Item No. 9 Classification: Open Date: 10.10.06 To Report title Ward(s) or groups affected From Executive Gateway 1 - Procurement Strategy Approval Supply of gas to sites consuming more than 25,000 therms All Finance Director (Head of Procurement) RECOMMENDATION (S) 1. That Executive approves the procurement strategy outlined in this report for the supply of gas to sites consuming more than 25,000 therms (equivalent to consuming more than 732,500 kwh) 2. That Executive approves the delegation of the contract award to the Finance Director for the reasons set out in paragraph 21. 3. Before Gateway 2, Departmental Senior Finance Managers identify current 2006/07 and 2007/08 budgets for each property on the schedule so that the full impact of the new contract can be identified. BACKGROUND 4. The estimated annual cost of contract is 10,020,000 with a contract period or one or two years making the maximum potential total contract value 20,040,000. The cost breakdown by department and sites is shown as Appendix A 5. This contract has no extension provision. Reason for this procurement 6. Gas supplies to the council s buildings and schools are arranged through three contracts according to the levels of gas consumption of the sites. Supplies are grouped in this way because this is how the suppliers arrange their supply portfolios. This contract is for sites consuming more than 25,000 therm per annum and includes the larger schools and municipal buildings along with centralised boiler rooms on housing estates (to supply heating and hot water). 7. The current contract is with Elf Business Gas and is due to expire on 31/01/07. Market considerations 8. UK gas prices have been rising steeply since 2000. The main reasons for this are:- UK North Sea gas reserves are decreasing UK gas market prices are now linked to international oil prices. Current oil prices are high, particularly because of continuing strong demand from China.
9. The wholesale gas market is also very volatile and UK market prices are fixed on a daily basis. As a result, suppliers hold tendered prices valid for very short periods typically no longer than 3 hours. Summary of the business case 10. This contract is a re-tender for an existing requirement for gas supplies to the sites listed in Appendix A. 11. The council is a founder member of the London Utilities Consortium (LUC) which was set up by London boroughs in the 1990s. The objective of the LUC is to secure contracts for utility supplies at the most favourable rates through the combined purchasing power of members. Through the LUC, the council appointed LASER to act as agent when inviting tenders for utility supplies. LASER is a non-profit making organisation managed by Kent County Council s Commercial Services Department. 12. In order to let energy contracts a minimum set of data is required (e.g. supply address, account number, meter numbers and annual consumption). LASER collects this data by receiving client s invoices directly from the suppliers (in electronic form). LASER then undertakes basic checks on the invoices and then sends these (in paper form) to the respective clients across the council, and schools. Where a supplier invoice is in query, LASER provide the facility to pay the supplier (within the agreed contract period) while holding invoices to the client until the query is resolved. 13. LASER undertakes the competitive tender process on behalf of the council using an electronic tendering system, which both encourages more competitive bidding from suppliers and reduces the time taken by the tender process. 14. LASER charge for their services via an increment to the gas unit charge. Currently this amounts to around 1% of the contract value, this service charge is declared on invoices. 15. The council participated in the London Centres of Excellence evaluation of energy procurement processes in 2005. Participating London boroughs submitted energy contract details, including method of procurement, site details, prices and timing of tenders. The participating boroughs had used a variety of procurement methods including; LASER, other private sector consultancies, in-house (with bought-in energy market advice). 16. The study was unable to identify any procurement strategy as delivering best value. However, the study did recommend that the Centres of Excellence programme establish a project in 2006 to identify national best practice in energy procurement and billing administration. 17. The study did highlight those councils that achieved the best prices over all the contracts. The prices secured by Southwark through LASER were the lowest in the study. While this provides evidence that the LASER procurement route is sound, the snapshot nature of the study and the volatile nature of the market mean that this result must be treated with caution. 18. The council will continue to play a pro-active role in the Centres of Excellence energy procurement programme. The recommended procurement route for this contract is therefore to continue to tender gas supplies through LASER as:- no alternative best value procurement route has yet emerged from the Centres of Excellence programme, and Page 2
on the basis of the comparative London boroughs study, the LASER process is securing good prices for the council s gas contracts. KEY ISSUES FOR CONSIDERATION Policy implications 19. There are currently no environmentally preferable options available for natural gas supply. Council policy in this case is to award the contract on the basis of lowest gas cost tendered. Procurement project plan Activity Planned date Gateway 1: Procurement strategy for approval report (this report) 10/10/06 Completion of tender documentation Advertise the contract Closing date for expressions of interest Invitation to tenders Closing date for return of tenders Completion of evaluation of tenders Completion of any post-tender clarification meetings These tasks completed by LASER Gateway 2: Contract award for approval report Nov. 06 Contract starts 01/02/07 Identified risks and how they will be managed 20. Because of the volatility of gas prices, the greatest risk is deciding when to request offers for gas prices from the market. LASER use in-house, and external sources of market intelligence to advice clients on the optimum time to request prices. LASER s procedures are flexible in order to initiate the tender process at whatever time is advised to be best. 21. Due to the volatility of the energy market and the need to make timely decisions to secure the most favourable energy prices for the Council, it is recommended that the award of the contract for gas supplies to sites consuming over 25,000 therms be delegated to the Finance Director, who will make the award according to current Council policy (as set out in paragraph 18.) TUPE implications 22. Not applicable. Development of the tender documentation 23. Documentation is completed by LASER Page 3
Advertising the contract 24. LASER advertises the contract in the Official Journal of the European Union. Evaluations 25. Tenders are invited in accordance with EC Public Procurement Directives so tenderers will have to comply with the relevant financial checks, which are undertaken by LASER. Once the tender is complete LASER will send the results by e-mail to the Council for analysis and an award decision. The responses will be evaluated on price. Prices for a 12 or 24 months contract will be obtained, and the price offering the best long-term value selected. Community Impact Statement 26. This contract covers gas supplies to central boiler systems which provide heating to housing estates. Rising gas prices will therefore affect tenants service charges. However, all sections of the community are equally affected by rising energy prices, whether they have their own domestic boilers (and pay their own gas bills) or are connected to communal systems. The objective of this contract is to secure the lowest price for gas supply to such communal systems. Sustainability considerations 27. This contract is concerned with securing natural gas supplies to heating systems. As such, there are no sustainable alternatives for this form of supply. However, it should be highlighted that the rise in gas prices means that alternative, renewable forms of providing heat are close to becoming viable. For example, bio-fuels (produced via energy crops, or bio-degradable waste) may soon be an economically viable option. The council is currently undertaking projects evaluating these options, and should continue to do so. Other implications or issues 28. There are no further specific implications or issues. Financial implications 29. Current gas market indications are that there will be an average 70% increase on the previous contract prices. Assuming current consumption levels remain the same, the increase in annual costs by department is shown in the table below. department Predicted annual cost Current annual cost Annual increase Housing 28,868 16,981 11,887 HRA estates 9,342,447 5,495,557 3,846,890 Environment & Leisure 86,942 51,143 35,800 Schools 503,430 296,135 207,295 Social Services 25,345 14,909 10,436 Strategic Services 34,589 20,346 14,242 Total 10,021,621 5,895,071 4,126,550 30. The estimated cost increases will inevitably impact on the housing district heating budget and therefore on tenant and leaseholder service charges. These increases will have to be addressed in the Housing Revenue Account budget and rent setting report for 2007/08. Page 4
31. Communications with the tenants and leaseholders must put these increases in the context of the global rise in energy costs. Homeowners with individual central heating boilers are experiencing equivalent rises in their domestic gas charges. Consultation 32. Departmental senior finance managers have been informed of the predicted costs. Each departmental finance manager has stated that the predicted cost increases cannot be contained within existing budgets. 33. This contract includes supplies of gas to central boilers supplying housing estates. A Notice of Intention has therefore been served to leaseholders to comply with Section 20 of the Landlord and Tenant Act, informing them of the intention to tender for this contract. Leasehold Management will be applying to the Leasehold Valuation Tribunal for dispensation, due to the fact that a response to tenders is required within the day. 34. Schools can choose whether to make their own arrangements for contracting their gas supplies, or to remain on the council s corporate gas contracts. Almost all schools in the borough including all the Academies - have opted to secure their gas supplies through the council s corporate contracts. The council does not currently charge any related administrative costs to the schools. LASER recover their service charge directly from the schools through their invoicing. SUPPLEMENTARY ADVICE FROM OTHER OFFICERS Borough Solicitor 35. This Report seeks the Executive s approval for the procurement strategy for the supply of gas to sites outlined in this report and also to approve the decision to award the contract to be delegated to the Finance Director for reasons set out in paragraph 21 of this report. 36. The Council has obligation and powers to supply power for the support of its statutory functions. 37. Where the value of the contract is estimated at over 2 million, it is a strategic procurement, which is to be considered by the Executive for the award of contract unless delegated. 38. The report proposes that the Council will use the consortium purchasing arrangements made available to the Council through the LASER scheme (paragraph 10). This is a competitively advertised procedure, where LASER acts as the Council s agent when inviting tenders (paragraph 12). 39. Contract Standing Orders provide that Executive can approve such consortium arrangements provided that the Executive is satisfied that the arrangements comply with EU and UK legislation and provide value for money: say that in those circumstances, the requirements for tendering in the Council s own CSOs will not apply. The report sets out the manner in which those requirements are satisfied (paragraphs 23 to 25). It is for the Executive to approve these tendering arrangements. 40. The second proposal is for the delegation of the decision on award to the Finance Director because it is a strategic procurement the contract award is to be made by the Executive unless, as explained in this report, other arrangements are made. It is for the Executive to decide if the proposed delegation should be made. Page 5
Finance Director 41. This report asks for executive approval to the supply of gas contracts to sites exceeding 25,000 therms. 42. Paragraph 29 details the current cost per department of this contract, and a predicted future cost based on current indications of a 70% increase in cost, resulting in a predicted increase of 4,126,550. 43. These costs need to be sorted into categories to enable additional 2006/06 costs and 2007/08 funding issues to be identified. 44. General Fund (excluding schools) These services are financed by Government grant and council tax, these increases will have to be managed through the 2007/08 budget process.. 45. Schools Schools are funded through the Dedicated Schools Grant, inflationary increases must be contained within the grant allocated by government. 46. Housing Revenue Account The HRA is financed through Rents and Government Grants, inflationary increases must be contained within the funding mechanism or by savings. 47. The impact of these increases on each of these categories is shown below. Current annual Cost Predicted annual Cost Full Year Increase (2007/08) 2006/07 Increase (February to March ) General Fund (excl Schools) 103,379 175,744 72,365 12,061 Schools 296,135 503,430 207,295 34,549 HRA 5,495,557 9,342,447 3,846,890 641,148 Total 5,895,071 10,021,621 4,126,550 687,758 45. At this stage the 70% is only an estimate, the real impact on 2007/08 budgets and 2006/07 outturn will only become clear at Gateway 2 stage. 46. As there is likely to be a significant increase in gas charges it is essential that before Gateway 2, Departmental Senior Finance Managers identify current 2006/07 and 2007/08 budgets for each property on the schedule so that the full impact of the contract at Gateway 2 can be identified and funding options discussed. 47. It is almost certain that at this stage in the 2007/08 budget process that inflationary increases identified by departments will have to be match funded through savings. Head of Procurement 48. Comments are included within the main body of the report. Page 6
KEY POINT SUMMARY This procurement will follow a Strategic protocol This contract is for goods and is replacing an existing provision Page 7
BACKGROUND PAPERS Background Papers Held At Contact Schedule of gas sites Chatelaine House, 186 Walworth Road Bob Fiddik APPENDICES Appendices number A Title of appendix Schedule of large gas sites AUDIT TRAIL Lead Officer Report Author Duncan Whitfield, Finance Director Bob Fiddik, Sustainability Manager Version 2 Dated 02/10/06 Key Decision? Yes If yes, date appeared on forward plan CONSULTATION WITH OTHER OFFICERS / DIRECTORATES / EXECUTIVE MEMBER Officer Title Comments Sought Comments included Legal: Borough Solicitor & Secretary Yes Yes Chief Finance Officer Yes Yes Head of Procurement Yes Yes Executive Member Yes Date final report sent to Constitutional Support Services Page 8
Appendix A Schedule of large gas sites estimated 05/07 current cost predicted 07/09 department site kwh/year p/kwh annual charge annual charge increase Environment & Leisure Honor Oak Crematorium 872,239 1.506 13,133 22,326 9,193 Environment & Leisure Manor Place Baths & Depot 1,124,106 1.635 18,383 31,251 12,868 Environment & Leisure Municipal Offices 1,172,524 1.674 19,626 33,365 13,738 51,143 86,942 35,800 Housing Municipal Offices 957,312 1.774 16,981 28,868 11,887 HRA Acorn Estate 14,546,207 1.427 207,627 352,966 145,339 HRA Albert Baines 1,507,082 1.449 21,839 37,126 15,287 HRA Alberta Westcott House 1,267,185 1.463 18,538 31,515 12,977 HRA Arica House 411 2.045 8 14 6 HRA Barlow Estate 3,290,916 1.494 49,175 83,597 34,422 HRA Barset Housing 8,255,570 1.412 116,607 198,231 81,625 HRA Bell Garden Estate 1,491,776 1.474 21,985 37,375 15,390 HRA Brandon Estate 16,854,381 1.413 238,213 404,962 166,749 HRA Brim Pomeroy 18,930,838 1.439 272,332 462,964 190,632 HRA Broadmayne House 4,362,774 1.476 64,388 109,460 45,072 HRA Cardinal Bourne Boiler Room 1,437,150 1.571 22,581 38,388 15,807 HRA Castlemead Estate 5,024,904 1.456 73,181 124,407 51,227 HRA Cheltenham Road Boiler House 2,197,232 1.488 32,705 55,598 22,893 HRA Colby Path 3,500,910 1.509 52,834 89,818 36,984 HRA Columbia/Regina Estate 3,253,998 1.485 48,308 82,123 33,815 HRA Conant House 1,921,360 1.558 29,926 50,875 20,948 HRA Consort Road Development 16,914,112 1.406 237,840 404,327 166,488 HRA Coopers Close 1,252,833 1.491 18,674 31,746 13,072 HRA Coopers Road Estate 4,889,891 1.466 71,679 121,854 50,175 HRA Cossal Estate 9,858,241 1.394 137,390 233,564 96,173 HRA D'eynsford Road 8,881,112 1.454 129,163 219,578 90,414 HRA Dighton Court 1,885,820 1.520 28,673 48,744 20,071 HRA Falcon Point Bankside 1,881,723 1.499 28,199 47,938 19,739 HRA Gilesmead 896,063 1.566 14,036 23,860 9,825 HRA Haddon Hall Estate 973,719 1.549 15,080 25,635 10,556 HRA Havil Street 6,320,321 1.452 91,788 156,039 64,251 HRA Helen Gladstone House 631,108 1.523 9,612 16,340 6,728 HRA Heygate Area 30,093,550 1.353 407,244 692,315 285,071 HRA Jack Jones House 819,777 1.603 13,143 22,343 9,200 HRA King Charles Court 829,659 1.511 12,535 21,309 8,774 HRA Kipling Estate 2,547,158 1.505 38,341 65,180 26,839 HRA Leoline Close 5,102,612 1.499 76,491 130,035 53,544 HRA Lettsom Street Development 11,403,696 1.452 165,532 281,404 115,872 HRA Livingstone House 1,314,399 1.568 20,608 35,034 14,426 HRA Lew Evens House 823,331 1.592 13,110 22,288 9,177 HRA Mayhew House 5,091,154 1.460 74,349 126,394 52,044 HRA Meakin Estate Central Boiler House 3,504,258 1.514 53,043 90,172 37,130 HRA Neville Close 4,535,055 1.400 63,507 107,962 44,455 HRA New Place Boiler House 38,560,695 1.443 556,377 945,841 389,464 HRA Newington Development 10,164,046 1.465 148,899 253,129 104,229 HRA Osprey Estate 8,132,655 1.540 125,280 212,977 87,696 HRA Paisley Road Estate 4,395,252 1.457 64,037 108,863 44,826 HRA Pedworth Development 4,236,184 1.469 62,219 105,773 43,554 HRA Pelican Estate 3,723,915 1.478 55,057 93,596 38,540 HRA Pelier Street Development 1,427,930 1.543 22,031 37,453 15,422 HRA Perronet House 2,433,210 1.504 36,607 62,231 25,625 HRA Redmon House 2,012,819 1.506 30,304 51,517 21,213 HRA Sedgemoor Place 1,981,072 1.556 30,831 52,412 21,581 HRA Sceaux Gardens Estate 10,193,453 1.453 148,066 251,712 103,646 HRA Scovell Road Estate 2,990,998 1.474 44,101 74,972 30,871 HRA Setchell Development 7,335,305 1.454 106,667 181,334 74,667 Page 9
estimated 05/07 current cost predicted 07/09 department site kwh/year p/kwh annual charge annual charge increase are HRA Sheltered Housing 922,741 1.508 13,915 23,655 9,740 HRA Slade Walk 1,293,268 1.471 19,023 32,340 13,316 HRA Smeaton Court 1,180,172 1.483 17,505 29,759 12,254 HRA Soane House 797,402 1.592 12,692 21,576 8,884 HRA Styles House 813,437 1.519 12,354 21,002 8,648 HRA Surrey Docks Housing Area 1 9,444,574 1.473 139,077 236,431 97,354 HRA Sydenham Hill Estate 3,494,030 1.495 52,220 88,775 36,554 HRA Tissington Court 9,103,372 1.472 133,998 227,797 93,799 HRA Tustin Estate 2,574,560 1.435 36,944 62,805 25,861 HRA Willowbrook Estate 1,948,432 1.525 29,707 50,502 20,795 HRA Wyndham Estate 42,001,033 1.446 607,360 1,032,513 425,152 5,495,557 9,342,447 3,846,890 Schools Academy at Peckham 2,158,705 1.631 35,203 59,846 24,642 Schools Harris Academy of Bermondsey 2,572,106 1.727 44,412 75,500 31,088 Schools Bredinghurst School 826,583 1.627 13,452 22,869 9,417 Schools Brunswick Park School 625,250 1.800 11,257 19,138 7,880 Schools Camelot School 628,807 1.809 11,373 19,334 7,961 Schools Cobourg Primary School 568,623 1.839 10,455 17,774 7,319 Schools Crawford School 611,021 1.757 10,737 18,253 7,516 Schools Gloucester Primary School 595,290 1.869 11,128 18,917 7,789 Schools Goodrich JMI School 941,118 1.807 17,006 28,910 11,904 Schools John Ruskin School 662,544 1.692 11,213 19,061 7,849 Schools Kingsdale School 1,166,809 1.708 19,930 33,881 13,951 Schools Langbourne School 689,667 1.594 10,993 18,688 7,695 Schools Peckham Rye Primary School 644,519 1.749 11,276 19,169 7,893 Schools Waverley Upper School 2,455,756 1.688 41,442 70,452 29,010 Schools - VA Archbishop Michael Ramsey School 2,217,184 1.635 36,259 61,640 25,381 296,135 503,430 207,295 Social Services Mabel Goldwin House 880,391 1.693 14,909 25,345 10,436 Strategic Services Peckham Town Hall 1,260,327 1.614 20,346 34,589 14,242 Page 10