Hate That Gas Bill? Wait 'Till Next Fall

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By Jeff Long and Robert Manor, Tribune Staff Writers. Tribune staff writer Gary Washburn contributed to this report. January 3, 2001 Winter's brutal home heating bills could be repeated next December, as higher natural-gas prices are likely to linger through 2001, gas industry analysts said Tuesday.

With that dire forecast, government officials and consumer watchdogs said they will scrutinize the way Peoples Gas and Nicor manage their gas purchases, the costs of which are passed along to consumers.

The key question regulators will ask is whether the companies' buying strategies are keeping prices as low as possible in a market spiraling upward.

Soaring heating costs offer an unwelcome lesson in the difficult economics of energy: In a sort of reverse pipeline, all the money being paid by homeowners, renters and businesses is flowing right through local gas utilities to gas exploration companies and production companies.

For those companies, the high prices are a windfall, and the stock of some energy businesses has jumped in recent weeks. The utilities, on the other hand, say they are simply passing along their costs for natural gas and only make money on delivery.

To avoid paying top dollar for natural gas when prices spike in January, utilities stockpile gas reserves during the summer and lock in prices with long-term contracts. Regulators and officials are now asking whether the companies used those hedges as effectively as possible.

Each year, the Illinois Commerce Commission checks whether natural-gas utilities made "prudent" deals for natural gas. This year, Chicago's Department of Environment and the Citizens Utility Board plan to review those deals as well.

"We want to make sure the company has used any and all tools to manage the risk to their consumers," said city Environment Commissioner William Abolt.

If the Commerce Commission decides a utility made a bad deal, it can order the company to give money back to its customers. That hasn't happened in recent years, however.

"In my 17 years as a commissioner, we have never disallowed the purchase price for Nicor or Peoples," said Ruth Kretschmer, chairwoman of the gas policy committee.

Natural-gas pricing, it turns out, is extremely complex.

The price of the gas that heats your home is the average of what it cost your gas utility to purchase it over the course of the year, said Nicor Gas spokesman Craig Whyte.

"There are hundreds, if not thousands, of contracts," Whyte said.

The prices of those contracts are blended together to form a price paid by consumers. The price the homeowner pays, then, should be somewhere between the high and low prices paid on the open market over the course of the year.

Now, though, the prices homeowners are paying are close to the sky-high prices on the open market.

The January price for natural gas on the New York Mercantile Exchange, for example, ranged from 94 cents per therm to $1.01 per therm, settling at 99.8 cents per therm. Three gas utilities in northern Illinois are charging customers between 95 cents and 98 cents per therm, the unit of measurement for gas heat.

Utilities say the price on the exchange just represents the cost of the gas. Included in the charge for gas on consumers' bills is the cost of transporting the gas and storing it. So, although the exchange price and the price on the bill are similar, the companies say it could be worse.

Utilities could theoretically keep down prices by tapping reserves, but those reserves must last all winter.

"We have a responsibility to make sure there's an available, reliable supply through the winter," said Karyn Pettigrew, a spokeswoman for Peoples Energy, which owns Peoples Gas and North Shore Gas.

Higher natural-gas prices are likely to continue through 2001, industry analysts say. "The outlook for natural-gas prices remains very strong," said Zach Wagner, senior energy analyst with Edward Jones. "I really don't see that changing too much."

From 1997 to 1999, warm winters kept natural-gas prices unusually low. As a result, there was little exploration for new gas fields. Existing gas fields saw production gradually decline with age.

While residential demand was low, the nation's booming economy created greater demand for natural gas by industrial customers.

Wagner said the proliferation of new gas-fired electrical generating plants will worsen the situation as time goes on. Peaker plants, which generate electricity at times of peak demand, are springing up to meet a national shortage of electricity.

Energy companies are drilling for new supplies. But it takes 18 months or more for a new gas field to begin production, meaning little will reach the market until late this year or 2002.

"Even next year, we are looking at higher prices," said Lelan Russell, executive vice president of the Illinois Oil and Gas Association.

Russell noted that utilities buy and store natural gas during the summer, when prices are typically low. But with the nation's inventory of stored gas at very low levels now, utilities will be forced to buy more gas than usual this summer. Prices are likely to stay high as a result.

But energy prices can be extremely unpredictable. If the economy turns soft, gas prices are likely to follow. And if the rest of winter is warmer than expected, that would depress gas prices. For example, on Tuesday the futures price of natural gas dropped 15 percent because of forecasts that the country will see somewhat warmer weather in the next few days.

At least some people are pleased by the high cost of energy. Companies that produce and transport natural gas are seeing sharply higher profits, with stock prices rising rapidly.

For example, stock in Apache Corp. of Houston, a gas exploration and production company, closed Tuesday at $70.81--far above its 2000 low of $30.

Ocean Energy Inc., another Houston gas and oil company, has done even better. Its stock closed Monday at $16.62. Last year it traded as low as $6.31.

Petco Petroleum Corp. of Hinsdale is privately owned and need not disclose revenues. But Jay Bergman, president of the company, said higher natural-gas prices are good for his firm.

"From a year ago, it has tripled our natural-gas revenue," he said.

Not so at Peoples Gas and Nicor, however. Both companies charge only a service fee for the delivery of natural gas to consumers.

"The delivery charge is where Nicor makes its revenue, and that number has not changed since 1996," said Nicor spokesman Whyte.

"Has Nicor made more money on the high prices? The answer is no," Whyte said.

Meanwhile, Mayor Richard Daley planned to meet with members of Illinois' congressional delegation in Washington on Wednesday and U.S. Energy Secretary Bill Richardson on Thursday to discuss relief for consumers who have been hit with soaring natural-gas bills.

Among other things, the mayor will seek liberalized rules to qualify for federal assistance.

Under current regulations, people who earn 150 percent of poverty-level income can qualify for grants to help pay bills, a standard that perhaps should be raised to 175 percent, Abolt said.

Abolt took a new shot at Peoples, charging the company is recalculating the payments of at least some of its "budget plan" customers on a monthly basis in an apparent effort to minimize its own exposure to rising prices.

The company has made conflicting statements about the frequency of recomputing the amount to be paid by customers on the budget plan, referring to quarterly adjustments at times and "periodic" adjustments at others, he said.

"We got a call from a woman today who has seen her budget plan go from $400 in October to $500 in November," Abolt said.

Pettigrew said Peoples Gas automatically adjusts on a monthly basis if the customer's actual gas bill rises 25 percent or more. That way, the customer won't be hit with a huge bill all at once when it comes time to settle the account.


"We want to keep those extreme anomalies from eating people up," she said.

-- Martin Thompson (mthom1927@aol.com), January 03, 2001

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