HomeMy WebLinkAboutResolution 3367-06-2006A Resolution
NO 3367-06-2006
RATIFYING EFFORTS OF THE CITIES AGGREGATION POWER PROJECT, INC
TO S ECURE A LONG TERM SOURCE OF ELECTRICITY
FOR BASE LOAD ELECTRICITY REQUIREMENTS
WHEREAS, the City is a member of the Cities Aggregation Power Project, Inc. ("CAPP") a
non-profit corporation that, ~f requested, purchases electricity m aggregate
amounts for its members, and
WHEREAS, all retail power bids from various retail electric providers in the deregulated
electric retail market have been directly indexed to natural gas futures paces, and
WHEREAS, CAPP's Board of Directors, CAPP s member cities and CAPP's consultants have
invested significant rime m investigating long-term electric power alternatives
that are not indexed to natural gas prices m order to provide CAPP's member
cities price savings and stability relative to traditional short-term energy
contracts, and
WHEREAS, CAPP desires to enter into a capacity contract for along-term supply of power to
meet its member cities base load electric needs for a fixed pace that should
provide considerable economic benefit and greater price stability m comparison to
traditional energy contracts, and
WHEREAS, available capacity m Texas fueled by resources other than natural gas accessible
to retail load is scarce and contracting for such capacity reflects an opportunity for
CAPP s member cities to increase savings and reduce electric pace volatihty• and
WHEREAS, persons negotiating on behalf of the owners of available non-natural gas fired
capacity require evidence of CAPP's interest and ab~lrty to contract for such
capacity • and
WHEREAS, CAPP desires to fund the acquisition of capacity for its member cities through the
issuance of contract revenue bonds that are secured by underlying contracts
between CAPP and its participating member cities, and
WHEREAS, the Public Finance Division of the Office of the Attorney General of Texas has
approved the proposed financing structure that CAPP intends to use to fund the
acquisition of capacity for its member cities, and
WHEREAS, the debt issued by CAPP should be considered taxable unless the Internal Revenue
Service responds to CAPP s pending Private Letter Ruling that the debt is tax
exempt; and
Resolution No. 3367-06-2006
WHEREAS, CAPP's Board of Directors has voted to require that any proposed deal for
capacity meet specific parameters m order to be considered by the CAPP
membership, including: that the deal demonstrate economic benefit for all
member cities as compared to exclusive reliance on energy priced on 100%
natural gas generation coupled with a conservative forecast of natural gas prices
and taxable debt; that the contract explicitly state that all liability is severable and
associated solely with the defaulting city (if any) and that there is no cross-
habilrty for other member cities, that CAPP s interest m the pre-paid capacity be
secured by some tangible asset; that CAPP attempt to mitigate and underwrite
identifiable risk through the contract negotiating process, and that capacity pre
payment, if required, will be secured by a general tax pledge of each member city
unless a member city is able to pre-pay its proportionate obligation with cash or
separately arrange with CAPP's financial advisor to base its debt service
obligations on annual appropriations, and
WHEREAS, adoption of this Resolution will not obligate the City of Fart Worth to participate
m or otherwise purchase any capacity purchased by CAPP unless the Crty Council
subsequently specifically authorizes such a transaction,
NOW THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE
CITY OF FORT WORTH,
I.
That the efforts of CAPP's Board of Directors to secure capacity generated by resources other
than natural gas for its member cities base load electric capacity needs for a fixed puce for a period not
to exceed twenty five (25) years are hereby ratified.
II.
That the City of Fort Worth endorses CAPP's Board of Directors committing to contract for
non-natural gas-fired capacity with the understanding that any such deal will meet all specific
parameters, as set forth m the recitals of this Resolution, and that the City will have an opportunity to
review and approve or reject any contractual agreement negotiated by CAPP for the purchase of long-
term electric power
III.
That any underlying contractual agreements between CAPP and pa.rticipatmg member cities will
include two components (i) a variable expense portion associated with that city's share of electric
energy received, including a fuel cost, that is to be paid as a budgeted expense, subject to annual
appropriation by the city and (ii) a fixed capacity expense that will be paid by the city through its
monthly electric bzlls but which shall constitute along-term, general obligation tax debt, with an
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Resolution No. 3367-06-2006
exception permitted that allows the city to use cash to fund its capacity pre-payment obligation or
arrange with CAPP's financial advisor to base its capacity pre-payment pledge on annual appropriations,
tf so able and that any incremental costs associated with such optional arrangements will be borne solely
by the city m question.
IV
That this Resolution does not obligate the City of Fort Worth to participate m or otherwise
purchase any capacity purchased by CAPP unless the City Council subsequently specifically authorizes
such a transaction.
Adopted this 20th day of June , 2006
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Attest: '"
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d! t Marty Hendnx~`"~s ~}
°;, Crty Secretary:.: ~•'
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APPROVED
CITY COUNCIL
JUN 2 0 2006
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City S~ ry of the
City of Forl Worth, Texas
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City of Fort Worth, Texas
Mayor and Council Communication
COUNCIL ACTION Approved on 6/20/2006 Resolution No 3367-06-2006
DATE Tuesday June 20 2006
LOG NAME 03CAPP
REFERENCE NO **G 15237
SUBJECT
Approve Resolution Ratifying Efforts of the Cities Aggregation Power Project, Inc to Secure a
Long-Term Source of Electricity for Base-Load Electricity Requirements
RECOMMENDATION
It is recommended that the City Council approve the attached Resolution which
1 Supports Cities Aggregation Power Project, Inc. s (CAPP) efforts to identify and contract for long term
capacity generated by resources other than natural gas for the City's base load electric capacity needs for a
fixed price for a period not to exceed twenty-five years,
2. Consents to the proposed financing structure for the long-term capacity contract that has been
approved by the Public Finance Division of the Texas Attorney General's Office and
3 Endorses the CAPP Board of Directors committing to contract for non-natural gas-fired capacity with
the understanding that any such deal will meet all specific parameters set forth in the attached Resolution
DISCUSSION
One characteristic of the Texas deregulated electricity market is that retail prices for electricity are linked to
the natural gas market. There have been dramatic increases in prices for electricity as the gas prices have
gone up Recently prices have been as much as 275% higher than they were when deregulation of the
electricity market started
The City entered into its current contract for electricity with The Texas General Land Office (GLO} last year
This contract insulates 85% of the City's electricity requirements from the recent price increases through
June 2009 However when the contract expires the City's electricity expenditures are expected to
increase 100 150%
Cities Aggregation Power Project, Inc. (CAPP) is a political subdivision corporation authorized by the Texas
Local Government Code which was formed to contract for power on behalf of its member political
subdivisions. Although the City of Fort Worth has never purchased electricity through CAPP on June 26
2001 the City Council approved Resolution No 2740 accepting membership in the organization
As CAPP gained experience in the deregulated electric market, its mission evolved beyond just securing
favorable energy pricing on an annual basis. CAPP's members must prepare annual budgets, and they
need predictable costs for essential services such as electricity CAPP has started taking proactive steps to
stabilize prices for its members
Over the last two years the CAPP Board of Directors has looked for long-term options that would mitigate
the volatility of natural gas-fired generation. CAPP's consultants have identified owners of generation
facilities that are willing to negotiate directly with CAPP for long-term generation capacity at very favorable
Logname 03CAPP Page 1 of 3
rates The general structure of such a deal would fix the price for approximately one-half of the total
aggregated energy requirement for a term of up to 25 years. The remainder of the electricity would be
supplied with short-term contracts
A long-term contract would involve a commitment for the output of a base toad (probably coal-fired)
generation facility and pre-payment of the capacity costs associated with that facility Experienced bond
counsel advised CAPP regarding an appropriate financial structure that would permit payment of the
capacity portion of a potential energy contract. The Chief of the Public Finance Division of the Office of the
Attorney General approved CAPP's proposed structure last summer
This Resolution endorses the arrangement approved by the Attorney General's Office which would have
CAPP issuing general revenue bonds with the bond proceeds used to pre-pay the 10-year capacity
commitment on behalf of members The bonds would be backed by contracts between CAPP and
individual CAPP member cities that would commit to purchase their electric needs from CAPP for the
duration of the capacity commitment. The individual contracts would be comprised of two components 1)
a variable expense portion associated with each member's share of the electric energy received including a
fuel cost, and 2) a fixed capacity expense that equals the annual principal payments corresponding to the
percentage of the capital cost of the electric generation facility for which the member is responsible The
variable energy expense portion would be paid by each member as a budgeted expense subject to annual
appropriation The fixed capacity component would constitute long-term general obligation tax debt of
each respective member This means that the fixed capacity portion of the contract would be secured by a
pledge of the member's ad valorem taxes. The CAPP Board of Directors has approved an exception to the
financial structure for members that wish to avoid undertaking a general obligation tax debt and are
financially able The exception allows members to either bring sufficient revenues to pre-pay the capacity
portion associated with the member's particular requirements or to arrange with CAPP's financial advisor to
base their capacity pre-payment pledge on annual appropriations.
The Resolution also directs CAPP to consider only long-term capacity contracts that meet certain defined
parameters meant to protect CAPP members. These parameters are
A statement that the debt would be taxable and that CAPP must demonstrate that the proposed
deal would provide member cities with an economic benefit. There is a pending Private Letter Ruling
Request filed by CAPP seeking an opinion that the debt would be tax-exempt. If the IRS responds
that the debt is tax-exempt, then it will be that much easier to demonstrate economic benefit.
Severable liability associating the risk with the defaulting city and no cross-liability
Securitization of CAPP's interest in the capacity (that has been pre-paid) by some tangible asset,
and that CAPP shall attempt to mitigate and underwrite identifiable risk through the contracting
process.
To secure the most favorable terms CAPP needs to increase the size of its aggregated load They have
invited the City of Fort Worth to join this venture If CAPP is successful in obtaining a favorable contract,
city facilities on the current contract wi11 not be transferred until after June 2009 The most likely start date
will be in 2010
Persons negotiating on behalf of the owners of the generation facilities require evidence of CAPP's ability to
contract for the generation capacity Therefore the CAPP Board has requested that all cities interested in
participating adopt resolutions endorsing the concept. Adoption of the resolution does not contractually
obligate the City to purchase electricity through any contract negotiated by CAPP The City will have the
opportunity to review and approve a contractual agreement once a contract is negotiated
Logname 03CAPP Page 2 of 3
FISCAL INFORMATION/CERTIFICATION
The Finance Director certifies that this action will have no material effect on City funds
TO Fund/Account/Centers
FROM Fund/AccountlCenters
Submitted for City Manager's Office by. Richard Zavala (Acting) (6222)
Originating Department Head. Bridgette Garrett (8518)
Additional Information Contact: Danny Reed (6145)
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