ADMINISTRATIVE REPORT
Date: July 10, 1997
CC File No.: 1805
TO: Vancouver City Council
FROM: Director of Operations Support and
Manager of Purchasing Services
SUBJECT: Proposal No. 28-97-02 Broker/Consultant Services for the
Supply of Natural Gas
RECOMMENDATIONS
A. THAT Council approve the proposal from ECNG Inc. for the
supply of broker/consultant services for arranging the supply
of natural gas to the City and that ECNG Inc. be appointed as
agent for the City with respect to the direct purchase,
administration and management of the City's natural gas
requirements including the arrangement of "Buy/Sell",
"T-Service" agreements and other Gas Supply arrangements with
local distributors of natural gas, subject to agency
agreements satisfactory to the Director of Legal Services.
B. THAT the Director of Legal Services be authorized to approve
any Buy-Sell, Alternate Supply or T-Service contracts arising
from these arrangements.
GENERAL MANAGER'S COMMENTS
The General Manager of Corporate Services RECOMMENDS approval of A
and B.
COUNCIL POLICY
Council entered into a similar three year arrangement for the supply of
natural gas for the period ending November 1, 1997.
DISCUSSION
The B.C. Utilities Commission, in an effort to develop a less regulated
competitive market, changed the rules governing gas supply and sales.
Customers can now make other arrangements for the supply of gas using
"Buy/Sell", "Unbundled T-Service" or "Direct Purchase Gas Supply"
arrangements. Normally, customers use a gas broker/consultant to
negotiate gas supplies and delivery contracts with gas producers on
behalf of the consumer. Such arrangements are now common in B.C. and
the rest of Canada.
Typically, under these alternative supply agreements, gas is purchased
directly (Buy-Sell) from the producer rather than through BC Gas., or
alternative delivery arrangements (T-Service) are negotiated. However,
BC Gas will still deliver the gas and will continue to supply all of the
related services such as billing, meter reading, and customer service.
Under alternative supply arrangements, monthly billings from BC Gas
remain unchanged. The savings are paid to the City in the form periodic
refund cheques that represent the difference in price between the rate
BC Gas charges, and the rate negotiated under the alternative supply
agreement, or by reduced billings. With T-Service agreements, the
transportation costs charged by the Utility are reduced by using excess
pipeline transportation capacity sold at a discount. The City has used a
broker for the past three years, and has achieved savings of
approximately $145,000 to date. Because market conditions determine
savings, it is not possible to forecast potential savings.
In most cases, these agreements are administered by a broker due to the
complexity of gas marketing and administration. The Broker is best
qualified to evaluate proposals from suppliers and to ensure that
ongoing compliance and administration is maintained. A three year
term, with a 90 day cancellation option, is normal due to the lead times
required to set up administrative systems and accounts with B.C. Gas,
and to ensure continuity of gas supply.
Proposals were called to supply the Agent/Broker/Consultant service to
the City, and were opened on June 16, 1997. Only one qualifying
proposal was received from ECNG Inc. Other firms either declined to
submit proposals, or submitted partial responses. The proposal from
ECNG Inc. satisfied the City's requirements for services and for risk
avoidance. ECNG Inc. is the one of the largest firms offering these
services in Canada, and have a proven track record with many government
agencies and cities in Canada.
RISK
The risk inherent in alternate supply agreements is generally confined
to downward price changes in the marketplace during the life of the
alternative supply arrangement. The Broker monitors the market, and
will find opportunities for savings which they then present to the City
for acceptance. The savings opportunity will usually be on a portion of
the total gas volume for a period of less than a year, and will be
measured against the price today 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. However, this does not
represent a true loss in that the City will not be paying any more than
the contract price. It is similar to locking down a mortgage and seeing
the market rates drop further. In both cases, one will not pay any more
than what was expected. It is to be expected that this may happen from
time to time but the majority of alternate arrangements in practice
result in savings.
The contract with ECNG Inc. will provide the City with the right to
approve any alternate arrangements in advance of entering into the
arrangement. Therefore, the City can confirm that savings exist prior
to accepting any alternative arrangement.
FEES FOR SERVICE
The fees for brokerage and consultant services are on a shared savings
basis for Buy-Sell contracts, and on a $0.07 per gigajoule on T-Service
Agreements. In both cases, the City must approve the alternative gas
supply arrangement, and will confirm net savings are available in
advance. If no deals or savings are available, no fee will be paid.
This arrangement provides good security, and prevents any exposure to
unwanted risk. The fees charged are normal for the industry, and are
reasonable.
CONCLUSION
In 1993, the B.C. Utilities Commission changed regulatory policy
governing gas supply and marketing so that customers can now with
reasonable safety, enter into a variety agreements with producers for
the supply of natural gas. The City has taken advantage of this
deregulation and achieved savings in the last three years, and can
continue to reduce costs. The administration of these agreements is
complex and requires specialized knowledge to avoid potential risks and
to ensure that maximum savings are realized. ECNG Inc. has extensive
experience in this field and has successfully provided administration
services to several municipal and government agencies. As agents for the
City, they will provide ongoing administration of the supply agreements.
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