HomeMy WebLinkAboutStaff Report 6802
City of Palo Alto (ID # 6802)
City Council Staff Report
Report Type: Consent Calendar Meeting Date: 5/16/2016
City of Palo Alto Page 1
Summary Title: Resolution Authorizing City Manager to Purchase Natural Gas
Title: Staff Recommendation That the Council Adopt a Resolution
Authorizing the City Manager to Purchase a Portion of the City’s Natural Gas
Requirements From Certain Prequalified Natural Gas Suppliers Under
Specified Terms and Conditions During Calendar Years 2016 Through 2022,
Inclusive, With a $100 Miliion Maximum Aggregate Transaction Limit; and
Adopt an Ordinance Repealing Ordinance Number 4936, the Council's Prior
Authorization for Natural Gas Purchases
From: City Manager
Lead Department: Utilities
Recommendation
Staff recommends that the City Council:
1. Approve the attached resolution (Attachment A) authorizing the City Manager or his
designee to purchase a portion of the City’s natural gas requirements from certain
prequalified natural gas suppliers under specified terms and conditons (“Master
Agreements”) during calendar years 2016 through 2022, inclusive, subject to the
following limitations:
a. The date for natural gas delivery for each transaction shall not exceed 36 months
from the date the transaction is executed;
b. The delivery date for any transaction shall not extend beyond December 2022;
c. The maximum aggregate transaction limit under each Master Agreement shall be
$100 million;
d. All transactions are subject to the Palo Alto Municipal Code; and
e. All transactions are subject to the City’s Energy Risk Management Policy,
Guidelines and Procedures; and
2. Repeal Ordinance 4936 which authorized the City Manager to purchase a portion of the
City’s natural gas requirements from certain prequalified natural gas suppliers under
specified terms and conditions during calendar years 2007-2022, inclusive. (Attachment
B)
City of Palo Alto Page 2
Executive Summary
An active set of creditworthy counterparties is essential to ensure that the City of Palo Alto
Utilities (“City”) meets its obligation to meet customers’ natural gas demands. In 2007, via
Ordinance 4936, Council authorized the City Manager to transact with a set of prequalified
natural gas suppliers for the purchase and sale of natural gas via North American Energy
Standards Board, Inc. Contracts (“NAESB Contracts”, or “Master Agreements”. Ordinance 4936
authorized the City Manager to transact with those counterparties under specified terms and
conditions including a maximum expenditure of $65 million per Master Agreement. An increase
in the $65 million maximum expenditure is needed to continue to purchase natural gas for the
City’s retail load. Adopting the proposed resolution will realign the City Manager’s authority
with the current set of counterparties and establish adequate expenditure limits. Repealing
Ordinance 4936 and instead completing the proposed actions via resolution streamlines the
City’s administrative process as well.
Staff will seek Council approval prior to execution of any transaction outside of the above
limitations. Counterparties with valid gas Master Agreements include:
1. BP Energy Company;
2. ConocoPhillips Company
3. Mercuria Energy Gas Trading L.L.C.
4. Powerex Corp; and
5. Shell Energy North America (US), L.P.
Background
Approved Counterparties
In 2007, Council approved a set of gas Master Agreements (via adoption of Ordinance 4936)
enabling the City to transact for natural gas and gas-related products. The approved Master
Agreements were with the following counterparties:
1. BP Energy Company;
2. Coral Energy Resources, L.P.;
3. Sempra Energy Trading Corporation;
4. ConocoPhillips Company;
5. J.P. Morgan Ventures Energy Corporation; and
6. Powerex Corporation.
Between 2007 and 2015, Coral Energy Resources, L.P. merged into parent company Shell
Energy North America U.S. L.P., and Sempra Energy Trading Corporation was sold to J.P.
Morgan Ventures Energy Corporation, which was then sold to Mercuria Energy Gas Trading
L.L.C. The current set of counterparties includes:
1. BP Energy Company;
2. ConocoPhillips Company
3. Mercuria Energy Gas Trading L.L.C.
4. Powerex Corp; and
5. Shell Energy North America (US), L.P.
City of Palo Alto Page 3
Expenditure Limits
On April 19, 2012, Council adopted Resolution 9244 amending the Gas Utility Long-Term Plan
(GULP) Objectives, Strategies, and Implementation Plan to discontinue the laddering purchase
strategy and implement gas supply rates that change monthly according to market prices as
noted in Staff Report 2552. With the exception of a few de minimis fixed-price transactions
executed in the summer months to monetize excess pipeline capacity, all transactions are
priced at the short-term monthly and daily market indices. Therefore, the City does not have
any exposure to market price changes and does not have a need to diversify purchases across
multiple counterparties to minimize credit risk.
Under Ordinance 4936, Council delegated authority to the City Manager to transact under
Master agreements subject to certain conditions and restrictions including a $65 million
expenditure limit applied to each Master Agreement. Only two of the City’s counterparties,
Shell and Mercuria, are active bidders for the City’s index-based purchases, and only $7.5
million out of the $65 million approved expenditure remains for Mercuria as of February 29,
2016.
Discussion
All transactions under the Master Agreements will be executed by staff in accordance with the
Council-approved Energy Risk Management Policy, and internally-approved Energy Risk
Management Guidelines and Procedures. Council is provided with an update of all executed
transactions under the Master Agreements in the quarterly Energy Risk Management reports.
The cost of natural gas purchased under the Master Agreements is a function of market prices
and the City’s actual gas use. The City’s expected gas commodity cost is $8.3 million in fiscal
year (FY) 2017 and is forecasted to increase to $12.6 million by FY 2025, however gas prices are
volatile and unpredictable and actual costs incurred and passed through to ratepayers could be
different.
While the City has five enabled gas suppliers, it is likely that most transactions will be executed
with the two suppliers that have been most active over the past several years. Staff
recommends a maximum transaction limit of $100 million for each Master Agreement. This
increased limit will leave enough headroom, under the most heavily used contract, for an
estimated five years of gas purchases.
Efforts are underway to expand the number of counterparties enabled under gas Master
Agreements. Any new Master Agreements will be presented to Council for approval with
recommended conditions and restrictions including a maximum expenditure limit for each
Master Agreement.
City of Palo Alto Page 4
Alternatives
Council could elect to approve different expenditure limits, however lower limits could reduce
staff’s ability achieve the lowest cost for gas supplies.
Resource Impact
Approval of the recommendation will not impact the FY 2016 budget nor the FY 2017 proposed
budget request.
Policy Implications
Authorizing the City Manager to buy and sell natural gas to meet load obligations under the
Master Agreements conforms to existing Council-approved Energy Risk Management Policy and
the Palo Alto Municipal Code. Further, the recommendation is consistent with the Council-
approved GULP Objectives and Utilities Strategic Plan objective to manage supply cost by
negotiating supply contracts to minimize financial risk.
Environmental Review
Council’s authorization for the City Manager to purchase natural gas from prequalified suppliers
does not constitute a project for the purposes of the California Environmental Quality Act,
under Public Resources Code Section 21065, thus environmental review is not required.
Attachments:
Attachment A: Ordinance Repealing Gas NAESB Authority (PDF)
Attachment B: Resolution Extending Authority for Master Agreements (PDF)
NOT YET APPROVED
160414 jb 6053732 1
Ordinance No. ____
Ordinance of the Council of the City of Palo Alto Repealing Ordinance No.
4936, Which Authorized the City Manager to Purchase a Portion of the
City’s Natural Gas Requirements from Certain Prequalified Natural Gas
Suppliers Under Specified Terms and Conditions During Calendar Years
2007-2022, Inclusive
The City Council finds and declares as follows:
A. On March 12, 2007, the City Council adopted an ordinance authorizing
the City Manager to purchase a portion of the City’s natural gas requirements from certain
prequalified natural gas suppliers under specified terms and conditions during calendar years
2007-2022, inclusive, with a maximum expenditure limit of $65 million in for each Master
Agreement.
B. Since Council’s approval of Ordinance No. 4936, two counterparties, Shell
Energy North America (U.S.) L.P., and Mercuria Energy Gas Trading L.L.C., have been active
bidders for the City’s index-based gas purchases, and only $7.5 million of the approved $65
million expenditure limit remains for Mercuria Energy Gas Trading L.L.C. as of February 29,
2016. An increase in the maximum expenditure limit is needed to continue to purchase natural
gas for the City’s retail load.
C. The Council intends to adopt a resolution authorizing the City Manager to
purchase natural gas from one or more pre-qualified suppliers for delivery during calendar
years 2016 through 2022, inclusive, so long as the supplier with whom the City negotiates a
specific purchase transaction continues to be qualified and otherwise eligible to transact with
the City. Increasing the expenditure limit will provide for an estimated five years of gas
purchases.
D. Implementing this change via Council’s approval of a resolution rather
than an ordinance, as was done in prior years, will streamline the City’s administrative
processes. Therefore, staff recommends that Council repeal Ordinance 4936, and instead
adopt a resolution to be recommended for Council approval on May 16, 2016, outlining the
terms and conditions under which the City Manager can purchase a portion of the City’s natural
gas requirements.
NOW, THEREFORE, the Council of the City of Palo Alto does ORDAIN as follows:
SECTION 1. Ordinance 4936, Authorizing the City Manager to Purchase a Portion
of the City's Natural Gas Requirements from Certain Prequalified Natural Gas Suppliers under
Specified Terms and Conditions During Calendar Years 2007 Through 2022, Inclusive is repealed
in its entirety.
ATTACHMENT A
NOT YET APPROVED
160414 jb 6053732 2
SECTION 2. The Council hereby finds and determines that the repeal of this
Ordinance does not constitute a project under Public Resources Code Section 21065, thus no
California Environmental Quality Act assessment is required.
SECTION 3. This ordinance shall be effective on the 31st day after its adoption.
INTRODUCED:
PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
____________________________ ____________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
____________________________ ____________________________
City Attorney City Manager
____________________________
Director of Administrative Services
NOT YET APPROVED
160414 jb 6053733 1
Resolution No. _____
Resolution of the Council of the City of Palo Alto Authorizing the City
Manager to Purchase a Portion of the City’s Natural Gas Requirements
from Certain Prequalified Natural Gas Suppliers Under Specified Terms
and Conditions during Calendar Years 2016 through 2022, Inclusive
RECITALS
A. On April 19, 2012, the Council adopted Resolution #9244 amending the Gas
Utility Long-Term Plan (GULP) Objectives, Strategies, and Implementation Plan to discontinue
the laddering purchase strategy and implement gas supply rates that change monthly
according to market prices, as described in Staff Report #2552.
B. In accordance with GULP, the City must purchase and, incidental to
purchases, sell gas to meet the needs of its gas customers by contracting for terms varying
from less than one month to one month. The City's Energy Risk Management Policies,
described in Staff Report #5026, provide that the City will purchase only that quantity of gas
meeting its load requirements at the time a transaction is executed.
C. By Ordinance No. 4936, adopted March 12, 2007, Council authorized the
City Manager to negotiate and sign new, amended, or restated North American Energy
Standards Board, Inc. contracts (each a “NAESB Contract” or “Master Agreement”) with BP
Energy Company, Coral Energy Resources, L.P., Sempra Energy Trading Corporation,
ConocoPhillips Company, J.P. Morgan Ventures Energy Corporation, and Powerex Corporation,
and further authorized the City Manager or his designee, the Director of Utilities, to negotiate
one or more individual transactions, including, but not limited to, negotiating contracts,
addenda, confirmations and transactions. The authorization extended to individual
transactions executed under any number of NAESB Contracts with the referenced suppliers;
provided, however, (a) the maximum expenditure under any NAESB Contract shall not exceed
$65 million in the aggregate; and (b) the maximum term of any transaction shall not exceed
three years, commencing on the delivery date of the transaction.
D. Since Council’s adoption of Ordinance No. 4936, three approved
counterparties have undergone changes in corporate structure or ownership:
a.On June 1, 2008 Coral Energy Resources, L.P. was merged into parent
company Shell Energy North America (U.S.) L.P.
b.On December 1, 2010 Sempra Energy Trading Corporation was sold to
J.P. Morgan Ventures energy Corporation.
c.In October, 2014 J.P. Morgan Ventures Energy Corporation sold to
Mercuria Energy Gas Trading L.L.C. the portion of its gas trading business
with which the City transacts. On September 21 Council adopted
ATTACHMENT B
NOT YET APPROVED
160415 jb 6053733 2
Resolution 9545 approving an Assignment, Assumption and Consent
Agreement (Assignment Agreement) and authorizing the City Manager
or his designee to execute the Assignment Agreement, effectively
assigning the City’s NAESB with J.P. Morgan Ventures Energy
Corporation to Mercuria Energy Gas Trading L.L.C.
E. The current list of Council-approved counterparties includes: BP Energy
Company, ConocoPhillips Company, Mercuria Energy Gas Trading L.L.C., Powerex Corporation,
and Shell Energy North America (U.S.), L.P.
F. Since Council’s approval of Ordinance No. 4936, two counterparties, Shell
Energy North America U.S. L.P., and Mercuria Energy Gas Trading L.L.C., have been active
bidders for the City’s index-based gas purchases, and only $7.5 million of the approved $65
million expenditure limit remains for Mercuria Energy Trading L.L.C. as of February 29, 2016.
An increase in the maximum expenditure limit is needed to continue to purchase natural gas
for the City’s retail load.
G. The City intends to purchase natural gas from one or more of these pre-
qualified suppliers for delivery during calendar years 2016 through 2025, inclusive, so long as
the supplier with whom the City negotiates a specific purchase transaction continues to be
qualified and otherwise eligible to transact with the City.
H. Increasing the expenditure limit will provide for an estimated five years of
gas purchases. Further, effecting this change via Council’s approval of a resolution rather than
an ordinance, as was done in prior years, will streamline the City’s administrative processes.
NOW, THEREFORE, the Council of the City of Palo Alto RESOLVES as follows:
SECTION 1. The Council hereby authorizes the City Manager or his designee, the
Director of Utilities, to purchase a portion of the City’s natural gas requirements from the
prequalified suppliers by negotiating one or more individual transactions, including, but not
limited to, contracts, addenda, confirmations and transactions. The authorization shall extend
to individual transactions executed under any number of NAESB Contracts or Master
Agreements with the suppliers referenced in Recital F.
SECTION 2. The purchases negotiated under Section 2 shall conform to the
following requirements:
a. The maximum expenditure under any Master Agreement will be $100 million;
b. The maximum term of any transaction shall not exceed three years,
commencing on the delivery date of the transaction. The sentence preceding
notwithstanding, the City may enter into a transaction greater than three
years, if the Council grants prior approval to such transaction.
c. No transaction entered into with any of the referenced suppliers shall extend
beyond December 31, 2022.
NOT YET APPROVED
160415 jb 6053733 3
SECTION 3. The Council hereby finds and determines that the adoption of this
Resolution does not constitute a project under Public Resources Code Section 21065, thus no
California Environmental Quality Act assessment is required.
INTRODUCED and PASSED:
AYES:
NOES:
ABSTENTIONS:
ABSENT:
ATTEST:
_____________________________ _____________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
_____________________________ ______________________________
Senior Asst. City Attorney City Manager
______________________________
Director of Administrative
Services
______________________________
Director of Utilities