By VERNON ROBISON
Moapa Valley Progress
The Overton Power District (OPD) Board of Trustees decided last week to take a new direction in the way the district purchases its power resources. It is a direction which stands to save OPD more than $42 million in cost of power over the next nine years.
In a meeting held Wednesday, April 20 in Overton, the board voted unanimously to award a power scheduling contract to Morgan Stanley Commodities, a large firm which, among other things, supplies power to several electric coops across the west.
The new contract, expected to begin this summer, offers a dramatic departure from the district’s past method of scheduling its power resources. OPD General Manager Mendis Cooper explained to the board that, in recent years, the district had been purchasing a flat block of power for a five year period. This was done to obtain a better price than what the district could get on the spot market, Cooper said.
The practice had served the district fairly well over the years but it had two major drawbacks, Cooper said.
The first drawback is that the district is often obligated to buy more power in its contract than it actually needs for its customers. It must then seek a buyer for the surplus resource on the open market.
This then leads to the second drawback. As an example, in its last power contract, the OPD locked in a price at a time when natural gas prices seemed to be on the rise. Shortly after that time, though, gas prices started a long decline which has continued to the current time. Thus, when the district has had surplus resources to sell, it usually has not been able to recover the cost of the contract price for the resource. Thus the district has been forced to take a significant loss on those excess resources.
“We are now looking at a much better approach for addressing this in the future,” Cooper said.
In a presentation to the board, Morgan Stanley Commodities Managing Director Murray Margolis said that it happens to be a good time for the district to be looking for this change.
“Pretty much all of the energy products in the market are low right now,” he said. “Natural gas especially has seen a decline in prices and power prices usually have a similar shape to natural gas. While we don’t know, for sure, what will come next, it looks like the timing is good for OPD right now.”
Margolis explained that his firm would fold OPD into a larger portfolio of power resources. This allowed for a fixed overall price for resources. But it would also allow for selling the district only the power that it used, not some predetermined block.
“You will only be buying what you need,” Margolis said. “The purchase will be done on an hourly basis and so will result in a better shaped product to fit your needs. You are never in a net long or short position.”
Margolis presented two possible options to the board in executing the contract. Since OPD’s current power supply contract doesn’t expire until the end of 2017, the question became how to handle that outstanding contract.
In the first option, the district would keep the current contract through its expiration and then convert over the Morgan Stanley in the beginning of 2018.
Under the second option, OPD would assign its current contract over to Morgan Stanley. The firm would take the loss on it and add it to its overall portfolio.
While the overall contract cost would be somewhat higher in this scenarios due to the loss, it would also allow OPD to realize a significant savings up front. The district would save $3 million in the first year and $5.5 million in the second year.
Board members approved the second option which included the assumption of the existing power contract by Morgan Stanley.
Over the life of this contract, OPD would pay a total of $124.3 million. This figure is far below the district’s current cost of power which, projected out eight years, totals nearly $176 million.
“These savings will allow the District to pay down debt, invest in our own power generation without acquiring new debt and lower large commercial rates that will help the economic development of the region,” said Cooper.
