.. Two factors contributed (staff believes)to that not happening, resulting in lost opportunity to realize additional saving in the most recent twelve month period. • The partnership with Enron as the City's electric services provider deteriorated and ended; and • The sales representative who had served the City's interests well as a market advisor left Enron and is now employed by Sempra Energy Sales. Real savings are achieved in procurement of natural gas by being able to identify times when the market prices have bottomed out and to be able to instantly lock in the advantageous price. The market tends to follow a cyclical pattern but is influenced by unseasonable weather conditions or other uncontrollable factors. Selecting a partner for 3A PURNATURALOAS.WPD STAFF REPORT PAGE APPROVE PURCHASE OF NATURAL GAS FOR CITY'S COGEN PLANTS for procuring this commodity is more akin to selecting a stock broker. All firms have access to the same market price. Selection is based on the reliability and track record of the "broker" and the track record and reliability of the firm. That is why staff is recommending Sempra Energy Sales as the City's new partner for providing natural gas. Sempra Energy Sales is the deregulated arm of the company of Sempra Energy which is the parent company of Southern California Gas Company, the regulated seller of residential and commercial gas within the City of Palm Springs. Southern California Gas is the nation's largest natural gas distributor utility serving 18 million people. The combination of this corporate experience and clout, teamed with the service representative who previously performed effectively on the City's behalf, should result in substantial future savings for the City. The current relationship with Enron expires on September 30, 1999 at midnight. Without exercising a new and favorable agreement at this time, the City will be subject to paying the unfavorable regulated price for gas delivery from The Gas Company. Starting the relationship with Sempra now will allow time to lock in a favorable fixed price for the winter or under worst case scenario, if the new relationship begins riding the NGI index, it will still be possible to save money compared to The Gas Company's price structure. However, additional savings will be enabled when either a fixed winter price at or below $2.65/MMBtu for the months of November, December, January and February, or an annual fixed price at or below $2.25/MMBtu becomes available. By authorizing the City Manager to utilize the two options to lock in favorable prices referenced in the recommendation, and allowing the City to respond quickly to market changes and recommendations from its contract provider, maximum savings can be achieved for the City. Funds are available in the following accounts: Energy Account# 550-5806-42010 $140,000 Energy Account# 550-5807-42010 $270,000 HAROLD E. GOOD SOOTT MIKESELL Procurement Manager Director of Facilities APPROVE: / /� § APPROVER p.r1,n City Manager Attachment: 1. Resolution PURNATURALGAS.WPD STAFF REPORT RESOLUTION NO. 19626 OF THE CITY COUNCIL OF THE CITY OF PALM SPRINGS, CALIFORNIA, AUTHORIZING CONTRACTING WITH SEMPRA ENERGY SALES FOR THE NATURAL GAS COMMODITY REQUIREMENTS FOR THE CITY'S TWO COGENERATION PLANTS FOR A PERIOD OF TIME NOT TO EXCEED 42 MONTHS. WHEREAS,the City of Palm Springs owns and operates two cogeneration plants utilizing natural gas as a fuel. WHEREAS, the natural gas market has been deregulated and natural gas is a commodity item available at deregulated prices. WHEREAS, the City relies on its provider of natural gas to make recommendations during the term of any purchase agreement concerning whether to utilize NGI index pricing, fixed rate wait winter price protection, or fixed rate unit year-round pricing. WHEREAS, Sempra Energy Sales is the deregulated arm of Sempra Energy which is the parent company of Southern California Gas Company, the nation's largest natural gas utility serving 18 million people. WHEREAS, the City's representative from Sempra Energy Sales has successfully advised the City in the past resulting in a twelve month savings of approximately $150,000. NOW THEREFORE BE IT RESOLVED by the City Council of the City of Palm Springs as follows: SECTION 1. That City Council hereby authorizes contracting with Sempra Energy Sales for the natural gas commodity requirements for the City's two cogeneration plants for a period of time not to exceed 42 months. SECTION 2. Service is to begin at 12:01 a.m., October 1, 1999. SECTION 3. Sempra Energy Sales shall make market-based recommendations to the City relative to when to maximize saving by the City by locking in fixed pricing. SECTION 4. In response to recommendation by Sempra Energy Sales,the City Manager may act to better the City's position at any time during the life of the Agreement by locking in winter price protection for the months of November, December, January and February,provided the lock rate unit price is $2.65 per MMBtu, or lower. SECTION 5. In response to recommendation by Sempra Energy Sales,the City Manager may act to better the City's position at any time during the life of the contract by locking in year-round firm fixed unit pricing, provided the lock rate price is $2.25 per MMBtu, or lower. I 3 +� PURNATURALGAS.WPD STAFF REPORT - Res. No. 19626 Page 2 SECTION 6. For any portion of the contract period for which the City Manager has not elected a fixed price option,the billing price shall be the Natural Gas Intelligence (NGI) Southern California Border Index price. ADOPTED this 28th day of July, 1999. AYES: Members Barnes, Hodges, Oden, Reller-Spurgin and Mayor Kleindienst NOES: None ABSENT: None ATTEST: CITY OF PALM SPRINGS, CALIFORNIA By: City Clerk City Manager REVIEWED & APPROVED: PURNATURALGAS.WPD STAFF REPORT