Natural gas prices to rise substantially

State residents may have to absorb increase to avoid energy troubles.

Sunday, March 18, 2001

By SCOTT ANDERSON NEWS STAFF REPORTER

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There doesn't appear to be any way around it: Heating your home will cost more next winter.

As chilly an idea as that is, some experts believe Michigan residents may have to swallow the steeper prices now to avoid the same energy troubles California is experiencing. And though they'll stick around for a while, the high prices might not last forever.

The two major natural-gas utilities are poised to hand down their first rate increase in three years. Michigan Consolidated Gas Co. - the area's predominant utility, with about 155,000 customers in Washtenaw County and a handful in Livingston - hopes to raise rates next month. But first, it needs permission from the state's Public Service Commission to end its current plan, which would otherwise expire at the end of the year. The company hopes to raise rates from $2.95 to $5.17 per 1,000 cubic feet.

Consumers Energy, with 45,000 customers in Livingston County and about 6,500 in Washtenaw, had planned to boost rates from $2.84 to around $5 starting April 1, but said Wednesday it will freeze rates for at least one more month.

The average home uses about 120,000 cubic feet of natural gas a year, and gas is by far the most common source for home heat.

Both utilities say other elements of your gas bill, the service fees and gas delivery charges, will not go up. Both also say the new rates will make up for soaring natural gas prices, which have been more than $10 per 1,000 cubic feet in recent months.

Keith Crocker, professor of business economics and public policy at the University of Michigan, said the prices of oil and natural gas often work in tandem, meaning both could stay high for the time being.

Crocker said if the state did not allow for the natural-gas price increases, Michigan could have been heading down a path similar to California's, which also kept power prices well below market values. Many experts say artificially low prices there left power suppliers with no incentive to sell electricity or build new plants, fueling the shortages.

Meanwhile, more natural-gas drilling, increased competition from outside natural-gas vendors, a slowing of the economy and the possibility of milder winters could all pull prices down. But not for a while, according to Pamela Prairie, a senior fellow at the Institute of Public Utilities at Michigan State University.

"If those things happen, I would expect to see some price relief in 18 to 24 months," Prairie said.

Because prices have been held low for three years, outside suppliers have been hesitant to compete in the Michigan market. For example, MichCon's choice program, which allows other vendors to market natural gas to MichCon customers, attracted about 47,000 customers in three years. But between Nov. 1, 2000, and Feb. 28 of this year, not a single new customer signed up, according to state regulators.

Now that prices will more accurately reflect market realities, Michigan may begin to resemble states like Ohio, where natural gas has no price cap. Residents there see about 5 to 12 percent lower prices than the market, mostly because outside suppliers can compete fully for customers, Prairie said.

"The reality is, it's simply impossible to have that kind of sustained below-market price that Michigan has had," Prairie said.

In the meantime, it is still unclear what rate increase, if any, will be granted to MichCon. The company said it is considering allowing credits or refunds to customers to match the higher gas expenses if the state lets it out of its contract. The Public Service Commission said it may support MichCon's proposal, but only if the utility guarantees those credits to customers, said Michael Kidd, director of the PSC's gas division.

MichCon spokeswoman Amy Messano said the utility can't make any guarantees because of the fluctuating market price of natural gas.

"We don't think it would be responsible or prudent in a market as volatile as it's been," Messano said. "We don't like the higher prices, but this an unprecedented market."

The next Public Service Commission meeting is March 29, but it may not decide the MichCon issue then.

Consumers Energy spokesman Jeff Holyfield acknowledged its price could go as high as $5.69 when that company makes a decision in mid- to late April. But he pointed out open market prices have been dropping, lessening chances of a huge hike.

"The main thing we've been trying to tell customers is we don't make a profit on the gas," said Consumers spokesman Jeff Holyfield. MichCon and Consumers make most of their money through services, such as meter reading and charges for delivering the natural gas.

Prices have been trading between $5 and $6 in recent weeks. That's far lower than the price in January, which peaked at $10.18 per 1,000 cubic feet. But a year ago, prices stood around $2.30.

The utilities say the natural-gas exploration boom following the 1970s energy crisis began to wane in the 1990s. Because the price was so low for so long, there were few financial incentives for companies to search for more. Now that the supply has plummeted, drilling has increased.

"Will the gas ever be as cheap as it was in the '90s? Probably not," Holyfield said. "Looking down the road, we're probably in for high prices for the next couple years before it drops again."

Scott Anderson covers technology, energy and other business news. He can be reached by e-mail at sanderson@annarbornews.com or at (734) 994-6843.

http://aa.mlive.com/news/index.ssf?/news/stories/20010318a830a1natgas18.frm

-- Martin Thompson (mthom1927@aol.com), March 18, 2001