ADMINISTRATIVE REPORT

Date: June 30, 2000
Author/Local: JY/KK

RTS NO. #1447

CC File No. 1805

Council: July 25, 2000

TO:	Vancouver City Council
FROM:	Manager, Building Management
SUBJECT:	Extension of Existing Natural Gas Supply Contract (Proposal No. 28-97-02) for 2 years

RECOMMENDATION

THAT Council approve two year extension of the City's existing contract with Premstar Pacific(formerly, ECNG Inc.) for consulting and brokerage services in the purchase and delivery of natural gas, appointing Premstar Pacific as City's agent with respect to direct purchasing, administration and management of the City's natural gas requirements including the arrangement of "Buy/Sell","T-Service" agreements and gas supply arrangements with distributors of natural gas, based on existing agency agreements, to be effective between November 1, 2000 and October 31, 2002.

GENERAL MANAGER'S COMMENTS

The General Manager of Corporate Services RECOMMENDS approval.

COUNCIL POLICY

Council entered into a similar three year arrangement for the supply of natural gas for the period ending November 1, 2000.

BACKGROUND

In 1993, the B.C. Utilities Commission, for the purpose of developing a less regulated competitive market, revised the regulations governing natural gas supply and sales. Since then, large users have been making their own deals for the supply of gas using "Buy/Sell", "Unbundled T-Service" or "Direct Purchase" arrangements. Typically, customers use gas broker/consultants to negotiate gas supplies and delivery contracts with gas producers on their behalf. City has been doing this since November 1, 1994.

Generally, under these alternative arrangements, natural gas is purchased directly from the producer rather than through BCGas, and delivered by specific contracts which may use discounted transmission modes. However, BCGas still delivers the gas and supplies services such as meter reading, billing for transmission, and customer service. Prior to November 1997, under alternative supply arrangements, monthly billing from BCGas remained unchanged. The savings were paid to the City in the form of periodic refund cheques that represented the difference between BCGas billings and the rate negotiated under the alternative supply agreement. With T-Service agreements, using excess pipeline transportation capacity sold at a discount reduces transmission costs charged by BCGas.

Since November 1997, BCGas has not been handling the billing part of gas purchased from the producer. We pay the producer through our broker for the purchased gas. The savings result from the difference between contracted price and BCGas rate. In addition, we have transmission cost savings.

The broker/consultant receives a fee of $0.07 per GJ(gigajoule) of natural gas purchased, which represents 1.2% of the total transaction at the prevailing price.

RISK

The risk inherent in alternate supply agreements is generally confined to downward price changes in the market during the life of the alternative supply arrangement. The broker/consultant monitors the market, and finds opportunities for savings and presents them to us for acceptance. The saving opportunity usually is on a portion of the total gas volume for a period of less than a year, and is measured against the current price and expected future prices. If the market for gas collapsed, and the price fell dramatically, the City would still have to pay the contracted price. It is similar to locking in a mortgage and seeing the rates drop further. In both cases, one will not pay any more that what was expected.

SAVINGS

From November 1994 to November 1997, City has avoided $145,000 in natural gas costs. From November 1997 to April 2000, we have achieved actual cost avoidance of $56,000 representing the difference between BC Gas posted rate and our costs. These savings are net of fees. Due to the June 21, 2000 approval of BCGas rate increase, and the fact that we had locked in deliveries to October 2000 at lower prices, we project our cost avoidance to October 2001, to be $310,000.

FUTURE

Further deregulation of natural gas retailing is expected. It is proposed that all customer categories should have the choice to choose alternative gas supplies other than BCGas, while BCGas continuing to be responsible for the delivery. It is similar to the deregulation of long-distance phone service. At present, gas deregulation applies to accounts with consumption exceeding 2,000 GJ per year. The City has 40 such accounts.

They amount to:
· Engineering Services = 60,000 GJ @ $300,000 / year
· Park Board = 130,000 GJ @ $660,000
· Civic Buildings = 100,000 GJ @ $500,000 TOTAL $ 1,460,000

TIMING

It is expected that the BC Utilities Commission will extend deregulation to users with annual consumption of less than 2000 GJ to be effective November 1, 200l. The City has buildings which fall into this group, effectively doubling the amount of gas that we will purchase in open markets. This will also make the consulting and brokerage market more competitive. We will call for new proposals following the expected changes in the market and a new agreement will be recommended to Council in a report detailing the terms. It is also important to note that even if the proposal awarding was completed soon after November 1, 2001, forward purchasing prior to this date may be prudent.

CONCLUSION

Partial deregulation has allowed the City to reduce its natural gas purchase costs. We expect that deregulation will be extended to buildings which consume less than 2000 GJ annually. In the interim an extension of the City's service agreement with Premstar Pacific will serve our needs for two years.

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(c) 1998 City of Vancouver