HomeMy Public PortalAboutResolution No. 367-10 12-14-2010 • MODEL RESOLUTIONB
RESOLUTION NO. 367-10
A RESOLUTION OF THE CITY OIRichland Hills TEXAS, AUTHORIZING
THE CITIES AGGREGATION POWER PROJECT, INC. (CAPP) TO
NEGOTIATE AN EXTENSION TO THE CURRENT ELECTRIC SUPPLY
AND NECESSARY RELATED SERVICES AGREEMENT WITH NEXT ERA
FOR A FIXED PRICE PER kWh THAT IS LOWER THAN CONTRACT
RATES FOR 2011-2013, SAID EXTENSION TO CONTINUE UNTIL
DECEMBER 31, 2018; APPROVING CAPP CONTRACTING WITH NEXT
ERA AND AUTHORIZING THE MAYOR OR OTHER DESIGNATED CITY
OFFICIAL TO SIGN A CONTRACT WITH CAPP FOR THE CITY'S
ELECTRICITY NEEDS FOR THE PERIOD BEGINNING JANUARY 1, 2011
OR AS SOON AFTER FINALIZATION OF A CONTRACT AS POSSIBLE
AND EXTENDING UP TO DECEMBER 31, 2018; COMMITTING TO
BUDGET FOR ENERGY PURCHASES AND TO HONOR THE CITY'S
COMMITMENTS TO PURCHASE POWER THROUGH CAPP FOR ITS
ELECTRICAL NEEDS THROUGH DECEMBER 31, 2018.
WHEREAS, the City of RICHLAND HILLS ~ Texas (City) is a member of Cities Aggregation
Power Project, Inc. (CAPP), a nonprofit political subdivision corporation
dedicated to securing electric power for its 102 political subdivision members in
• the competitive retail market; and
WHEREAS, CAPP negotiated favorable contract terms and a reasonable commodity price for
delivered electricity since 2002 resulting in significant savings for its members;
and
WHEREAS, the City's current contract for power with Next Era arranged through CAPP
expires December 31, 2013; and
WHEREAS, the CAPP Board of Directors is currently considering a blend and extend contract
with Next Era with indicative retail energy prices that will reduce the prices
under the current contract for the next three years and extend a fixed price for
energy through December 31, 2018; and
WHEREAS, the current contract is a master agreement between CAPP and Next Era endorsed
by contract with individual CAPP members; and
WHEREAS, CAPP must be able to commit contractually to prices in a blend and extend
contract amendment within a 24-hour period in order to lock-in favorable prices;
and
•
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• WHEREAS, experiences in contracting for CAPP load since 2002 demonstrated that providers
demand immediate response to an offer and may penalize delay with higher
prices; and
WHEREAS, suppliers demand assurance that CAPP will pay for all contracted load; and
WHEREAS, the City must assure CAPP that it will budget for energy purchases and honor its
commitments to purchase power for its electrical needs through LAPP for the
period beginning Januazy 1, 2011 and extending through December 31, 2018; and
WHEREAS, CAPP intends to continue to contract with Next Era (power supply) and Direct
Energy (billing, administrative and other customer services); and
WHEREAS, the current contractual relationships between CAPP and Next Era and Direct
Energy have been beneficial and cost effective for CAPP members and the City.
BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF RiEHLAND HILLS
TEXAS:
Section 1:
• That the CAPP Board and its consultants and advisors are agents authorized to negotiate
for the City's electricity needs as a member of CAPP and extend the current supply agreement
through December 31, 2018.
Section 2:
That the City approves CAPP extending its current contract with Next Era for the supply
of electric power and related, necessary services for the City for a term to begin January 1, 2011
or as soon after finalization of a contract as possible and extending up to December 31, 2018, so
long as the extension results in savings over the current contract term of 2011-2013 and results in
fixed prices through December 31, 2018.
Section 3:
That the Mayor or other designated city official will execute a contract with CAPP that
permits the Chairman of CAPP to sign a Commercial Electricity Supply Agreement ("CESA")
for the City's electricity needs and related, necessary services beginning January 1, 2011 and
extending up to December 31, 2018, as a member of CAPP and commits its load for the same
period pursuant to the contract recommended and approved by the CAPP Boazd of Directors,
provided that the energy price to be paid per kWh in 2011-2013 is less than the current contract
price for 2011-2013 resulting in savings for the City and that the fixed price for the period 2011-
2013 will continue through December 31, 2018.
•
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• Section 4:
That the City will budget and approve funds necessary to pay electricity costs
proportionate to the City's load under the supply agreement arranged by LAPP and signed by the
Chairman of CAPP on behalf of all CAPP members for the term beginning January 1, 2011 and
extending up to December 31, 2018.
Section 5:
That a copy of the resolution shall be sent to Mary Bunkley with the City Attorney's
office in Arlington and Geoffrey M. Gay, legal counsel to LAPP.
PRESENTED AND PASSED on this 14th day of December , 2010, by a vote
of 5 ayes and -0- nays at a regular meeting of the City Council of the City of
Richland Hills, Texas.
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Lloyd 816 Congress Avenue, Suite 1900
1 Austin, Texas 78701
Gosselink Telephone: (512) 322-5600
Facsimile: (512) 472-0532
~~~u ATTORNEYS AT LAW
www.lglawfirm.com
Mr. Gay's Direct Line: (512) 322-5875
Email: ggay@lglaw6rm.com
MEMORANDUM
TO: All CAPP and STAP Members
FROM: Geoffrey M. Gay
DATE: November 5, 2010
RE: Electric Rates for 2011 and Beyond
Things are on track for the merger of CAPP and STAP, effective January 1, 2011, and for
the assumption of the new identity, Texas Coalition for Affordable Power ("TCAP"). The
merger will have no impact on existing contractual relationships with Next Era and Direct
Energy.
As all of you are aware, the current energy supply agreement expires December 31, 2013.
Energy prices for each year of the current five-year contract were locked on at the time the
contract was signed in the fall of 2008. Prices vary by ERCOT zone and for 2011, the energy
prices are scheduled to be only slightly higher than 2010 prices. The contractually scheduled
prices for 2011 are:
North Zone 7.895¢ per kWh
South Zone 8.044¢ per kWh
West Zone 5.914¢ per kWh
Houston Zone 8.447¢ per kWh
New Offer Results in SavinEs
The purpose of this memorandum is not so much to remind you of next year's energy
prices as it is to inform you that you have a rare opportunity to reduce next year's prices and
achieve significant savings over the next three years by amending and extending the existing
supply agreement.
1813/O0/1218170
Lloyd Gosselink Rochelle & Townsend, P.C.
November 5, 2010
Page 2
Your supplier, Next Era, has offered to liquidate the natural gas futures contracts it
secured in 2008 to give CAPP and STAP fixed electric rates for five years. Next Era would then
purchase new gas futures contracts to secure fixed pricing for aneight-year period at rates less
than rates that must be paid next year under the existing terms and conditions of the contract with
Next Era. For most CAPP and STAP members, Next Era's offer to "blend and extend"
would reduce 2011 prices by approximately 1¢ per kWh. For the small users who consume
less than 1 million kWh annually, that reduction should result in savings of between $2,500 and
$30,000 over the remainder of the current five-yeaz agreement. For the largest user, the savings
should approximate $5 million.
Background
The current contract is referred to as a four-party agreement. It contractually commits
CAPP and STAP to Next Era (aka, Florida Power & Light) as supplier and Direct Energy
Business Services ("DEBS") as retail electric provider responsible for customer accounts and
billing. Each CAPP and STAP member was required to pass a resolution agreeing to be bound
by the four-party agreement and pledging to sign an individual customer energy supply
agreement with DEBS. The current contract became effective on January 1, 2009 and will
expire December 31, 2013. Under ordinary circumstances, bids for power to meet member
needs in 2014 and beyond would not have commenced until sometime in 2012.
In June, CAPP and STAP received an unsolicited offer for a block of base load energy to
be available in 2014 from distressed generation assets to be purchased by some West Texas
investors and backed by J.P. Morgan. The indicative pricing looked favorable for afive-to-
twelve-year commitment.
Both Boards were interested in the proposal. The CAPP Board directed R.J. Covington
Consulting to perform a due diligence evaluation of the proposed pricing. Consultants were able
to obtain several compazable offers, including an offer from Next Era. However, Next Era
indicated that while they were willing to discuss the block power commitment, better pricing
could be offered in a blend and extend arrangement. Indeed, their blend and extend proposal
contained more favorable pricing with less risk than any other offer. Next Era proposed to
liquidate the gas futures contracts obtained in 2008 to serve CAPP and STAP load through 2013
and to purchase new gas futures contracts at lower prices to serve CAPP's and STAP's full
requirements through 2018. The energy price offered to members would be fixed for eight years
subject to the same adjustment provisions (for ancillary services, nodal market prices and
changes to total member load) in the current contract. Generally speaking, members in the
North, South, and Houston ERCOT Zones would see a reduction in next year's price of about 1 ¢
per kWh. Multiplying each member's annual consumption by 1 ¢ yields a savings estimate for
next year.
In 2008, the excess supply in West Texas permitted LAPP members in the West Zone of
ERCOT to realize about a 2¢ reduction off of North Zone prices during the five-yeaz contract.
Over the last yeaz, pricing differentials between zones have narrowed significantly. Under the
blend and extend arrangement, West Zone members, including Wichita Falls, Abilene, San
Angelo, and Odessa and others should see some reduction in contract prices currently set for
Lloyd Gosselink Rochelle & Townsend, P.C.
November 5, 2010
Page 3
2011-2013, but not nearly as great as the 1¢ per kWh price reduction that should be available in
the other three zones.
Do Near-Term Savings Justify a Five Year Extension?
Two factors largely determine electric prices in the Texas deregulated market: natural gas
futures prices and heat rates which are in turn influenced by market perceptions of available
generation capacity. At this point in time, natural gas prices are low and stable and there is
excess capacity. Whether natural gas prices will remain low and stable through 2013 depends a
great deal upon the future of shale gas extraction. If environmental factors such as potential
groundwater contamination limit the production of shale gas or if the economy recovers and
industrial and electric company demand for gas increases, natural gas prices will rise. Most
analysts of population growth predict significant expansion of the population of Texas. How
soon such growth will cause demand for electricity to grow faster than supply is unknown, but
some forecasts suggest that the reserve margins for generation of electricity may dip below a
reasonable level by as early as 2013. If that happens, electric prices will rise above current
levels.
An optimistic forecast would indicate that natural gas prices will remain around current
levels for the next three or four years. To pass on an offer to reduce current contract rates and
achieve a fixed price guarantee for eight years, one has to count on gas prices continuing to
decline and for electric generation supply to remain comfortably greater than peak demand at
least through the end of 2013. Even if gas prices decline so as to justify a lower rate in 2013 for
the 2014-2016 period, it is unlikely that the rate would be sufficiently lower to justify foregoing
the potential near-term savings afforded by a blend and extend arrangement.
Your Option
Your political subdivision is under contract through 2013. You may reject the blend and
extend opportunity and remain under the current terms and conditions. If you desire to take
advantage of a blend and extend offer that produces both immediate savings and price stability
for the next eight years, your governing body will need to authorize someone to sign an amended
agreement with Next Era, if and when the CAPP and STAP Boards approve and recommend an
amendment.
Explanation of the Contracting Process
The contracting process for the blend and extend agreement is exactly like the process
used in the last several contracting periods. Your council will need to approve one of the two
attached model resolutions. One resolution (Model Resolution A) authorizes LAPP to act as an
agent to negotiate and execute a contract for the member's electricity needs while the other
resolution (Model Resolution B) requires the city to contract with CAPP to purchase power for
the member through CAPP and to designate an individual with the power to execute the contract.
The resolutions streamline contracting procedures. The resolutions empower the
Chairman of CAPP to sign a blend and extend agreement with the current power provider on
behalf of all CAPP members for 2011-2018 energy needs. A majority of CAPP members
previously authorized the CAPP Chairman to execute the 2007 and the 2008 energy contracts on
Lloyd Gosselink Rochelle & Townsend, P C.
November 5, 2010
Page 4
their behalf. Model Resolution A accomplishes that objective for 2011-2018. Model Resolution
B is to be adopted by those cities whose charters prevent the cities from delegating contracting
power to anyone but the mayor or other designated city representative. For those cities, the
resolution directs the city to contract with CAPP for the city's 2011-2018 electricity needs. In
addition, both resolutions reiterate that each member is obligated only for its proportionate shaze
of the contracted load. Every LAPP member should expeditiously adopt one of the two
resolutions and provide a copy of the resolution to my office.
If you have any questions or need more information, please contact Geoffrey Gay
(512!322-5875, ggay@lglawfirm.com).
PLEASE NOTE: Passage of one of the attached resolutions does not guazantee that
the Next Era contract will be extended. That will only happen if both Boards conclude that
significant near-term savings and fixed prices will result. Passage of a resolution just ensures
your political subdivision the right to participate in the blend and extend agreement, if it is
finalized, approved, and recommended by the CAPP and STAP Boards.
Lloyd Gossefink Rochelle & Townsend, P.C.
Lloyd 816 Congress Avenue, Suite 1900
Austin, Texas 78701
Gosselink Telephone: (512) 322-5800
Facsimile: (512) 472-0532
u~ ATTORNEYS A T LAW www.lglawfirm.com
Mr. Gay's Direct Line: (512) 322-5875
Email: ggay~lglawfirm.com
MEMORANDUM
TO: All CAPP & STAP Members
FROM: Geoffrey M. Gay
DATE: November 9, 2010
RE: Blend and Extend Power Agreement
Regarding last week's communication of a possible fixed price extension to your current
power supply agreement in exchange for lower energy prices than the scheduled prices for 2011-
2013under the existing contract, I have had several questions which I should answer generically.
First, what is the deadline for passage of a resolution authorizing the signing of a
blend and extend contract? Realizing that we cannot do much in terms of actually nailing
down prices and finalizing a contract until we know who wants to participate, the most correct
answer to the question of when do you need the authorizing resolution is, "the sooner the better."
Electric price reductions depend upon being able to take advantage of an historically aberrant
condition of low and stable natural gas prices. We have to act before gas mazket conditions
change, and no one can reliably predict if or when that will occur. My response to the deadline
question then is that resolutions must be received by mid-December-say December 15th to
have any hope of completing a contract price revision and extension effective January 1st. Even
if all resolutions are returned by December 15th, it is likely that a contract cannot be executed
until sometime in January. Let us hope natural gas futures prices continue to be in their current
range for months to come.
Second, how can we guarantee that blend and extend prices for 2014-2018 are going
to be lower than prices we might find available for that period around the time the current
five-year agreement is scheduled to expire? No one could make such a guazantee. The issue
becomes, "does the combination of savings over scheduled prices in the current contract and the
perpetuation of those prices through 2018 seem less risky than betting that natural gas prices will
be lower in 2013 than they are today and that the ERCOT reserve margins will remain higher
than necessary into 2015?" The objective of a blend and extend agreement is to achieve current
savings, insure against price volatility, manage risk, and stabilize budgets.
Electricity prices are primazily governed by natural gas futures prices set by NYMEX.
Gas prices at the well-head or delivered to gas-fired generation stations in Texas do not matter.
The NYMEX futures prices are influenced by world politics, global weather patterns, and mazket
1813/00/1223831
Lloyd Gosselink Rochelle & Townsend, P.C.
November 9, 2010
Page 2
perceptions of supply and demand. Currently, there is a perception that there is an abundance of
natural gas because of shale gas recovery. Current relative price stability in the natural gas
mazket could return to historically volatile patterns if a legislative body or a court determines that
shale fracturing pollutes water supplies. Waz in the mid-East or hurricanes in the Gulf could
similazly cause gas prices to spike.
The second primazy driver behind deregulated market prices for electricity is the electric
mazket's perception of available generation capacity in Texas. Our Governor wants to lure new
industry to Texas. Will new businesses and population growth cause the demand for electricity
to rise faster than supply? Shall LAPP and STAP members assume the risk that current
generation plants may fail, that demand may outstrip supply, that factoring may pollute, and that
hurricanes and wazs may affect gas prices? The blend and extend contract potential is equivalent
to an insurance policy with the offer of a reduction in premium. Will a better deal be available
two yeazs from now? The answer can only be found in wild guesses.
Third, assuming authorization to participate in a blend and extend agreement is
granted by passing a resolution. may the authorization be withdrawn? The answer probably
lies in the "no harm, no foul" rule. Nothing precludes authorization for participation in a
contract once given from being revoked so long as there has been no adverse (as in creating
financial harm) reliance on the authorization. All the terms and conditions of the existing
contract, except price and length of term, should remain the same in the blend and extend
agreement. There will not be much for any member to evaluate other than price risk. Whether
and when the contract amendment moves forward depends first upon the degree of interest by
members and second upon price and resulting savings. There will be no extension unless the
CAPP and STAP Boards, and perhaps ultimately the TCAP Board believes near-term savings are
significant. Members will be provided updates on indicative prices and potential savings after it
appears appropriate to start asking Next Era for such information upon reaching some, as yet
unknown, threshold of member support through resolutions.
Fourth, is it possible for some members to reiect the blend and extend option while
other members take advantase of the offer? Yes, and the decision to proceed depends not as
much on the percentage of the 154 CAPP and STAP members that promptly act on the
resolution, but rather on the percentage of total contract load that is made available for the
extension. Twenty members consume roughly two-thirds of the total 1.4 billion kWh annual
usage. It is unlikely that Next Era will require 100% of the CAPP and STAP load to commit to
the blend and extend contract amendment, but it is probably reasonable to expect that Next Era
will require 75%-95% of the load to be supported by authorizing resolution before it is willing to
finalize a contract.
Fifth. if the contract extension does not occur before December 31st, should the
resolution refer to "TCAP" as well as "CAPP" and "STAP"? Reference to "TCAP" need not
be included in the resolution unless a governing body does not intend to pass the resolution until
next year. All contractual commitments, revenues, assets and liabilities with both CAPP and
STAP will pass to TCAP on January 1, 2011.
If you have other questions, concerns or comments, please feel free to get in touch with
me.
Lloyd Gosselink Rochelle & Townsend, P.C.
Lloyd 816 Congress Avenue, Suite 1900
Austin, Texas 78701
Gosselink Telephone: (512) 322-5800
Faaimile: (512) 472-0532
ATTORNEYS A T LAW www.lglawfirm.com
Mr. Gay's Direct Line: (5 ] 2) 322-5875
Email: ggayle~lglawfirm.com
MEMORANDUM
TO: All CAPP and STAP Member Representatives
FROM: Geoffrey M. Gay
DATE: November 22, 2010
RE: Blend and Extend Opportunity
I have received a copy of Resolution A passed by the following members:
City of Charlotte
City of Kingsville
City of Los Fresnos
City of Lyford
City of Mission
City of Rockport
South Texas Water Authority
City of Hamilton
Johnson County Special Utility District
City of Sherman
I have received a copy of Resolution B passed by the following members:
City of Copperas Cove
City of Seadrift
I have been informed that the following members have approved of a blend and extend
arrangement that produces savings:
City of Lake Jackson
City of Abilene
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Lloyd Gosselink Rochelle & Townsend, P C.
November 22, 2010
Page 2
I have received indications that passage of a blend and extend contract will be
recommended from the following members:
City of McAllen
City of Arlington
City of Plano
City of Corpus Christi
City of Sugar Land
To date, I have received no indications of opposition to a blend and extend.
Please note that I will provide this type of update on a periodic basis. If your governing
body has taken action that is not reflected in this communication, please let me know. Also, it
would be helpful to know the dates that governing bodies will be considering action during the
month of December.
Lloyd Gosselink Rochelle & Townsend, P.C.