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Utilities Board members met with county councilors for a special session Tuesday night. They discussed adopting a resolution that would permit the county to enter into an agreement with the New Mexico Municipal Energy Acquisition Authority for a 30-year supply of natural gas at a set discount of the price index.
After discussion and questions, councilors voted 7-0 to pass the motion.
Council authorized Chair Jim Hall to execute the gas supply agreement and financial guaranty agreement.
However, the county is interested in entering into the agreement only if the market conditions are favorable and the discount can be set at $0.75 per MMBTU (Million British Thermal Units) or better. When and if the conditions exist, Hall will execute the agreement and guaranty.
Utilities Manager John Arrowsmith was in council chambers to make the presentation.
He stated that natural gas for Los Alamos County is always bought from San Juan at the spot market or index price.
“We will still purchase gas at the monthly index price like always, except all purchases through this agreement will be discounted. If we are able to secure a $0.75 discount, the Department of Public Utilities could realize an annual savings of $550,000,” Arrowsmith said.
He also said that the greatest risk to the county is the diminution in the discount value, should the spot market price of gas skyrocket.
Councilor Michael Wheeler questioned Arrowsmith regarding RBC’s motives for selling gas at a discounted price.
“I’m kind of new to this,” Wheeler said. “The discount originates because of the concept that we’re buying futures. Is that correct? Why does the source want to sell us gas at a discount, when they can sell (it for) full price?”
John Musselman of the Kutak and Rock law firm, which was hired to represent the county in this matter, answered Wheeler’s question.
“It’s not futures. RBC is taking advantage of the arbitrage in the market ... the spread between the taxable and tax exempt rates,” he said.
Wheeler also wanted to know if there was a way to simplify the deal.
Musselman said there is a large amount of money borrowed from the state bond issuer (NNMEAA), and there’s no recourse for the county. He also said that from the county’s perspective, they could buy gas under a supply contract at less than the index price.
Councilor Frances Berting stated, for clarification, that the discount is separate from the price of gas.
“If the price of gas goes up, funding is the way it is,” she said. “It’s separate so that we can take advantage and discount where we can,” she continued.
Musselman stated that the discount is separate.
“The discount will always pertain, no matter what the price of gas,” he said.
Utilities Board Vice Chair Thurman Talley asked Musselman, “What if the demand is not adequate for the contract amount? Can we sell the excess to some other entity?”
Musselman said that the gas could be resold to other qualified municipalities.
Utilities Board member Ralph Phelps asked Arrowsmith to explain the point of 75 cents and how it was derived.
“Three months ago the discount was at a dollar, then $1.14. A month ago it was about $0.75. Las Cruces didn’t want to do a deal if it was less than 80 cents. The market conditions are volatile but will improve, and when it does, we want to be able to act,” Arrowsmith explained.
“The discount is also tied to the cost of gas. $0.75 is 75 percent of the price of gas at the time. The $0.75 is achievable,” he continued.
Phelps further queried Arrowsmith on how the deal would be approved.
Arrowsmith said that action would be taken by giving the council chair authority to execute the agreement if the discount is approximately $0.75.
“We want to ensure that if it's approximately $0.75, we will be able to take advantage of it. If it's $0.50, we're not interested,” he said.
During the presentation, Arrowsmith explained that the NNMEA will determine the deal or bonds, but also said that the county is not obligated to participate unless the council chair executes the agreement.