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Published: Sunday, 11/21/2004

Columbia Gas stands by its strategy

BY MARY-BETH McLAUGHLIN
BLADE BUSINESS WRITER
Columbia Gas has requested a midquarter rate increase to 99 cents per 100 cubic feet of natural gas from 88 cents. Columbia Gas has requested a midquarter rate increase to 99 cents per 100 cubic feet of natural gas from 88 cents.
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Ask 10 utility executives how they forecast natural gas prices, and you're likely to get 10 different answers.

Said Bob Eyre of the Ohio Gas Co.: "It's like if you get 10 tax accountants together, you're going to get 10 different tax returns."

Forecasting prices of a prime heating fuel is a hot topic amid the request by Columbia Gas of Ohio Inc. to boost its early winter rate to 99 cents per 100 cubic feet of gas from 88 cents. The rate took effect just three weeks ago and was supposed to last through January.

If state regulators approve the increase, customers of the primary natural-gas utility for metro Toledo and other parts of northwest Ohio would pay an average of $18 a month more in heating costs for December and January.

Columbia Gas already charges customers more than most other utilities in northwest Ohio and more than most of the state's other big utilities.

The reason, according to the gas company and experts, has to do with the firm's best guesses on wholesale natural gas prices, with its decisions on how much gas to buy on the spot market, and with its volume of gas in storage.

Other factors include the weather and price swings based on speculators' trading of energy futures.

"Everyone has their own supply strategy," said Rob Black, president of Waterville Gas & Oil Co. The Wood County company provides natural gas to 4,400 homeowners, renters, and businesses for 70 cents per 100 cubic feet.

That strategy and related decisions, however, affect customers' pocketbooks.

Toledo resident Tom Pawloski said last week that a year ago he locked in a 74-cent rate with an alternative supplier, WPS/FSG Energy Services. But when his renewal recently arrived, it was for $1.06 per 100 cubic feet, so he's shopping around.

"To tell you the truth, I was very much surprised," he said. "That would give me [more than a 40 percent] jump in one winter. If you do that every winter, pretty soon, you're facing the doubling factor."

Alternative gas suppliers also have boosted their rates in recent weeks to about the rate Columbia Gas is proposing. Two smaller area utilities are proposing to increase their rates too, although only one is looking for a rate as high as Columbia Gas.

The higher natural gas prices come as government figures show that nationwide, demand has declined and pre-winter storage levels are well above historic norms.

The U.S. Energy Department's latest figures show that natural gas consumption for the first eight months this year was down from the same period a year ago, and that available supply, at 3.3 trillion cubic feet in storage two weeks ago, is as high as it has been since 1991.

Strategic purchasing has become paramount to utilities since the natural-gas industry was partly deregulated in the early 1990s, said utility executives in northwest Ohio. Even into the late 1990s, natural gas prices to consumers tended to be so low - 30 to 50 cents per 100 cubic feet - that they received little public attention.

Columbia Gas, which has 175,000 customers in the greater Toledo area and is in more than two-thirds of the state's 88 counties, buys and stores about 50 percent of its projected supply, buys at a fixed rate for later delivery an additional roughly 15 percent, and purchases the rest on the spot market. That spot purchase of 35 percent of supply is higher than that for many utilities and explains in part the high rate the company charges its customers.

Mr. Eyre, of Ohio Gas, which has 45,000 customers in the most northwestern corner of Ohio, said his company has in storage 50 percent of the gas it will use this winter, has purchased an additional 30 percent at a fixed rate for later delivery, and will buy 20 percent at market rates.

With a considerably lower proportion than that of Columbia Gas dependent on daily wholesale prices, the utility in Bryan charges its customers 76 cents per 100 cubic feet.

James Halloran, an energy analyst with National City Private Client Group in Cleveland, said, "In general, you should have no more than 15 to 20 percent that you're playing with [daily]."

But Columbia Gas stands by its choices. Spokesman Gina Thompson said executives are comfortable with their mix of storage, fixed contracts, and spot-market purchases, as well as their wholesale purchasing decisions.

"We have a strong, solid portfolio, designed to deliver firm gas service at the best price available," she said.

Mr. Eyre of Ohio Gas said his firm consulted with gas producers and other utilities and decided in September that the wholesale price of gas was low. Thus the utility bought enough to deliver to customers through the winter.

"That took the volatility out of our price," he said.

Columbia Gas, however, decided at about that time to ask for a rate of 88 cents per 100 cubic feet for November through January, down from its late summer rate of 91 cents. Less than two weeks after the new rate took effect, the firm asked state regulators to allow it to boost the rate to 99 cents because of the higher spot market prices and its forecasting changes.

Mr. Halloran, the energy analyst, said companies seeking a rate increase mid-quarter often signal that not enough gas has been set aside in storage. Some utilities have their own storage facilities, but most rent space.

Larry Martin, in charge of regulatory policy for Columbia Gas in Ohio, said it is not cost effective for the utility to add gas storage, and even if it wanted to, there may not be enough underground storage available.

Utilities can store only so much, because leasing space is not cheap, nor is building more, said Thom Pearce, a natural gas specialist with the Public Utilities Commission of Ohio. The commission oversees rate requests and is expected to rule this month on the Columbia Gas case.

"The utilities do need to access the daily markets because for every down side, there's an up side when prices go down," he said.

Extolling the benefits of locking in wholesale purchases in advance is Jeffrey Mayer, chief executive of Mx Energy Inc. of Stamford, Conn., an alternative supplier in metro Toledo. He said his firm buys its gas three years in advance and stores it during the summer, enabling it to offer a rate of 93 cents per 100 cubic feet.

"It's very similar to a bank selling fixed-rate mortgages," Mr. Mayer said. "People who have such mortgages understand the benefit of locking in their prices and avoiding unpleasant price shocks."

The regulated utilities, by law, cannot make a profit on the fuel costs, nor can they take losses. So price increases they pay get passed on to customers. The regulators are charged with ensuring that the companies are making prudent decisions.

"It's definitely a balancing act," said Mr. Pearce, of the PUCO.

As wholesale natural-gas prices jump wildly, executives at northwest Ohio gas utilities said they keep a close eye on the New York Mercantile Exchange. There, natural gas futures are trading at prices roughly 50 percent higher than a year ago.

A big reason for that is increased trading by hedge funds and other speculators.

Widespread destruction by Hurricane Ivan, which disrputed gas pipelines for days, started the speculation and it just increased as hungry investors jumped on board, said Mark Frye, a consultant with Palmer Energy Co. in Toledo.

"It's human nature to start jumping on the bandwagon," he said.

One industry group said this month that the market has become vulnerable to manipulation, the Associated Press reported.

"The natural gas market price is no longer being set by consumers' demands for the physical supply of gas," Paul Cicio, executive director of Industrial Energy Consumers of America, said in a letter sent to Congress. "Instead of the market serving the greater public good, it serves the investment interests of ever-growing unregulated billion-dollar hedge funds that are completely disconnected from the consumer and manufacturing market."

David Pemberton, Jr., president and chief operating officer of Suburban National Gas Co. in Cygnet, said, "It used to be that the gas would just flow and then you'd monitor what you needed, prices would go up in the cold weather, and then drop back down.

"Now, it's the most volatile futures commodity that's out there."

Still, customer rates from northwest Ohio's 10 regulated utilities range from 70 cents to slightly more than $1.

Suburban National Gas, which has a 70-cent rate, has asked state regulators to allow it to charge its 5,500 customers nearly $1, starting Dec. 1. Sheldon Gas Co., with 1,500 customers, plans to raise its rate from 79 cents to 88 cents.

Some utilities prefer to adjust their rates monthly, rather than quarterly as Columbia Gas does.

Mr. Martin of Columbia Gas said the quarterly approach makes it easier on customers because it prevents wide price swings.

However, the utility's rates don't seem to reflect that. For example, Columbia Gas boosted its summer rate of 77 cents to 91 cents for August through October this year, and last year dropped its summer rate of 96 cents to 72 cents in August.

Mr. Eyre, of Ohio Gas, said his firm's monthly rate change generally prevents wide swings.

"With the monthly option, if we see a severe turn in the marketplace, we can adjust our rate up or down quickly," he said.

Contact Mary-Beth McLaughlin at: mmclaughlin@theblade.com or 419-724-6199.



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