01-004-O
ORDINANCE NO. __________

AN ORDINANCE PERTAINING TO THE PROCUREMENT OF NATURAL GAS BY THE DEPARTMENT OF PUBLIC WORKS AND UTILITIES, ADDING AN ARTICLE XVI TO CHAPTER 48 OF THE DULUTH CITY CODE, 1959, AS AMENDED.

BY COUNCILOR ECKENBERG:

        The city of Duluth does ordain:

                Section 1.    That a new Article XVI entitled "Natural Gas Procurement" be added to Chapter 48 of Duluth City Code, 1959, as amended, to read as follows:

Article XVI. Natural Gas Procurement.

Sec. 48-240.    Procurement of natural gas.

        (a)    Notwithstanding the provisions of Chapter 41 or any other provisions of this Code, the department may procure and purchase natural gas by exercising powers enumerated in Minnesota Statutes sections 453A.01 through 453A.12 as authorized by the provisions of Minnesota Statutes section 453A.08, subdivision 2. The department may enter into cooperative agreements with other gas purchasing entities and exercise any and all of the powers granted in Minnesota Statutes sections 453A.01 through 453A.12 in its utility operations;
        (b)    This Article shall not be construed in any manner to limit or diminish any existing legal right or power the department now has.

Sec. 48-241.    Finance director to oversee natural gas purchases.

The finance director shall oversee the procurement and purchase of natural gas by the department and may conduct audits and make recommendations consistent with good accounting and purchasing practices. The finance director may appoint a committee to assist in performing duties set forth in this Section.

                Section 2.    That this ordinance shall take effect and be in force 30 days from and after its passage and publication.

STATEMENT OF PURPOSE:  The city of Duluth has operated a gas utility since before 1900. Before 1960, when the utility was selling "manufactured gas," the city would enter into ten year contracts with the supplier, using usual purchasing procedures with city council approval. In 1960, when a natural gas pipeline reached Duluth, the situation changed somewhat. Northern Natural Gas company owned both the gas and the pipeline and was, in effect, a sole supplier. Duluth entered into a 15 year contract with Northern Natural Gas company which lasted from 1962 to 1977. In 1969, a "winter peak" contract with Northern Natural Gas company lasting through 1984 was executed. All of these contracts were duly processed through the Duluth City Council and filed with the federal power commission, as federal law required. In the mid-1980's, federal gas regulation changed drastically under the federal energy regulatory commission (FERC). Sales of natural gas were "unbundled" so that the owner of the pipeline could no longer sell the gas carried on that pipeline. The pipeline became a common carrier. FERC controlled pipeline prices and insured that prices for "old gas" under regulatory definitions was "fair and reasonable." Newly discovered gas was deregulated. Pipeline transportation for the gas, gas storage capacity and the gas itself were purchased from separate parties through brokers. The utilities gas requirements were met by a combination of long term, moderate term and very short term contract subject to FERC docketing and regulation. The process of buying pipeline capacity and gas, storing gas, getting rid of excess capacity or securing gas for underestimated capacity became much more complex. If Duluth has an extremely cold night, natural gas might have to be purchased by 10:00 a.m. that next morning to keep the utility fully operational.

As a result of these historical changes, it became difficult, and often virtually impossible, for the utility to purchase the natural gas it needed using traditional purchasing and contracting methods set forth in the purchasing provisions of the City Code. The utility adapted well to the way the natural gas industry bought, sold, transported and stored natural gas but heretofore no one had examined changing the city code to conform to how the utility had to operate.

After the merger of the water and gas and public works departments, the director of public works and utilities became concerned about this situation. After considerable study, it was decided that the best and easiest solution was to incorporate the provisions of Minnesota Statutes, Chapter 453A, which is entitled "Municipal Gas Distribution" into the Duluth City Code as provided for in Minnesota Statutes section 453A.08, subdivision 2.

Chapter 453A authorizes two or more municipalities to form joint powers consortiums called "municipal gas agencies" to purchase gas for the members and sets forth all necessary powers these agencies need to accomplish the gas purchases. The statute also provides, however, in Section 453A.08, subdivision 2, that any single municipality can exercise the powers in Chapter 453A if its city council passes a resolution authorizing the exercise of these powers. Such a resolution will accompany this ordinance along with a copy of Minnesota Statutes Chapter 453A.

This ordinance also provides that the director of finance will oversee the purchase of natural gas by the utility to ensure good purchasing and accounting practices are maintained. This will provide a check over purchasing procedures which previously did not exist.