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Gas Too Volatile for Baseload Power, Says Utility CEO

Of course, commercial and industrial power consumers don't like high prices, but it's price volatility that bedevils their cash flows and crimps operations to the point of employee layoffs, Dominion Virginia Power CEO Paul D. Koonce told a Houston audience last week.

That's why Koonce is concerned about the potential for an over reliance on gas-fired power generation in the future. Gas prices are no stranger to volatility, and when the price of power swings with them it can wreak havoc on employers like grocery chain Food Lion. Koonce said he spoke recently with Food Lion executives about their power usage in his company's Virginia service territory.

"Our fuel factor increased 18% last year, and then this year, as we all know, commodities collapsed and that 18% increase was reversed and we updated our fuel factor. [Food Lion's] message to me and my message to you is it's the volatility that they can't stand," Koonce said. "Even if it's plentiful, the volatility of gas concerns my consumers. In fact, Food Lion laid off employees to deal with the price shock last year. They've laid off people in the store stocking shelves to compensate for the volatility of our product.

"I believe in gas. We all believe in gas, but the volatility in gas causes our consumers great concern."

But Koonce believes in gas as an intermediate and peaking generation fuel source, not as a fuel to power baseload generating plants as some gas producers have suggested it should be. Expanding the role of gas through the retirement of coal-fired baseload plants is one plank in the pro-gas lobby's platform (see NGI, Sept. 7).

Hedging has its place, and Dominion Virginia hedges gas purchases with financial products, and its corporate kin Dominion Exploration and Production (E&P) hedges its gas sales, Koonce said.

"That works for a while, but then the hedges roll off and the world changes and then what do you do? And in the interim you've used up balance sheet capacity; you're in a constant fight with your public accountant over the effectiveness of the hedge, and if it's not effective, what's the mark-to-market implication.

"We do it because we have to. That's the way we manage the earnings at our E&P company, and that's the way we manage the volatility at our electric utility. But the ultimate hedge, we believe, is to have a generation mix that reflects how consumers use generation, which is baseload, intermediate and peaking. And we see natural gas as an intermediate and peaking asset, not a baseload asset."

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