HomeMy WebLinkAbout03. Authorize GM to purchase natural gas through service agreement with Shell Energy North America, LP January 1, 2026 through December 31, 2026Page 1 of 2
Item 3.
DCENTRALSAN
MEETING DATE: JUNE 20, 2024
BOARD OF DIRECTORS
POSITION PAPER
SUBJECT: AUTHORIZE THE GENERAL MANAGER TO PURCHASE NATURAL GAS
THROUGH AN EXISTING SERVICE AGREEMENT WITH SHELL ENERGY
NORTH AMERICA, LP, FOR THE PERIOD OF JANUARY 1, 2026 THROUGH
DECEMBER 31, 2026, UP TO 1,200 DEKATHERMS PER DAYATA PRICE
NOT TO EXCEED $7.00 PER DEKATHERM, EXCLUDING
TRANSPORTATION SERVICE COSTS
SUBMITTED BY: INITIATING DEPARTMENT:
CLINTSHIMA, SENIOR ENGINEER OPERATIONS-RELIABILITYENGINEERING
REVIEWED BY: NEIL MEYER, PLANT MAINTENANCE DIVISION MANAGER
GREG NORBY, DEPUTY GM - ENGINEERING & OPERATIONS
Roger S. Bailey
General Manager
ISSUE
Board of Directors (Board) authorization is requested for the General Manager authority to purchase
natural gas (NG) futures contracts to hedge against excessive future NG price increases.
BACKGROUND
Central San uses approximately 430,000 dekatherms (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.
Thus far in 2024 when NG burner tip prices remained below approximately $13.80/dth, which includes
transportation, continuing to generate electrical power for the Treatment Plant is a cost benefit to Central
June 20, 2024 Regular Board Meeting Agenda Packet - Page 16 of 130
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San. The breakeven cost constantly fluctuates based on plant load and utility rate schedules. The monthly
average breakeven cost is posted in the quarterly energy usage reports. Staff targets NG purchases to
remain below the breakeven cost.
Generally, Central San agrees to purchase in advance approximately 1,000 dth per day of NG. For 2024,
staff purchased 1,000 dth per day at an average Citygate market price of $5.54/dth. The remaining amount
is purchased during the month, or at the end of the month, at market price.
If the average spot market price of NG remains at or near $7.00/dth, Central San's average burner tip
price for NG for fiscal year 2023-24 will be approximately $9.27/dth for a total expenditure, including the
added cost of transportation ($4.14/dth) of approximately $4,300,000. This compares to the current year
budget for NG purchases of $4,400,000.
Pre -purchasing allows staff the flexibility to continue to respond to market changes. Locking in fixed pricing
for NG can insure Central San against an upside cost; there is a market risk if prices go down, but staff
believes the downside 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, 2026
through December 31, 2026 at a price not -to -exceed $7.00/dth. By authorizing gas purchases through
2026, Central San will be able to take advantage of future favorable pricing changes, thus stabilizing the
energy budget for a third fiscal year. The General Manager will keep the Board apprised of NG purchases.
ALTERNATIVES/CONSIDERATIONS
1. Central San could purchase all NG at market price on the spot market (Not recommended).
2. Central San could pre -purchase up to three years in advance and save costs as long as the pre-
purchase price is less than the breakeven price for electricity using Cogeneration (Recommended).
FINANCIAL IMPACTS
Purchasing NG each month at the spot 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 matter at its June 5, 2024 special meeting and
recommended approval.
RECOMMENDED BOARD ACTION
Authorize the General Manager to purchase natural gas through an existing service agreement with Shell
Energy North America, LP, for the period of January 1, 2026 through December 31, 2026, up to 1,200
dekatherms per day at a price not to exceed $7.00 per dekatherm, excluding transportation service costs.
Strategic Plan Tie -In
GOAL FOUR: Governance and Fiscal Responsibility
Strategy 3 - Maintain financial stability and sustainability
June 20, 2024 Regular Board Meeting Agenda Packet - Page 17 of 130