HomeMy WebLinkAbout9/6/2017 - STAFF REPORTS - 1.K. QpLM Sp
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°411FORN�p City Council Staff Report
DATE: September 6, 2017 CONSENT CALENDAR
SUBJECT: AUTHORIZE THE CITY MANAGER TO PURCHASE NATURAL GAS
FOR A PERIOD OF TWENTY-FOUR MONTHS THROUGH NOVEMBER
30, 2019
FROM: David H. Ready, City Manager
BY: Maintenance & Facilities Department
SUMMARY
Approval of this action authorizes the City Manager to enter into purchase agreements
for natural gas from the wholesale commodity market. The City Council's previous
authorization expires November 30, 2017, and it is necessary to authorize the City
Manager to enter into new purchase agreements for natural gas commencing on
December 1, 2017, not to exceed a term extending to November 30, 2019.
RECOMMENDATION:
1. Authorize the City Manager to enter into purchase agreements for natural gas
from the wholesale commodity market for a term not-to exceed 24 months from
December 1, 2017, through November 30, 2019.
2. Authorize the City Manager to execute all necessary documents.
STAFF ANALYSIS:
The City purchases natural gas to fuel the Municipal Co-Generation Plant at City Hall
that produces electricity and thermal energy (heating and cooling) for the Airport, Fire
Station No. 2, City Hall, and Police Department, as well as electricity for the City Yard.
In order to ensure the City has fuel to operate the Municipal Co-Generation Plant, it is
necessary to solicit bids from the wholesale natural gas commodity marketplace. The
natural gas 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 historically requests authorization for the City
Manager to enter into a purchase agreement for supply of natural gas at a time and at a
price that best serves the City's interests. The current natural gas purchase agreement
ITEM NO.�_
City Council Staff Report
September 6, 2017-- Page 2
Purchase of Natural Gas
expires November 30, 2017, and it is necessary to re-authorize the City Manager to
enter into future purchase agreements for natural gas.
Since the federal government de-regulated 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, often 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. Historical natural gas price
trends have shown lower contract prices in the late fall than in the spring months,
provided the end of the hurricane season does not damage or destroy natural gas and
petroleum refineries located in the Gulf Coast.
Under the City Council's prior authorization, the City Manager entered into the following
purchase agreements for natural gas:
• 12/1/12 — 11/30/13 = $4.32 fixed per Decatherm (Dth)
• 12/1/13 — 11/30/14 = $4.14 fixed/Dth
• 12/1/14— 11/30/15 = $4.39 fixed/Dth
• 12/1/15 — 11/30/16 = $2.83 fixed/Dth
• 12/1/16 — 11/30/17 = $3.36 fixed/Dth
Recently, natural gas prices have fluctuated some, but still remain less than $3.50
fixed/Dth.
The severe weather in the Gulf Coast due to Hurricane Harvey will impact the cost of
natural gas, however it is unknown how much higher pricing will be affected in the
wholesale natural gas commodity marketplace. At the time the City solicits pricing for
natural gas in October/November, to the extent pricing exceeds $5.00/Dth, the City
Manager will meet with the City Council Budget Subcommittee to advise them of the
fiscal impact of such higher pricing.
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 thru the bidding
process. It is further recommended that City Council extend the authorization to the City
Manager by an additional 24 months to November 30, 2019, consistent with prior
authorizations.
ENVIRONMENTAL IMPACT:
Section 21084 of the California Public Resources Code requires Guidelines for
Implementation of the California Environmental Quality Act ("CEQA"). The Guidelines
are required to include a list of classes of projects which have been determined not to
have a significant effect on the environment and which are exempt from the provisions
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City Council Staff Report
September 6, 2017-- Page 3
Purchase of Natural Gas
of CEQA. In response to that mandate, the Secretary for Resources identified classes
of projects that do not have a significant effect on the environment, and are declared to
be categorically exempt from the requirement for the preparation of environmental
documents. In accordance with Section 15301 "Existing Facilities," Class 1 projects
consist of the operation, repair, maintenance, permitting, leasing, licensing, or minor
alteration of existing public structures, facilities, mechanical equipment involving
negligible or no expansion of use beyond that existing at the time of the lead agency's
determination. Therefore, authorizing the purchase of natural gas to operate the
Municipal Co-Generation Plant is considered categorically exempt from CEQA.
FISCAL IMPACT:
The cost of natural gas is budgeted in the Energy Fund at $5 per decatherm (Dth)
through the end of the current 2017/2018 fiscal year. The current contract price for
natural gas is $4.23/Dth, but is likely to increase due to impacts in the Gulf Coast from
Hurricane Harvey. To the extent natural gas pricing exceeds $5/Dth, the City Manager
will advise the Budget Subcommittee on the pricing and any impacts to the 2017/2018
fiscal year budget.
SUBMITTED:
Marcus L. Fuller, MPA, PE, PLS David H. Ready, Esq.
Assistant City Manager City Manager
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