HomeMy WebLinkAboutAgenda Report - February 20, 2002 E-13CITY OF LODI COUNCIL COMMUNICATION
AGENDA TITLE: Adopt a resolution authorizing the City Manager to sign a consulting services agreement with
McDonald Partners to provide bulk power cost modeling and strategic advisory services to
the Electric Utility Department (not to exceed $75,000) (EUD)
MEETING DATE: February 20, 2002
PREPARED BY: Electric Utility Director
RECOMMENDED ACTION: That the City Council authorize the City Manager to sign a consulting
services agreement for professional services with McDonald Partners to
provide production cost modeling and strategic advisory services to the Electric Utility Department up to a maximum
of $75,000.
BACKGROUND INFORMATION: The extreme volatility in the energy markets last year has made the entire
energy industry re-evaluate the traditional concept of resource planning.
Traditional seasonal relationships related to energy pricing can not be counted on in the new energy markets.
The City of Lodi Electric Utility Department (EUD) has relied on the Northern California Power Agency (NCPA) to
handle most of its seasonal energy needs. In the past, energy prices were based on production costs. Now, energy
prices are market driven. It is the intent of the EUD to reduce our exposure to market prices and lock in a stable and
competitive energy rate for our customers.
NCPA uses a sophisticated production cost model to optimize the value of NCPA resources for the ten NCPA pool
members. Lodi is a member of the NCPA pool and has traditionally benefited from the cost modeling provided to all
members. Things have changed. Although it is the EUD's intent that Lodi remains a pool member, the time has come
for Lodi to evaluate it's own resource needs in terms of future energy market volatility. NCPA must continue to focus
on the entire NCPA pool. It is the EUD's intent to drastically limit our exposure to the vagaries of the existing energy
market place. In that regard, it is our intent to retain the technical expertise of McDonald Partners to assist Lodi in
developing a financially based production cost model. Such a model integrates all cost centers and allows for real
time analysis of our revenue requirement compared to a variety of operating scenarios.
The arrangement which we are asking the Lodi City Council to approve provides for a number of tasks to be
performed by McDonald Partners. The end product will be a PC based financial model which integrates market
movements in both electrical and fuel costs. The EUD can not project its resource costs in an efficient manner, in the
long term, without such a model. The City does not posses the expertise to develop an integrated model like this on
its own. It is therefore recommended that the City Council authorize the City Manager to execute a consulting
services agreement for professional services with McDonald Partners at a cost not to exceed $75,000. A copy of the
proposed agreement is attached hereto.
FUNDING: 160603.7323 _
Funding Approval: si CL &, ivy
Vicky McAthie, Finance Director
C: City Attorney
Finance Director
APPROVED:
H. Dixon vnn -
Alan N. Vallow
Electric Utility Director
McDonald Partners
February 12, 2002
Mr. Alan Vallow
Electric Utility Director
Lodi Electric
1331 S. Ham Lane
Lodi, CA 95242-3995
Dear Alan:
McDonald Partners would be pleased to provide resource cost and strategic advisory
services to Lodi Electric. As we discussed, McDonald Partners will work closely with
you, your staff and other consultants to develop and execute strategies that are consistent
with a goal of obtaining long term price stability for Lodi Electric's customers. The
proposed scope of work shall include the following tasks:
Task 1 — Data Gathering and Critical Review
• Identification of all of Lodi Electric's resources and contractual arrangements
• Review of existing financial and resource models.
• Review of Lodi Electric's most recent and historical load forecasts.
• Correlation of historical loads and resources with weather data.
Estimated Time: Four Weeks
Proposed Fee: $15,000
Task 2 - Develop Comprehensive Resource Cost Model
• Integrate load and resource data with gas and power forecasts
• Include economic dispatch of peaking assets
• Provide flexibility for alternative scenarios
• Measure current price risk and budgetary impacts
• Document model for additional users
• Review mid -Task as necessary with Lodi Electric Management
Estimated Time: Eight to Ten Weeks
Proposed Fee: $45,000
Task 3 — Development of Recommendations to Ensure Price Stability.
• Recommend appropriateness of physical or financial hedging strategies
• Identify potential transaction structures
• Demonstrate impact on Lodi Electric's retail rates
222 High Eagle Road, Alamo, CA 94507 Phone (925) 743-8498 Fax (925) 743-8425
Estimated Time: Three to Four Weeks
Proposed Fee: $15,000
Additional provisions
McDonald Partners is available to begin work on Task One of this assignment
immediately. Work on each subsequent Task shall commence solely at the direction of
Lodi Electric's General Manager. McDonald Partners will share proprietary forward gas
and power curve data throughout this engagement. All information related to this
assignment will be held in strictest confidence.
In addition to the fees proposed above, all out-of-pocket expenses (which shall include,
but not be limited to, travel, lodging, telephone, overnight mail, postage and copying)
shall be for the account of Lodi Electric. Fees and out-of-pocket expenses will be billed
at the completion of each Task.
The effective date of this engagement shall be February 21, 2002. This engagement shall
terminate upon completion of the identified tasks, unless an amendment outlining
additional tasks, expected completion and fees is agreed to by both parties.
If the terms of this engagement as set forth in this letter are satisfactory, kindly sign the
acceptance and return an original to me the above address. If you have any questions or
need additional information, please call me at (925)-743-8498. I look forward to working
with you on this assignment.
Sincerely,
Sandra McDonald
Principal
McDonald Partners
Accepted:
City of Lodi
By:
Title: City Manager
Date:
222 High Eagle Road, Alamo, CA 94507 Phone (925) 743-8498 Fax(925)743-8425
ATTEST
By:
Title: City Clerk
Date:
APPROVED AS TO FORM
By:
Title: City Attorney
Date:
222 High Eagle Road, Alamo, CA 94507 Phone (925) 743-8498 Fax (925) 743-8425
RESOLUTION NO. 2002-44
A RESOLUTION OF THE LODI CITY COUNCIL AUTHORIZING
THE CITY MANAGER TO EXECUTE A CONSULTING SERVICES
AGREEMENT WITH MCDONALD PARTNERS TO PROVIDE
BULK POWER COST MODELING AND STRATEGIC ADVISORY
SERVICES TO THE ELECTRIC UTILITY DEPARTMENT
NOW, THEREFORE, BE IT RESOLVED, that the Lodi City Council does hereby
authorize the City Manager to execute a consulting services agreement with McDonald
Partners to provide bulk power cost modeling and strategic advisory services to the
Electric Utility Department.
Dated: February 20, 2002
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I hereby certify that Resolution No. 2002-44 was passed and adopted by the Lodi
City Council in a regular meeting held February 20, 2002 by the following vote:
AYES: COUNCIL MEMBERS — Hitchcock, Howard, Land, Nakanishi, and
Mayor Pennino
NOES: COUNCIL MEMBERS — None
ABSENT: COUNCIL MEMBERS — None
ABSTAIN: COUNCIL MEMBERS — None
SUSAN J. BLACKSTON
City Clerk
2002-44