HomeMy WebLinkAbout3/6/2002 - STAFF REPORTS (7) Gi
DATE: March 6, 2002
TO: City Council
FROM: Harold E. Good, Director of Procurement and Contracting and
Scott Mikesell, Director of Parks, Recreation&Facilities
APPROVE PURCHASE OF NATURAL GAS FOR THE CITY'S COGENERATION PLANTS.
RECOMMENDATION:
That City Council authorize the City Manager to purchase the city's natural gas commodity
requirements forthe City's two cogeneration plants from Sierra Southwest Cooperative Services,Inc.
of Tucson,Arizona,beginning September 2002,for a period oftime not to exceed 12 months locking
in a firm, fixed price not to exceed $3.20 per decatherm.
SUMMARY:
Due to extreme volatility in the natural gas market last year when prices spiked to over $50 per
decatherm, the city locked in to a firm fixed price of$7.97 per decatherm for purchase of natural gas
effective March 1, 2001 to August 30,2002. Although that price is now significantly higher than the
spot market, the strategy resulted in an overall favorable experience during the period the pricing
structure has been in effect. Gas prices have come down in the past several months and savings can
be captured by entering into a new pricing structure. The annualized savings would be approximately
one million dollars. It should be noted that the new pricing structure will not be effective for two
months in July and August of the 2002-2003 budget year because the current pricing is locked in
through August 31 st.
BACKGROUND:
In January and February of 2001, the City was forced to pay an average of$14.53 per decatherm for
natural gas; an approximate 6-fold increase over historical pricing. On February 7, 2001, City
Council approved locking in a firm fixed price not to exceed $8.00 per decatherm. The price was
locked in at $7.97 for a period of 18 months. The result of locking in the price was to avert price
spikes which exceeded $50 per decatherm during the most volatile period. The City's deal with
Unicom/Excelon was considered one of the most advantageous developed in California because of
the comparatively low rate when compared with what other entities werp paying; coupled with the
fact that it contains flexibility in usage 20% over and under the historical use baseline without
incurring penalties such as"take or pay".
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National gas prices have fallen dramatically during the past several months, both nationally and in
California. Under the proposed pricing structure, the City will realize a savings beginning in
September, 2002, for ten months over the next fiscal year. The average monthly consumption for
both cogeneration plants is 17,250 decatherm. Based upon the proposed price reduction for the ten
month period from September, 2002 through July, 2003, at the lower rate, the projected savings
will be $822,830.
The price offered by Sierra is 27 cents per decatherm under the pricing offered by Occidental— the
only other entity willing to offer the 20% flexibility in usage with no penalties desired by the City.
Occidental's price is$3.47 per decatherm. TXU price is also $3.47 but it will only write up to 80%
of the City's historical usage at a fixed price. The remainder would be at an index price. Sempra
Energy would require the same structure and similar pricing. No pricing was requested from Enron,
the only other provider for the Palm Springs area.
Staff recommends locking in the firm, fixed price with Sierra to provide the annualized savings over
a two year period starting September V.
While gas prices are predicted to remain level for several months, the industry has not followed
historical pricing patterns. World events and/or manipulation of the market could send the market
into a spiral again at any time. The price of$3.20 per decatherm with 20%plus or minus flexibility
in usage with no penalties or surcharge is believed to be very attractive and will provide the City
predictability, savings and flexibility in usage.
The gas purchase will be funded from the Energy Fund whose costs are recovered via charges to user
departments.
OTT MIKESELL HAROLD E. GOOD
irector of Parks, Recreation&Facilities Director of Procurement & Contracting
APPROVED:
City Manager c�
REVIEWED BY DEPTH.OF FINANCE
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Fla,
February 26, 2002 (9:06am) -2-
MINUTE ORDER NO.
AUTHORIZING THE CITY MANAGER TO
PURCHASE THE CITY'S NATURAL GAS
COMMODITY REQUIREMENTS FOR THE CITY'S
TWO COGENERATION PLANTS FROM SIERRA
SOUTHWEST COOPERATIVE SERVICES,INC.OF
TUCSON, ARIZONA, OR OCCIDENTAL ENERGY
MARKETING, INC. OF HOUSTON, TEXAS,
EFFECTIVE SEPTEMBER 2002, FOR A PERIOD
OF TIME NOT TO EXCEED TWELVE MONTHS
LOCKING IN A FIRM FIXED PRICE NOT TO
EXCEED $3.50 PER DECATHERM.
I HEREBY CERTIFY that this Minute Order authorizing City Manager to
purchase the city's natural gas commodity requirements for the city's two
cogeneration plants from Sierra Southwest Cooperative Services, Inc., of
Tucson, Arizona, or Occidental Energy Marketing, Inc. of Houston, Texas,
effective September 2002, for a period of time not to exceed twelve months
locking in a firm fixed price not to exceed $3.50 per decatherm was adopted by
the City Council of the City of Palm Springs, California in a meeting thereof held
on the V of March, 2002.
PATRICIA A. SANDERS
City Clerk
73
MINUTE ORDER NO.
AUTHORIZING THE CITY MANAGER TO
PURCHASE THE CITY'S NATURAL GAS
COMMODITY REQUIREMENTS FOR THE CITY'S
TWO COGENERATION PLANTS FROM SIERRA
SOUTHWEST COOPERATIVE SERVICES, INC.OF
TUCSON, ARIZONA EFFECTIVE SEPTEMBER
2002, FOR A PERIOD OF TIME NOT TO EXCEED
TWELVE MONTHS LOCKING IN A FIRM FIXED
PRICE NOTTO EXCEED$3.20 PER DECATHERM.
I HEREBY CERTIFY that this Minute Order authorizing City Manager to
purchase the city's natural gas commodity requirements for the city's two
cogeneration plants from Sierra Southwest Cooperative Services, Inc., of
Tucson, Arizona effective September 2002, for a period of time not to exceed
twelve months locking in a firm fixed price not to exceed $3.20 per decatherm
was adopted by the City Council of the City of Palm Springs, California in a
meeting thereof held on the 61h of March, 2002.
PATRICIA A. SANDERS
City Clerk
713
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