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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 • 1813/00/1218145 • 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. • isi3roon2~sias • 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. 'J yor ATTEST: \\\~~~~e t n i i i i i ~ i ii~~~~~ ~ a ,V ~ y= ~s~3roon2isias 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 1813/00/1227695 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.