HomeMy WebLinkAbout10/7/2015 - STAFF REPORTS - 2.J.DATE: October 7. 2015
City Council Staff Report
CONSENT CALENDAR
SUBJECT: AUTHORIZE THE CITY MANAGER TO PURCHASE NATURAL GAS
FOR A PERIOD OF TWENTY-FOUR MONTHS THROUGH NOVEMBER
30, 2017
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, 2015, and it is necessary to authorize the City
Manager to enter into a new purchase agreement for natural gas for an unknown term
commencing on December 1, 2015.
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
through November 30, 2017; and
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.
On June 19, 2013, the City Council approved an Energy Services Contract with
Chevron Energy Solutions, Co., (now Opterra), for construction of over $14 Million of
various Energy Conservation Measures (ECM's), with the single largest ECM being
undertaken at the Municipal Co -Generation Plant at City Hall.
After thorough review, including an independent third party evaluation of Chevron's
proposed ECM's, it was concluded that continued investment in the City's Co -
Generation Plant at City Hall was worthwhile, and would result in significant savings
over the long-term as compared to purchasing electricity directly from SCE. Co-
generation is the sequential production of two energy forms, usually steam and
ITEM NO. b
City Council Staff Report
October 7, 2015-- Page 2
Purchase of Natural Gas
electricity, from a single fuel source. In our case, natural gas is used as fuel to run a
reciprocating engine that turns a generator to create electricity. Waste heat (heat
created by a running engine) that would normally escape into the air, is recovered from
the engine and passed through an absorption chiller to provide cold water for air
conditioning. Alternatively, in the winter, waste heat is used to heat water for space
heating.
Co -generation was originally selected as the most appropriate alternative energy
solution for Palm Springs due to the City's tremendous cooling requirements in the
summer. Therefore, a Co -Generation Plant can be a very valuable asset, in that it
provides not only electricity for the City's facilities, but through its internal mechanical
process, provides thermal energy (heating and cooling).
Thus, 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 expires November 30, 2015, 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, provided the
just ended 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 = $4.20 fixed/decatherm(Dth)
12/1/13 - 11/30/14 = $3.99 fixed/Dth
• 12/1/14 - 11/30/15 = $4.23 fixed/Dth
Recently, natural gas prices have continued to fall, and pricing is anticipated at less
than $3.50 fixed/Dth. This pricing will result in significant savings for the City, in that the
City was purchasing natural gas at $6.50 or more per Dth.
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City Council Staff Report
October 7, 2015-- Page 3
Purchase of Natural Gas
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, 2017, 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
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 through the
end of the current 2015/2016 fiscal year. The current contract price for natural gas is
$4.23/Dth, and future natural gas prices are anticipated well below the budgeted
amount of $5/Dth.
SUBMITTED:
Jan Ander*
Interim Direc r Maintenance & Facilities
David H. Ready, Esq.,
City Manager
d q" 4 1,
Marcus L. Fuller, MPA, PE, PLS
Assistant City Manager/City Engineer
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