HomeMy WebLinkAboutStaff Report 186-05/
City of Palo Alto
City Manager's Report
TO: HONORABLE CITY COUNCIL
FROM: CITY MANAGER DEPARTMENT: UTILITIES
DATE: APRIL 25, 2005 CMR:186:0S
SUBJECT: GAS UTILITY LONG-TERM PLAN (GULP) BIANNUAL PROGRESS
UPDATE
This is an informational report and no Council action' is required.
BACKGROUND
The Finance Committee voted unanimously on August 3, 2004 to accept staffs 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 (CMR335.04). Council
approved that recommendation on September 13, 2004 (CMR:368.04). This information-only
report is an update on the six Council-approved Gas Long-Term Plan (GULP) recommendations.
Three main factors drove the need to develop GULP: (1) a need to review and update the current
commodity purchasing strategy with public input; (2) the possible need to commit to PG&E
assets as part of a PG&E bankruptcy negotiation (not applicable at this time); and (3) the need to
be prepared for possible new regulations imposing minimum asset holdings for core customers.
In addition, GULP addresses recommendation #20 in the Assessment of Utility Risk
Management Procedures by the City Auditor, "CP AU should continue to regularly and actively
(a) review the performance of the energy procurement strategy, (b) quantify the risk and cost
consequences of alternatives, and (c) communicate the risks and costs of recommended revisions
to the City Council."
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 season price differences. The results of the analysis led to staffs
recommendation not to purchase storage assets at this time. The current arrangement the City
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has with suppliers whereby gas is seld to. er beught frem the City at a pre-arranged daily market
index prices in erder to. balance lead and supplies is mere cest-effective than sterage. Sterage
cest is much greater than the expected benefit ef seasenal price differences.
Staff is, hewever, investigating the benefits ef jeintly centracting with anether municipality that
has seasenal demands that are cemplementary to. Pale Alte's. The synergy created by such a
partnership may result in an ecenemically beneficial arrangement fer beth parties.
Recemmendatien #2: De net acquire additienal natural gas pipeline capacity at this time.
Pipeline capacity acquisitien was net recemmended given the City's current gas cemmedity
pertfelie. Staffs analysis· shewed that the tariff rates are much abeve the expected future value
ef all relevant pipeline reutes and that the uncertainty ef pipeline capacity value is ~uch that the
necessaryleng-term nature ef such acquisitiens do.es net result in an expected pesitive value.
Staffs analysis efthis asset has net changed.
Recemmendatien #3: Appreve staff undertaking initial steps related to. gas reserve acquisitien
including: a) identifying and evaluating petential censertiums including jeint actien
eppertunities; b) entering into. censertium agreement to. sceut preperties; c) threugh the
censertium, empleying an investment bank and censultants to. sceut preperties and spend up to.
$65,000 in FY 04-05 related to. this effert; and d)threugh the censertium, identifying attractive,
feasible eppertunities.
Staff recemmended pursuing jeining a censertium to. investigate petential natural gas reserve
acquisitien and, if successful, preceeding with the next step, namely hiring an investment bank
and censultants to. sceut fer gas reserve properties. This phase will utilize the prepesed FY
04/05 budget fer this preject ef $65,000.
Staff did identify a gas develepment project censertium ef mestly Seuthern Califernia electric
utilities. The agreement ameng the parties laid eut a multi-phase gas reserves purchasing plan
whereby each participant cemmitted, up frent, to. a percentage ef all gas reserve purchases by the
censertium. The City ef Les Angeles was the project manager and the main financing
erganizatien was the Seuthern Califernia Public Pewer Autherity (SCPP A). Staff reviewed the
agreement and the structure ef the preject and determined that the shert ti~eline required fer
Pale Alto. to. make a large financial cemmitment was inccmpatible with the City's process
requirements. Additienally, staff was uncemfertable with the petentiallack ef centrel ever the
preject decisiens, and staff time was being spent en ether high-prierity projects.
Staff centinues to. seek eut ether censertiums including a' pessible project group invelving
Nerthern Califernia Pewer Asseciatien (NCPA) members, a greup with which the City already
has a werking relatienship. .
Recemmendatien #4: De net participate in a gas prepay deal at this time.
The City ceuld take ~dvantage ef its lew cest ef capital and prepay fer natural gas in exchange
fer a disceunted price under new regulatiens implemented by the IRS as ef Octo. ber 2003. While
stafffeund that it may be pessible to. structure a prepay deal with little credit risk to. the City, the
estimated benefit ef $50,000 per year was tee small to. justify the staff time and cest ef fermal,
expert advice required to. structure a deal. This recemmendatien has net changed. Hewever,
CMR:186:05 Page 2 cf4
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staff will continue to monitor interest rates since, as interest rate rise, this type of project
becomes more attractive.
Recommendation #5: Pursue any low-cost, high-value prospects to acquire supply-related
resources that may arise froni time to time.
This recommendation has not . changed. No high-value supply-related resources have been
identified. Staff is, however, in the process of analyzing the benefit of purchasing gas for
delivery beyond three years from the present. Inflation-adjusted forward gas prices in the 2008-
2010 timeframe appear relatively inexpensive in a preliminary analysis. Extending the time
horizon for gas purchases would require amending the Gas Master Agreements and explicit
Council approval prior to execution.
Recommendation #6: Develop comprehensive demand-side· management goals and
implementation plan by Fall 2004 in time for incorporation into FY05-06 and future raternaking
and budget decisions. In the interim, continue implementation of current and plamied FY 04-05
demand-side management programs.
Development of comprehensive demand-side management goals is being managed under the
Rocky Mountain Institute (RMI) project that was initiated in Fall 2004. Staff is working with
RMI, a leading planning and analysis organization, to implement an integrated approach for a
robust energy resource portfolio to meet balanced objectives and reliable service at low and
stable cost/rates in an environmentally responsible manner. RMI has developed state-of-the art
resource planning principles called the Energy Resource Investment Strategy (ERIS) which is
directly applicable to CPAU. RMI received a grant from the William and Flora Hewlett
Foundation to apply these unique ERIS principles to utilities resource planning. RMI will apply
$30,000 of this grant to Palo Alto's proposed project. Palo Alto's cost is $75,600. The specific
goal of the project is to refine the local resource elements of CPAU's electric and gas portfolio
implementation plans to meet the objectives and guidelines reflected in the long-term plans, with
particular attention to local generation alternatives, and demand-side resources.
In the interim, staff recommended continuing implementation of current and planned FY 04-05
demand-side management programs (DSM). This includes evaluating opportunities to leverage
portions of the annual Gas DSM budget of $225,000 to reduce Utilities costs. An example.
would be targeting supplemental furnace rebates to Rate Assistance Program (RAP) participants
having older pilot light units in. order to reduce the number of Field Service seasonal pilot tum-
on and tum-off workload. This could result in savings to both the participating customer
(operating costs) and the Utilities Department (labor and financial subsidies).
POLICY IMPLICATIONS
The GULP recommendations support the Utilities Strategic Implementation Plan (CMR:223:01),
in particular, Strategy 2 -Preserve a supply cost advantage compared to the market price and
Strategy 6 -maintain stable General Fund transfers, and maintain financial strength.
CMR:186:05 Page 3 of 4
PREP ARED BY:
DEPARTMENT HEAD:
Karla Dailey -Resource Planner'
Ipek Connolly -Resource Plannet
Anthony Enerio -Manager Utility M rketing Services
CITY MANAGER APPROVAL:
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