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HomeMy WebLinkAbout2006-04-19 STAFF REPORTS 2H O<VALMS. u u, City Council Staff Report DATE: April 19, 2006 CONSENT CALENDAR I UBJECT: AUTHORIZE THE PURCHASE OF NATURAL GAS FROM: David H. Ready, City Manager BY: Public Works and Procurement and Contracting SUMMARY The City operates two natural gas fueled co-generation plants to generate electricity and thermal energy (heating and cooling) for designated City facilities. Natural gas is typically purchased annually through third-party gas marketers. The price the City pays is influenced by numerous hard-to-foresee factors and is typically dependent on both the structure and the duration of the pricing agreement. The City's current contract for natural gas expires in December 2006. To avoid buying gas during the peak winter heating season, staff is seeking authorization to purchase natural gas at a time when gas pricing is lower. RECOMMENDATION: 1. Adopt Minute Order No. authorizing the City Manager to purchase natural gas at the best available price for a period not-to-exceed 18 months. 2. Authorize the City Manager to execute all necessary documents to effectuate this action. STAFF ANALYSIS: The City has historically entered into annual contracts to purchase natural gas. Authorization to purchase gas is typically requested several months in advance of the expiration date of the then-current pricing agreement in order to allow staff the time to track and competitively solicit pricing and enter into an agreement at an advantageous time and price. On July 6, 2005, City Council approved a minute order authorizing the City Manager to enter into an agreement for the purchase of natural gas for a term to commence on October 1, 2005. Although staff immediately began to monitor market prices in order to identify an advantageous time and price to lock in pricing for the next contract term, hotter temperatures and an increase in crude oil prices had already resulted in a steady Item No. 2 . H . City Council Staff Report April 19, 2006 -- Page 2 Purchase of Natural Gas climb in gas prices. Just as the market started to stabilize Hurricane Katrina hit the Gulf Coast sharply reducing gas production and forcing a rapid escalation in gas prices. The situation was further exacerbated by Hurricane Rita which hit the Gulf Coast a couple weeks later straining the natural gas infrastructure even more. In the wake of these natural catastrophes gas prices increased to near record levels selling for as much as $14.00 a decatherm on the spot market. Since the City's gas budget was predicated on an assumed gas price of $8.00 a decatherm, staff was reluctant to enter into a one year fixed price term contract under these pricing conditions. As a result, staff executed several single-month term contracts for natural gas supply for the months of October and November and sought alternate pricing strategies to reduce the City's budget exposure. In late November 2005, gas prices began to stabilize and staff decided to enter into one-year agreement with 75% of the City's requirements on a fixed price ($9.43 per decatherm) and 25% on an index-based (market-based) price. The rationale behind this approach was to shelter the largest part of the City's gas requirements from expected winter price increases and at the same time allow for some downward movement in overall expenditures should prices decline in the spring and as the natural gas infrastructure recovered. Since the first of the year gas prices have fallen and are now approximately $0.70 to $0.80 less than what the City is currently paying. Staff believes it is likely that the City could achieve a more favorable result for future gas needs now than in a period closer to the expiration of the term of the current term (November 30, 2006). According to several gas industry analysts, gas prices will likely increase as we approach summer. This increase is due to several factors including: • Summer Temperatures Normal or warmer than normal temperatures will result in increased gas usage since more and more electric power generation is fueled by gas. • Hurricane Season June 1 s' marks the start of hurricane season. Weather forecasters have issued their first extended-range forecast for the 2006 season, predicting a well above- average season (17 named storms, 9 hurricanes, 5 of Category 3 or higher). Additionally, forecasters have predicted a high potential for at least one major hurricane to directly impact the United States: the forecast indicates an 81% chance of at least one major hurricane striking the U.S. mainland (including a 64% chance of at least one major hurricane strike on the East Coast including the Florida peninsula, and a 47% chance of at least one major hurricane strike on the Gulf Coast from the Florida Panhandle westward). In addition, the potential City Council Staff Report April 19, 2006-- Page 3 Purchase of Natural Gas for major hurricane activity in the Caribbean was above average. With another active hurricane season possible this year, news of any developing hurricanes and tropical storms with a potential to cause significant new outages could add to the volatility in prices in the latter part of the summer. • Gas Production Overall North American gas production remains flat while gas and electric power usage increase each year. Price increases have served to keep supply and demand in balance, but the trend of flat production and increased usage will continue to result in upward pressure on prices. LNG cargoes have been diverted to higher priced markets, even last year when domestic gas prices were in the $12 + range. This is expected to continue for some time. • Gas Usage Demand has been increasing each year and, barring any recession, this trend should continue which should support higher prices. Given these factors, staff recommends that City Council authorize the City Manager to enter into an agreement with any of the gas marketers authorized to sell on the Southern California Gas System at a time and at a price that best serves the City's interests. The nature of the market makes it impractical, if not impossible, to bring a specific contract amount to 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 a longer than usual contract term in order to avoid high demand/high price periods. Staff believes a contract term of 17 months, from December 2006 to April 2008, would afford the most flexibility by enabling the City to solicit pricing in the lower demand spring season which should result in lower overall prices than agreements entered at the beginning of the peak winter heating season. FISCAL IMPACT: Entering into an agreement before the close of the current fiscal year would provide the opportunity to better project overall expenditures for the FY 2006-07 and to budget accordingly. The cost of natural gas is budgeted in the Energy Fund. The City is currently paying $9.43 per decatherm through the end of the current term (November 2006). For budgetary purposes staff is using a price of $10.00 per decatherm for the remainder of the fiscal year (December 2006 through June 2007). Based on the City's current gas City Council Staff Report April 19, 2006 -- Page 4 Purchase of Natural Gas usage, a $0.10 adjustment in unit price will result in an overall contract change of $30,000. As of March 31, 2006, working gas in storage stood slightly above last year's level. Much of the current high storage level is accounted for by unexpectedly warm winter weather, particularly in January. Spot Henry Hub natural gas prices, which averaged $9.00 per decatherm in 2005, are expected to fall to an average of about $7.50 per decatherm over the next few months (from an average of about $13.44 per decatherm in December). Although spot gas prices are expected to ease, leading to an annual average decline in the Henry Hub price of about 10 percent, this decrease is expected to be short-lived. Concerns about potential future supply tightness and continuing pressure from high oil market prices are keeping expected spot natural gas prices for the next heating season at high levels, with the Henry Hub spot price projected to again rise to just under $10.00 per decatherm by the end of summer. The Henry Hub price is expected to average approximately $8.40 per decatherm in 2007. As of April 11t", the latest price quote provided to the City was $8.70 per decatherm. While gas prices may decrease a little more over the next few weeks, the market is very unpredictable and prices could as easily increase. To take advantage of the favorable pricing that currently exists, staff recommends that the City Council authorize the City Manager to purchase natural gas at the best possible price for a period not-to-exceed 18 months. re�� David Barakian, P.E. roy L. Butzl d Director of Public Works istant Cit M iger David H. Ready, City P�p*%-er Attachment: 1. Minute Order MINUTE ORDER NO. AUTHORIZING THE CITY MANAGER TO PURCHASE NATURAL GAS AT THE BEST AVAILABLE PRICE FOR A PERIOD NOT-TO-EXCEED 18 MONTHS. I, James Thompson, City Clerk of the City of Palm Springs, hereby certify that this Minute Order authorizing the City Manager to purchase natural gas at the best available price for a period not-to-exceed 18 months, was adopted by the City Council of the City of Palm Springs, California, in a meeting thereof held on the 19th day of April, 2006. James Thompson, City Clerk