Councilors hedge bets on future fuel prices

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Plan revisited under less volatile conditions

By Mandy Marksteiner

The Los Alamos County Council Tuesday night approved a new arrangement to purchase discounted natural gas within a long-term plan.

Councilors voted 4-1 in favor of authorizing John Arrowsmith, the county’s director of public utilities to sign an agreement for Los Alamos, along with the New Mexico Municipal Energy Acquisition Authority (NMMEAA) to enter into a pre-paid natural gas transaction with a variable gas discount structure that could save Los Alamos residents an estimated $750,000 a year in gas for the next 30 years.

This agreement, which will be ready next week, will replace the current fixed discount structure that allows NMEAA to buy gas according to the market index price.

Erik Harrigan, a representative from RBC Capital Markets, said, “Under the variable rate discount Los Alamos can potentially see more savings than under the fixed rate.”

Harrigan gave a presentation on how the plan works by taking advantage of the difference between SIFMA (tax exempt) and LIBOR (taxable) indexes, which could save local consumers up to $1 per unit of gas.

John E. Musselman, an attorney from Kutak Rock, LLP, representing RBC Capital Markets, said that it is a lot like a revenue bond. RBC has hedged the SIFMA/LIBOR ratio and will sell bonds to prepay for 30 years worth of gas. The transaction will pay for 85 percent   of the community’s historical use of natural gas in winter and 75 percent of the historical use in the summer.

The discount that Los Alamos gets will vary from month to month, and there will be a rate stabilization fund in place that will absorb the difference if the discount rate becomes negative. If the discount rate reaches a level that NMEAA wants to keep, they have the option of locking it in. If the rate stabilization fund is depleted and NMEAA is in a position where they are paying more than the index rate, they have the option of collapsing the agreement.

This agreement was rejected last year because economic conditions caused the SIFMA and LIBOR curves to converge and invert – so people weren’t willing to buy the bonds.

Councilor Robert Gibson said to Arrowsmith, “It was a creative idea last year. Glad you didn’t take no for an answer but came up with a solution that would work in this economy.”

Musselman called the agreement a “safe transaction supported by federal law,” and added, “The worse case scenario is you go back to buying gas the way you are now.”

Musselman also said, “The liability for repayment of the bonds goes back to RBC. If RBC goes down we’ve made it as clear as we can that Los Alamos is not a player in the obligation that goes back to the bond holders.”

With Councilors Ralph Phelps and Nona Bowman absent, Vincent Chiravelle voted against approval in a 4-1 vote.

He said, “I want to exercise caution because it locks us in for 30 years. There are a lot of assumptions that go into these savings. We may not realize the savings. I’m more comfortable sticking with our current approach.”