HomeMy WebLinkAboutINS-17-085 - 3 Year Review ofNatural Gas Purchasing PolicyREPORT TO: Finance and Corporate Services Committee
DATE OF MEETING: December 4,2017
SUBMITTED BY: Greg St. Louis,Director of Utilities,519-741-2600 ext. 4538
PREPARED BY: Danny Persaud,Manager of Gas Supply Operations &
Regulations, 519-741-2600 ext. 4255
WARD(S) INVOLVED: All
DATE OF REPORT: November 23, 2017
REPORT NO.: INS-17-085
SUBJECT: 3 YEAR REVIEW OF NATURAL GAS PURCHASING POLICY
RECOMMENDATION: For Information.
BACKGROUND:
In January 1998, Council adopted policy I-560 (The Gas Purchase Policy), which
bylaw. The main driver for this separate policy is that the nature, extent, and timing of
these transactions
services.
Since its inception, this policy has been amended four times, with the most recent
amendment being in June 2014 when council established a more
management of the gas purchase portfolio. This was accomplished by reducing the
proportion of fixed purchases and the purchase horizon from 5 years to 3 years. Tables
1 and 2 below provide the fixed portfolio limits before and after the changes.
PastFixed LimitsYear 1Year 2Year 3Year 4Year 5
Maximum90%70%50%30%20%
Minimum40%30%20%10%10%
CurrentFixed LimitsYear 1Year 2Year 3
Maximum60%40%20%
Minimum20%20%0%
*** This information is available in accessible formats upon request. ***
Please call 519-741-2345 or TTY 1-866-969-9994 for assistance.
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As per clause 4 of the gas purchasing policy, Staff is required to review the policy on a
no less than three-year basis to ensure that the ongoing performance of the portfolio is
meeting its strategic objectives and customers rate expectations. This report addresses
the requirement as per clause 4.
REPORT:
Since the introduction of the market responsive policy in 2014,Staff has found that retail
rates charged to its customers are more reflective of market costs and are less stable
overall.
Figure 1 below depicts gas rate charged to its customers
compared to market prices and Union Gas rates.
rate impact in relation to the market trend.
Section 1 Prior to 2005, the gas market was rising significantly and the original
gas purchasing policy allowed Kitchener Utilities a significant advantage as it was
able to provide stable rates to its customers during this period of growing
uncertainty. Excessive volatility (peaks and valleys) in the market price were
being mitigated by the policy.
Section 2 Between 2005 and 2009, the market was starting to flatten out and
.
Section 3 Starting in 2009, the introduction of shale gas (leading to higher
supply) and the looming financial crisis (leading to lower demand from recession)
disrupted the natural gas markets and caused prices to drop significantly
because of the oversupply relative to demand. Since Kitchener had a gas
purchasing policy that favoured stable rates, long term pricing was locked in, and
when the market collapsed, Kitchener was left paying higher prices than market.
However, due to the responsiveness of the original policy, rates were trending
down to come in line with market prices.
Section 4 Before the introduction of the new gas purchase policy,market
prices
market costs. This makes sense because markets are inherently cyclical and
will perpetually go up and down.
Section 5 In June 2014, council passed a resolution that reduced the fixed
horizon and limits in an effort to make rates even more market responsive. By
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this time, KU gas rates and market prices were already converging
although existing fixed contracts made under the original policy were still
in effect. The gas market fell again slightly and KU rates subsequently followed.
Section 6 In 2016, most fixed contracts made under the original gas purchase
policy came to completion and Staff made its first fixed contract under the new
gas purchase policy in October 2016.
SectionMarketTrendKU RateImpact
Outperforming market by weathering the high
1Risingvolatility (peaks & valleys in pricing)
Slightly underperforming the market but stable,
2Flatsecure & flat while continuing to mitigate volatility
Underperforming the market but stable, secure &
3Fallingtrending downto catch up to market prices.
Slightly underperforming but stable, secure &
4Rising
flattening off to be in-line with market
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SectionMarketTrendKU RateImpact
New policy takes effect but existing fixed contracts
5Flatstill in effect.Rates stable, secure & in-line with
market
First fixed contract under new policy.
6FlatRates stable, secure & in-line with market
Therefore, two conclusions can be drawn.
1. The introduction of the new gas purchase policy, which reduced fixed
limits, did not have an effect on the portfolio thus far due to the lagging
effect of the hedging mechanism.
2. Not much time has elapsed to completely understand the impact of these
reduced limits on forward markets.
With the growing uncertainties in the natural gas market arising from lower commodity
prices due to weather, carbon taxing, competition from clean coal etc., having a portfolio
that is more market responsive to changing market conditions may prove helpful in the
future. However, as natural gas is being touted as a transition fuel for the low-carbon
economy, we may see natural gas prices start to rise and having these reduced limits
may place Kitchener at a significant disadvantage in securing stable rates for its
customers. Staff believes that in light of these uncertainties, it is prudent to employ a
-and- approachin order to gauge its longer-term effect.
Staff will return no later than three years as stipulated in the purchasing policy
with an update to this discussion. Staff would like to stress the point that hedging and
use of the fixed portfolio is not about beating the market and winning but its primary goal
is to reduce volatility in prices and keep rates stable for customers. Also, supply rates
are charged at cost and the utility makes no money from these programs. During some
periods, gas rates will be higher than market and at other times, it will be
lower than market. This is the trade-off required for stable rates, which are favored by a
majority of Kitchener gas customers.
ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN:
vision through the delivery of core service.
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FINANCIAL IMPLICATIONS:
Not applicable.
COMMUNITY ENGAGEMENT:
INFORM
advance of the council / committee meeting.
PREVIOUS CONSIDERATION OF THIS MATTER:
th
INS-14-014 Natural Gas Purchase Policy Review May 29 2014
ACKNOWLEDGED BY: Cynthia Fletcher, Interim Executive Director,
Infrastructure Services
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