2016-010 - TCAP 2018-2022 electrical needsRESOLUTION NO. 2016 -010
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PARIS,
TEXAS, AUTHORIZING THE TEXAS COALITION FOR AFFORDABLE
POWER, INC. (TCAP) TO NEGOTIATE AN ELECTRIC SUPPLY
AGREEMENT FOR FIVE YEARS FOR DELIVERIES OF ELECTRICITY
EFFECTIVE JANUARY 1, 2018; AUTHORIZING TCAP TO ACT AS AN
AGENT ON BEHALF OF THE CITY TO ENTER INTO A CONTRACT
FOR ELECTRICITY; AUTHORIZING JOHN GODWIN OR A.J.
HASHMI, M.D. OR JAY DOEGEY TO EXECUTE AN ELECTRIC
SUPPLY AGREEMENT FOR DELIVERIES OF ELECTRICITY
EFFECTIVE JANUARY 1, 2018 AND COMMITTING TO BUDGET FOR
ENERGY PURCHASES IN 2018 THROUGH 2022 AND TO HONOR THE
CITY'S COMMITMENTS TO PURCHASE POWER FOR ITS
ELECTRICAL NEEDS IN 2018 THROUGH 2022 THROUGH TCAP
WHEREAS, the City of Paris, Texas (City) is a member of Texas Coalition For
Affordable Power, Inc. (TCAP), a non - profit, political subdivision corporation dedicated to
securing electric power for its more than 170 members in the competitive retail market; and
WHEREAS, TCAP has unique rights under Texas law to negotiate directly in the
wholesale market and arrange separate contracts for power supply and retail services which
provides TCAP leverage to achieve contract provisions that single city negotiations with a Retail
Electric Provider (REP) would be unlikely to produce; and
WHEREAS, TCAP's geographic diversity across all four ERCOT zones produces an
aggregated peak load that is lower than the total of individual peak loads of the individual TCAP
members, allowing price benefits in the wholesale market that are not likely to be available to
any given TCAP member alone; and
WHEREAS, TCAP and its predecessor organizations, Cities Aggregation Power Project,
Inc. (CAPP) and South Texas Aggregation Project, Inc. (STAP), negotiated favorable contract
terms that resulted in rebates from the wholesale supplier and reasonable commodity prices for
delivered electricity since 2002 resulting in stable budgets for electricity for members; and
WHEREAS, commodity prices for electricity experienced significant volatility between
2002 and 2009, with prices ranging from 4 cents to over 13 cents per kWh, causing CAPP and
STAP members to welcome a five year contractual commitment that came close to cutting the
2008 prices in half, with that contract being extended until December 31, 2017, with a negotiated
price reduction of about 1 cent per kWh; and
WHEREAS, TCAP has become a forceful voice for consumer protections and market
reform to benefit the public and well as cities and other political subdivisions; and
WHEREAS, TCAP is owned by its members and distributes monetary and other
resources according to relative load size of members and is controlled by a 15 member Board of
Directors, all of whom must be city employees of members who represent diversity in size and
geography; and
WHEREAS, wholesale power prices within the deregulated Texas market are largely
determined by the NYMEX gas futures prices for natural gas which are currently low and
relatively stable, but which change daily; and
WHEREAS, daily price changes require retail customers to execute a contract
immediately upon receipt of a favorable offer; and
WHEREAS, pursuant to Texas Local Government Code Section 252.022(a)(15)
expenditures for electricity are exempt from competitive bidding requirements; and
WHEREAS, on any given day, TCAP is able to capture a favorable wholesale price for
any period of time, comparable to or better than any given REP or broker; and
WHEREAS, TCAP intends to continue to contract with its current wholesale supplier,
NextEra, because the relationship with NextEra is such that NextEra is willing, after it knows the
size of a given load, to execute a contract at or below prescribed price and terms; and
WHEREAS, the City desires to execute a contract for electricity for the period beyond
the expiration of its current contract on December 31, 2017 that locks -in favorable wholesale
prices under one of three different supply options:
Option 1 - fixed -price, full- requirements at a price not to exceed 4.1 cents per kWh for
the North and West zones or 4.25 cents per kWh for the South and Houston zones;
Option 2 - fixed price for on -peak hours and variable spot market prices for off -peak
hours;
Option 3 - block energy at a fixed price to cover the base load hours, a fixed price for
solar energy to cover mid -day peak hours (approximately 10% of total load) and variable spot
market prices for all remaining consumption; and
WHEREAS, TCAP will allow members six weeks from receipt of this resolution to
consider whether to participate in this second opportunity to contract for post -2017 electrical
supply, and thereafter allow NextEra until June 30, 2016 to contact for power for five years at a
price not to exceed 4.1 cents per kWh in the North and West zones and a price not to exceed 4.25
cents per kWh in the South and Houston zones for Option 1 , so long as the aggregated load for
any of the three supply options reaches at least 50 megawatts; and
WHEREAS, wholesale suppliers demand assurance that TCAP will pay for all
contracted load; and
WHEREAS, the City needs to assure TCAP that it will sign a Commercial Electric
Supply Agreement (CESA) reflecting the contract extension and budget for energy purchases for
K
the post -2017 period and honor its commitment to purchase power for its electrical needs for
2018 through 2022 through TCAP.
THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF
PARIS, TEXAS:
Section 1. The findings set out in the preamble to this resolution are hereby in all things
approved.
Section 2. That the TCAP Board of Directors and its consultants and advisors are agents
authorized to negotiate for the City's electricity needs as a member of TCAP for the period 2018
through 2022 at a price not to exceed 4.1 cents per kWh for the North and West zones and a
price not to exceed 4.25 cents per kWh in the Houston and South zones for supply Option 1;
Section 3. The City prefers to participate in supply Option one (1) with the following
understanding: a) while supply Option 1 is a full- requirements, fixed -price option, Options 2
(fixed price on -peak, variable spot prices for off -peak usage) and 3 (fixed price for base load,
fixed price for a portion of peak load, and variable spot market for remainder) have variable
price components and savings over Option 1 cannot be guaranteed, and b) if there is insufficient
desire among members to achieve a 50 MW threshold for either Option 2 or 3, the member
selecting the inadequately subscribed option will be placed in the Option 1 category. If no
option is selected, TCAP will assume that a passed Resolution approves of Option 1.
Section 4. Assuming this resolution is passed before February 25, 2016 and the combined
load of TCAP members passing this resolution exceeds 50 megawatts for the preferred Option
and NextEra is able to provide TCAP an opportunity prior to June 30, 2016 to contract for power
to be delivered to members at a price not to exceed 4.1 cents per kWh for the North and West
zones and not to exceed 4.25 cents per kWh in the Houston and South zones for supply Option 1
for the period January 1, 2018 through December 31, 2022, any one of the following individuals
is hereby authorized to sign an electric supply agreement for the City within 24 hours of receipt
of a contract that has been approved and recommended by the TCAP Board of Directors: John
Godwin or A.J. Hashmi, M.D., or Jay Doegey.
Section 5. That the City will commit to purchase power to meet all of its electricity needs
eligible for competition pursuant to the TCAP approved supply agreement and approve funds
necessary to pay electricity costs proportionate to the City's load under the supply agreement
(whether wholesale or retail) arranged by TCAP and signed by TCAP's Executive Director or
President or other TCAP representatives authorized by the TCAP Board.
Section 6. That a copy of this resolution shall be sent to Jay Doegey, Executive Director,
TCAP, 15455 Dallas Parkway, Suite 600, Addison, Texas 75001 and Geoffrey M. Gay, legal
counsel to TCAP at 816 Congress Avenue, Suite 1900, Austin, Texas 78701.
3
PASSED AND APPROVED this the 22nd day of F
ATTEST:
ice Ellis, City Clerk
APPROVED AS TO FORM:
1 -
G�
Stephanie H. Harris, Interim City Attorney
Model Staff Report to Support Resolution
Authorizing TCAP to Procure Electricity for 2018 -2022
This resolution is designed to support the second of several opportunities for TCAP
members to contract for electricity for the post -2017 time period. If interested in contracting for
a five -year term (2018 -2022) during 2016, the authorizing resolution must be passed by the
governing body of the interested TCAP member by February 25, 2016. The deadline will allow
definition of the load to be served under each of three different electric supply options, which
must be at least a minimum of 50 megawatts. Also, the deadline will give the wholesale
provider ample opportunity to lock a fixed -price, equal to or less than a specific benchmark for
each ERCOT zone, before June 30, 2016. When that supply scenario is locked, each member
that passed the authorizing resolution must immediately sign a contract for that power. Please
Note: The draft resolution is in Word and blanks must be filled in to identify the member, the
preferred supply option and several individuals by name or position who will sign the contract
when the appropriate price point is reached.
Explanation of Whereas Clauses:
What is TCAP?
As reflected in the fourth and seventh Whereas clauses, TCAP is a non - profit, political
subdivision corporation, owned and controlled by its 171 political subdivision members, the vast
majority of whom are cities. TCAP was formed in 2011 from the merger of Cities Aggregation
Power Project ( "CAPP ") and South Texas Aggregation Project ( "STAP "), both of which were
created in 2001, shortly before retail deregulation became effective on January 1, 2002. TCAP is
governed by a 15 member board of directors, all of whom must be city employees or elected city
officials. Typically, board members have been mayors, city managers, assistant city managers,
finance directors or city attorneys.
Market Benefits of TCAP
An individual city, citizen or commercial customer can only purchase power directly
from a Retail Electric Provider ( "REP ") which under Texas law exists to give the impression of a
competitive market. REPS cannot generate electricity, nor can they own wires. REPs are
unnecessary middlemen between the wholesale and retail markets. As reflected in the second
and fourth Whereas clauses, TCAP, as a political subdivision corporation, uniquely can go
directly to the wholesale market. CAPP and STAP, prior to their merger into TCAP, separated
contracts between a wholesale supplier and an independent REP, providing TCAP consultants
with greater insight into the margins of various market participants than would be possible for
most consumers. A broker or a REP would hand a form contract to an individual consumer. In
the case of TCAP, no form contract is acceptable and, because of the size of TCAP's load, both
wholesale suppliers and REPs are willing to negotiate contract terms that are beneficial to TCAP
members, enabling the refunds members have consistently received, special terms for adds and
deletes, including an ability to add new loads at current market prices even if the market price is
lower than the price of the master agreement.
TCAP's benefits regarding pricing
TCAP's membership consumes approximately 1.4 billion kWh annually which amounts
to approximately $100 million in revenue for the wholesale provider at current contract prices.
The value of the aggregated load is extremely appealing to wholesale market participants,
enabling TCAP to get the market competitive pricing at any particular moment. As reflected in
the third Whereas clause, in addition to the size of its load, TCAP derives benefit from
geographic diversity. TCAP members reside in all four ERCOT zones and are spread between
the entire length and breadth of Texas, from Wichita Falls to Harlingen and Fort Stockton to
Palestine. Since consumption is influenced by weather and since weather conditions are seldom
the same across all of Texas, it is unlikely that all TCAP members are reaching peak
consumption simultaneously. If the peaks of all TCAP members were totaled, the sum would
equal 313.1 MW. But a wholesale supplier looks at the peak consumption of TCAP as an
aggregated load rather than the sum of the peaks of all members. TCAP's peak demand is 246.9
MW. That reduction in peak is a specific and unique benefit of aggregation. And unlike other
aggregation groups that accept counties and school districts as members, TCAP has focused its
membership on cities and other political subdivisions that have a relationship with cities to
maintain the very favorable load factor of cities with high off peak consumption from street
lights which provides favorable pricing terms.
History of CAPP, STAP, TCAP pricing
As reflected in the fifth and eighth Whereas clauses, aggregated cities have historically
been interested in flat, fixed -price, full- requirements contracts and price stability. The resolution
under consideration maintains that goal for a five -year period at a price much lower than the
current contract price. In 2002, CAPP and STAP were able to obtain prices for energy at 4 cents
per kWh. Very quickly after retail deregulation was implemented, natural gas prices started to
rise, and they continued on an upward trend until late 2008. In late 2008, CAPP cities were
paying approximately 13.5 cents per kWh. Fear that natural gas price volatility would continue
to result in high electricity rates, CAPP cities were excited to lock -in long term rates beginning
in 2009 that were significantly lower than prices experienced in the 2007 -2008 time frame.
STAP cities experienced their highest rate in 2006 at slightly more than 9 cents per kWh. STAP
cities saw prices drop to around 7.8 cents per kWh in 2008 and were happy to find a contract that
would stabilize prices in the 7 to 8 cent range for an extended period. When CAPP and STAP
members signed new contacts in late 2008, no one could have predicted that the economy was
about to enter a multi -year recession and that fracking would bring a glut of natural gas to a
market with reduced demand, putting natural gas and electricity prices into a downward trend.
Fortunately, gas prices have continued to drop and now TCAP members have an opportunity to
again capture rates in the range of, and hopefully below, 4 cents per kWh.
Contract Requirements
As explained in the tenth Whereas clause, there is no legal requirement that a city engage
in a competitive bidding process prior to contracting for electricity. The primary expectation of
contracting for wholesale energy in a deregulated energy market is that a purchaser sign a
contract accepting a particular offered price within 24 hours of receipt of the offer. NYMEX gas
futures prices change daily, and since gas prices drive electricity prices, it is unlikely that any
2
given price quote for wholesale electricity during a given period will remain open for more than
a day. As explained in the ninth Whereas clause, TCAP members are expected to immediately
execute a contract once TCAP's supplier is able to lock in a price at or below the benchmark
prices specified in the resolutions for a five -year period commencing January 1, 2018. That is
why Section 2 of the resolution requires the naming of specific individuals with whom TCAP
can correspond and provide a contract for signing when appropriate.
Resolution's Objective
As explained in the eleventh thru fourteenth Whereas clauses, after the size of the load
for the 2015 contract opportunity is defined by February 25, 2016, TCAP's supplier will look for
an opportunity to lock prices for the five -year term at or below specified benchmarks (4.1 — 4.25
cents per kWh). That may happen by the second week of March, but if it appears that prices are
trending downward, TCAP will direct its designated supplier, NextEra, to daily monitor the
market to hopefully capture a price under lower than benchmarked prices. The window of
opportunity for capturing a reasonable price at or below the benchmarks will expire by June 30,
2016. TCAP will develop another supply opportunity in the Fall of 2016 for any members not
contracting in this offering.
TCAP benefits to the consuming public
Whereas clause six references TCAP becoming a forceful voice for consumer protections
and market reform to benefit the public as well as political subdivisions. When CAPP and STAP
merged in 2011, one of the guiding principles established in meetings with members and through
subsequent board priority- setting meetings was that TCAP should advocate for reforms in the
market that would enhance competition and benefit the general public. TCAP has become the
closest thing to a consumer advocate that exists in the deregulated marketplace on both the
wholesale and retail sides of the business. TCAP membership not only provides political
subdivisions with resources to monitor markets, capture reasonable prices and best available
terms, stabilize budgets, address problems with invoices and help with governmental reports,
provide best of class portals to understand consumption patterns, membership also affords an
opportunity to represent to constituents that they have an advocate on their behalf.
CHOICE OF SUPPLY OPTION
Whereas Clause 13 identifies three different supply options that TCAP has arranged as
choices for each member. Option 1 is a fixed price for all consumption regardless of time of day.
The price will not exceed 4.1 cents per kWh in the North and West ERCOT zones. It will not
exceed 4.25 cents per kWh in the Houston and South zones. The actual price is likely to be less
than the benchmark prices. The prices will become effective January 1, 2018. Given that these
prices are to be locked in 2016 and will not expire until December 31, 2022, they are reflective
of the lowest prices for electricity experienced since the retail market was deregulated January 1,
2002. Generally speaking, there ought to be an expectation that the price of energy will climb
marginally for each year of the contract term beyond two years. The possibility of locking -in
energy prices at or below 4 cents per kWh for a period that terminates in seven years is truly
remarkable based upon the history of deregulation.
3
In the Spring of 2015, TCAP consultants received indicative fixed -prices around 4.5
cents per kWh. They then developed two supply options to the fixed price full requirements
contract that offered attractive savings opportunities. Both Options 2 and 3 have variable
components related to the energy spot market. While the average spot price in the past three
years has been $32.14 /Mwh (2013), $38.50 /Mwh (2014), $25.53/Mwh (2015), respectively, it is
important to note that spot market prices can change every 15 minutes, therefore it is impossible
to provide members a precise price for Options 2 and 3. While they provide an opportunity for
savings off of the benchmarked prices for Option 1, savings cannot be guaranteed, and thus
Option 2 and 3 involve risk to that does not exist with Option 1. A TCAP member that is
completely risk adverse should select Option 1.
Option 2 fixes a price for the peak usage period and then turns to the spot market for all
off -peak usage. When TCAP was developing these products in 2014, there was a large enough
gap between fixed price options and spot prices that this option looked very attractive. Now,
with market prices at historic recent term lows, both spot prices and fixed prices have fallen and
their price differential has shrunk to the point that future savings from the spot market may not
be as great as the risk of future price increases. The following graph shows how low current spot
market prices have gone.
{A�
d
y
Spot Natural Gas vs. ERGOT North Prices
SM $I N
$N SAN
SN
$)
A Saco SM .00 iaw
sa _ �- $3.N
Sm-. _ ._.... - . _.. - .... _.� _._.. - - -- -._ UN
S1
$o Saw
Q2 Q3 Q7 Q3 w Q3 Q2 Q3 Q2 Q3 Q2 Q3 Q2 Q3 Q2 Q3 Q2 Q3
2N72N7 2=2NH2N92MM 021RR 2Ml2Ul20222N22C232w32ala2wa2a2S2a25
—ERarn rMM Holm iZ Pex — HSESpa1 Prix
pi
FZ
6
"s
Option 2 was developed with the anticipation that spot prices during the off peak period
would be in the range of $10 /MWh to $40/MWh ($0.0140.04/kWh) over time for spot
purchases. Our latest quotes for fully fixed priced products (Option 1) includes off peak pricing
fixed at under $20 /MWh. These low Option 1 fixed prices for off peak usage may make it
harder for future off peak spot prices to create additional savings under Option 2 over time even
though the customer will be incurring market price risk.
Option 3 begins with the purchase of a block of power to cover the base use of all
members who commit to this option. Block power, since it is a firm commitment 24 hours a day,
is the cheapest form of energy available in the wholesale market. Daytime peak consumption
will be partly covered by a fixed price for solar power with all other consumption supplied by the
spot market.
In considering Option 2, TCAP consultants would tell you that with current prices about
a half cent less than the price that existed when Option 2 was conceptualized last Spring, it will
be difficult for Option 2 to generate savings sufficient to justify its selection. Option 3 with its
M
majority reliance on the cheapest form of energy has a greater probability than Option 2 of
producing savings over Option 1. But again, with such low Option 1 fixed priced products now
available to TCAP members, and since there are no guarantees that Options 2 or 3, which utilize
spot market pricing, will remain as attractive as they were even a few months ago.
EXPLANATION OF "BE IT RESOLVED" SECTIONS
Section 1. Authorizes TCAP to submit the members load, along with the load of other
authorizing members, to be aggregated into a pool by TCAP's wholesale
supplier for a contract commencing January 1, 2018 and terminating
December 31, 2022 with the understanding that the fixed, full- requirements
price under Option 1 must not exceed 4.1 cents per kWh in the North and
West zones and must not exceed 4.25 cents in the Houston and South zones.
Section 2. Sets conditions precedent that the aggregated load exceed 50 MW, that the
resolution be passed before February 25, 2016, and that NextEra has until
June 3, 2016 to lock in a fixed price for the aggregated load that does not
exceed benchmark prices. It also requires the designation of a specific
individual, by name or title, who are authorized to sign a contract within 24
hours of submittal, assuming the conditions have been met.
Section 3. Consistent with the last two Whereas clauses, this section commits the
member to budget for and approve funds necessary to pay for the member's
proportionate share of the aggregated load that TCAP commits to with
NextEra. TCAP will contract with NextEra based upon representations of
authorizing members, each of whom will be provided with a Commercial
Electric Service Agreement ( "CESA ") with GEXA, the current REP, that
extends current retail service terms with the lower wholesale price arranged
with NextEra for the 2018 -2020 time period.
Section 4. In order for TCAP to be informed of the passage of the resolution so that the
member's load can be aggregated by NextEra, this section specifies that a
copy of the resolution should be sent to TCAP's Executive Director and
General Counsel.
3137/10/5098893
5