25 Long range plan to stabilize future electrical costsCITY COUNCIL AGENDA ITEM BRIEFING SHEET
Submittal Date:
Originating Department:
Presented By:
Agenda Item No.:
12/OS/08
Council Date:
City Manager
Gene Anderson
25.
12/08/08
RECOMMENDED MOTION:
POLICY ISSUE(S):
Long range plan to stabilize future electrical costs.
BACKGROUND:
The City of Paris has been a member of the Cities Aggregation Power Project (CAPP) since 2002 and
purchased our electriciry from them at significant savings compared to using a regular retail electric
provider. Estimated savings in the first five years was $1,777,162 based on comparing actual City expense to
the "price to beat" xate. CAPP has been working for over a year trying to secure a long-term contract to
achieve maxirnum savings for member cities and pxovide a stabilized price for budgeting purposes. This
long term contract would cover only the City's base load needs which xepresent about 60% of the total Ciry
electrical consumption. The remaiiung electrical needs would be provided under a separate agreement
similar to the CAPP agxeements used in the past. CAPP attorney Geoffrey Gay will give a presentation on
the project. CAPP needs a commitment by December 17 if Paris wishes to participate.
While it is likely that over the 24-year term of the proposed agreement the City will realize savings on
electricity, the innovative financing mechanism and pledge of taxing authority to cover the debt portion of
the project represent areas of risk. Paris' estimated maximum debt portion under the agreement would be
$446,319 and would likely be less than that amount. This is not an additional expense that increases the
budget. Additionally, while savings are expected, the volatility of the oil market and the 24-year term leaves
open the possibility of minimal or no savings opportuniries. If Council wishes to pursue participarion in the
long-term agreement but wants more time to digest the information, we will need to have a special meeting
before December 17 to take action to commit.
BOARD/COMMISSION RECOMMENDATION:
EXHIBITS:
Resolution; CAPP PowerPoint Presentation; CAPP Board Memo
ACTION:
BUDGET INFO:
❑ Financial Report ❑ Minute Order
Expense
$
❑ Department Report Z Resolution
Budgeted Amt.
$
F~ Presentation
❑ Ordinance
y'I'D Actual
$
❑ Public Hearing
❑ Other
Acct. Name
Acct. Number
FISCAL NOTES:
REVIEWED AND APPROVED BY:
Z Administration Z Ciry Clerk ❑ Community Development ❑ EMS/IT Z Finance ❑ Fire
❑ Municipal Court Z Legal ❑ Library ❑ Police ❑ Eng./Public Works ❑ Utilities
City of Paris
Revised 2/04/08
- UO(a17~
The Problem: Electric Price Increases
Just as other commodity prices are expected to increase over coming years, electric prices in
Texas and the United States are also expected to rise. Unpredictable electnc prices andpo tential
price spikes may create municipal budget challenges as cities strive to balance the need for
electncity with the need for city services.
A Responsible Solution: Long-Term, Competitive Prices
1. Taxpayer Beneflt
Local taxpayers win as cities largely insulate themselves from potential energy price increases.
2. Leveraging Our Buying Power
The Cities Aggregation Power Pro1 ect (CAPP) and the South Texas Aggregation Project (STAP)
are bringing togefher more than 150 cities to obtain more favorable competitrve energy pncing for
municipal elecVic use than if we acted independently.
3. Budget Certainty
This 24-year energy contract with Luminant will help provide greater municipal budget certainty.
4. Competitive Energy Prices Locked-In
This is a"bulk" energy purchase. We simply get a better price by purchasing a large amount of
electricity over 24 years. The energy price portion of the contract will limit future energy pnce
increases to 3% per year to provide more budget predictability for CAPP/STAP members.
5. Energy Price Protection
Energy prices are volatile. For example, each time a hurricane nears the Gulf of Mexico, natural
R as prices jump as production shuts down. In turn, energy prices usually increase as this important
uel cost nses. With this contract, cities will be largely insulated from these mcreases. 0
.41ahiliJV fn EnerXti` Coa7s ta 7exas Lifie.ti
U,
6. Saving Hundreds of SMillions
Our long-term projections estimate savings at hundreds of millions as the contract continues.
7. Contract Protections
This contract has important protections for CAPP/STAP members including a first lien on major
Luminant assets, including all baseload power plants.
Contract Details
• This is an agreement for CAPP/STAP to purchase, on behalf of its members, 150 megawatts of
energy from Luminant and its subsidiaries at far more predictable ener9Y prices over a 24-year
period. Energy is being purchased for municipal use - not for residential use.
• CAPP/STAP will prepay part of the contract on behalf of participating cities by issuing general
revenue bonds. By prepaying, our groups can secure more competitrve and predictable energy
prices than those currently avatlable on the retail market.
• The energy supplied by Luminant will come from seven power generation units at three power
plants. Contracts like this usually come from only one power plant, so this agreement provides
CAPP/STAP members with additional power certainty.
• Energy obtained under the contract will supply about 70%, or the base component, of a city's
annual energy needs. The remaining 30% associated with variable power reqwrements (e.g. peak
consumption during hot summer days) will be obtained under supplemental one- to three-year
contracts with prices that more closely track current retail market electricity prices.
• Members choosing to take part in the contract will sign a contract with CAPP/STAP agreeing to pay
for their share of the prepayment portion of the base purchase of electricity.
Prorldi+ig Stabilifs irt liacrgs (:osts frr 7esas C'ittes
Who's Involved
Who are CAPP and STAP?
CAPP is a non-profit group created in 2001 that pools Texas cities' electric power
needs in order to negotiate lower, more stable prices through bulk purchasing. Along
with STAP, these organizations have more than 150 political subdivision members
across the state that have saved more than $100 million since the Texas electriciry
market deregulated in 2002. CAPP and STAP are both run by boards of directors
made up of city officials. For more information, visit www.capptx.com.
Who is Luminant?
Luminant is the largest competitive electric generating company in the state.
Previously known as TXU Power, Luminant has over 18,300 megawatts of generation
in Texas, including 2,300 megawatts of nuclear and 5,800 megawatts of coal-fueled
generation capacity. Visit www.luminant.com for more information.
Luminant is the largest purchaser of wind-generated e/ectricity in Texas and fifth
largest in the United States.
Prnriding Slabititv iri Errerxv Costr ra Tesas Cities
'x 000171
Weeky On-Peak Price Indax
I -emrw«kb~w.~e.co-tvnc~
-~acw«tM~ro~d~ I
$150
$14
$775
s+z
~ $700
$10
H
Y $75
$a ~
E
m
~ M
4
O ss°
$4
$zs
$z
so
$0
VJeek Endinp
Stahilitv in Enrrgv Cnsts to Trzn,s Cifiex
~ 610017; 3
sn uo ~i
tn oo {
ie w il
7! W 1
UM1
uao
m.m
Yrm-idirrg Srabi(irv in Energ;s 4'osts ta Tesus Ciuas
III' IIIIIIII
WwO
.
.
.
-ToUlRepuircmenf(Pxak+12.5Y. RecerveMarym)
110.000
- -Peakdemantl
-capacny less anita 50 yean o+d or oMr
. . . . . .
. . . . . . . . . . . . . . .
-Capacey less unds M yesra oM orolder
~j
1~,~
-caoaca!tkssunrts30raanuleorolaer .
. . . . . .
J,, . .
.
~
. .
-
90,000
gg~r30. '
'
-
- 93,727
80,OW
79,575 -y' ' ^ '
85,681
75,989 ---.....~'78,694
70,000
70,733 70,126
60,000
39.856
59,
50,000
48,001
40 000 '
42,434
-
35,291
28,335
20,000
2013 2018
2023
2028
Nrnridireg S1ah(Iitv in l
atergp C osu ln Texux Citirs
4
~ (~0Cf, 176
1. A 24-year fixed price contract for approximately 70%
(that is, baseload - 24/7/365 use) of participants historic
use.
2. CAPP issues bonds to pre-pay capacity portion (3/5) of
the PPA.
3. Participants enter a contract with CAPP that pledges
taxing authority to fulfill the debt service obligation (3/5
of the contract price).
4. The energy cost under the PPA (2/5 of the PPA price) is
blended with other supply agreement priced at market
cost and billed by the Retail Electric Provider (REP).
Stahrlilc in /:nerKp Cra.sts dr 7eza.s Citie.5
v 0 0017 i 5
F-
I 'ar
i60%
; 50%
i aoso
~30%
f 2096
10%
I ~ q~ ry
I Yi o o b~O o o S o o S"O' o t7 "p' o P! `~O' o o~ o 0 8
N N N N N N N N N N N N N N N N N N N tV N N N N
PrarieliregSlabilits i+) Energy Cnzfs ta 7isus C'ilir,
Annual Load Growth: 3.00%
5 Year Wrap Contract with PPA Option 24 Year PPA with Wrap Contract
1. 100°,6 gas based pricing if PPA option not selecled 1. 70% coal & 30% gas based wholesale pricing
2. Takes advantage of financial crisis/recession 8 resulting 2. Takes advantage of recent gas price decline for 30 % of
decline in gas prices load for 5 years while maintaining stable coal prices for 70%
of electric needs for additional 19 years
3. Keeps commodity (energy price) below 8¢ for 5 years 3. Keeps commodity (energy price) near 8¢ for 5 years and
likely maintains discount to market rate for decades
4. Reflects competitive market pricing
5. Pricing for energy needs in 2014 and beyond is uncertain
and subject to natural gas supply 8 demand, global
economics and weather - high volatility
6. While pricing is favorable to Cities, the contract will not be
noticed by the market or policy makers
4. Reflects pricing and reliability superior to what is generally
found in the competitive retail market
5. Stable, predictable pricing for 2014 and beyond - 55%
less volatile than complete reliance on pricing based on
natural gas
6. The fixed price, long-term nature of the contrad could
have a major influence on the market and policy makers and
hopefully offer hope to residentiai customers trapped with
reliance on short-term, highly votatile prices
Yraridireg S(ahilrry in F.irc•rxs Gnsts In Tvsas Crdes
1. Diversity of fuel source
2. Reduces volatility associated with natural gas
3. Increased budget stability
4. Projected long term ($1 billion) savings
5. Market innovation
*Based on 2009 indicative prices
Slahility in Enrr,u Costs ta Trxa~ C7lre+
- (W0171i
7
1. PPA dependent upon TXU LBO Financing
2. Potential Early Termination (Art. 12)
• events of default may trigger (Art. 10)
• make-whole provisions
• liquidated damages
3. Refinancing and Substitute Collateral (Art. 9)
4. Failure to schedule and liquidated damages
• CAPP will know before event
5. New Governmental Charges
PraridingSlahilirv in En€r2;y C.'osts ta Tezns Ci1ies
1. First lien on competitive assets including all of
Luminant's (formerly TXU) generation facilities.
2. 90% availability on rolling three-year average.
3. Liquidated damages (up to $120 million) for withholding
power or early termination.
4. "Make whole" of outstanding portion of prepayment in
an event of early termination, including bankruptcy.
5. Guaranty from parent.
6. No Member liability for other participants failure to
appropriate.
PsonidAtg 51ahilitv rti Energy Cnsts tn lrxas ('ilies
- 0101) 18(~ 8
Risk
1. Bankruptcy
2. Gas Price Decline
3. Early Termination/
Adequacy of Collateral
4. Environmental Surcharge
5. Collateral Value Reduction
on Refinancing
Nsni-idiug StabiJity in (:ngrqp 4n.cts 1a Traas C7iecs
Mitiqation
Plants will continue to operate
The contract will either stand or
be renegotiated
Would have to be sustained (several
years) below $7
CAPP will constantly monitor economics to
cover debt defeasance
Will impact entire U.S.
electric market
TCEH will add new assets
CAPP gets benefits negotiated by new
secured creditors
Contract has dilution tests
Arlington
Duncanville
Carrizo Springs
Terrell
McAllen
Grand Prairie
Harker Heights
Lyford
Sherman
La Marque
Addison
Comanche
Odessa
Port Aransas
Cedar Hill
Gainesville
Brownwood"
South Padre
Falfurrias
The Colony
Lake Jackson"
Snyder
Springtown
Colleyville
Bellmead
Commerce"
Dickinson*
Alton
Benbrook
Copperas Cove
Everman
Robinson
Rotan
*Ordinance Approved On First Reading
PrnridGtg S(aAilifv in lzrtrrgy Co.sls tre %esus Citle..
9
RJC
~
~
CAPP BOARD MEETING
December 4, 2008
CONSULTANT'S REPORT
MF.MBERSHIP UPDATES
The City of Palmer passed the resolution to join CAPP, but is holding the resolution
while exploring the possibility of terminating a current electric contract in order to being
service through CAPP. The Cities of Carrollton, Haskell, Heath, Irving, Iowa Park,
Killeen, Lamesa, Trophy Club MD, and Waxahachie have opted not to participate in the
5 year contract and have withdrawn hom CAPP in 2009.
FINAL CONFIRMED PRICING UNDER FNE YEAR CONTACT
FPLE has submitted their final calculation of pricing under the five year contract.
Pricing is very close to the original estimates provided by RJC. Final pricing is shown
below.
Final FPLE Conflnned Pricing Under Five Year Contract
(¢IkWh, w/ DEBS Fee)
North Zone
West Zone
South Zone
Houston Zone
2009
2010
2011
2012
2013
6.974
7.708
7.895
7.883
7.878
5.257
5.781
5.914
5.905
5.801
7.109
7.854
8.044
8.031
8.026
7.451
8.243
8.447
8.434
8.428
There is a potential for minor adjustments in these prices in the future if the nodal
market is ever implemented in ERCOT or if there are significant changes in the costs of
ancillary services or the overall CAPP and STAP load in the years 2012 and 2013. It is
anticipabed that if any of these poeential adjustments are ever realized, their impact
would be minor.
ENERGY PR1CE UPDATE FOR 2QQ6
Energy prices moved downward in early November, but have been trading in a stable
band of pricing for the past three weeks. OPEC oil prices have been trading in a range
of $43/bbl to $54/bbl. Natural gas spot prices at the Houston Ship Channel have ranged
from $5.90/MMBtu to $6.65/MMBtu. NYMEX natural gas futures prices have been
approxunately $1/MMBtu higher with the 2009 12 month strip price ranging from
1 [;O() 18~
121312008
$6.90/MMBtu to $7.60/MMBtu. The December 2008 NYIv1EX natural gas futures
ccantract expired an Navember 24 at 56.888/MMBtu, approximately $0.40/MMBtu
higher than the Novemher 2008 contract expiratican price of $6.469/MMBtu.
ERCOT balanculg encrgy prices maved aawn in November due ko moderating weather
and lawer demand. Shart tt>rm eongestion events cantiriue to keep price vrslatility high.
For November, NiCPE in ERCOT prices rangGd frQm a-S35/M1Nh (all zones) up to
$1,950JMtNh (Houston zone).
Last week's DOE storage artivity update rcported a surprisingly strong withdrawal of
66 Bcf for the werk ending November 21, leaviilg storage inventories at 3,422 Bcf (95.2°l0
of the historic high).
Future predictions of energy prices are inixcd with some analysts prEdicting lower
prices in 2009 in bokh the petroieum ancl electric markets and others preciicting a
rebound in prices in bodi these markets. The oil to gas price ratia is now back un the
traditional 6 to S times range, suggesfipg natural gas may be suhject ta further
dawnwazd pressure if oil prices remain at their current pricing levels. Other parties
suggest that oil is oversold at the moment and that a combination of oil prociucCion
rutbacks, and antiripated warmer summer in 2009, and a greater reliance on natural gas
generation to achieve emissian reductions will put significant upward pressure on
natural gas pric es starting this winter.
Recent NYMEX 2009 Jan-Dec (12 Mth Annual) Strip Prices
MM
W
~
~
~
$14.00 -
$13.00
$12.00
$11.00
$10.00
$9.00
$8.00
$7.00
$6,00 -
-
$5.00
$4.00
oo~ 001 o~~ 04~ ~ti~ a~~ o~e, 4~~ ooe 04~ ~aw oe
40141`
Day
-Jan-Dec 2009 3trip -Jan-Dec 2010 Strip -Prompt Month PHce
The most recent Er10 dav forecast for from thE: Climate PredicHon Center, ankicipates
cc>oler than norrnczl weather over ntiost of the rontipental U.S. and nonnal to warmer
2
r t ;~(1 f) 183
12/3/'2008
than normal weather confined to the west coast. Precipitation is predicted to be wetter
than normal over the eastern half of the continental U.S. and the northern mid-continent
region with normal to drier than nomial conditions forecast for the westem half of the
rnntinental U.S. extending into Texas. Overall temperatures for December are predicted
to be colder than normal in the eastern half of the continental U.S. and warmer than
normal in the western half.
CAPP/STAP CONTRACT STATUS
On November 11th, Jay Doegey executed the contract documents for the CAPP 5 year
wholesale supply from FPL Energy Power Mazketing Inc. with a matching 5 year REP
Services Agreement with Direct Energy Business Services (DEBS). On November 13w
the CAPP Board authorized RJC to work with FPLE to lock in gas prices for all five
years. Due to the magnitude of the number of gas contracts, the lock in process took two
trading days and was completed on November 17t+. Prices as shown above under Final
Confirmed Prices have now been included in a contract amendment for Jay Doegey to
execute. The DEBS Commercial Electricity Supply Agreements (CESAs) for each
individual member were also executed on November 11w and will be distributed to
members in the near future.
The 5 yeaz contract includes an option to replace 50 MW of the base load energy amount
with the Luminant Long Term contract generation supply if it is executed by June 2009.
Geoffrey Gay will provide an update at the Board meeting regarding the status of this
contract.
3