For a fourth consecutive year, the oversight board for Los Angeles Department of Water and Power (LADWP) has approved another one-year, $1.795 million contract with Southern California Gas Co. for underground natural gas storage services to help the nation’s largest municipal utility manage its fuel supplies for a fleet of gas-fired generation plants in the greater LA metropolitan area. The contract requires city council and mayoral approval.

The board also is looking at a long-term natural gas pre-pay deal, but the transaction still is being reviewed by the mayor’s chief administrative officer and city council staff to make sure the elected officials are onboard with the group purchase of gas supplies as a hedge against future price volatility.

Under the storage agreement, LADWP gets up to 10 MMcf/d withdrawal and 20 MMcf/d injection rights with overall storage capacity of 500 MMcf for the 12-month period of April 1, 2007 through March 31, 2008.

“Storage is getting more and more expensive,” said LADWP’s Randy Howard, an assistant general manager working with the city-run utility’s chief operating officer. For the electric muni, storage has become less of a hedging tool and more of a load balancing tool as there is less winter-summer seasonal variation, Howard said. “You can find high prices in the middle of the summer as well as the winter. It is hard to gauge now.”

On the pre-pay contract, LADWP missed a special meeting May 15 of its oversight board but hopes to get approval in the next few weeks for a public power consortium’s pre-paid natural gas supply contract. A source close to the arrangement that was brokered by a public power financing arm, the Southern California Public Power Authority (SCPPA), said LADWP is taking more time than previously anticipated to get the deal approved.

“We were initially targeting the gas pre-pay for the May 15 LADWP meeting, but there are a few loose ends to be tied up,” said Bill Carnahan, executive director at SCPPA, a joint power authority created by the state legislature in 1981. Inside LADWP, the prime SCPPA member, some of the utility attorneys are beginning to worry some of the deal’s proponents because they are picking apart what one observer thinks are only ancillary points of the deal.

“We’re waiting on signoff by the LA city attorney, and that is not a substantive discussion, then they will start putting the proposal through LADWP’s approval process that ends with its Board of Water and Power Commissioners. Some of the other cities involved in the deal have already begun their processing,” Canahan said.

At stake is a contract with Goldman Sachs to handle a massive pre-payment for future gas supplies stretching over the next 20 to 30 years. The investment bank finalized the financing and operational details for a number of munis, including LADWP, that would pre-pay between $500 million to $1.5 billion in future gas supplies. They would buy so-called “index-minus-priced” supplies over a 20- to 30-year period.

The complex deal involves taking advantage of the public-sector borrowing authority’s lower interest costs to reap gas prices 40-90 cents/Mcf below the index at a given time. If approved by the oversight officials for LADWP and the other munis, the Goldman Sachs deal would lead to a bond sale that would leverage SCPPA’s low-cost financing ability and solid A credit rating.

While it used to be “somewhat beneficial” to the large municipal electric utility to buy gas in the summer, store it and pull it out in the winter, that is no longer the case, according to the utility’s Randy Howard. “You’d do okay on the hedge back then, but we don’t see those opportunities as much any more. You can still find some opportunities in real time, but it is less so for us, and now is more of a daily balancing help when we have less or more gas needed for the scheduled electrical load for the day.”

The LADWP board agenda item described the extended storage contract as “a follow-on to four other storage agreements from the last five years, which brings [it] into the purview of the city council approval for continuous contracting for more than three years. The storage capacity, injection, withdrawal and pricing are determined in a controlled auction process managed by SoCalGas.”

While the contract extension is being processed at LADWP and among city elected leaders, the utility cannot fully use its storage rights, so LADWP said it is working with the mayor’s chief administrative officer to develop an ordinance for the city council to pass that would delegate future storage agreement approval to the utility’s oversight board.

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