HomeMy WebLinkAbout03.a. Review draft Position Paper to authorize the General Manager to purchase natural gas through an existing service agreement with Shell Energy North America, LP, for the period January 1, 2021 through December 31, 2021, up to 1,000 decatherm per day Page 1 of 2
Item 3.a.
CENTRAL SAN BOARD OF DIRECTORS
POSITION PAPER
DRAFT
MEETING DATE: JUNE 4, 2019
SUBJECT: REVIEW DRAFT POSITION PAPER TO AUTHORIZE THE GENERAL
MANAGER TO PURCHASE NATURAL GAS THROUGHAN EXISTING
SERVICE AGREEMENT WITH SHELL ENERGY NORTH AMERICA, LP, FOR
THE PERIOD JANUARY 1, 2021 THROUGH DECEMBER 31, 2021, 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
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
adjusting the input of Pacific Gas and Electric's imported electrical power. When NG prices stay below
about$8.00/dth, then 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. For 2019,
staff has purchased 1,000 dth per day at an average Citygate price of$3.04/dth. The remaining 200 dth
per day will be purchased during the month or at the end of the month at market price.
I n May 2018, the Board authorized the General Manager to agree to purchase NG through December 31,
2020, at a price not to exceed $4.00/dth. I n the last year, forward NG strip prices for 2019 remain in the
June 4, 2019 EOPS Regular Committee Meeting Agenda Packet- Page 3 of 19
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$3.00 to $4.00/dth range. Nationally, the overall NG storage value has been low, but production has
remained higher than average. The five-year average of two-year forward pricing was $3.74/dth; therefore,
a not-to-exceed price of$4.00/dth is appropriate. If the spot market price of NG remains at or near
$3.30/dth, Central San's average burner tip price for NG for Fiscal Year(FY) 2018-19 will be
approximately$5.05/dth for a total expenditure, including the added cost of transportation ($1.75/dth), of
approximately$2,100,000. The FY 2018-19 budget for NG is $2,000,000.
Forward NG prices normally includes a premium and are not as greatly affected by short-term price
changes. Current pricing for one-year strips of NG for 2021 is approximately$3.47/dth. Central San has
not yet agreed to purchase NG for calendar year 2020. 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, 2021 through December
31, 2021 at a price not-to-exceed $4.00/dth. By authorizing gas purchases through 2021, 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 June 4, 2019, and
recommended
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, 2021 through December 31, 2021 up to 1,000/dth per day
at a price not to exceed $4.00/dth, which does not include transportation service costs.
Strategic Plan Tie-In
GOAL THREE:Be a Fiscally Sound and Effective Water Sector Utility
Strategy 1 - Conduct long-range financial planning
June 4, 2019 EOPS Regular Committee Meeting Agenda Packet- Page 4 of 19