Natural gas to impact power

By Jerd Smith Denver Rocky Mountain News Staff Writer

Coloradans who are worried about skyrocketing natural gas bills this winter don't have to worry about their electric bills rising, too. At least not yet.

But the dramatic run-up in natural gas prices has utility regulators and energy experts worried that similar spikes in electricity rates will come sooner rather than later because state utilities are relying more on natural gas to run electricity plants.

"The prices are already having an impact," said Christine Hansen, executive director of the Interstate Oil and Gas Compact Commission, a nonprofit group that represents governors in 30 oil- and gas-producing states, including Colorado.

With electric companies racing to keep up with the economy's need for power, new gas-power plants are springing up everywhere.

"Everything we're building now and everything that's on the drawing board is gas-fired," Hansen said. "It's driving demand for natural gas dramatically."

Prices have followed that demand. They began moving up nearly a year ago when demand for natural gas finally outstripped a two-year supply glut. Driven by a strong economy and a new need for gas to generate electricity, supplies evaporated and prices rose in response, more than doubling in any given month.

Since late last year, when natural gas prices hovered at about $2.80 per million British thermal units, prices have topped more than $4 per million Btu. Spikes of more than $5 per million Btu are possible.

The increases already are hitting consumers hard. Public Service Company of Colorado, allowed by state law to pass the costs of its heating fuel directly to customers, notified regulators last week that it will pass along $126.2 million in new gas costs. That comes after a $117 million fuel price jump that kicked in July 1.

All told, Colorado homeowners could pay more than 40 percent more for their heating gas this winter. Public Service provides power to about 70 percent of Coloradans.

Electric bills won't reflect those rising fuel prices this winter and utility officials hope they can offset any major price spikes that may occur.

But eight new natural-gas plants are being built to provide Public Service with extra electricity. And industry experts are worried that new natural-gas plants will be hit hard by rising prices when they start operating.

Colorado homeowners now pay an average of about $38 per month for electricity. How much that might rise in coming years is anyone's guess.

According to the Electric Power Research Institute, a Palo Alto, Calif.-based energy think tank, natural gas costs comprise 20 percent to 50 percent of total electricity costs at natural gas-fired power plants.

"People had an expectation that natural gas prices were going to stay low," said Ahmad Faruqui, area manager for retail and power markets at the Electric Power Research Institute. "The whole industry has made the same decision. Who would have thought prices would rise like this?"

Though Public Service and others point to futures markets that value natural gas at about $2.95 per million Btu as far out as 2003, Faruqui said ongoing increases are likely because worldwide demand is growing faster than gas production.

"These prices are not just a blip," Faruqui said. "If we continue to see an increase in prices, you will see an impact on electric rates regardless."

Few expected such a turn of events. In a forecast published this year by the Energy Information Administration, part of the U.S. Department of Energy, gas prices and electricity prices are projected to drop over the next 20 years, not rise.

Those forecasts may be wrong, Faruqui said.

Public Service says it can forestall major price spikes in electric rates, in part because it has agreed to cap rates into 2002. (That was done to win approval of two recent mergers with other utilities.).

About 9 percent of Public Service Co.'s electricity is generated by natural gas. Within four years, that is expected to surpass 20 percent, according to David Eves, director of purchased power at Public Service.

Eves said Public Service will be able to hold rates in check because the new gas plants cost about half as much to build as traditional coal plants.

"The lower fixed costs associated with gas-fired generation should more than offset higher fuel costs," he said.

And utility officials are counting on the natural gas industry to develop enough new supplies to wipe out the shortage in the next two years.

But others believe the new production won't be enough to keep prices in check and that increases in electric rates are almost inevitable.

"There's not much power companies can do," Hansen said. "If they're buying off the pipeline, they're going to have to pay whatever the price is."

Renewable energy advocates, such as former Colorado utilities commissioner Ron Lehr, hope the high gas prices force utilities to develop more wind power. Such power, though more expensive than gas- or coal-generated electricity, becomes more economical when natural gas prices rise above $4 per million Btu.

Colorado regulators, who oversee Public Service Co.'s power buying plans, aren't worried yet because the state still relies on relatively cheap coal-generated electriciy for about 84 pecent of its electricity needs.

"It is the case right now that the price assumptions in (Public Service Co.'s power plans) don't look good," said Gary Schmitz, acting director of the utilities division at the Colorado Public Utilities Commission. "In 2012, we might say we were wrong about those gas prices. But right now we still have a lot of coal in the portfolio whose price is not volatile."

http://www.denver-rmn.com/business/0924elec2.shtml

-- Martin Thompson (mthom1927@aol.com), September 24, 2000