March 23, 2004

SUBJECT:  New Natural Gas Purchase Agreement for Water Pollution Control Plant

REPORT IN BRIEF 

Natural gas is purchased by the City for use in the power generation facility at the Water Pollution Control Plant (WPCP) from Pacific Gas and Electricity (PG&E). Purchased natural gas supplements landfill gas and digester gas for the most efficient generation of electrical power. 

The current rate schedule agreement with PG&E to supply gas is under a special rate schedule (Rate Schedule G-COG) specific to electric generation facilities. The WPCP received notification from PG&E in mid-February that Rate Schedule G-COG will be eliminated as of April 1, 2004, requiring that the City execute a new agreement for gas service. 

PG&E required notification by March 12, 2004 of the City's selection from the options offered for continued gas service in order to preserve all available options. To ensure uninterrupted operation of power generation for the WPCP under the most favorable option, a new agreement must be executed with a third party vendor by April 1, 2004.

Research for the most cost-effective, reliable and consistent gas purchase option led to the conclusion that entering into an agreement with the State of California Department of General Service (DGS), Natural Gas Service Division provided the best option for meeting all of the Water Pollution Control Plant's criteria.  Staff notified PG&E by March 12, 2004 of the selection of DGS, pending approval of an agreement.

BACKGROUND

The City currently has a gas service agreement with PG&E under Rate Schedule G-COG for electrical generators for "Core”, or non-curtailable delivery. This agreement is for the gas commodity purchase itself as well as for transportation, or so-called "bundled service".  On February 13, 2004, the City received notification from PG&E that in accordance with the California Public Utilities Commission’s recently issued Decision 03-12-061, Rate Schedule G-COG will be eliminated as of April 1, 2004.  PG&E will no longer be supplying core service to electrical generators.

The City was given two choices to continue gas service under a new agreement: The first choice was to procure the gas commodity itself from a third party gas supplier and move to a non-core (or curtailable) transportation rate schedule under PG&E, Rate G-EG.  This transportation rate schedule is specifically applicable to electrical generators and maintains the discounts to transportation costs, but is only available for non-core service. The second choice was to continue with PG&E on the current commodity rate schedule for core service but without the discount on transportation rates previously available to electric generators under the G-COG rate schedule.

DISCUSSION

PG&E required notification of the City's selection by March 12, 2004 in order to preserve all potential options.  Staff notified PG&E by March 12, 2004 of the selection of DGS, pending approval of an agreement.  Agreements must be in place with the new third party vendor, DGS, by April 1, 2004 to allow for smooth, uninterrupted transition of natural gas service to the WPCP.

Research for the most cost-effective, reliable and consistent gas supply led to the conclusion that entering into an agreement with the State of California Department of General Service (DGS), Natural Gas Service Division provided the best option for meeting all WPCP criteria.  Over the past twelve months, the DGS commodity cost for gas was lower than the PG&E cost. Estimated average price per therm before transportation costs was $0.515 through DGS vs. $0.528 through PG&E.

In addition to commodity rates for purchase of the gas itself, transportation costs from PG&E would range from $0.17/therm delivered to $0.31/therm delivered for core service. However, by switching to non-core service under transportation rate schedule G-EG, the transportation rate is much lower at $0.02/therm delivered.

History has shown no curtailments in the past 15 years, thus it is not cost-effective to pay the premium for core service over non-core service. Based on last year's therms delivered, it is anticipated that selecting the first choice of the non-core rate from DGS will cost the City approximately $60,000 less than selecting service directly with PG&E who would provide core rate services.

DGS offers three contract formats: a simple one-year contract running for a fiscal year (would require renewal by July 2004); an “evergreen” contract that is renewable automatically each year, but provides for opting out of the agreement at any time with notification by February 15^th of any year; and what was originally a five-year (now four year) contract that runs through 2008.  The benefit of the evergreen option is that it avoids the need for the pre-approval process each year, while providing flexibility, and is the recommended format.

FISCAL IMPACT

Expenses for the purchase of electricity and natural gas for use in the Water pollution Control Plant are budgeted in Program 342 – Wastewater Management.  The FY 2003/2004 program budget for Gas and Electric is $378,744, of which approximately $227,000 is directly for natural gas purchases for the power generation facility.

Staff has approximately 17 months of experience purchasing natural gas to supplement power generation for export.  It is difficult to determine if savings will accrue under the new agreement relative to the current contract as natural gas purchases have not been stable over this initial period of operation.  However, staff at this time projects that there will be no negative fiscal impact from the new agreement. 

PUBLIC CONTACT

Public contact was made through posting of the Council agenda on the City’s official notice bulletin board, posting of the agenda on the City’s web page and publication of the Council agenda in the San Jose Mercury News.

ALTERNATIVE ACTIONS         

 1.  Authorize the City Manager to execute an Evergreen Agreement for purchase of natural gas from State of California Department of General Service (DGS), Natural Gas Service Division for non-core service and an agreement for discounted transportation service from PG&E under new Rate Schedule G-EG

2.  Elect not to authorize execution of the agreement with DGS.  Instead, authorize the City Manager to execute an agreement for purchase and transportation of natural gas from PG&E at the higher core rate and non-discounted transportation rate.

RECOMMENDATION

Staff recommends Alternative #1.

Prepared by:
John R. Addeo
Operations Manager, WPCP

Reviewed by:
Marvin A. Rose
Director, Public Works

Reviewed by:
Mary J. Bradley
Director, Finance

Approved by:
Amy Chan
City Manager