HomeMy WebLinkAbout10/22/2008 - STAFF REPORTS - 1.A.DATE:
SUBJECT:
FROM:
BY -
City Council Staff Report
October 22, 2008
AUTHORIZE THE PURCHASE OF NATURAL GAS
David H. Ready, City Manager
CONSENT CALENDAR
Procurement & Contracting and Public Works & Engineering
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:
Authorize the City Manager 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.
On March 21, 2007 Council adopted MO#8018 authorizing the City Manager to enter into
agreements for the purchase of natural gas for a term not to exceed 24 months_ The effective
date of this action was June 1, 2007. Subsequently, three 6-month contracts have been
executed, the latest effective through November 30, 2008. There are only 6 months of authority
remaining of the original 24 months.
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. As an example, over the past 2 years, prices per decathenn have ranged
from $14 to $6.
ITEM NO.�
City Council Staff Report
October 22, 2008 -- Page 2
Purchase of Natural Gas
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, 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,
The City's current contract for natural gas will expire on November 30, 2008. 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 days before weather factors begin to adversely affect the
market. Historical price trends have shown lower contract prices in the late Fall than in the
Spring provided the just ended hurricane season did not result in damage to gas Infrastructure_
The current contract price is $8.59 per decatherm, about $2 below the budgeted amount. As
there was not serious damage form this years hurricanes current prices are even lower than the
current contract.
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
extend the authorization to the City Manager by an additional 24 months to May 31, 2011.
FISCAL IMPACT:
The cost of natural gas is budgeted in the Energy Fund at $11 per decatherm through the end of
the current 2008/2009 fiscal year. The current contract price is $8.59. For each change in unit
price of $.10, increase or decrease, the overall contract amount will be affected In the
approximate amount of $20,000 annually.
The latest price quotation (October 14, 2008) for a 1-year contract was $6.79 per decatherm.
Craig Gli(td&s
Procurement & Contracting Manager
David H. Ready
City Manager
i4_111ij-
David J. Barakian
Director of Public Works/City Engineer
Thomas J_ WiI
Assistant City anager — Development Services