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Midwest Utilities Stick to Procurement Script

Natural gas prices that some might describe as astronomically low and the unfolding of the North American shale gas story aren't enough to dissuade the chief executives of at least two Midwestern utilities from their tried-and-true gas procurement strategies.

Asked last Wednesday at the Bank of America Merrill Lynch 2009 Power & Gas Leaders Conference whether his gas utility business is rethinking the way it buys gas, CMS Energy Corp. CEO David W. Joos said, "No. We like the way we do it now."

He noted that CMS gas and power utility Consumers Energy has access to about 150 Bcf of gas storage capacity and has a total throughput of about 300 Bcf. "So we're able to basically bring gas in all year long and then store it over the summer season and deploy it during the winter heating season," he said. "We have the ability to manage our volumes of purchases fairly significantly in that regard. And we've had a gas cost recovery process since the mid 1980s in Michigan.

"We haven't had a disallowance for a long long time and that's because we sit down with the [Michigan Public Service] Commission staff and the various intervenors and we work out purchasing protocols: how much do we buy; how far forward; various price triggers and that sort of thing. And we follow that absolutely religiously. And we do that because it has allowed us to get 100% [gas cost] recovery and, furthermore, our gas prices have been among the lowest in the country because of the advantage with have with storage and the ability to buy gas that way."

Joos' co-panelist, NiSource Inc. CEO Robert C. Skaggs Jr., echoed the "if it isn't broke, don't fix it" mentality. NiSource gas utilities buy gas competitively on a seasonal basis and under regulatory programs that provide for hedging, he said. While the programs vary from state to state where the company has operations, he said the NiSource utilities have had "great success on flowing through costs." However, in Ohio NiSource's Columbia Gas of Ohio will be moving to an auction for procurement this coming April, he noted.

Because gas prices are so unpredictable, Joos said it's important to stay on course with a procurement plan.

"I'm amazed at where gas prices have been," he said. "I won't be amazed if they're $7 again in a year. Gas has been very volatile, and it's been very hard to decide when the low is the low. When it came off of $14 and started moving down toward $5 and $6, we thought we ought to buy a lot of gas and put a lot of cheap gas in storage for our customers. We couldn't get agreement to change the gas purchasing protocols, and in retrospect I'm glad we didn't because it got cheaper yet. Following that kind of protocol and being disciplined about it for us works best."

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