TITLE
Recommendation to authorize City Manager to enter into a Natural Gas Commodity Option Agreement pursuant to the International Swap and Derivatives Association (ISDA) Master Agreements, to provide natural gas price protection with terms that meet or exceed the following conditions: 1) a term of no more than three years; 2) pricing terms indexed at the Southern California border; and 3) a market price ceiling of not greater than $8.00 per MMBtu. (Citywide)
DISCUSSION
Natural gas is sold and purchased in an extremely volatile commodity market. Because Long Beach Gas and Oil Department (LBGO) purchases its natural gas supply in this unstable market on behalf of its customers, monthly gas bills are exposed to large fluctuations if gas purchases are not protected by risk management practices. For a perspective of this potential exposure and the need for risk management, had FY 14 natural gas prices been the same as during the energy crisis of 2000 through 2001, the average monthly winter (December through February) residential gas bill would have increased by $39.45, or 103 percent.
On February 17, 2009, to increase LBGO’s market flexibility, the City Council approved entry into International Swap and Derivatives Association (ISDA) Master Agreements (Agreements). Counterparties to the Agreements include Bank of America Merrill Lynch, Freepoint Commodities, J. Aron and Company (Goldman Sachs), BP Energy, ConocoPhillips, and Shell Energy North America. Under these Agreements, LBGO can enter into natural gas commodity option agreements to financially hedge the price paid for physical gas deliveries. Current low-priced market conditions offer very favorable opportunities for utilities to ensure customers are protected against significant price increases. LBGO proposes to hedge its winter season gas purchases when customer demand peaks and, therefore, has the greatest vulnerability to high gas prices.
Authorization is requested to enter into one or more Nat...
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