Item No.
9
Classification: Open Date: 10.10.06 To ExecutiveReport title
Gateway 1 - Procurement Strategy Approval
Supply of gas to sites consuming more than 25,000 therms Ward(s) or groups
affected All
From 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 decreasing9. 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
• 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
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
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.
SUPPLEMENTARYADVICEFROMOTHEROFFICERS
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.
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
KEY POINT SUMMARY
•
This procurement will follow a Strategic protocolBACKGROUNDPAPERS
Background Papers Held At Contact Schedule of gas sites Chatelaine House, 186 Walworth Road Bob Fiddik
APPENDICES
Appendices number
Title of appendix
A Schedule of ‘large’ gas sites
AUDITTRAIL
Lead Officer Duncan Whitfield, Finance Director Report Author 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
Appendix A
Schedule of large gas sites
department site 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
estimated kWh/year
are
department site p/kWh annual charge annual charge increase
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
estimated kWh/year
