HomeMy WebLinkAbout2002-02-04 City CouncilCity of Palo Alto
City Manager’s Report
TO:HONORABLE CITY COUNCIL
FROM:CITY MANAGER DEPARTMENT: UTILITIES
DATE:FEBRUARY 4, 2002 CMR: 113:02
TITLE:NATURAL GAS PURCHASE PLAN FOR FISCAL YEAR 2002-03
This is an informational report and no Council action is required.
BACKGROUND
Last winter’s unprecedented high gas prices and gas market volatility caused staff to
develop a structured natural gas purchasing plan. This gas purchasing plan defined the
fractions of each month’s gas requirement that are to be purchased over a three-year time
horizon. This "laddering" structure was implemented starting in winter 2000, and was
described to the Finance Committee via an informational report (CMR: 196:01) on April
17, 2001.
Staff presented an information report to the Utilities Advisory Commission (UAC) on
December 5, 2001 describing staff’s plan to diverge from the "laddering" structure for
fiscal year 2002-03 and purchase 100% of forecasted needs as soon as possible. The
UAC was supportive, and staff has implemented the revised plan.
DISCUSSION
Over the past several months, natural gas prices have dropped sharply from levels seen
last winter. Prices are projected to be about one fourth of last year’s peak price. This
CMR: 113:02 Page 1 of 3
decline is due to weather, an increase in gas storage, and a slumping economy. Staff
recognized an opportunity to purchase more gas for fiscal year 2002-03 at this time than
what was envisioned in the "laddering" structure, when prices can rise much more than
they can fall. Additionally, this will lead to greater cost and commodity budget certainty
and will enable staff to make rate-setting and budget-making decisions with less risk.
To that end, staff has deviated from the "laddering" approach and purchased, at fixed
prices, gas for CPAU’s customers who are not eligible to choose an alternative gas
commodity supplier. Purchasing the majority of the City’s natural gas requirements at
fixed prices will reduce the market price risk, but not totally eliminate gas cost
uncertainty. Additional gas, above the forecasted volumes, will be purchased at the
market price. Also, gas for those large customers who may choose an alternative
commodity supplier will be purchased either at the monthly market price (for those
customers who elect a market rate) or at a fixed price at the time of selecting a fixed-term
rate. These large customers account for approximately 23% of the total load and account
for the uncertainty remaining in the total gas cost.
RESOURCE IMPACT
The budget for fiscal year 2002-03 is currently set at $28 million, approximately 13%
less than the fiscal year 2001-02 budgeted cost of $32 million. Under the original
"laddering" goal for fiscal year 2002-03, the range of possible total, gas costs was
between $11 million and $31 million. The large range is attributed to having a large
portion of the gas load exposed to fluctuating wholesale market prices. As a result of
purchasing approximately 100% of expected load under the revised plan at current low
market prices, the total expected cost for fiscal year 2002-03 is $15 million and the range
of possible costs has narrowed from between $14.4 million and $17 million. In the
coming months staff will present to Council a retail rate decrease proposal that passes on
these budget savings to customers.
POLICY IMPLICATIONS
The revised gas purchasing plan for fiscal year 2002-03 diverges from the original
"laddering" approach previously reviewed by Council. Therevised plan was
implemented to achieve additional cost savings and rate certainty.The revised plan is
CMR:113:02 Page 2 of 3
consistent with the Council approved Utilities Strategic Plan to provide a supply cost
advantage compared to the market price and to maximize the General Fund transfers and
maintain financial strength.
PREPARED BY:
KARLA DAILEY
Resource Planner
DEPARTMENT HEAD:
JOHN~LRICH
Director of Utilities
CITY MANAGER APPROVAL:
EMILY HARRISON
Assistant City Manager
CMR: 113:02 Page 3 of 3