MidAmerican Energy drew a bull's eye on
its back, scheduling a series of forums
throughout Iowa allowing customers to vent about the high price of heating their homes this winter. The company tried to shift blame to natural-gas producers and traders, but they still got plenty of customer rage.


Since December 1999, the wholesale price of natural gas has quadrupled nationwide, with most of that increase happening in the past few months. As a result of the huge jump in prices and a colder-than-normal winter, customers have seen their bills for natural gas more than double compared to last winter, said Iowa Utilities Board Manager of Energy John Harvey.


As last week's Davenport forum held by MidAmerican Energy showed, that increase is making a lot of people angry. An overflow crowd of more than 150 people attended the session at the Radisson Quad Cities Plaza and sometimes shouted down the company's representatives.
It didn't help the room's mood that MidAmerican didn't expect some of the questions, particularly about how the company buys and stores natural gas, and had difficulty answering them.
"Somebody's putting money in their pocket," said one audience member.


"You're absolutely right that somebody's making a profit," said Randy Blauvelt, the company's vice president of corporate communication. "It's not MidAmerican," he claimed.


Strictly speaking, Blauvelt is correct. Energy providers in Illinois and Iowa are forbidden from marking up the cost of energy; what they pay to buy natural gas is what you pay for natural gas. On your bill, this is the "gas supply charge," and that is what has risen so dramatically over the past year.


The cost of doing business and profit for utility companies are built into other components of the energy bill, such as the "basic service charge" and the "delivery/distribution charge," both of which are regulated by state government in Illinois and Iowa.


But that doesn't make energy companies blameless for your heating bill this winter. Even though MidAmerican tried to put its best spin on the record-high prices for natural gas - more than twice as high as they've ever been - the company could have done more to protect consumers.


And they're not alone. Deregulation at the federal level and ineffective regulation at the state level have contributed to the problem.
But all that would be moot if the price from natural-gas producers weren't so high.



Bad Forecasting


Watchdogs are generally being charitable to local utility companies, noting that there's nothing they can do to lower the base price of natural gas. But they could have done more to ease the burden on businesses - many of which can't pass along their energy costs to their customers - and individuals.


Iowa's utility companies "have probably done a reasonable job" looking out for the consumer during the current natural-gas price spike, said Iowa Consumer Advocate Gary Stewart.


But the audience at MidAmerican's forum seemed hesitant to accept the company's claim that its bottom line wasn't being buffered by the high cost of natural gas.


Martin Cohen, executive director of the watchdog group Citizens Utility Board (CUB) in Illinois, agreed that energy-delivery companies such as MidAmerican aren't responsible for the high prices. But, he said, your utility company could have lowered your heating bill this winter.


"Gas utility companies are not to blame for the market price of gas," Cohen said. But utilities are "simply passing on prices that are very close to spot-market prices." He stressed that utilities have a legal duty to provide the low-cost energy for consumers, and when the rates being passed onto consumers are so close to those on the day-to-day market, the utilities aren't meeting that responsibility.


In spite of warnings throughout last summer of big price increases, utilities didn't secure more natural-gas contracts or increase storage to save customers money, Cohen said. In other words, utilities didn't prepare themselves for the price surge, and you're paying for it.


Utilities purchase natural gas in two ways: on the "spot market," basically paying the current price; or on the "futures market," buying a certain amount of fuel at a set price for delivery in the future. Buying natural-gas contracts for the future is known as "hedging" and is done when a utility expects the price of the fuel to rise.


Cohen said that utilities should have anticipated the huge jump in natural-gas warnings. In the summer of 2000, MidAmerican and other companies were predicting a jump in natural-gas prices. But they claim that they underestimated the size of the increase.


Cohen said utilities could have saved consumers a lot of money with more-accurate price-forecasting, better use of the futures market, and increased storage. "The gas industry has failed the country by not doing so," he said.


Had utilities done a better job of predicting the price of natural gas - and Cohen said they could have - they would have been able to buy cheaper natural gas on the futures market and put more fuel in storage. "In August, in the futures market, you could have bought all your gas for January" for a much lower price, he said.


The storage question nagged some people at MidAmerican's forum. The company claimed that it used all of its available storage last year, and that purchasing or leasing additional storage would have been prohibitively costly. "It's not cheap to store gas," one company representative said.


But MidAmerican provided no evidence that increasing its storage capacity would have been more expensive than purchasing gas on the spot market.


Harvey of the Iowa Utilities Board said the situation in Iowa could have been worse. He said the state's utility companies ended up with cheaper gas than many others because they filled up their storage space relatively early. Some utility companies, he said, thought the price of natural gas would drop before winter and didn't fill up their allotted storage. When the price continued to grow, the utilities were forced to buy spot-market energy for storage at as much as twice the cost of purchasing the gas earlier.



Regulatory Roulette


Utility companies aren't the only ones to blame for their failure to plan for higher prices.
The regulatory environments in both Illinois and Iowa discourage utility companies from looking out for your pocketbook, offering no incentive to seek out cheaper natural gas and potentially punishing utilities for playing the energy market in search of low-cost fuel.


A one-for-one pass-through of natural-gas costs to consumers is meant as a protection; MidAmerican Energy's profits aren't coming from the gas-supply charge.


But that restriction has a downside. Because residents and businesses will be absorbing the full cost of the energy used, it makes little difference to the utility what the price is.


"If they can pass it on one-for-one, they have no [financial] incentive" to seek out cheaper gas, said Dick Ballman, professor of economics at Augustana College. The only potential incentive for the energy company is public relations, he added.


"People and groups perform better when they have incentives," said the Iowa Utility Board's Harvey. "We haven't given power companies incentives to take risks and do better."
"It can be a concern" that there are no incentives for utility companies to develop energy-purchasing strategies to protect consumers, Stewart said.


One utility that operates in Iowa, Minnesota, Michigan, and Missouri has been accused of giving plum business customers better natural-gas rates than the rest of its consumers, Stewart said, although the charge is still be investigated. "If it's true, it's not a good deal," he said. The case could show that utilities can find better rates with the proper incentive.


MidAmerican, in reality, does have a small incentive to look for cheaper natural-gas price. It's the only utility in Iowa to participate in a program in which it can make a profit by securing good prices for natural gas. "If they can beat the marketplace, then they would get to share in the savings," Harvey said, "which translates for them into profit."


In other words, both the consumer and MidAmerican would benefit from a lower price. Part of the difference between the market price of energy and MidAmerican's price would be reflected in lower rates for consumers, while the remainder would go to the company's bottom line.


There is a theoretical risk to buying energy on the futures market for utilities, though. If a company buys a futures contract for natural gas and the price of natural gas drops, the higher fuel cost gets passed along to consumers.


And if customers get stuck with prices higher than the market, the utilities risk getting some of the charge disallowed by the state's regulatory body. "[Utilities claim that] 'we don't take on any risk because we are not rewarded for doing it,'" CUB's Cohen explained.


But that claimed fear doesn't hold up if one looks at regulatory history, he said. "What the gas companies [claim they] are afraid of is a phantom," Cohen said. "The ICC [Illinois Commerce Commission] has never disallowed a nickel because a company hedged."


The lack of any real threat of punishment, however, isn't accompanied by an incentive to buy futures contracts in the best interest of the consumer. "The ICC has never disallowed a nickel because a company didn't hedge," Cohen said.


The situation in Iowa is similar. A mechanism to disallow utility-company expenditures because of imprudent hedging "has not been used much" because natural gas was so cheap for so many years, Harvey said.



The Perils of De-Regulation


The natural-gas prices we're seeing (and paying) today wouldn't have happened without de-regulation.


The federal government began freeing the natural-gas industry from regulation in 1978, but full de-regulation wasn't achieved until 1993.

Regulation by the federal government kept natural-gas prices from bottoming out, but it also reduced the potential for profit among producers; it provided a floor for the price but also a ceiling.


De-regulation was sold as something that would be good for both consumers and producers. And for seven years, customers benefited from the low cost of natural gas.


But the price settled at a price so low that there was no profit in the fuel, and producers cut off the supply and stopped looking for and drilling for new deposits. Meanwhile, demand continued to grow as the economy expanded, and more power-generating plants began using natural gas instead of coal or other fuels. The price of natural gas rose accordingly, and because of de-regulation, now there's no ceiling price for natural gas.


Many consumers at MidAmerican's forum said they also suspect price-gouging, or at the very least the artificial manipulation of the supply to jack up prices.


"The producers have done well, but the traders have made out," Cohen said. Investors who bought natural-gas futures last summer have seen a huge return on their investments.


Companies moving the natural gas through pipelines and to consumers aren't benefiting from the price spike, Cohen claimed.


But MidAmerican does have an interest on the supply end of the equation. Last year, MidAmerican merged with CalEnergy, a debt-heavy Omaha, Nebraska-based company involved in the production of several types of energy, including natural gas.


Although CalEnergy is more focused on geothermal energy, any energy-producing company can benefit from an increase in natural-gas prices. "When one fuel goes up in price, the alternatives tend to also," said Augustana's Ballman.


Consumers will probably continue to pay high prices to heat their homes in the coming years. Because the cycle of natural-gas development is between 18 and 24 months, companies that began in recent months to look for and drill new sources of natural gas won't be bringing their product to market for quite a while.


As production increases somewhat and new sources yield greater supply, experts predict, natural-gas prices will fall by as much as 40 percent over the next two years, but still remain at levels that had not been reached until 2000. Consumers should expect to see their energy bills remain high through the 2002-3 winter before settling down.



Relief?


Although Illinois, Iowa, and several local government bodies are considering rolling back taxes on natural gas, those measures would only provide small and temporary relief.


"There may not be much that can be done on a local level," said Iowa Consumer Advocate Stewart. "I don't think there's much states can do individually."


There might be some strategies to protect consumers, though. Harvey said that the Iowa Utilities Board might consider giving energy companies stronger incentives to develop consumer-friendly purchasing strategies.


More intriguing would be a plan in which purchasing decisions are essentially taken out of the utility's hands and put into consumers'. Such a program would make energy choices similar to managing a stock portfolio, Harvey said.

Customers would decide on an energy-purchasing plan, choosing a combination of futures contracts (with a price locked in, but the risk that prices could drop) and spot-market purchases (with a more volatile price, but benefits when the price of energy drops).


"Those are things we might look at in the next year," Harvey said.


Such a program would give consumers greater power over their energy bill. Then again, it would leave them with only themselves to blame for bad choices.


For now, though, there's plenty of blame to spread around - the federal government, state regulators, utility companies, and natural-gas producers have all contributed to what's become the Energy Nightmare of Winter 2000-1.

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