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Home My WebLink AboutStaff Report 14805 City of Palo Alto (ID # 14805) City Council Staff Report Meeting Date: 10/3/2022 Report Type: Consent Calendar City of Palo Alto Page 1 Title: 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 for Delivery During Calendar Years 2023 Through 2028, Inclusive, With a $150 Million Maximum Aggregate Transaction Limit From: City Manager Lead Department: Utilities Recommendation Staff recommends that the City Council: 1. Adopt the attached resolution (Attachment A) authorizing the City Manager or their designee to purchase a portion of the City’s natural gas requirements from certain prequalified natural gas suppliers under specified terms and conditions (“Master Agreements”) for delivery during calendar years 2023 through 2028, 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 2028; c. The maximum aggregate transaction limit under each Master Agreement shall be $150 million. 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. In 2016, Council adopted Resolution 9586 updating and replacing Ordinance 4936, authorizing the City Manager to enter into natural gas purchase transactions with the pre-qualified suppliers through calendar year 2022 and increasing the maximum expenditure to $100 million per Master Agreement. An increase in the maximum expenditure limit from $100 million to $150 City of Palo Alto Page 2 million is needed to continue to purchase natural gas for the City’s retail load for delivery during calendar years 2023 through 2028. All natural gas purchase transactions are subject to the Palo Alto Municipal Code and the City’s Energy Risk Management Policy, Guidelines and Procedures. Staff will seek Council approval prior to execution of any transaction outside of the above limitations. 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. The current set of Council-approved counterparties which accounts for changes in corporate structure or ownership since 2007 includes: 1. BP Energy Company; 2. ConocoPhillips Company; 3. EDF Trading North America, L.L.C.; 4. Powerex Corp; and 5. Shell Energy North America (US), L.P. 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. Because the City does not purchase gas via long-term contracts, there is not a need to diversify purchases across multiple counterparties to minimize credit risk. Under Resolution 9586, Council delegated authority to the City Manager to transact under Master agreements subject to certain conditions and restrictions including a $100 million expenditure limit applied to each Master Agreement. BP Energy Company and EDF Trading North America, L.L.C. are active bidders for the City’s index-based purchases, and $36.1 million out of the $100 million approved expenditure remains for EDF Trading North America, L.L.C. as of June 28, 2022. City of Palo Alto Page 3 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 gas commodity cost is expected to be $16.2 million in fiscal year (FY) 2023 alone; however, gas prices are volatile and unpredictable and actual costs incurred and passed through to ratepayers could be different. While the City currently has 5 enabled gas suppliers, it is likely that most transactions will be executed with the 2 suppliers that have been most active over the past several years. Staff recommends a maximum transaction limit of $150 million for each Master Agreement. This increased limit will leave enough headroom, under the most heavily used contract, for an estimated ten years of gas purchases. There are efforts underway to expand the number of counterparties enabled under gas Master Agreements, including the adoption in 2016 (via Resolution 9628) of a standard form gas Master Agreement that new counterparties can sign on to at any time. 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. 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. Alternatives Council could elect to approve different expenditure limits; however, lower limits could reduce staff’s ability achieve the lowest cost for gas supplies if limits are reached for a given supplier. Resource Impacts Approval of the recommendation will not impact the FY 2023 budget. Environmental Review Council’s authorization for the City Manager to purchase natural gas from prequalified suppliers does not meet the definition of a project for the purposes of the California Environmental Quality Act, under Public Resources Code Section 21065 and CEQA Guidelines Section City of Palo Alto Page 4 15378(b)(5), because it is an administrative governmental activity which will not cause a direct or indirect physical change in the environment. Attachments: • Attachment A: Resolution 6055624 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 for Delivery during Calendar Years 2023 through 2028, Inclusive RECITALS A. Since April 19, 2012, the Council implemented gas supply rates that change monthly according to market prices, as described in Staff Report #2552. B.In accordance with the City’s Gas Utility Long-Term Plan (GULP), last updated June 5, 2017 (Staff Report #7967) 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, last updated December 17, 2018 (Staff Report #9813), 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.On May 16, 2016, Council adopted Resolution No. 9586, authorizing the City Manager to enter into natural gas purchase transactions with one or more of the pre- qualified suppliers through December 31, 2022 and increasing the maximum expenditure under any NAESB contract to $100 million. E.The current list of Council-approved counterparties which accounts for changes in corporate structure or ownership since Council’s adoption of Ordinance No. 4936 and Resolution No. 9586 includes: BP Energy Company, ConocoPhillips Company, EDF Trading North America, L.L.C., Powerex Corporation, and Shell Energy North America (U.S.), L.P. 6055624 F. The City intends to purchase natural gas from one or more of these pre- qualified suppliers for delivery during calendar years 2023 through 2028, 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. G. Since Council’s approval of Resolution No. 9586, BP Energy Company and EDF Trading North America, L.L.C. have been active bidders for the City’s index-based gas purchases, and $36.1 million of the approved $100 million expenditure limit remains for EDF Trading North America, L.L.C. as of June 28, 2022. H. An increase in the maximum expenditure limit is needed to continue to purchase natural gas for the City’s retail load for delivery during calendar years 2023 through 2028. 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 E. SECTION 2. The purchases negotiated under Section 1 shall conform to the following requirements: a.The maximum expenditure under any Master Agreement will be $150 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, 2028. // // // // // // // 6055624 // // SECTION 3. The Council hereby finds and determines that the adoption of this Resolution does not meet the definition of a project for the purposes of the California Environmental Quality Act (CEQA), under Public Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative governmental activity which will not cause a direct or indirect physical change in the environment. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: APPROVED: ________________________________ ________________________________ City Clerk Mayor ________________________________ ________________________________ Assistant City Attorney City Manager ________________________________ Director of Administrative Services ________________________________ Director of Utilities