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LDCs Taking Capacity Back to the Supply Basin, KeySpan Energy Exec Says

Local distribution companies contending with tight gas supplies, volatile pricing and sometimes the threat of hurricane-related shut-ins do well to remember the virtues of diversity -- specifically, diversity of supply, transportation and pricing strategies.

"They're all equally challenging," said Ron Lukas, vice president of regulatory strategy and relations for KeySpan Energy Corp. "They all interrelate with each other." Lukas and his team are working to diversify supply options for KeySpan's local distribution utilities in the Northeast. Since security of supply is the No. 1 priority, the company is stepping up to long-term gas supply contacts and is committing to transportation capacity as well.

"Several years ago... everybody was going to buy [gas] at the close-in liquid hubs, and we weren't going to contract back with pipeline transportation to the supply basins. Now we've kind of reversed that so we're contracting back to the supply basins," he said. The industry has taken note of last year's volatile hurricane season and how serious storms can wreak havoc with energy infrastructure. "It's interesting now that people are beginning to advertise 'hurricane-proof supplies,'" Lukas said.

Lukas will be a member of a panel addressing end-users and LDC issues in a high natural gas price environment at GasMart 2006 May 3-5 in Denver. He will be joined by executives from Procter & Gamble and Competitive Energy Services. Other featured speakers at the conference will be Questar Corp. Chairman Keith Rattie, Kinder Morgan gas pipelines President Scott Parker, and veteran financial analyst John Olson.

KeySpan's efforts to diversify its gas supply sources have the company sourcing gas from Chicago in addition to the Gulf Coast, and from Dawn, Ontario instead of just western Canada. Lukas said KeySpan is looking forward to receiving regasified LNG from Nova Scotia via the Maritimes & Northeast Pipeline. "LNG is big for us," He told NGI.He said that he believes LNG project economics require the support of contracts from local distribution companies. While it's still early in the game, Lukas said that KeySpan has explored cooperating with other LDCs to contract for LNG-based gas supplies. "I think for the projects to be built, I think they're going to need contracts from LDCs.... I think you may see LDCs work together as a group on some of those projects." He said the efforts could resemble how a consortium of LDCs contracted for import pipeline capacity from Canada on the Iroquois system.

As for managing price volatility, Lukas said that KeySpan's contracting and hedging strategy served it well last year. Through a combination of gas storage and financial instruments, the company's gas supply is about 70% hedged, he said. That was particularly advantageous given the fly-up in prices last year. "That [we were hedged] gave regulators a lot of comfort. Regulators are getting much more comfortable with hedging. As a matter of fact, if you weren't hedged you looked bad this year. You need diversity of supply; you need pipeline/transportation diversity, and you need some market gas, some financially hedged gas and some storage."

In all there will be nearly 30 speakers at GasMart examining all aspects of the natural gas market. For program information, visit http://gasmart.com. Sponsors include the IntercontinentalExchange (ICE), North American Energy Credit and Clearing (NECC), NGX, and the New York Mercantile Exchange (NYMEX).

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