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HomeMy WebLinkAboutStaff Report 255-06City of Palo Alto City Manager’s Report TO: FROM: DATE: SUBJECT: HONORABLE CITY COUNCIL CITY MANAGER DEPARTMENT:UTILITIES June 19, 2006 CMR: 255:06 GAS UTILITY LONG-TERM PLAN (GULP) BIANNUAL PROGRESS UPDATE This information-only report is an update on the six Council-approved Gas Long-term Plan (GULP) recommendations. No Council action is required and no further reports are planned. UTILITIES ADVISORY COMMISSION REVIEW The attached information-only report was presented to the Utilities Advisory Commission at its April 19, 2006 meeting. The Commissioners had no substantive comments. POLICY IMPLICATIONS The GULP recommendations support the Utilities Strategic Implementation Plan (CMR:148:05), in particular: Strategy 2 - Manage supply portfolio risk per Council policy to provide stable gas and electric rates, to preserve a supply cost advantage, and to manage business processes cost effectively; Strategy 4- Provide low and stable rates, adequate reserves, and budgeted transfers to the General Fund; and Strategy 6 - Provide targeted customer and environmental programs and services. ATTACHMENTS 1: Gas Utility Long-term Plan (GULP) Biannual Progress Update to UAC 2:Excerpts from Utilities Advisory Commission Meeting Minutes of April 19, 2006: Draft CMR:255:06 Page 1 of 2 PREPARED BY: DEPARTMENT APPROVAL: CITY MANAGER APPROVAL: KARLA DAILEY Resource Planner Assistant City Manager CMR:255:06 Page 2 of 2 ATTACHMENT 1 GAS UTILITY LONG-TERM PLAN (GULP) BIANNUAL PROGRESS UPDATE APRIL 19, 2006 4/5/06 UAC Item 2: GULP Update TO:UTILITIES ADVISORY COMMISSION 2 DATE: APRIL 5, 2006 SUBJECT:GAS UTILITY LONG-TERM PLAN (GULP) BIANNUAL PROGRESS UPDATE This is an information report and no UAC action is required. No further reports are planned. BACKGROUND The Finance Committee voted unanimously on August 3, 2004 to accept staff’s recommendation to approve the six Gas Long-Term Plan (GULP) recommendations and requested that staff provide a biannual update on the status of the recommendations (CMR:335:04). Council approved that recommendation on September 13, 2004 (CMR:368:04). Staff provided an update to Council on April 25, 2005 (CMR: 186:05). This information-only report is an update on the six Council-approved Gas Long-Term Plan (GULP) recommendations. DISCUSSION The GULP analysis evaluated potential City of Palo Alto acquisition and participation in five main areas: gas storage capacity, gas pipeline capacity, gas wellhead reserves, prepayment for gas, and gas efficiency programs. In parallel, the City gas commodity procurement strategy was revisited and revised (CMR: 167:04). Currently the City holds no long-term gas-related assets. Recommendation #1: Do not contract for natural gas storage capacity at this time. Storage was analyzed for two potential purposes: (1) swing gas for load-supply balancing and (2) taking advantage of seasonal price differences. The results of the analysis led to staff’s recommendation not to purchase storage assets. Currently, the City uses supply contracts to buy and sell gas within the month in order to balance supply with demand. This arrangement is more cost effective than using storage for daily and monthly balancing. In addition, storage cost is much greater than the expected benefit of seasonal price differences. Although staff’s conclusions have not changed since the last GULP update, staff continues to investigate the benefits of jointly contracting with other municipalities that have complimentary 4/5/06 UAC Item 2: GULP Update 1 of 4 seasonal demands to Palo Alto’s. The synergy created by such a parmership may result in an economically beneficial arrangement for both parties. Recommendation #2: Do not acquire additional natural gas pipeline capacity at this time. Pipeline capacity acquisition was not recommended given the City’s current gas commodity portfolio. Staff’s 2004 analysis showed that the tariff rates are much above the expected future value of all relevant pipeline routes and that the uncertainty of pipeline capacity value is such that the necessary long-term nature of such acquisitions does not result in an expected positive value. The fundamental components of staff’s analysis have not changed since the 2004 study or the last GULP update. Recommendation #3: Approve staff undertaking initial steps related to acquisition including: a) Identifying and evaluating potential consortiums including opportunities; b) Entering into consortium agreement to scout properties; c) d) gas reserve joint action Through the consortium, employing an investment bank and consultants to scout properties and spend up to $65,000 in FY 04-05 related to this effort; and Through the consortium, identifying attractive, feasible opportunities. Staff recommended consideration of membership in a consortium to investigate potential natural gas reserve acquisition and, if successful, proceeding with the next step of hiring an investment bank and consultants to scout for gas reserve properties. In the last GULP update staff reported that the timeline and structure of a consortium of Southern California electric utilities was incompatible with the City’s process requirements. Staff has now more thoroughly researched other municipal reserve acquisition projects and found the risks associated with such a purchase (both operational and environmental) to be incompatible with the City’s business and risk assessment practices. Staff is not currently pursuing this project. Recommendation #4: Do not participate in a gas prepay deal at this time. The City could take advantage of its low cost of borrowing capital and prepay for natural gas in exchange for a discounted price under new regulations implemented by the IRS as of October 2003. While staff found that it may be possible to structure a prepay deal with little credit risk to the City, the estimated benefit of $50,000 per year was too small to justify the staff time and the cost of formal, expert advice required to structure a deal. This recommendation has not changed. In the last GULP update staff reported that interest rates would be monitored since, as interest rate rise, this type of project becomes more attractive. Staff is still monitoring interest rates for this purpose. Recommendation #5: Pursue any lo~v-cost, high-value prospects to acquire supply-related resources that may arise from time to time. This recommendation has not changed. No high-value supply-related resources have been identified since the last GULP update. In the last GULP update, staff reported that the benefit of purchasing gas for delivery beyond three years from the present was being investigated. Periodically opportunities arise to take advantage of forward gas prices in 5-10 year timeframe. 4/5/06 UAC Item 2: GULP Update 2 of 4 Purchasing gas for delivery beyond 36 months will require explicit Council approval prior to execution. Staff is currently in the process of developing new enabling agreements for the purchase of natural gas commodity. In tandem, staff will review and possibly recommend revisions to the laddering strategy time horizon. Recommendation #6: Develop comprehensive demand-side management goals and implementation plan by Fall 2004 in time for incorporation into FY05-06 and future ratemaking and budget decisions. In the interim, continue implementation of current and planned FY 04-05 demand-side management programs. The in-depth analyses needed for a robust foundation to develop comprehensive demand-side management program goals and plans have taken longer than expected. The Rocky Mountain Institute assisted CPAU in reviewing CPAU’s electric and gas resource plans, including evaluating the technical and economic potential for residential and commercial natural gas efficiency options in Palo Alto. Initial results were presented to the UAC in November 2005, and the project Final Report Executive Summary was provided to the UAC in March 2006. RMI estimated that implementing all cost-effective gas energy efficiency measures by all CPAU customers could theoretically reduce long-term gas resource needs by up to 4.5 million therms per year (-12% of load) at a cost less than $0.65/therm, and up to 5.6 million therms per year (-15% of load) at a levelized cost of less than $1.00/therm. Careful program design and implementation, along with a long-term view, will be is required as it will take ten years or more to capture a significant portion of the achievable potential. Energy and Environmental Economics, Inc. is under contract to develop an efficiency program design tool tailored for CPAU to integrate electric, gas and water efficiency, and to include program labor and overhead costs in estimating program cost effectiveness. The tool will provide cost-effectiveness tests from several perspectives: utility, participant, community, and non- participant, and will also tie into systems used for tracking and reporting expenditures and estimated savings. This tool is expected to be in use by summer 2006, and will play a key role in developing a long-term multi-commodity integrated efficiency program plan that will incorporate the insights and ideas from the RMI study. As the integrated long-term plan is developed, staff is continuing implementation of the existing natural gas demand-side management programs (DSM), including evaluating opportunities to leverage portions of the annual Gas DSM budget of $273,400 to reduce Utilities costs. POLICY IMPLICATIONS The GULP recommendations support the Utilities Strategic Implementation Plan (CMR: 148:05), in particular: Strategy 2 - Manage supply portfolio risk as per Council policy to provide stable gas and electric rates, to preserve a supply cost advantage, and to manage business processes cost effectively; 4/5/06 UAC Item 2: GULP Update 3 of 4 Strategy 4 - Provide low and stable rates, adequate reserves, and budgeted transfers to the General Fund; and Strategy 6 - Provide targeted customer and environmental programs and services. PREPARED BY:Karla Dailey, Resource Planner REVIEWED BY: ~IRI-SI~ BALACHANDRAN !"Assistant Director of Utilities DEPARTMENT HEAD: CARL YEATS Director Services 4/5/06 UAC Item 2: GULP Update 4 of 4 ATTACHMENT 2 EXCERPTS FROM UTILITIES ADVISORY COMMISSION MEETING MINUTES OF April 19, 2006: DRAFT Bi-Annual GULP Progress Update Balachandran mentioned that there have not been any major changes since we began making these reports and staff would like this to be the last report the Commissioners receive unless there is something major that happens. Melton asked about the term ’enabling agreements’ and what it means. Staff replied the standard form contract is a purchase and sale agreement that allows gas to be purchased and sold back and forth between two parties. We have 5 agreements right now with different entities. We put our own constraints on the city when the contracts were approved by the Council. If we see an opportunity to make another deal, we’ll have to take to Council for approval.