Natural-gas providers paying dearly

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Sunday, December 24, 2000

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Natural-gas providers paying dearly

By Akweli Parker INQUIRER STAFF WRITER It's been a bruising year for Reed Horting, vice president of gas supply and transportation at Peco Energy.

Part weather forecaster, part commodities trader and part gambler, Horting resisted loading up on what he thought was pricey natural gas earlier this year, only to see its cost continue to climb to new highs.

"The good news is we have it," Horting said in an interview in his office at Peco's sprawling West Conshohocken gas plant.

The bad news is that getting it is costing a mint for Peco and other area natural-gas providers. Natural-gas futures contracts on the New York Mercantile Exchange have quadrupled since January.

Residential, commercial and industrial customers will absorb the higher costs. It's only a question of how quickly. The federal Energy Information Administration predicts that residential consumers can expect to pay 40 percent to 50 percent more on their gas heating bills this winter than last winter.

Peco said a residential gas customer might expect about a 31 percent increase from last year's typical $144 December bill to $189, depending on weather and the customer's energy use.

Philadelphia Gas Works said last week it would file with regulators for a $140 million rate increase just to pay for gas, effective Jan. 1. When combined with an increase approved by the Pennsylvania Public Utility Commission in November, it would mark a 44 percent jump for residential customers. Prior to November, PGW residential customers paid an average of $87 per month for gas. If the PUC approves the latest request, customers will pay an average of $125 per month.

And no one is sure when prices will hit a ceiling.

Industry experts have put forth a few interlocking theories of how gas rocketed from market underachiever to fuel of choice in less than a year: the California electricity crisis, the Internet, environmental concerns, and free-market capitalism.

"Traditionally, the story was you'd buy gas in the summer at $1.50" per thousand cubic feet (Mcf), Horting said.

Utilities then store the gas in several ways: injecting it into underground caverns, paying the pipeline company to store it, or compressing the gas into storage tanks where it takes liquid form.

In winter, as demand for gas picks up, the utilities draw upon their stashes so they don't have to pay high "spot market" prices.

Using indexes, weather models and experience, utilities can usually time their purchasing volume throughout the year to ensure an affordable, adequate supply.

But last spring, gas utilities largely held off on buying huge stockpiles of gas, deterred by previous warm winters and prices that were higher than normal.

They figured it would sink from its price range then of $2.85 to $3 per Mcf.

It never did, Horting said. "Prices continued to go through the roof," to the point that Peco was recently paying $9.50 to $12 per Mcf at its "citygate," the portal between Peco's regional distribution system and the interstate pipelines of Transcontinental Gas Pipeline Co. and Texas Eastern Transmission Co.

In California, supply problems in the electricity market have raised the price of last-minute gas purchases beyond $20 per Mcf.

"To some extent, California's electricity problems are affecting us," said Frederic Murphy, a professor of management science at Temple University's Fox School of Business and Management.

It's Economics 101: High demand plus low supply equals higher prices.

Both the wholesale price of natural gas and the speed with which it rose are unprecedented.

"These are not just record prices, but multiples of record prices," said Ira Megdal, a public-utilities lawyer for Cozen & O'Connor in Cherry Hill.

The price of natural gas is essentially a pass-through to consumers. Utilities charge customers what they paid for the gas and don't make a profit from that price. Instead, they make their profit on delivering the gas to customers.

One burning question is how much of this record increase consumers should be expected to pay.

"That's what the regulatory agencies are wrestling with now," Megdal said. "They're looking at how, and under what circumstances, to pass it through."

Utilities in New Jersey and Pennsylvania are considering plans that let them pass part of the increase to consumers now, "interim relief," and the rest of it later in 2001.

Such plans would have to be approved by New Jersey's Board of Public Utilities or the Pennsylvania Public Utility Commission to take effect.

In the meantime, the utilities are urging customers to switch to "budget billing" plans that flatten the peaks and valleys of customers' annual gas bills by distributing charges more evenly throughout the year.

Some customers may be eligible for federal Low Income Home Energy Assistance Program grants, or LIHEAP. (In New Jersey, contact the Department of Human Services, 1-800-510-3102; in Pennsylvania, contact the Department of Public Welfare at 1-800-692-7462.

Public Service Electric & Gas Co. in New Jersey raised the price of its average natural-gas bill for 100 "therms" from $70 a month to $81.20.

PSE&G follows the industry practice of buying gas steadily. But it had the chance to lock in cheaper, longer-term gas contracts several months ago, before they reached their recent stratospheric heights.

John Scarlata, PSE&G general manager of gas-supply operations, said waiting would have been a big gamble.

"It's like when you want to buy a [certificate of deposit] at 5.9 percent, and you look at your bank and say, 'Should I wait until next week?' "

You could hold out and get a higher interest rate the following week, or you could wait only to find that it dropped to 5.8 percent.

"You never get it right all of the time," Scarlata said of the gas-buying process.

Getting it wrong has gotten so much easier - in part, because of technology.

"The Internet is the root cause of all the evil we have with high natural-gas prices," said Kenneth Hoffman, manager of Orbitex Management Inc.'s energy and basic materials mutual fund.

In the early 1990s, before the Internet became a household word, government energy analysts predicted that electricity demand would grow annually by a negligible one-tenth of 1 percent throughout the decade.

It's actually grown 2 percent to 3 percent per year, Hoffman said.

All the routers, servers, personal computers, personal digital assistants and other accoutrements of the digital economy "have put amazing pressure on power demand in the United States," Hoffman said.

To relieve the pressure, traditional utilities and electricity marketers are building power plants that use natural gas for fuel.

Natural gas was once used mostly to heat homes and businesses and to fuel "peaking" plants, the generators that kick in during times of extreme electric demand. But highly efficient natural-gas-fueled plants designed to run constantly have become the norm for new generators.

Gas is attractive to power-plant owners because it burns much more cleanly than oil or coal, and thus makes for fewer environmental and regulatory headaches.

And for nearly the past two decades, its price has remained relatively flat.

In the last half-decade, gas and oil companies such as ExxonMobil, Enron and Conoco tapered off their gas production, shutting down unprofitable wells. The closings have contributed to this year's problems.

Gas producers have already responded, with more than 800 gas-drilling rigs now operating. In April 1999, only 362 rigs were running. But it will take at least a year for that increased production to lower prices, according to industry analysts.

The American Gas Association wants to use the crisis as a bully pulpit for promoting goals that have typically faced strong public opposition.

Association president David N. Parker recently wrote that perhaps with the natural-gas crisis as a backdrop, the new administration could soothe " 'not-in-my-backyard' objections to exploration, production, and construction or expansion of pipeline and utility facilities."

In most years, gas utilities stockpile natural gas during the summer, when heating demand is low and the price of gas is cheap.

That is, assuming producers and marketers have the gas on hand to stockpile in the first place.

This summer, that was not the case, for two big reasons:

Because the previous winter was warm, utilities did not carry a large reserve. And much of the gas available was being piped to gas-fired electricity generators.

About 15 percent of the natural gas consumed in the United States is used to fuel electric power plants, according to the gas association, which represents natural-gas utilities.

And that drain on gas reserves from electric power plants will only get bigger.

About 50,000 megawatts of power generation nationwide is planned to come online within the next year, and 40,000 megawatts in subsequent years, to keep pace with demand for electricity. Because of the environmental concerns about coal-, oil-, and nuclear-powered plants, most of that new generating capacity will use natural gas.

It's difficult to say when the price run-up will end, and how steep a price consumers will ultimately pay, especially since the worst of winter is still to come.

And there could be some unnerving side effects, noted Murphy, the Temple professor: "For the past 30 years, whenever there's been a big run-up in energy prices, a recession has followed."

Orbitex fund manager Hoffman predicted that natural-gas prices eventually would stabilize, "but at what levels, nobody knows."

Horting, of Peco, knows one thing for certain: The utility will be less adventurous when it comes to making the call of waiting for a better deal or stockpiling gas in the ground.

"We're going to start injecting earlier next year."

http://inq.philly.com/content/inquirer/2000/12/24/business/GASPRICES24.htm?template=aprint.htm

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


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