PROPOSED REDRAFT OF PGW'S REDRAFT GAS CONTRACTS ORDINANCE
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FOR DISCUSSION
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Title
AN ORDINANCE
Transmitting a bill aApproving certain contracts and transactions arising thereunder for the purchase, storage, distribution, transportation and/or transmission of natural and other gas entered into by the Philadelphia Facilities Management Corporation on behalf of the Philadelphia Gas Works, subject to certain terms and conditions.
Body
WHEREAS, The Philadelphia Facilities Management Corporation (PFMC) must enter into contracts on behalf of the Philadelphia Gas Works (PGW) to purchase gas supply, storage, distribution, transportation and transmission services in order to ensure a gas supply sufficient for the estimated maximum requirements of gas users in the city of Philadelphia; and
WHEREAS, Paragraph 2 of Section II of the Agreement Between The City of Philadelphia and the Philadelphia Facilities Management Corporation for the Management and Operation of the Philadelphia Gas Works dated December 29, 1972, authorized pursuant to an Ordinance of Council approved December 29, 1972 (Bill No. 455), as further amended (Management Agreement/Ordinance) requires PFMC to submit such contracts to the Philadelphia Gas Commission (Gas Commission) for its recommendations and to Council for approval before entering into them, except in temporary or emergency situations, in which case PFMC must submit contracts for such purchases within thirty (30) days after initiating such purchases to the Gas Commission and Council for their approval; and
WHEREAS, PFMC (for PGW) purchases large supplies of gas each year commencing in May and injects these purchases into storages in which PGW reserves capacity (i.e., various storage caverns located throughout the country) in order to provide for adequate firm supplies to the City's gas customers in the coming winter; and
WHEREAS, The injection season commences in May in order to make sure that storages are filled by the time the winter heating season occurs in November; and
WHEREAS, Gas supply sourced from storage is considered a more secure supply because it is not subject to the same type of weather-related force majeure events that could affect gas obtained on a live basis from the Gulf of Mexico; and
WHEREAS, Typically, PGW pays suppliers for gas purchased and injected into storage on a pay-as-you-go basis; however, for the Summer '04 injection season PGW sought to delay payment for such purchases due to PGW's cash flow circumstances; and
WHEREAS, Without the injected supply, PGW's ability to insure winter availability for Winter '04-'05 would be unacceptably jeopardized; and
WHEREAS, Occidental Energy Management, Inc. (Oxy), indicated that it would be willing to structure a delayed payment transaction with PGW that would permit PGW to receive the supply it needed commencing May 1, 2004 and to defer payment until December 25, 2004; and
WHEREAS, The material financial terms of the transaction with Oxy are summarized as follows:
- Oxy will sell 9,180,000 dth of gas to PGW commencing May 1, 2004 (the Oxy Volume) at a current approximate cost of $60 million;
- Approximately 2/3 of the Oxy Volume will be delivered to PGW from May 1 to September 30, 2004 and PGW will make payment for same in five (5) equal monthly installments commencing December 25, 2004;
- PGW has released capacity at two of its storage fields (Washington Storage and Eminence Storage - WS and ESS, respectively) to Oxy and has sold to Oxy incidental existing storage balances; Oxy will store the remaining 1/3 of the Oxy Volume in these released storage areas;
- During the winter season, PGW will purchase and pay Oxy for gas as withdrawn from the WS and ESS storages, but no sooner than December 25, 2004;
- At the end of the winter season, the storages will revert to PGW;
- The net cost to PGW for the transaction is approximately 35 cents per dth sold, in addition to commodity and other usual charges (fuel, transportation, storage, etc.); and
WHEREAS, The transaction also required that capacity releases be effected by PGW not later than April 30, 2004, by 10:00 a.m. or the transaction would be forfeit, putting PGW's winter supply in jeopardy; and
WHEREAS, in order to be able to properly effectuate the aforementioned capacity releases, PGW and Transcontinental Gas Pipe Line Corporation executed the agreements attached collectively hereto as Exhibit 1 on April 29, 2004, which agreements memorialized PGW's rights to the WSS and ES storage fields; and
WHEREAS, PGW and Oxy completed negotiations on April 29, 2004, and immediately executed the letter agreement and amendment collectively attached hereto as Exhibit 2, which are also subject to the terms of a North American Energy Standards Board base contract previously entered into with Oxy, which has been approved by the Gas Commission and City Council, and which is also subject to certain terms and conditions imposed by the Gas Commission and City Council, including, without limitation, with respect to certain reporting obligations.
WHEREAS, Due to interstate pipeline deregulation in the early 1990's, gas supply, storage, transportation and transmission service transactions now routinely occur in extremely short timeframes on a competitive basis such that PFMC on behalf of PGW must be able to enter into numerous authorized contracts on an expedited basis; and
WHEREAS, Current market conditions often make it impracticable for PFMC on behalf of PGW to obtain pre-approval of gas contracts under the requirements of Paragraph 2 of Section II of the Management Agreement/Ordinance, thereby jeopardizing PFMC's ability to finalize the necessary arrangements with gas suppliers to secure sufficient gas supply and maximize its ability to secure such supply at favorable prices; and
WHEREAS, In light of the Enron bankrupctcy and other recent similarly large financial crises in the gas and telecommunications industry, most gas suppliers have threatened or refused to supply gas supply, storage, distribution, transportation and transmission services without executed contracts from buyers; and
WHEREAS, Due to a number of exigent circumstances, PFMC on behalf of PGW, entered into certain contracts for gas supply, storage, distribution, transportation and/or transmission services on March 9, 2004 and is now seeking City Council approval of same as required by the Management Agreement/Ordinance; and
WHEREAS, The Joint Petition for Settlement of Philadelphia Gas Works' 2003-2004 GCR Proceeding dated May 14, 2003 submitted to the Pennsylvania Public Utility Commission (PUC) in accordance with the Pennsylvania Public Utility Code describes PGW's gas procurement program for the Fiscal Years 2003-2004 and 2004-2005, and mandates a least cost fuel procurement policy for PGW pursuant to 66 Pa.C.S.A. §1318(a).
THE COUNCIL OF THE CITY OF PHILADELPHIA HEREBY ORDAINS:
SECTION 1. APPROVAL OF CERTAIN CONTRACTS AND TRANSACTIONS
a. Subject to the same conditions established by Council as set forth in Bill No. 040367, and except as otherwise provided by all other provisions of this Ordinance, the contracts attached hereto as Exhibits 1 andthrough 82 (the Contracts) and the transactions arising thereunder for the purchase of natural and other gas supply (including volumes of gas associated with the production of Liquefied Natural Gas (LNG)), storage, distribution, transportation and transmission services (collectively, Services) entered into by PFMC on behalf of PGW for Services to be delivered to PGW no later than August 31, 2007, and transactions arising thereunder, are hereby approved. , provided that each Contract approved as set forth in this Section includes a provision to the effect that it is understood and agreed that any payments required to be made by PFMC and/or PGW as a result of or arising out of entering into such contract shall be made solely from the revenues of the Philadelphia Gas Works.
The approval set forth in Section 1(a) of this Ordinance shall not apply to a Contract or transaction arising thereunder related to any of the following:
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- Financial hedging. For purposes of this Section 1, financial hedging shall mean the purchase of an insurance or derivative-based product intended to protect against the risk of financial loss due to fluctuations in the price of natural gas but which does not itself constitute the purchase of gas supply, transportation, transmission, or storage services; or
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- Outsourcing of the procurement of all or a substantial part of PGW's gas supply, storage, distribution, transportation and/or transmission services. For purposes of this Section 1, outsourcing of the procurement shall mean any arrangement between PFMC and a third party whereby such third party is contracted by PFMC and/or PGW to direct PGW's gas supply, storage, distribution, transportation and/or transmission services for any period of time on behalf of itself, PGW, or PFMC. Further, for purposes of this Section 1, a substantial part shall mean fifty (50) percent or more of the volume or the then-market value of PGW's gas supply, storage, distribution, transportation, or transmission services; or
(3) Sale or lease of LNG facilities and/or the land appurtenant thereto.
SECTION 2. MAXIMUM GAS COSTS
The sum total of Contracts and transactions arising thereunder entered into pursuant to the authorization provided in Section 1 for the delivery of Services during each PGW Fiscal Year shall not exceed the projected sum for gas purchases for such Fiscal Year as set forth in PGW's annual Gas Cost Rate (GCR, also referred to as Gas Cost Adjustment (GCA)) filing as approved by the PUC (the approved 1307f Filing), as updated by PGW's quarterly GCR filings with the PUC; provided, however, that the foregoing not-to-exceed sum total of the Contracts and transactions arising thereunder for each PGW Fiscal Year shall be adjusted accordingly if PFMC:
a. notifies the Gas Commission in writing prior to the end of any Fiscal Year that:
- the actual degree days for a PGW Fiscal Year exceed the projected number set forth in the approved 1307f Filing; and/or
- the Near-Month New York Mercantile Exchange (NYMEX) closing pricing for non-locked-in-for-price volumes is actually greater than the pricing projected in the approved 1307f Filing; and/or
- pricing set forth in an amended 1307f Filing which has been approved by the PUC exceeds the initial projected sum for such gas purchases, and
b. specifies in such notice the amount by which PGW's not-to-exceed sum total of contracts has been adjusted and itemizing the resultant dollar impact of each of the applicable factors identified in the foregoing Sections 2(a)(1),(2) and (3).
c. For purposes of this Section 2, degree day shall mean a measure of the coldness of the weather experienced based on the extent to which the daily mean temperature falls below 65 degrees Fahrenheit. For example, on a day in which the daily mean temperature is 59 degrees Fahrenheit, there are six (6) degree days.
d. For purposes of this Section 2, Near-Month New York Mercantile Exchange (NYMEX) closing pricing shall mean the published NYMEX closing price for Henry Hub gas futures contracts for the last trading day of the previous month.
e. For purposes of this Section 2, non-locked-in-for-price volumes shall mean volumes of natural or other gas for which the unit price is determined by any means other than a fixed, express contract price.
SECTION 3. PROCUREMENT STANDARDS
The approval set forth in Section 1 of this Ordinance is conditioned upon the following:
a. The Contracts and transactions arising thereunder shall be consistent with the then-applicable 1307f Filing approved by the PUC. To the extent that the 1307f Filing requires PGW/PFMC to engage in financial hedging (as defined in Section 1) if approval of the local authorities is obtained, Section 1 of this Ordinance shall neither constitute nor be construed as such approval.
b. The Contracts and transactions arising thereunder shall be consistent with a least cost fuel procurement policy.
SECTION 4. REPORTING AND DISCLOSURE
The approval set forth in Section 1 of this Ordinance is conditioned upon the following:
a. PFMC shall provide the Gas Commission with copies of each transaction arising under the Contracts pursuant to Section 1 of this Ordinance within ten (10) business days of entering into such transaction. When any such transaction pertains to outsourcing of the procurement of less than a substantial part of PGW's Services, as provided in Section 1(b)(2) of this Ordinance, PFMC shall provide the Gas Commission with a report on the purpose and total cost of the transaction, which report shall be provided no later than with the next quarterly comparison report to be provided pursuant to Section 4(b) of this Ordinance.
b. PFMC shall provide the Gas Commission with a quarterly report comparing the GCA approved by the PUC for PGW with the then-current PUC-approved GCAs for other Pennsylvania natural gas utilities. Whenever this comparison report shows that, of the eight (8) largest natural gas utilities, PGW is not among the four (4) with the lowest GCAs, PFMC shall include an explanatory narrative. This report shall be due on the tenth (10th) business day of September, December, March, and June of each fiscal year until August 31, 2007.
c. PFMC shall provide the Gas Commission, within five (5) business days of filing with the PUC, copies of all documents filed relative to PGW's GCA. If not already provided as part of such PUC filings, PFMC, by no later than March 1, 2005, shall also provide the Gas Commission with PGW's proposed gas procurement program for the period September 1, 2005 to August 31, 2007. In addition, PFMC shall provide the Gas Commission with copies of all orders and secretarial letters issued by the PUC regarding PGW's GCA within three (3) business days of issuance.
d. PFMC shall promptly furnish the Gas Commission or the Gas Commission's designee with the terms of any proposed agreement and/or settlement with the PUC and/or with any parties to a PUC proceeding relating to gas procurement. Such terms may be furnished telephonically but must be confirmed by an e-mail or other writing within twenty-four (24) hours. If the Gas Commission or the Gas Commission's designee determines that any term of such proposed agreement and/or settlement appears to contravene any provision of this Ordinance or of the Management Agreement/Ordinance, the Gas Commission or the Gas Commission's designee shall promptly notify PFMC, Council and the Mayor.
e. PFMC shall file a report with the Gas Commission at any time that PFMC projects that PGW will exceed or whenever PGW actually exceeds the cost maximums set forth in Section 2 of this Ordinance. PFMC will explain the reasons for the anticipated or actual variance.
f. PFMC shall file on October 3, 2005 a report with the Gas Commission and Council reviewing its implementation of and compliance with this Ordinance.
g. The Gas Commission shall submit a report to Council during December 2005 with respect to PGW's implementation of and compliance with this Ordinance.
SECTION 52. EXHIBITS
The Exhibits 1 through and 28 referred to and incorporated in this Ordinance shall be kept on file by the Chief Clerk of City Council and shall be available to the public for inspection, reading or copying at reasonable times.
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EXHIBITS 1 THROUGH AND 82
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