June 10, 1998

To:Corporate Services Committee

From:The Commissioner of Corporate Services and the Chief Financial Officer and Treasurer

Subject:Natural Gas Supply to the City of Toronto

Purpose:

To enter into a new natural gas supply arrangement for the City of Toronto facilities.

Financial Implications:

Cost of natural gas is included in existing operating budgets of the City=s various operating departments, Agencies, Boards and Commissions. It is expected that this purchasing arrangement will provide the least cost arrangement to the City.

Recommendations:

It is recommended that:

(1)authority be given to appropriate City staff to negotiate and enter into a three year agreement for the period November 1, 1998 to October 31, 2001, with yearly renewal clauses, with Coral Energy Canada Inc. to arrange a natural gas supply for the City of Toronto facilities including Agencies, Boards and Commissions;

(2)authority be given to appropriate City staff to enter into an Agency Billing Collection and Transportation agreement with Consumers Gas related to the direct purchase of natural gas;

(3)the Energy Management office in the Corporate Service Department administer the agreements through the Finance Department;

(4)all administrative costs, including outside consulting costs, be included as part of the costs to be passed on to all the City=s natural gas end users;

(5)in the event that a gas supply arrangement is not successfully negotiated, the City would elect to return to a system gas supply through Consumers Gas; and

(6)the appropriate City officials be authorized to take any action necessary to give effect thereto, including the execution of any required agreements with the Supplier and Consumers Gas, in respect of the direct purchase arrangements, on terms and conditions satisfactory to the Commissioner of Corporate Services, the Chief Financial Officer and Treasurer and the City Solicitor.

Background:

The former City of Toronto, the former Municipality of Metropolitan Toronto, the former City of Scarborough, the former City of York and the former City of Etobicoke have, since 1987/88, been purchasing natural gas through a direct purchase program. Direct purchase programs have been available to natural gas end users since the natural gas industry began to deregulate in 1985. Cumulative savings of approximately $14 million have been realized by the City of Toronto participants through the direct purchase program.

By adoption on July 5, 1995 of Clause 36, of Report No. 20, of the Corporate Administration Committee of the former Municipality of Metropolitan Toronto and by adoption on June 26/27, 1995 of Clause 15 of Report 17 of the Executive Committee of the former City of Toronto and by adoption on August 21, 1995 of Item 20-2 of the Administration Committee of the former City of Scarborough, authority was given to enter into a three year natural gas supply contract with Suncor Energy Inc. This contract expires on October 31, 1998. The former City of Etobicoke and the former City of York have contracted with ECNG Inc. to arrange their gas supplies and these contracts also expire on October 31, 1998.

Discussion:

Since the current natural gas supply contracts are expiring and since the direct purchase of natural gas has provided savings in comparison to the Consumers Gas=s cost of gas, it would be to the City=s benefit if the direct purchase arrangements can be renewed.

Current direct purchase arrangements are based on a Abuy-sell@ arrangement whereby the City purchases natural gas from the supplier at an agreed upon price. Consumers Gas then purchases this gas from the City at the Ontario Energy Board regulated Western buy-sell reference price (WBSRP). Consumers Gas takes title to the gas at an agreed upon junction point on the TransCanada Pipeline in Western Canada. The City continues to purchase gas from the distributor at each location under current rates and continues to receive the same level of service. The savings to the City are realised from the difference between the price at which it bought gas from the supplier and the higher price at which the City sold the gas to the distributor, Consumers Gas. This buy-sell arrangement provides the City with a guaranteed savings since the City purchases gas at a price below the WBSRP.

A request for proposals for the supply of natural gas to the City of Toronto, Cityhome and the Town of Markham was issued on April 21, 1998 by the Purchasing and Materials Management Division. Proposals were received from the following firms by the May 7, 1998 closing date: Comsatec Inc., Consumersfirst Ltd., Coral Energy Canada Inc., Direct Energy Marketing Ltd., ECNG Inc., El Paso Energy Marketing Canada, Engage Energy Canada, L.P., Enron Capital & Trade Resources Canada Corp., Suncor Energy Inc., and TransCanada Gas Services.

All proposals were reviewed by the City=s Manager of Energy Management, the Purchasing and Materials Management Division and the City=s natural gas consultant A.E. Sharp Limited.

Following a detailed analysis of the proposals and the natural gas market, it was concluded that the proposal submitted by Coral Energy Canada Inc., offered the City the greatest opportunity to minimize natural gas costs. Coral Energy Canada Inc. is offering the City an indexed price with the flexibility to choose, on a monthly basis, any combination of fixed, floating or indexed pricing. An analysis of the proposals, prepared by the natural gas consultant, A.E. Sharp Limited, is on file with the City Clerk.

The natural gas business and natural gas pricing has seen many changes in the last few years and especially in the past year. The buy-sell pricing arrangement, whereby the City could realize guaranteed savings, is no longer being offered by natural gas suppliers. It should be noted that over 80% of Consumers Gas= Commercial/Industrial customers purchase their natural gas through some type of direct purchase program. It is also expected that Consumers Gas will be exiting the merchant gas business, (the actual buying and selling of natural gas) within the next few years.

The direct purchase arrangement recommended for the City is the Consumers Gas= Agency Billing Collection and Transportation service (ABC-T). Under this arrangement gas is supplied to the City by the supplier at an agreed upon Alberta based price (the unit price). Consumers Gas transports the City=s gas through the TransCanada Pipeline to Toronto. The unit price would appear on the Consumers Gas invoices, for each gas-using City facility, which are to be paid in the usual manner. Consumers Gas will forward funds to the City, on a monthly basis, equal to the amount of gas shipped by the supplier to the City at the agreed upon unit price and this money in turn will be used to pay the natural gas supplier. All transactions are reconciled at the end of each contract year. This payment arrangement is very similar to our current payment arrangement under the buy-sell agreement.

Experience and history has shown that a direct purchase based supply price, has almost always been lower than the Consumers Gas based supply price. A direct purchase program will also allow the City to better manage its natural gas costs. Consumers Gas, historically, has had to change its rates through the year to account for changing gas costs. At times this has meant retroactive charges going back a number of months. A rate increase effective May 1, 1998 increased the gas supply charge by almost 20% for an overall rate increase of over 10%. The recommended direct purchase arrangement will avoid these retroactive charges and rate increases related to the gas supply charge. Based on forecasted pricing by A.E. Sharp Limited, and the forecasted Consumers Gas pricing for natural gas for the period November 1, 1998 through October 31, 1999, savings to the City could amount to over $500,000.00 (after expenses noted in the following paragraph are deducted). However, due to ongoing fluctuations in the natural gas market, the price from our recommended supplier is not guaranteed to be lower than the Consumers Gas= gas supply charge.

The Energy Management office in the Corporate Services Department has been arranging and administering the direct purchase program for the former Municipality of Metropolitan Toronto and would administer this direct purchase program, in consultation with its natural gas consultant, on behalf of the City=s natural gas using departments, agencies, boards and commissions. The cost to administer this program would include some staff time, Consumers Gas= ABC-T fees which would amount to approximately $5,000.00 annually and some outside consulting services which would amount to approximately $20,000.00 annually. These costs would be recovered proportionally from each of the City=s gas using locations through the unit price put on the Consumers Gas bill.

The total value of the contract, for a one year period, based on current market pricing and volumes, is estimated to be $7.2 million.

It should be noted the City=s total cost of natural gas, invoiced each month by Consumers Gas is comprised of two main components, commodity and distribution, which amounts to approximately $14.4 million. The distribution charge is regulated by the Ontario Energy Board (OEB). This report relates to the commodity portion only. Natural gas is used at some 700 city facilities.

The Manager, Fair Wage and Labour Trades Office, has reported favourably on the firm recommended.

Conclusions:

Through deregulation of the natural gas industry, end users, such as the City of Toronto, must adapt their purchasing strategies to obtain the best available, market sensitive pricing for this commodity. Using the purchasing arrangement outlined in this report will allow the City to obtain the best available price for its natural gas requirements.

Contact Name:

Jim Kamstra, Manager, Energy Management, Corporate Services Dept., Tel: 392-8954,

Fax: 392-4828