HomeMy WebLinkAbout13. Authorize purchase of natural gas from Shell Energy for 2020 Page 1 of 2
Item 13.
CENTRAL SAN BOARD OF DIRECTORS
' POSITION PAPER
MEETING DATE: MAY 3, 2018
SUBJECT: AUTHORIZE THE GENERAL MANAGER TO PURCHASE NATURAL GAS
THROUGH AN EXISTING SERVICE AGREEMENT WITH SHELL ENERGY
NORTH AMERICA, LP, FOR THE PERIOD JANUARY 1, 2020 THROUGH
DECEMBER 31, 2020, UP TO 1,000 DECATHERM PER DAYATA PRICE NOT
TO EXCEED $4.00 PER DECATHERM, EXCLUDING TRANSPORTATION
SERVICE COSTS
SUBMITTED BY: INITIATING DEPARTMENT:
CLI NT T. SHI MA, P.E., SENIOR ENGINEER OPERATIONS-RELIABILITYENG INEERING
REVIEWED BY: NEIL MEYER, PLANT MAINTENANCE DIVISION MANAGER
ANN SASAKI, DEPUTY GENERAL MANAGER
9
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Roger S. Bailey
General Manager
ISSUE
Board authorization is requested for the General Manager to agree to purchase natural gas (NG).
BACKGROUND
This recommended action aligns with Central San's Strategic Plan, specifically Goal No. 3, to be a fiscally
sound and effective water utility, and Strategy 1 to conduct long-range financial planning.
Central San uses approximately 430,000 decatherms (dth) of NG annually (or roughly 1,200 dth per day)
for the Treatment Plant's Cogeneration System and as backup fuel to landfill gas in the multiple-hearth
furnaces and auxiliary steam boilers. The Cogeneration System consumes approximately 80 percent of
Central San's NG and is operated to stay below the 25,000 metric tons carbon dioxide equivalent
greenhouse gas threshold to avoid mandatory offsets. This is accomplished by monitoring fuel use and
May 3, 2018 Regular Board Meeting Agenda Packet- Page 89 of 225
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adjusting the input of Pacific Gas and Electric's imported electrical power. When NG prices stay below
$9.00/dth, continuing to generate power for the Treatment Plant is a cost benefit to Central San.
Generally, Central San agrees to purchase in advance approximately 1,000 dth per day of NG. Each
transaction typically is for one-third of the total amount or 333 dth per day. For 2018, staff has purchased
1,000 dth per day at an average Citygate price of$3.24/dth. The remaining 200 dth per day will be
purchased at the end of the month at market price.
I n May 2017, the Board authorized the General Manager to agree to purchase NG through December 31,
2019, at a price not to exceed $4.25/dth. In the last year, forward NG strip prices for 2019 have remained
in the $3.00 to $4.00/dth range. Market prices are favorable for purchasing due to above-average NG
supplies. The five-year average of two-year forward pricing is $3.89/dth; therefore, a not-to-exceed price
of$4.00/dth is appropriate.
Forward NG prices include a premium and are not as greatly affected by short-term price changes.
Current pricing for one-year strips of NG for 2019 is approximately$3.00/dth. For calendar year 2019,
Central San has agreed to purchase the normal total amount of 1,000 dth per day at a price of$3.04/dth.
NG prices tend to be lower during the shoulder seasons of spring and fall.
Pre-purchasing allows staff the flexibility to respond to market changes. Locking in a fixed price for NG
can insure Central San against an upside cost; there is a market risk if prices go down, but staff believes
the down side benefit is less than the upside risk. Accordingly, staff recommends Board authorization to
allow the General Manager to agree to purchase NG for the period of January 1, 2020 through December
31, 2020 at a price not-to-exceed $4.00/dth. By authorizing gas purchases through 2020, Central San will
be able to take advantage of future favorable pricing changes, thus stabilizing the energy budget for the
next three years. The General Manager will keep the Board apprised of NG purchases.
ALTERNATIVES/CONSIDERATIONS
Central San could purchase all NG at market price each month or other frequency, or Central San could
agree to purchase just one year in advance.
FINANCIAL IMPACTS
Purchasing NG each month at market price presents a risk of market price volatility and excessive Central
San expenditures. Based on past experience, pre-purchasing NG can result in significant cost savings.
COMMITTEE RECOMMENDATION
The Engineering and Operations Committee reviewed this position paper on April 25, 2018 and
recommended approval of the agreement.
RECOMMENDED BOARD ACTION
Authorize the General Manager to purchase NG through an existing service agreement with Shell Energy
North America, LP, for the period of January 1, 2020 through December 31, 2020 up to 1,000/dth per day
at a price not to exceed $4.00/dth, which does not include transportation service costs.
May 3, 2018 Regular Board Meeting Agenda Packet- Page 90 of 225