Rapid City, SD-based Black Hills Corp. is developing a program for some of its utilities in seven states to initiate ratepayer purchases of natural gas reserves from its exploration and production (E&P) segment.

Through its local utilities, Black Hills is making the pitch to state regulators to allow utility customers to lock in low-cost gas supplies on a long-term basis. CEO David Emery told analysts during a quarterly earnings conference call Tuesday that the company hopes to have formal proposals filed before the end of this year.

Calling it a “growth opportunity,” Emery said Black Hills’ “cost-of-service utility gas supply program” is a direct investment in gas supplies by regulated utilities as a means of providing more “long-term price stability” for customers.

He said Black Hills representatives are now engaged in “healthy dialogues” with state regulators, consumer advocates and other stakeholders in Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota and Wyoming.

“We…feel we are making good progress in evaluating potential purchases of new acreage and drilling prospects for inclusion in a cost-of-service gas purchase program,” Emery said. “Those properties include our Mancos Shale properties in Colorado and New Mexico.”

He said Black Hills expects to have a program later this year. The eventual regulatory filings could be tied to specific new reserves acquired and developed by its E&P unit, Black Hills Exploration & Production, or with prospective reserves not yet under Black Hills control, he said.

Both electric and natural gas utilities in the West for a number of years have invested in gas reserves. Four years ago Portland, OR-based NW Natural inked a deal with Encana Corp. to develop gas reserves in the Jonah Field in Wyoming (see Daily GPI, April 21, 2011). A decade ago the Los Angeles Department of Water and Power structured similar ratepayer-supported gas reserve acquisitions (see Daily GPI, June 24, 2005).

Emery said Black Hills has a goal of having its E&P activities eventually supply half of the supply needs of its gas distribution utilities, and up to half of the fuel used in its gas-fired generation fleet. Combined, that amounts to providing utility operators with up to 39 Bcf annually.

“That’s a big number,” Emery said. “And relative to our current E&P production [about 10 Bcf], we would need a pretty big increase in production.” He emphasized that with current level of E&P spending, Black Hills cannot get “anywhere near” the 50% volumes required by the utilities.

Emery said the company’s preference is to file simultaneously this year in the states, but that may change. “We’d like to do it this year, but we have a dilemma because we don’t have a [potential reserve] property right now that we are comfortable recommending be included in the program,” Emery said. “Our objective is to get something filed before the end of this year” with a property or without, and guidelines for selecting one.

Without the prospect for the cost-of-service program and the need to fill up capacity at a gas processing plant, Emery said he is not sure Black Hills would be pursuing more wells in the Mancos Shale in today’s pricing environment. “We’d probably wait until things got a little bit better, but given those two key factors, we’re pushing ahead at current price levels.”