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Chicago-area customers already pay more for gas than neighbors

Updated: December 24, 2012 6:49AM

Even before a new rate-hike request goes before Illinois regulators, Chicago-area North Shore and Peoples Gas customers are paying more for historically low-priced natural gas than customers of most other Midwestern utilities contacted by the Sun-Times.

Peoples defends its prices by saying it locks in the price on about one-third of its gas ahead of time, takes another third out of storage and buys the final third on the open market at current prices.

Natural gas costs a fraction of its price only a few years ago. The price for natural gas fell throughout last winter as new supplies continued to come onto the market and as a mild North American winter led to low demand. Natural gas is expected to displace oil as the largest single fuel in the U.S. energy mix by 2030 because new drilling technology called hydraulic fracturing, or fracking, has allowed a bonanza of natural-gas production.

The price of natural gas hit a brief low just below $2 per million British thermal units (mmbtu) in April before rebounding to current levels. But the current $3.90 average is far below peak prices of $14 per mmbtu seven years ago.

At the same time, consumers can expect higher heating bills this winter — 12 percent to 18 percent more than last winter — because the weather is expected to be harsher, experts say.

Could Peoples and North Shore, subsidiaries of Integrys Energy Group, do more for their customers by choosing to buy greater quantities of natural gas in the current market, while prices are historically low?

After all, Xcel Energy, parent company of Northern States Power, takes 25 percent of its natural-gas supply from storage, 25 percent from hedged contracts and 50 percent priced on the spot market.

Yes, now is the time for utilities to re-evaluate their strategies so they can lock in long-term supply agreements when natural gas prices are so low and probably won’t go lower, said David Dismukes, professor of energy studies at Louisiana State University in Baton Rouge.

“When the economy starts to turn around, those prices will increase,” he said Tuesday.

A major problem is that utilities send the gas prices straight through to consumers, so there is no incentive for them to aggressively go after the lowest prices, Dismukes said.

Others say it would be a fabulous situation for utilities to buy 100 percent of their natural gas supplies at the lowest price, but it would be foolhardy, difficult and flunk regulatory scrutiny.

“In a lot of cases, the rules are not set up for utilities to take a chance on the gas price looking forward,” said Bob Lyon, portfolio manager at Toronto-based AGF Investments Inc.

“If [the utility] locked in at $3 and the price fell to $2, the regulators would say, ‘Why did you do that? You just cost the consumers money. You have to rebate that money to the consumer.’

“If the utility was right and locked in at $3 and the price went to $4, there is no benefit to the utility. The utility takes all of the risk of being wrong but gets no benefit in being right.”

The main reason: Utilities pass through the cost of buying the gas itself without a markup. They tack on extra fees for storage, transportation and supply management.

Attorney General Lisa Madigan’s argument against Peoples’ gas rate request deals only with the costs of natural-gas billing, distribution and customer service. It has nothing to say about the way the utilities purchase natural gas because they pass through that cost to customers with no markup, her office said.

Chris McGill, vice president of policy analysis at the American Gas Association, the natural gas utilities’ trade association in Washington, D.C., said a combination of hedging, storing and buying natural gas on the spot market is much like a person building a diverse investment portfolio — it’s a good idea.

“There is no one standard,” he said.

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