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HomeMy WebLinkAboutFIN-06-030 - Natural Gas Purchase Policy ) db KITCHENER Financial Services ~ Report To: Date of Meeting: Submitted By: Prepared By: Ward(s) Involved: Date of Report: Report No.: Subject: Finance & Corporate Services Committee October 2, 2006 Pauline Houston, General Manager of Financial Services & City Treasurer Dwayne Quinn, 2538 All September 25, 2006 FIN-06-030 NATURAL GAS PURCHASE POLICY RECOMMENDATION: That the Gas Purchase Policy Criteria for continuation of the Utilities Division provision of Gas Supply services as attached to Report FIN-06-030 be approved. BACKGROUND: As deregulation advanced during the 1990's, Kitchener Utilities determined that the best way to balance the interests of its customers and owners in a changing market would be to purchase its own supply of natural gas. In 1998, after consecutive years of significant retroactive billing by the City's previous supplier, Kitchener Council approved the development of a Kitchener Utilities supply program. This program undertook responsibility for the purchase of natural gas for all customers that chose not to contract for their gas supply on their own. The gas industry has evolved since 1998. The most notable impact was the collapse of Enron and the subsequent consolidation of the market, followed by a moderate expansion. The resulting environment provides the Utilities Division with the opportunity to expand its portfolio of suppliers in an effort to achieve on-going value for the customers. In the same period, Kitchener's administration has reorganized resulting in the elimination of the former Public Works roles. REPORT: In its first eight years, the Utilities Division's natural gas purchase strategy has resulted in savings in excess of $30 million compared to the City's previous supply arrangements. While the program has been successful by any measure from a customer point of view, much has changed in the gas market and the City's organization since 1998. The attached recommended policy addresses those changes and provides opportunities of continued success of the Gas Supply program. In the years since the initiation of the program, Kitchener Council has implemented a reorganization that evolved the departments eliminating the General Manager of Public Works position that was integral to the authorized Gas Purchase Criteria. While staff has managed the Gas Purchase criteria to the intent of the original criteria, this recommendation provides the opportunity to align the criteria to the current organization of the City. Further, with the continued evolution of the market, the Utilities Division recommends that this is also the time to adjust some aspects of the criteria to ensure ongoing value for the Community's customers and owners. The development of the market enhances the opportunity for multiple suppliers to provide value to the portfolio while mitigating counter-party risk. Additionally, the proposed criteria differentiates the on-going nature of our responsibilities as a utility in allowing longer term contracting for transportation and storage upstream of the City. FINANCIAL IMPLICATIONS: While unquantifiable, the benefits of supply source expansion yield further opportunities to enhance the value of the program to end use customers. COMMUNICATIONS: None required. Dwayne Quinn, P Eng., MBA Director of Utilities Pauline Houston, CA General Manager of Financial Services & City Treasurer GAS PURCHASE POLICY CRITERIA 1) The basic principle of minimum cost of gas for the minimum risk should be at the forefront. This should be accomplished by monitoring and projecting economic market forces to develop a prudent purchase strategy. 2) The purchase strategy should review a five year horizon and develop a disciplined approach to acquiring a portfolio of natural gas contracts which varies the pricing and terms of the contracts to minimize risk. 3) Given the long-term nature of getting gas to the City, acquiring transportation or storage contracts should include a longer term view with contract terms of up to 20 years. 4) The purchase strategy should be monitored continuously and adapted to changing markets conditions. 5) To ensure market competition is used and balanced with contracting costs, the City's expected gas supply needs will be placed with no less than 3 but no more than 7 primary suppliers. At no time should more than 50% of the City's annual supply be placed with one supplier. 6) The gas supply contracts will only be placed with large, financially secure suppliers with a proven industry track record. Before supply contracts are placed, the City must ensure that the supplier has a strong financial rating as evaluated by an independent evaluator. The minimum rating with be Standard & Poors BBB or equivalent Moody's rating Baa. 7) The gas supply contracts will provide the City with the flexibility to swap between indexed and fixed prices at market based transactions fees. 8) The financial exposure of the City will be minimized by seeking financial assurances in the event of supplier default. These assurances will be maintained commensurate with exposure of the contracts to an individual supplier. When dealing with a marketing entity for supply, assurances will be sought from the corporate parent. 9) All gas purchase transactions will be authorized by the General Manager, Financial Services Department or in his/her absence one of the City's signing officers and the Director of Utilities or in his/her absence, Utilities' Manager, Regulatory Affairs and Supply or Utilities' Manager, Asset Optimization. 1 0) Separate accounting for the supply and delivery programs should be maintained, audited and reported to Council on a regular basis with other City financial statements.