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HomeMy WebLinkAboutMinutes - City Council - 2007-08-15 - Special Meeting 183 City Council, Special Meeting Council Chambers 777 Cypress Avenue Redding, California August 15,2007,3:00 p.m. The meeting was called to order by Mayor Dickerson with the following Council Members present: Bosetti, Jones, Murray and Stegall. I Also present were City Manager Starman, Assistant City Manager Bachman, City Attorney Duvernay, Electric Utility Director Feider, Assistant Director Electric Utility/Resource Planning Nichols, Electric Program Supervisor Arthur, City Clerk Strohmayer, and Assistant City Clerk Sherman. RESOLUTION - Authorizing Take-and-Pay Natural Gas Commodity Purchase, Negotiation of a Gas Storage Agreement and Increased Authorization for Forward Commodity Purchases. (E-120-058/E-120-150-676) City Manager Starman explained that due to anticipated increased reliance on natural gas as the primary fuel for future energy generation, Redding Electric Utility (REU) staffhas been discussing options with consultants experienced in this field to provide information to assist City Council in making an informed decision with respect to the proposed long-term agreement for a natural gas commodity purchase and associated issues. I Electric Utility Director Feider recalled that in 2006, the City Council authorized contract negotlations for Unit #6 at Redding Power, and with its anticipated completion in June 2010, and expiration ofth 25MW Contract with American Electric Power (AEP) in December of 2010, REU will significantly increase its reliance on natural gas as the primary fuel required to serve its customers. He said that increased natural gas usage is partly necessitated by the State of California's policy to severely restrict the use of coal and prohibit new nuclear energy development. Renewable energy will continue to provide a meaningful minority of REU's energy requirement, currently estimated at approximately 25-30%, given its intermittent nature and rapidly escalating cost. REU will continue to pursue renewable opportunities including solar thermal, additional wind energy, biomass, and geothermal when commercially attractive. Mr. Feider introduced Electric Program Supervisor Arthur. Mr. Arthur provided an overview of the Natural Gas Procurement Strategy covering Take- and-Pay (T &P) Purchase Commitments, Underground Gas Storage, and Forward Commodity Purchases. Take-And-Pay Purchase Commitment - Mr. Arthur explained that the natural gas T &P transaction is a unique opportunity, commercially viable due to recent federal legislation and on-going efforts ofthe investment banking community. He said that initially, T &P contracts provided publicly-owned utilities with limited cost reduction benefits and considerable risk which resulted in few completed transactions. As a result, the investment banking community redesigned its offer to provide additional benefits and significantly reduce risk making it possible to enter into 30-year T &P contracts which offer substantial discounts and no liability to the utility for repayment of the debt. I Mr. Arthur explained that new T &P contracts now assign the risk of repayment to the natural gas supplier, typically the investment bank, and usually include liquidated damage clauses that provide the utility with some ofthe contracted benefits - even if the transaction eventually unwinds. These new provisions have defined the T &P contract as a financially- attractive option for reducing costs for natural gas fuel required to serve retail customers. Mr. Arthur pointed out that several large California government-owned utilities have completed T &P transactions because it allows a municipal entity to issue non-recourse, tax- exempt debt to purchase natural gas for up to 30 years at a discount from the index. In this case, he said that the reference index would be the Pacific Gas & Electric (PG&E) City Gate gas price, and the discount benefit associated with a 30-year T &P is estimated to be in the range of$I.20 to $1.35 per decatherm (Dth) (15% to 20% from current market price), or $2 million per year given a 5,000 Dthlday requirement. The price is determined at the time the T &P transaction is performed and depends on the price of natural gas over the thirty-year term, and varying interest rates between tax exempt and taxable credit instruments. Mr. Arthur emphasized that these contracts do come with Internal Revenue Service (IRS) restrictions in that REU cannot contract for more natural gas than it can bum at Redding 8/15/2007 184 Power for sale to customers or sell to other "restricted-use" providers without risking a voided contract and loss of future discounts. He said the availability of the T &P option is unknown, but REU is currently pursuing this option through Modesto-Santa Clara-Redding (MSR) joint agency, which has issued an RFP, and narrowed the list to two finalists to be interviewed in late August. He added that REU is prepared to pursue the T &P option on its own or with another interested utility if it best meets the needs of its customers. Mr. Arthur explained that based on anticipated volumes to match forecasted growth, the non-recourse T &P financing will cost between $300 million and $350 million. Natural Gas Storage - Mr. Arthur explained that natural gas procured via T &P contracts can be placed in storage and withdrawn when needed to serve retail load, and peak needs can be served with discounted natural gas when peak period timing is unknown. He said the natural gas can be stored and used later to maximize REU' s purchase, and because the requirements of these contracts preclude sale of natural gas on the open market, excess gas (if generated) can be placed in storage or re-marketed to other "restricted use" entities. By utilizing storage, Mr. Arthur estimated that an additional 2,000 Dthlday of natural gas can be purchased within IRS guidelines; at a $1.25 per Dth rate, potential financial benefits from storage could exceed $0.8 to $1.2 million per year. Preliminary discussions with Northwest National Gas Company (Northwest) indicate that the price is fixed for the contract term, and a possible opportunity to reduce annual cost with an up-front payment is being considered. I Mr. Arthur explained that it has been suggested that the annual cost for 1 billion cubic feet (BCF) of storage will cost $1.7 to $2.0 million, which is $0.9 million to $1.2 million more than the current cost of$0.8 million. However, Mr. Arthur pointed out that with a one-time, up- front payment of approximately $1 7 to $29 million, it may be possible to decrease annual storage costs by $150,000 to $200,000. Mr. Arthur said the recommended 1 BCF of storage will permit REU, on any given day, to place its entire T &P contracted natural gas in storage to provide for 200 days at a 5,000 Dthlday rate. It will also allow natural gas withdrawal sufficient to operate both Unit #5 and/or Unit #6 and one additional combustion turbine for up to 40 days if necessary. Mr. Arthur summarized that this, overall, optimizes restricted T &P natural gas use with other purchases of unrestricted natural gas to meet customer needs. I Expanded Authorization for Forward Commodity Purchases - Mr. Arthur related that the combination ofT &P gas contracts and forward-market purchases at a fixed price creates the potential for gas purchases in excess of the quantity actually required for Redding Power generation. He said it is also recommended that REU's natural gas services provider, currently Constellation Energy, be instructed to sell excess quantities at the time the price is set for prepay purchases, typically in the month ahead, at PG&E City Gate market. Mr. Arthur recalled that in March 2001, Council authorized REU to forward purchase the natural gas commodity up to $16 million per year for up to 10 years which permitted 100% coverage of expected natural gas fuel requirements for Redding customers. However, with the completion of Unit #6 and the commodity price escalation from $3 to $5 to $5 to $9 range, it is no longer possible to fully cover requirements within that $16 million limit. He related that by increasing the authorized level of forward purchases from $16 to $25 million, and extending the time window from 10 to 12 years, it will be possible to meet requirements. Mr. Arthur underscored that given the present authorization level and current gas market prices, REU has the ability to only forward purchase an additional 2,000 to 2,500 Dthlday of commodity natural gas which results in the ability to cover approximately 70% of its expected requirement rather than 100%. Electric Utility Director Feider recommended that the City Council adopt the resolution authorizing the Electric Utility Director to negotiate a 30-year non-recourse Take-and-Pay natural gas commodity purchase agreement, negotiate a long-term natural gas storage agreement with Northwest Natural Gas Company and increase existing authorization limits for forward commodity purchases from $16 million per year not to exceed 10 years, to $25 million per year, not to exceed 12 years. I In response to Council Member Stegall, Mr. Arthur defined renewable energy and added that the City has been fortunate in that the energy it receives is more useful than raw energy. He also pointed out that when the City began using renewable energy, the cost was $1 million per megawatt; today's cost is $2 million per megawatt which underscores the significant financial impact which must be considered to stabilize prices. 8/1512007 185 Mayor Dickerson questioned the timing for Council to make such a policy decision. Electric Program Supervisor Arthur said that staffwill return the negotiated contract to Council for consideration within the next three to four months so that Council will be better informed to make the final policy decision at that time. Dan Hartman, Managing Director of Public Financial Management, Inc. (PFM) Group provided a simple definition of a T &P contract as a government entity issuing bonds for future gas delivery that can run for 30 years. He said these contracts generate a significant discount which ranges from 10% to 15% between the tax and tax-exempt rate. I Electric Utility Director Feider emphasized that T&P contracts do not insulate Redding against gas price volatility, but provide a discount from the market price at any given time. MOTION: Made by Council Member Stegall, seconded by Council Member Jones adopting Resolution No. 2007 -177, a resolution of the City Council of the City of Redding authorizing the Electric Utility Director or his designee to negotiate a 28-30 year Take-and-Pay Natural Gas Contract, a 28-30 year Natural Gas Storage Contract with Northwest Natural Gas Company or affiliate, and expand the Redding Electric Utility's authorization to purchase natural gas from $16 million to $25 million for up to 12 years. The Vote: AYES: Council Members: Bosetti, Jones, Murray, Stegall and Dickerson NOES: Council Members: None ABSTAIN: Council Members: None ABSENT: Council Members: None Resolution No. 2007-177 is on file in the Office of the City Clerk There being no further business, at the hour of 4:42 p.m., Mayor Dickerson declared the meeting adjourned. I APPROVED ~ o:zg~- Mayor ATTEST: ~~1 CIty Clerk I 8/15/2007