HomeMy WebLinkAbout7/2/2003 - STAFF REPORTS (10) DATE: July 2, 2003
TO: City Council
FROM: Director of Procurement and Contracting and
Director of Public Works/City Engineer
AUTHORIZE CITY MANAGER TO ENTER INTO PRICING AGREEMENT FOR
PURCHASE OF NATURAL GAS FOR CITY'S COGENERATION PLANTS
RECOMMENDATION:
It is recommended that the City Council authorize the City Manager to enter into a
pricing agreement (purchase order) for the purchase of natural gas for use at the City's
cogeneration plants.
SUMMARY:
On April 11, 2002, City Council approved a minute order authorizing the City Manager
to lock in a firm fixed price for natural gas for a term not to exceed 12 months and at a
price not-to-exceed $5.00 per decatherm. The City was fortunate to secure a price of
$3,81 per decatherm for the period beginning September 1, 2002 and ending August
31, 2003. In order to insure the City continues to have an uninterruptible supply of gas
at a reasonable price for its cogeneration plants it is necessary to enter into a new
pricing contract. Unfortunately, the natural gas market continues to be extremely
volatile with pricing fluctuating between $4.91 and $6.00 per decatherm. This makes it is
almost impossible to bring a specific contract amount to City Council for approval. As a
result, staff is requesting that the City Manager be authorized to monitor the market and
to lock in pricing that is favorable to the City.
BACKGROUND
The nation's gas supply is not growing as quickly as demand, forcing prices in the
longer term to remain high. In addition, gas production is 4-6% lower than a year ago.
The combination of rising demand and declining production has made the gas market
extremely volatile and is likely to keep prices high for several years. In fact, many
experts believe that gas prices are not expected to come down until new major gas
pipelines are built connecting new gas fields in Alaska and the Northwest Territories.
That is at least 7 years away.
According to Federal Reserve Chairman Alan Greenspan, market expectations "imply a
25 percent probability"' that the peak price natural gas on the wholesale market will
exceed $7.50 per thousand cubic feet by next January. Furthermore, the Energy
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Department has stated that extremely short supplies of natural gas in storage will result
in a continuation of high prices through the end of the year and well into 2004.
To deal with this volatile situation, the City has traditionally entered into fixed price
contracts for 100% of the gas use for the City's two cogeneration plants. Currently
there are only two firms, Occidental Energy Marketing and Southwest Cooperative
Services, that will supply natural gas for 20% over or under the City's historical use
baseline with no penalty. Other gas marketers are willing to provide firm fixed pricing
for only 80% of the City's historical baseline. Any additional usage would be at index
pricing which fluctuates wildly depending on supply and demand.
Due to the uncertain nature of the gas market and to secure a stable price, staff is
requesting authorization for the City Manager to enter into an agreement with any of the
gas marketers authorized to sell on the Southern California Gas System offering a
pricing structure serving the best interests of the City. To guarantee future price stability,
staff is also recommending that the term of the agreement be for a period of 24 months.
The cost of natural gas is budgeted in the Energy Fund at approximately $4.00 per
decatherm. For each $.10 price increase, the City's overall cost will go up about
$30,000. Once the final contracted price is known, it may be necessary to amend the
Fiscal Year 2003-04 budget to cover the higher costs.
HAROLD E. GOOD DAVID BARAKIAN
Director of Procurement & Contracting Director of Public Works/City Engineer
APPROVED:
AI�
City Manager y
REVIEWED BY DEPT.OF FINANCE
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MINUTE ORDER NO.
AUTHORIZING THE CITY MANAGER TO
EXECUTE A PURCHASE ORDER FOR
NATURAL GAS, FOR A TERM NOT TO
EXCEED 24 MONTHS, BEGINNING
SEPTEMBER 1, 2003.
I HEREBY CERTIFY that this Minute Order authorizing City Manager to
execute a purchase order for natural gas for a term not-to-exceed 24
months, beginning September 1, 2003 was adopted by the City Council of
the City of Palm Springs, California in a meeting thereof held on July 2,
2003.
PATRICIA A. SANDERS
City Clerk
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