HomeMy WebLinkAbout3/21/2007 - STAFF REPORTS - 2.I. 4VALM SA6
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City Council Staff Report
DATE: March 21, 2007 CONSENT CALENDAR
SUBJECT: AUTHORIZE THE PURCHASE OF NATURAL GAS
FROM: David H. Ready, City Manager
BY: Procurement and Contracting Division
SUMMARY
Annually, the City purchases natural gas to fuel the two co-generation plants that produce
electricity for various City facilities. The prices available on the open market vary depending
upon numerous hard-to-foresee factors that affect both the structure and the duration of the
pricing agreement. Due to the volatility of the market, staff is seeking authorization for the City
Manager to enter into an agreement for supply of natural gas at a time and at a price that best
serves the City's interests.
RECOMMENDATION-
1. Adopt Minute Order No. authorizing the City Manager to enter into an
agreement for the purchase of natural gas for a term not-to exceed 24 months.
2. Authorize the City Manager to execute all necessary documents.
STAFF ANALYSIS:
The City purchases natural gas to fuel its two (2) co-generation plants. Historically, staff has
requested Council authorization several months in advance of the expiration date of the then-
current pricing agreement in order to allow staff the time to track, competitively solicit pricing
and to enter into an agreement at an advantageous time and price.
Predicting natural gas prices, even for just a few years, has been very difficult for even
seasoned professionals. This has been especially true the last few years, which have seen
very volatile gas prices. Most experts view the increased volatility as an effect of the swings in
winter temperatures and increased summer demand for natural gas by gas-fired electric
generating plants.
Since the federal government quit regulating the wellhead price of natural gas in the mid-1980's,
market forces (of supply and demand) now set natural gas prices. Prices often change direction
for no apparent reason, due to weather changes, the economy, hurricanes (which can
temporarily affect gas production in the Gulf of Mexico), oil prices, and more recently, expected
demand for gas-fired electric generation, which is highly dependent on actual or forecasted
summer weather.
ITEM NO.
City Council Staff Report
March 21, 2007-- Page 2
Purchase of Natural Gas
Although this year's moderate winter weather across the nation has helped reduce gas demand
and gas storage withdrawals recently leading to lower prices, market analysts are starting to see
some fluctuation in price. Analysts are projecting that gas prices will start to rise as we near
summer. In addition, the upcoming forecasts for the next hurricane season, starting June 1, is
about to be released, The mild El Nino weather pattern in the Pacific Ocean is being cited as
the reason the past hurricane season was a non-event for the gas and oil facilities in the Gulf.
However, prediction of a La Nina weather pattern means increased likelihood of more Atlantic
hurricanes, which would increase the risk in the Gulf of Mexico.
The City's current contract for natural gas will expire on May 31, 2007. Staff has been
monitoring current market trends and believes that it would be advantageous for the City to lock
in a favorable price within the next 30 to 45 days before weather factors begin to adversely
affect the market.
Due to the volatile nature of the natural gas market, it is impractical, if not impossible, to bring a
specific contract amount to the City Council for approval. Price quotes, when delivered, expire
within minutes as the market responds to daily inputs. As a result, staff is requesting that the
City Manager be authorized to lock in pricing that is favorable to the City as a result of
monitoring the market on a day-to-day basis. It is further recommended that City Council
authorize the City Manager to enter into a longer-term agreement, up to 24 months, rather than
the usual 12 month contract to take advantage of lower pricing should that become available.
FISCAL IMPACT-
Entering into an agreement before the close of the current fiscal year would provide the
opportunity to better project overall expenditures for fiscal year 2007-08.
The cost of natural gas is budgeted in the Energy Fund at $8.56 per decatherm through the end
of the current term (May 2007). For each change in unit price of$.10, increase or decrease, the
overall contract amount will be affected in the approximate amount of$30,000.
The latest price quotation (March 9, 2007) for a one year contract was for $7.83 per decatherm.
Pricing for a two year term was slightly higher at $7.92 per decatherm.
r L. ButzqM
David Barakian
asi nt Cit r--Administration Director of Public Works/City Engineer
David H. Ready, City a '`
Attachment,
1. Minute Order
MINUTE ORDER NO.
AUTHORIZING THE. CITY MANAGER TO ENTER INTO AN
AGREEMENT FOR THE PURCHASE OF NATURAL GAS
FOR A TERM NOT-TO-EXCEED 24 MONTHS.
I, James Thompson, City Clerk of the City of Palm Springs, hereby certify that this
Minute Order, authorizing the City Manager enter into an agreement for the purchase of
natural gas for a term not-to-exceed 24 months, was adopted by the City Council of the
City of Palm Springs, California, in a meeting thereof held on the 21' day of March,
2007.
James Thompson, City Clerk