R2010-157 - 2010-11-22 RESOLUTION NO. R2010 -157
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
PEARLAND, 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;
AUTHORIZING CAPP TO ACT AS AN AGENT ON BEHALF OF THE
CITY TO ENTER INTO A CONTRACT FOR ELECTRICITY;
AUTHORIZING THE CHAIRMAN OF CAPP TO EXECUTE AN
EXTENSION TO THE CURRENT ELECTRIC SUPPLY AGREEMENT
FOR DELIVERIES OF ELECTRICITY EFFECTIVE JANUARY 1, 2011
OR AS SOON AFTER FINALIZATION OF A CONTRACT AS
POSSIBLE; 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 Pearland, 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; an
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
RESOLUTION NO. R2010-157
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
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 CAPP for
the period beginning January 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; and therefore,
BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PEARLAND, TEXAS:
Section 1. That the CAPP Board and its consultants and advisors are agents
authorized to negotiate for the City's electric power 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
1813\00\1223036 2
RESOLUTION NO. R2010-157
the current contract term of 2011-2013 and results in fixed prices through December 31,
2018.
Section 3. That the Chairman of CAPP is hereby authorized to sign a
Commercial Electricity Supply Agreement ("CESA") for the City pursuant to the contract
approved and recommended by the CAPP Board of Directors within 24 hours of said
approval and recommendation, 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.
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
CAPP and the CESA signed by the Chairman of CAPP on behalf of the City for the term
beginning January 1, 2011 or as soon after finalization of a contract as possible 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 CAPP.
PASSED, APPROVED and ADOPTED this the 22nd day of November, A.D.,
2010.
TOM REID
MAYOR
1813\00\1223036 3
RESOLUTION NO. R2010-157
ATTEST:
;.MCA._.A :6
SONIA WEBB E5 /
DEPUTY CITY SECRETARY ''•,,pytlNHN MAP,OP
APPROVED AS TO FORM:
6/6-
DARRIN M. COKER
CITY ATTORNEY
1813\00\1223036 4
Lloyd 8 I 6 Congress Avenue,Suite 1900
Austin,Texas 78701
Gosselink Telephone:(512)322-5800
Facsimile:(512)472-0532
<<^ ATTORNEYS AT LAW www.lglawfirm.com
Mr.Gay's Direct Line: (512)322-5875
Email: ggay@lglawfirm.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 7.8950 per kWh
South Zone 8.0440 per kWh
West Zone 5.9140 per kWh
Houston Zone 8.4470 per kWh
New Offer Results in Savings
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.
1813/00/1218170
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 an eight-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 10 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-year 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 a five-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 comparable 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 10
per kWh. Multiplying each member's annual consumption by 10 yields a savings estimate for
next year.
In 2008, the excess supply in West Texas permitted CAPP members in the West Zone of
ERCOT to realize about a 20 reduction off of North Zone prices during the five-year contract.
Over the last year, 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 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 share
of the contracted load. Every CAPP 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 guarantee 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 Gosselink Rochelle &Townsend, P.C.
Lloyd 816 Congress Avenue,Suite 1900
( Austin,Texas 78701
Gosselink Telephone (512) 325800
����‘�� Facsimile: (512)472-0532
4ATTURNEYS AT 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-
2013 under 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 fmalizing 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 market 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 guarantee. 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 primarily 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 market
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
market could return to historically volatile patterns if a legislative body or a court determines that
shale fracturing pollutes water supplies. War in the mid-East or hurricanes in the Gulf could
similarly cause gas prices to spike.
The second primary driver behind deregulated market prices for electricity is the electric
market'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 CAPP and STAP members assume the risk that current
generation plants may fail, that demand may outstrip supply, that facturing may pollute, and that
hurricanes and wars 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 years 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
fmancial 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 reject the blend and extend option while
other members take advantage 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
fmalize 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.
Loyd Gosselink Rochelle &itwnsend, P.C.
Current Contract Schedule Blend/Extend Variance
from CS
Energy 8.2430 8.447 7.447
11.8%
All In 12.2967 12.5007 11.5007
8%
Past 12 month History 30 million KWH annually
Based on last 12 months, approximate savings of$240,000 annually from contract schedule
versus new blend/extend rate
This usage and savings is before full-year usage on new facilities(PSB, UofH, Recreation
Ctr/Nat.., AS Expansion
and new Fire Station#5 scheduled to open early 2011.
We budgeted $4,721,017 for FY2011.
Annual Savings of Appoximately $375,000 or $1,125,000 for 3 years, if rate left flat until 2013.
GF = $215,000 WS = $160,000
FY2011 Savings of 9 months-approximately $280,000 +, as higher usage in summer than in
winter.
GF = $161,250 WS =$120,000
Claire
i .
NYMEX - NATURAL GAS CONTRACT SETTLEMENT PRICE HISTORY
Monthly Settlement Price
YEAR TAN FEB MAR APR MAY TUN TUL AUG SEP OCT NOV DEC YR AVG
2005 6.213 6.288 6.304 7.323 6.748 6.123 6.976 7.647 10.847 13.907 13.832 11.180 8.616
2006 11.431 8.400 7.112 7.233 7.198 5.925 5.887 7.042 6.816 4.201 7.153 8.318 7.226
2007 5.838 6.917 7.547 7.558 7.508 7.591 6.929 6.110 5.430 6.423 7.269 7.203 6.860
2008 7.172 7.996 8.930 9.578 11.280 11.916 13.105 9.217 8.394 7.472 6.469 6.888 9.035
2009 6.136 4.476 4.056 3.631 3.321 3.538 3.949 3.379 2.843 3.730 4.289 4.486 3.986
2010 5.814 5.274 4.816 3.842 4.271 4.155 4.717 4.774 3.651 3.837 3.292 4.404
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Claire Bogard/COP To Darrin Coker/COP@ci.pearland.tx.us
11/15/2010 11:56 AM cc
bcc
Subject Fw:Electric Rates 2011 and Beyond
Info.from Geoffrey. I'm verifying the numbers.
--Forwarded by Claire Bogard/COP on 11/15/2010 11:53 AM----
From: "Geoffrey Gay"<gmg@Iglawfirm.com>
To: <CBogard@ci.pearland.tx.us>
Date: 11/15/2010 11;50 AM
Subject: RE:Electric Rates 2011 and Beyond
Claire,the price of energy under the NextEra contract with CAPP is a blended rate for all usage.
I don't believe that there is a separate contract for street lighting in Pearland. The 2010 energy
rate is$00.08243 per kWh. In 2011 the rate is scheduled to go to $00.08447 in the Houston
Zone. Keep in mind that as you look at invoices,different uses will reflect different prices
because of the rates for wires services and non-bypassable charges authorized by the PUC for
CenterPoint differ by customer class. The possible blend and extend would likely lower the 2011
energy rate by a penny per kWh. The City of Pearland consumes around 26 million kWh
annually. My expectation would be that the blend and extend arrangement could save the City
around $260,000 next year and possibly close to$1 million over the next three years. Geoffrey
From: CBogard@ci.pearland.tx.us [mailto:CBogard@cl.pearland.tx.us]
Sent: Monday, November 15, 2010 9:36 AM
To: Geoffrey Gay
Cc: Caitlin Bowdish
Subject: Electric Rates 2011 and Beyond
Geoffrey
Working on an agenda item for Pearland City Council and potential savings.
I'm assuming that the 1Cent anticipated reduction for the Houston Zone would not
be applicable to Street Lights or how would this work with Street Lights?
Claire Bogard/COPatioty
To Darrin Coker/COP@ci.pearland.tx.us
11/15/201011:56 AM cc
bcc
Subject Fw:Electric Rates 2011 and Beyond
f
Same info.from RJ Covington. Still verifying the numbers.
----Forwarded by Claire Bogard/COP on 11/15/2010 11:54 AM
From: "Caitlin Bowdish"<cbowdish@rjcovington.com>
To: <CBogard@ci.pearland.tx.us>
Cc: "Geoffrey Gay"<gmg@tglawfirm.com>
Date: 11/15/2010 11:50 AM
Subject: RE:Electric Rates 2011 and Beyond •
Claire,
CAPP's contract is structured as a fixed price per kWh for all accounts. Therefore,the energy rate for streetlighting
is the same as for all other accounts and the 1 cent reduction would apply.
The City of Pearland consumes roughly 26 million kWh annually. Saving one cent per kWh at that level of
consumption would save approximately$2G0,000 next year. Assuming the City's load will grow over the next three
years,the savings under a blend and extend agreement should approximate to over$800,000 over the course of
the next three years,dependent on how far into 2011 the blend and extend is executed. Also,please keep in mind
that passage of a resolution authorizing someone to sign a blend and extend agreement is conditioned to
demonstration of savings,and the savings will have to at least approach what I have reflected above or the
extension will likely not be approved by the STAP/CAPP/TCAP Board of Directors.
I hope this helps!
Thanks,
Caitlin Bowdish
R.J.Covington Consulting, LLC
512-331-4949 x104 ,
From: CBogard@d.pearland.tx.us [mailto:CBoaardt lci.pearland.tx.us]
Sent: Monday, November 15, 2010 9:36 AM
To: Geoffrey Gay
Cc: Caitlin Bowdish
Subject: Electric Rates 2011 and Beyond