07-A CAPP Ltr of Intent
AGENDA INFORMATION SHEET
PROJECT: Approving CAPP'S Letter ofIntent to enter into negotiations for a capacity contract with the
owner of coal (including Texas Lignite) generation to supply the base load Electric power needs
(approximately 55%-60% of total energy needs) for CAPP members over a IO-year period.
BACKGROUND:
· The Local Government code was amended in 1999 to provide for creation of political subdivision
corporations with all the powers of Texas non-profit corporations. The specific purpose of political
subdivision corporations is to aggregate the electric loan of all member political subdivisions and to
contract for power on behalf of all members. Cities Aggregation Power Project, Inc. (CAPP) of which
the City of Paris is a member, was created in 2001 to prepare for electric deregulation effective January
I, 2002. Since that date, CAPP has delivered on average more than 20% savings per year when
measured against prices the City would have paid if the City had stayed on the regulated price to beat
(PTB) offered by incumbent utilities through affiliated retail electric providers (REPs).
· Despite well-timed and executed contracts that have delivered significant savings off the PTB, electricity
costs have climbed steadily upward with adverse impact on city budgets. Prices have increased because
of the volatility of natural gas prices and because all REPs base their contract offers on NYMEX gas
futures prices as of a particular time and date.
· While competition is theoretically possible, the conclusion reached by the CAPP Board and the
consultants that serve it is that the market reflects a rivalry between a handful of energy providers who
all use similar gas-based formulas for pricing their products regardless of actual source or actual cost.
· Without a proactive stand to secure sources of power that are not exclusively dependent upon natural
gas as the means for establishing price, the City can expect dramatic, costly and unpredictable swings
in its electric bills over the next few years. The price of electricity today is twice what CAPP members
paid in 2004. If the City desires some electric price stability and predictability, it is necessary to fix a
set price over a long period (10 years). If the City wants to reduce its electric bill by shifting to a fuel
source less costly than natural gas, the best opportunity today is for CAPP to commit to the output from
a specific coal plant in Texas. IfCAPP does not take advantage of the opportunity in the next several
months, a similar opportunity is not likely to reappear for a number of years.
· The CAPP Board of Directors has attempted several investigations and proactive strategies to
circumvent the fact that the electric retail market is at the mercy of all REPs who price electricity,
regardless of source, as if produced by natural gas. CAPP activities have uncovered a unique
opportunity to stabilize more than one-half of CAPP' s annual energy costs by contracting at a fixed
price, with a small escalator, for a I O-year period with the owner of coal-fired generation. The coal plant
in question has advanced technology and is not associated with the environmental criticisms frequently
levied at coal facilities. CAPP consultants have modeled the indicative coal generation costs available
to CAPP and have compared the costs of meeting each CAPP member's base load needs with coal
capacity and all residual needs with gas generation to 100% reliance on gas, assuming application of the
most recent Department of Energy long-term gas price forecast in both cases. The modeling
demonstrates economic benefit for each member above and beyond the type of savings CAPP has been
able to achieve in each of the last 3 1/2 years from entering a long-term supply contract (10 years) with
CAPP, whereby CAPP secures coal capacity to serve base load needs.
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· The Staff encourages the City Council to approve the resolution that ratifies the decision of the CAPP
Board to move ahead with development of necessary contracts. Adoption of this resolution does not
obligate the city contractually. The appropriate contract will be brought back to the City for approval
at some point in the future.
DESCRIPTION: The attached resolution will approve the referenced CAPP Letter of Intent.
RECOMMENDATION: Approve a resolution approving said CAPP Letter of Intent.
STAFF CONTACT: City Manager Tony N. Williams and City Finance Director Gene Anderson.
ADDITIONAL MATERIALS: Resolution and other supporting materials are attached.
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DRAFT
fattomeylresowrk\current\ CAPP - Letter ofIntent Coal Generation Res
December 2, 2005
RESOLUTION NO.
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PARIS,
PARIS, TEXAS, APPROVING CITIES AGGREGATION POWER
PROJECT'S LETTER OF INTENT TO ENTER INTO NEGOTIATIONS FOR
A CAPACITY CONTRACT WITH THE OWNER OF COAL (INCLUDING
TEXAS LIGNITE) GENERATION TO SUPPLY THE BASE LOAD
ELECTRIC POWER NEEDS (APPROXIMATELY 55%-60% OF TOTAL
ENERGY NEEDS) FOR CAPP MEMBERS OVER A to-YEAR PERIOD;
MAKING OTHER FINDINGS AND PROVISIONS RELATED TO THE
SUBJECT; AND PROVIDING AN EFFECTIVE DATE.
WHEREAS, the City of Paris ("City") is a member of Cities Aggregation Power Project, Inc.
("CAPP") and said membership has resulted in average annual energy savings over 20% off of the
Public Utility Commission ("PUC") approved price to beat; and,
WHEREAS, all retail power bids from various Retail Electric Providers (REPs) in the
deregulated electric retail market have been directly linked to natural gas futures prices; and,
WHEREAS, natural gas prices have been extremely volatile and have caused substantial
increases in the price of electricity paid by the City; and,
WHEREAS, CAPP is in the process of negotiating a 10-year capacity supply contract for
the city's base load electric needs (approximately 55% of the city's total electric energy needs) for
a fixed price that should provide considerable economic benefit and greater price stability in
comparison to traditional energy contracts with REPs; and,
WHEREAS, coal-fired capacity in Texas available to retail load is scarce and the situation
giving rise to the Letter of Intent reflects a unique opportunity for CAPP members to increase
savings and reduce electric price volatility; and,
WHEREAS, the owner of the coal capacity needs a letter of intent and desires completion
of a contract by December 31, 2005; NOW, THEREFORE,
BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PARIS, PARIS,
TEXAS:
Section 1. That the findings set out in the preamble to this resolution are hereby in all things
approved.
Section 2. That the efforts of the CAPP Board to secure coal capacity for the City of Paris'
base load electric capacity needs for a fixed price for a 1 O-year period commencing in the 4th quarter
of 2007 are hereby ratified.
Section 3. That the city of Paris endorses the CAPP Board committing to a letter of intent
to contract for coal capacity with the understanding that: 1) CAPP will provide proof of economic
benefit of coal capacity and energy from a coal and gas mix in comparison to exclusive reliance on
energy priced on 100% gas generation coupled with a conservative forecast of natural gas prices; 2)
the City of Paris will have an opportunity to review and approve or reject a 10-year contractual
agreement to supply all the city's power needs; and 3) CAPP will issue bonds to secure funding of
amounts necessary to prepay the capacity portion of the coal supply contract.
Section 4. That this resolution shall be effective from and after its date of passage.
PASSED AND APPROVED this 12th day of December, 2005.
Curtis Fendley, Mayor
ATTEST:
Janice Ellis, City Clerk
APPROVED AS TO FORM:
John D. Lestock, Assistant City Attorney
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