HomeMy WebLinkAbout2/7/2001 - STAFF REPORTS (27) DATE: February 7, 2001
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 the City Manager to contract with Unicom Energy of Columbus, OH, a division
of Exelon Corporation, for purchase of the natural gas commodity requirements for the City's two
cogeneration plants for a period of time not to exceed 24 months locking-in a fixed price, if a fixed price of
$8.00 per MMBtu or lower becomes available.
SUMMARY:
Due to the extreme volatility in the natural gas market, staff recommends locking-in firm fixed prices for
purchases of natural gas. The City is currently purchasing gas from Sempra Energy Solutions based on
Natural Gas Intelligence (NGI) Southern California Border index prices. In prior years this was a safe
strategy because the market fluctuated within a narrow range and was somewhat seasonally predictable.
The current fluctuations (spikes) subject the City's energy budget to significant risk. Fixed rates are
available at the time this staff report is submitted in the range of$7.83 to $8.51 per MMBtu, depending on
the length of the contract. Staff requests authorization for the City Manager to lock in a rate not to exceed
$8.00 per MMBtu for a period of time of 12, 18 or 24 months,depending on price differentials available when
the pricing is locked-in. Staff also requests flexibility in selecting the date and time to strategically commit
the City to the price and duration of the contract.
BACKGROUND:
Deregulation of electricity in California has caused extreme volatility in the natural gas market place. In
previous years the City has utilized three different strategies depending on the market conditions to control
costs. The strategies have been (1)locking-in year-round fixed pricing, (2) utility-fixed pricing for fourwinter
months and"riding"the Natural Gas Intelligence(NGI)Southern California Border Index price the other eight
months, and (3)"riding"the index for all 12 months. In fiscal year 1997-1998 the City saved $150,000 from
the previous year by taking advantage of an opportunity to lock in an exceptionally low fixed price of$2.32
pe MMBtu. Lower savings were achieved in fiscal year 1998-1999 ($50,000) because fixed price options
were artificially high at renewal time and the only viable option was to lock in winter price protection and ride
the index the other eight months. The same situation was present in 1999-2000, however, utilization of the
same strategy of locking in winter rates resulted in paying higher prices than market prices forthe fourwinter
months. Retrospectively, it would have been more advantageous to have been at index pricing.
The current market is more unstable than the market in any of the previous years. Index prices have spiked
to as high as $54.00 per MMBtu on some dates. In December the City paid over $14.00 per MMBtu.
The City has been on index pricing for fiscal year 2000-2001. Normally, February is not the most
advantageous month in which to lock in a fixed price. Reluctantly, staff finds itself in the position of
recommending that strategy in order to protect the City from being subject to market spikes that could prove
disastrous to the energy budget.
t4 CO 16
Staff has solicited sample fixed-price proposals from three of the largest natural gas suppliers in Southern
California-Unicorn Energy, Sempra Energy Solutions and TXU. The recommendation for award to Unicorn
is based on the fact that they will allow purchases of 20% less or more than our average annual usage at
their firm fixed price (without penalty) and their sample pricing was very competitive. Sempra would only
guarantee 90% of the City's historical usage at a fixed rate but the balance would be billed at the prevailing
index rate plus a profit margin. TXU's pricing structure was significantly higher (approximately $1.00 per
MMBtu) than either Unicorn's or Sempra's. It should be noted that Southern California Gas Company is
prohibited by a California Public Utilities Commission ruling from selling gas to the City for cogeneration
purposes.
Long term fixed rates available from the recommended supplier (Unicom) on this date (February 7, 2001)
are $8.51 per MMBtu for a 12-month term and $7.83 per MMBtu for a 24-month term.
Because of daily volatility in prices (i.e. price spiking), staff believes the window to lock-in the rate should
be a period of fifteen days. Authorizing a window of opportunity for the City Manager to lock-in a favorable
price will protect the City from choosing in advance an arbitrary lock-in date which may hit the market at an
inopportune time.
Staff requests authorization to lock-in a rate of up to$8.00 per MMBtu for a contract period of either 12 , 18
or 24 months, depending on price differentials at the time the pricing is locked-in.
The gas purchases will be funded from the Energy Fund and any additional cost will be absorbed by the
Fund or will be recovered via charges to user departments.
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HAROLD E. GOOD SCOTT MIKESELL
Procurement Manager �Director of Facilities
APPROVE:
City Manager
REVIEWED BY DK OF FINANCE
Attachment:
1. Resolution C� /}
MINUTE ORDER NO. 6797
AUTHORIZING THE CITY MANAGER TO
CONTRACT WITH UNICOM ENERGY OF
COLUMBUS, OH, A DIVISION OF
EXELON CORPORATION, FOR
PURCHASE OF THE NATURAL GAS
COMMODITY REQUIREMENTS FOR THE
CITY'S TWO COGENERATION PLANTS
FOR A PERIOD OF TIME NOT TO
EXCEED 24 MONTHS LOCKING-IN A
FIXED PRICE, IF A FIXED PRICE OF
$8.00 PER MMBTU OR LOWER BECOMES
AVAILABLE.
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I HEREBY CERTIFY that this Minute Order, authorizing the City Manager to contract
with Unicom Energy of Columbus, OH, a Division of Exelon Corporation, for purchase
of the natural gas commodity requirements for the City's two cogeneration plants for a
period of time not to exceed 24 months locking-in a fixed price, if a fixed price of$8.00
per MMBTU or lower becomes available, was adopted by the City Council of the City
of Palm Springs, California, in a meeting thereof held on the 7th day of February, 2001.
PATRICIA A. SANDERS
City Clerk