HomeMy WebLinkAbout04.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, 2022 through December 31, 2022, up to 1,000 decatherm per day a Page 1 of 2
Item 4.a.
CENTRAL SAN BOARD OF DIRECTORS
POSITION PAPER
DRAFT
MEETING DATE: JUNE 2, 2020
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, 2022 THROUGH DECEMBER 31, 2022, 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 the Central San's Strategic Plan, specifically Goal No. 3, to be a
fiscally responsible and effective wastewater utility, and Strategy 2 to manage costs.
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
$8.00/dth, continuing to generate power for the Treatment Plant is a cost benefit to Central San.
Staff is evaluating various equipment outage scenarios related to the sequencing of the Solids Handling
Facilities Improvement Project, DP 7348. The current plan is for the Cogeneration System to continue
producing energy through the duration of the project.
Generally, Central San agrees to purchase in advance approximately 1,000 dth per day of NG. For 2020,
staff has purchased 1,000 dth per day at an average Citygate price of$3.01/dth. The remaining 200 dth
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per day will be purchased during the month, or at the end of the month at market price.
In June 2019, the Board authorized the General Manager to agree to purchase NG through December 31,
2021, at a price not to exceed $4.00/dth. I n the last year, forward NG strip prices for 2020 remain in the
$3.00 to $4.00/dth range. Nationally, the overall NG storage value and production has been higher than
average, but prices have been increasing. The six-year average of two-year forward pricing is $3.52/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 2019-20 will be
approximately$5.00/dth for a total expenditure, including the added cost of transportation ($1.70/dth) of
approximately$2,000,000. The Fiscal Year 2019-20 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 2022 is approximately$3.40/dth. For Calendar
Year 2021, Central San has agreed to purchase 666 dth per day NG at a price of$3.06/dth. NG prices
tend to be lower during the shoulder seasons of spring and fall.
Pre-purchasing allows staff the flexibility to continue 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, 2022
through December 31, 2022 at a price not-to-exceed $4.00/dth. By authorizing gas purchases through
2022, Central San will be able to take advantage of future favorable pricing changes, thus stabilizing the
energy budget for the next three fiscal 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 item on June 2, 2020 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, 2022 through December 31, 2022, 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 2- Manage costs
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