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HomeMy WebLinkAboutMinutes - City Council - 2000-09-06 - Adjourned Meeting 184 City Council, Adjourned Meeting Civic Center Council Chambers 777 Cypress Avenue, Redding, California September 6,2000, 12:00 p.m. The meeting was called to order by Mayor Anderson with the following Council Members present: I Cibula, Kight, McGeorge, and Pohlmeyer. Also present were City Manager Warren, Assistant City Manager Perry, Deputy City Manager Starman, City Attorney Wingate, Electric Utility Director Feider, Electric Program Supervisor Graves, Electric Program Supervisor Keener, Electric Group Manager Russell, Electric Program Supervisor King, Electric Group Manager Nichols, Electric Utility Resource Planner Arthur, Electric Utility Resource Planner Watros, City Clerk Strohmayer, and Executive Secretary English. RESOLUTION - Authorizing Execution of Purchase Power Contracts Resulting from the Final Power Alternatives to Request for Proposal Schedule No. 3368 - Continued from the September 5,2000, Regular Council Meeting (E-090 & B-050-100) Electric Utility Director Feider brought additional information to the City Council for consideration to authorize purchase power contracts resulting from the final power alternatives to Request for Proposal Schedule No. 3368. Mr. Feider outlined power supply cost comparisons from Fiscal Year (FY) 2001 to FY 2009 and the cost of service for FY 2000. Council Member Cibula questioned whether or not the rates charged to consumers will remain the I same regardless ofthe City's costs. Mr. Fieder indicated that if the City is exposed to a fluctuating market, the consumer rates will be affected. However, approval of staffs recommendation will secure a set price through the purchase power agreement and keep a rate hike from occurring. City Manager Warren stated that 71 percent of the City's power is derived through a contract with Western Area Power Administration, and this amount will decrease to 30 percent by the year 2004. This means that the City will be forced to purchase power through the open market. Mr. Warren explained that this is the reason staff has negotiated a contract to purchase additional power for an amount not to exceed that which is currently being paid. In response to Council Member Cibula, Mr. Fieder clarified that this proposal would guarantee the purchase of a certain amount of electricity, and any excess power can be sold. Mayor Anderson asked what amount is necessary to fill the City's anticipated power needs. Resource Planner Watros related that there is an approximate deficit of 400 gigawatt (GW) hours for the period of 2005 forward. If the contract is approved, the deficit will decrease by half to 200 GW hours. In response to Council Member Cibula, Mr. Fieder responded that any price reduction wo~ld not be significant. However, there are provisions within the proposed contract that deal with this scenario. It is the recommendation of the Electric Utility Director that the City Council adopt a resolution authorizing the Mayor to execute a purchase power contract for up to 25 megawatts (MW) of capacity and associated energy for a 10-year term beginning in late 2004. I 09/06/2000 I I I 185 Electric Utility Resource Planner Arthur summarized the following highlights of a prototype 10-year annual contract for 25MW: 1. 2. 3. 4. 5. 6. 7. The price would be $45.05MWH flat with no escalation. Adds 25MW base load resource at approximately the existing average system cost. Both winter and summer energy would be provided. Provides a hedge against high gas prices (>$4.00) and the loss of other supply resources. Complements the existing portfolio. An annual cost of$9.9 million. A 10-year cost of $99 million. Mr. Arthur explained that the provider of this product is Enron which is the largest energy marketing company in the world and worth approximately $20 billion. Enron has its own energy trading exchange which currently does business in excess of $34 billion per year. In response to Council Member Cibula, Electric Utility Resource Planner Arthur confirmed that the contracted price will not increase for ten full years. Mr. Arthur also discussed the following steps to assure performance: (1) diversify portfolio to limit exposure to any single contingency (fuel, outage, nonperformance), (2) conduct business with credit- worthy counter parties (established, investment grade record of performance), and (3) develop contract language. Electric Utility Resource Planner Arthur reviewed the following contract language: 1. Establish a prudent credit limit (a threshold amount )-approximately $12 million in this case at this time. Require additional collateral above the threshold amount in the form of cash or letter of credit or equivalent liquid asset (performance assurance). Require additional performance assurance (collateral) should the credit worthiness of the counter party decline in bond rating during the contract period (material adverse change). 2. 3. In response to Mayor Anderson, Mr. Arthur clarified that Enron has proposed that they not be required to post additional collateral until such time as the exposure exceeds $25 million, but they have also agreed to post a guarantee letter at a large operating subsidiary level for the entire $25 million. Mr. Arthur was confident that ifthis contract is finalized, the City will not have appreciable exposure. Council Member Pohlmeyer questioned to what extent Enron manufactures any of the energy to be produced. Mr. Arthur commented that Enron has limited generation capabilities. Although Enron has purchased generation assets within the northeast and mid-west areas of the Country, he pointed out that Enron usually buys and sells assets as the market conditions change. Council Member Pohlmeyer questioned the possibility of obtaining a comparable price from a company which has generating capacity. Electric Utility Resource Planner Arthur stated that the difficulty with such an arrangement is that all of the short-listed parties have offered power marketing types of arrangements wherein they would make the sale to the City and then sell against the market to cover such an obligation. Staff did not receive any competitive offers that were associated with a fixed plan. 09/06/2000 186 Council Member Pohlmeyer questioned whether or not the City is up against a time constraint to capture these units of energy which would require a decision from the Council at this time. He suggested the possibility of making this decision while considering the issue of the City acquiring additional generating capacity for itself for the entire amount required. Mr. Arthur responded that the price will fluctuate in the future depending upon the market. He stated that this price represents an expansion of the City's existing resources approximating its overall existing cost. Mr. Arthur opined that this price will fall below future market conditions and compliment a subsequent decision I to move forward with the expansion of Redding Electric Utility (REU). He maintained that this will allow the City broader diversity resulting in lower overall costs throughout the contract life. Council Member Pohlmeyer asked how long it will take for REU to complete a proposal outlining the process and the cost of generating 50 units of capacity. Mr. Arthur stated that while staff is moving forward with contract negoti~tions for the expansion ofREU, which is approximately a 40 to 50 MW facility, it would be difficult to determine when exactly those contract discussions will be completed. He further stated that a great deal depends on the complexity of these discussions in terms of providing the City with the necessary assurances that the facility will be built at the agreed upon cost. Despite these facts, Mr. Arthur estimated that it will take approximately one to two months for the completion of such a proposal. Electric Utility Director Fieder and Electric Utility Resource Planner Arthur both explained that staff has shadow priced the option to expand REU to compare against this resource. Mr. Arthur explained that it appears that this particular offer is approximately the same or slightly less than what staff anticipates the cost will be to expand REU under long-term, reasonable gas prices. Council Member Pohlmeyer expressed concern about the description ofEnron. He stated that Enron is not significantly in the power production business but in the contract rights acquiring and trading business. Mr. Pohlmeyer asked if the City enters into this agreement, will it be forced to rely be upon Enron's ability to acquire other contract rights from other sources. Mr. Arthur answered that I while this statement is true, there will be guarantees and assurances requiring financial payments from Enron to the City if the energy is not delivered at the price specified. Council Member Pohlmeyer expressed a preference to contracting with a company that actually produces some of the energy to be provided. He asked what the downside would be if the decision is delayed until the full 50MW can be attained. Mr. Feider replied that the price will probably increase if the decision is deferred. He estimated that it will take one to two months to develop a typical proposal. Council Member McGeorge asked if the contract rate is ap. average price. Mr. Arthur stated that the price has been much higher within the recent past, and this is an estimate of what it could become in the future during the 10 years of the contract life. Mr. Arthur clarified that this contract does not lock in the price of gas for REU, it locks in megawatt hours and equivalent gas price. If gas prices fall, the City will be able to produce at a lower price at REU. If gas prices rise, the cost of additional production at REU will increase above this number. In response to Council Member Cibula, Electric Utility Resource Planner Arthur s~ated that it is possible that prices will increase over the next two months. Electric Utility Director Fieder indicated that the price is more likely to increase than decrease, because the State of California is significantly short of resources and change in this condition is not anticipated within the foreseeable future. I 09/06/2000 I I I 187 Mayor Anderson questioned whether it would be worthwhile to obtain a guarantee that ifEnron does not perform, the City can take over any long-term purchase power contracts Enron has made with other suppliers to meet the City's needs. Mr. Arthur opined that this would not be possible given the environment of the power market. He indicated that it is usually not a specific, one-to-one assignment between a delivery the power company has committed to and how the company covers such a commitment. Mr. Fieder stated that Enron would not be willing to allow the City to go behind its hedging strategy. Council Member Pohlmeyer asked if the City's energy portfolio would receive additional diversification by decreasing the number of units of energy purchased in the contract with Enron and entering into a contract with another company that actually produces this power for the remaining units. Mr. Fieder recommended against cutting the units from 25 MWH, because most of the companies would not respond to anything lower. Mayor Anderson asked if after hearing the Council Members' concerns staff would change its recommendation. Electric Utility Director Fieder stated that in order to raise the comfort level of the Council Members, a six-month purchase could be considered. However, it was still his recommendation that the City Council approve the original proposal. Council Member Cibula asked if any radical change in legislation that may occur during the next ten years could be addressed in the contract. Electric Utility Resource Planner Arthur indicated that the potential for radical change in either the federal, state, or local regulatory environment is addressed in the contract. If such a change makes the contract illegal or creates a significantly adverse economic consequence, then the City will price the value of the contract at that time and the prevailing party will receive a financial payment in lieu of physical performance. Council Member Kight summarized that staff is recommending that the City Council authorize the purchase of a product (energy) at a good price, and the question is whether or not there is a willingness to take a chance that the price will not go any lower. He expressed an unwillingness to take such a chance. Council Member Pohlmeyer indicated to wait a few months on this issue and an interest in seeing a recommendation which would take care of the entire energy deficit. Council Member McGeorge related that he supported staff s recommendation and did not believe prices will drop any lower. Electric Utility Resource Planner Arthur assured the City Council that staff will work diligently to obtain the best protection available to the City against bankruptcy. MOTION: Made by Council Member McGeorge, seconded by Council Member Kight, adopting Resolution No. 2000-146, a resolution of the City of Council of the City of Redding authorizing the Mayor to execute a purchase power contract, as recommended by the City Manager and approved as to form by the City Attorney, for up to 25 MW of capacity and associated energy for a 10-year term beginning in late 2004 from the short list of RFP proposers. Voting was as follows: Ayes: Noes: Absent: Abstain: Council Members - Cibula, Kight, McGeorge, Pohlmeyer, and Anderson Council Members - None Council Members - None Council Members - None Resolution No. 2000-146 is on file with the Office of the City Clerk. 09/06/2000 188 ADJOURNMENT There being no further business, at the hour of 1: 15 p.m., Mayor Anderson declared the meeting adjourned. APPROVED ~e~~ ayor ATTEST: ~~ City Clerk 09/06/2000 I I I