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HomeMy WebLinkAboutStaff Report 2306-16532.Discussion and Finance Committee Recommendation on Alternative to Manage Winter 2023-24 Natural Gas Price Uncertainty Item No. 2. Page 1 of 1 2 5 2 0 Finance Committee Staff Report From: Dean Batchelor, Director Utilities Lead Department: Utilities Meeting Date: August 15, 2023 Staff Report: 2306-1653 TITLE Discussion and Finance Committee Recommendation on Alternative to Manage Winter 2023-24 Natural Gas Price Uncertainty RECOMMENDATION Staff requests the Finance Committee make a recommendation on the Utility’s natural gas price purchasing strategy for Winter 2023-24 and recommend Council approval EXECUTIVE SUMMARY The attached presentation describes the City’s current market-price-based natural gas purchasing and pass-through commodity rate strategy and an alternative capped-price winter purchasing strategy to manage natural gas price uncertainty. Staff seeks the Finance Committee’s recommendation on whether to maintain the current strategy or implement the alternative. Staff plans to present these options to Council in September 2023 and implement the Council- approved strategy in October 2023. In addition, this presentation offers some potential longer- term natural gas market price risk containment strategies for discussion. ATTACHMENTS Attachment A: Presentation APPROVED BY: Dean Batchelor, Director of Utilities Staff: Jason Huang, Resource Planner September 5, 2023 www.cityofpaloalto.org Alternative to Manage Winter 2023-24 Natural Gas Price Uncertainty Finance Committee TITLE 40 FONT BOLD Subtitle 32 font 2 www.cityofpaloalto.org §In 2012, Council approved a monthly market-price-based natural gas purchasing and  pass-through commodity rate strategy (Resolution 9244) due to falling market natural  gas prices and resulting non competitiveness with PG&E §City purchases gas at prices tied to a published market monthly index §Customer gas rates include the commodity charge based on the published monthly  index (commodity charge is capped per the customer gas rates schedule) §Monthly prices remained under the previous Council-approved $2/Therm commodity  charge cap until January 2023    Background TITLE 40 FONT BOLD Subtitle 32 font 3 www.cityofpaloalto.org §In late November 2022, gas prices started rising  dramatically in CA §Staff communicated to customers about the expected  higher prices and in December 2022 Council increased the  $2/Therm commodity charge cap to $4/Therm §Monthly index price for January 2023 settled at just below  $5/Therm §Reserves ($1.84 million) were utilized to cover a portion of  the price increase  Winter 2022-23 Price Surge TITLE 40 FONT BOLD Subtitle 32 font 4 www.cityofpaloalto.org Gas Monthly Index Prices Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 0 1 2 3 4 5 6 Gas Monthly Index Prices ($/Therm) PG&E Citygate TITLE 40 FONT BOLD Subtitle 32 font 5 www.cityofpaloalto.org §Continue purchasing gas at prices tied to a published market monthly index §Continue monthly variable retail rate tied to published market monthly index §Utilize reserves when actual commodity price exceeds Council-approved cap (has  only happened once – January 2023) §Longer-term variation of status quo: adder to commodity rate to build reserve for  market price spikes Current Policy (Status Quo) TITLE 40 FONT BOLD Subtitle 32 font 6 www.cityofpaloalto.org §Energy market prices are inherently unpredictable and  volatile, but gas prices including for the projected upcoming  winter have stabilized and come down significantly since  March 2023 §Commodity rates loosely track and are less than PG&E’s  under most circumstances §Cost is lowest over the long run Considerations for Current Policy TITLE 40 FONT BOLD Subtitle 32 font 7 www.cityofpaloalto.org §Continue purchasing gas at prices tied to a published market monthly index §For some winter months, CPAU can also purchase gas with a price cap in place, which  functions as an insurance policy and caps the retail price paid at $2/Therm §If the monthly index settles below $2/Therm, the price paid is the monthly index §If the monthly index settles at or above $2/Therm, the price paid is $2/Therm §Retail cost of the price cap for Dec-Feb estimated at $0.175 - $0.275/Therm, based on  recent supplier quotes (CPAU’s total estimated cost $1.93 million - $3.03 million) §Commodity charge will continue to be tied to monthly market price plus an adder  that spreads out the total Dec-Feb price cap cost over 12 months (estimated adder  $0.07 - $0.11/Therm) Alternative: Capped-Price Winter Gas Purchasing TITLE 40 FONT BOLD Subtitle 32 font 8 www.cityofpaloalto.org §Adder of $0.07 - $0.11/Therm for the total Dec-Feb price cap cost results in an  increase of 4%-6% in the median monthly residential bill over the year   §Winter months (Nov-Mar): 4%-6% increase §Summer months (Apr-Oct): 3%-5% increase Capped Price Adder: Customer Bill Impact TITLE 40 FONT BOLD Subtitle 32 font 9 www.cityofpaloalto.org §Will protect reserves from price spikes §Will protect customers from price spikes §Will be higher cost to customers in long term §May be an insurance policy that adds cost and is not used (policy can be reviewed  annually) §Capped price product is uncommon and may not be readily available from  suppliers §Cost of product may be higher if market is very volatile or lower if market is stable Considerations for Alternative: Capped- price Winter Gas Purchasing §Establish reserve to manage gas price spikes §Fixed-price gas purchases §Full laddering strategy §Gas production assets §Gas storage 10 www.cityofpaloalto.org Other Alternatives – Potentially Considered for the Future This Photo by Unknown Author is licensed under CC BY-NC-ND TITLE 40 FONT BOLD Subtitle 32 font 11 www.cityofpaloalto.org §Council consideration on September 18, 2023 §Implement Council-approved strategy in October 2023 for gas year November  2023-October 2024 Next Steps TITLE 40 FONT BOLD Subtitle 32 font 12 www.cityofpaloalto.org For winter 2023-24, the Finance Committee recommends Council direct staff to:  §Maintain current market-price-based natural gas purchasing and pass-through  commodity rate strategy; or §Revise current strategy and implement the capped-price winter natural gas  purchasing alternative Recommended Motion