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LADWP Streamlines Gas-Buying Processes
The nation’s largest municipal utility, the City of Los Angeles Department of Water and Power (LADWP), has the dual challenge this month of streamlining its natural gas-buying abilities to conform with a new city charter and also adapting to a new general manager following the departure of the high-profile S. David Freeman, who now heads up California’s new state power authority. Freeman’s plans to take interests in pipelines or production have been placed on the back-burner due to favorable transportation and commodity prices right now, a department source said.
LADWP’s oversight board and the city council will have to take action in the next few weeks and months to re-establish the department fuel-buying unit’s authority to sign deals, similar to what has been done for the giant city-owned utility’s wholesale electricity trading unit. It is the first step in establishing more of an “integrated” gas-buying program in the department as outlined earlier in the year by Freeman’s replacement, David Wiggs.
“What we are trying to do is bring together a package of resolutions and new ordinances that will allow us to conduct gas business along the lines of the problems we are trying to deal with, such as providing more stability in supplies and price,” said one of LADWP’s fuel-buying managers. Eventually, the department wants the general manager to be able to delegate authority to the buyers to be able to lock in longer term deals of three to five years’ duration.
City legal authorities have determined that the utility has to update its series of standard-offer gas supply contracts that had been in place since 1989 when the natural gas wholesale market opened up. LADWP’s gas-buyers are considering a spot contract that is closer to the GISB contract, with more language related to current bilateral contracts, the department buying manager said.
If the utility runs into political delays in getting the new ordinances it needs, it has an interim approach that the department has used in other seasonal, but nonenergy, purchase programs. It will be a blanket contract for suppliers providing supplies, but will leave undetermined the amounts or timing for the deliveries. Meanwhile, LADWP has much of its gas needs taken care of through forward contracts through the third quarter of next year.
“We still need re-established flexibility on the spot purchases, though, because forecasts never match the gas you burn,” said the LADWP buyer. “We want to reduce volatility, plus our financial planners want one number plugged into their budget models so we can more accurately estimate our costs and our revenue transfer to the city.”
The department is currently thinking that three-year deals may be as long as they want to go because the prospect of liquefied natural gas (LNG) terminals in Baja California, Mexico, could significantly alter the gas supply picture in Southern California within five years. “LNG provides some security and storage that we don’t have right now,” the department buyer said.
Other options, such as investing in gas production and reserves and reviving a 10-year-old plan for a municipal utility consortium-backed transmission pipeline, have been re-examined, but aren’t being actively considered, the buyer said. LADWP is paying a transportation rate (to Southern California Gas Co.) of 25 to 30 cents, the buyer said, in contrast to 69-cent rates when the pipeline was re-examined.
LADWP has been buying gas in the forward market throughout the summer, locking up supplies in the low $2 area in supply basins and then using transportation deals that reportedly keep the price at their Los Angeles Basin gas-fired generation plants under $3/Mcf, according to the buying source. “I think we’ll be okay (next year) unless the weather turns around and we have some serious heat waves,” the source said.
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