The California Public Utilities Commission (CPUC) has determined that Southwest Gas’ failure to store more natural gas or to contract in advance for delivery of natural gas for the winter of 2000-2001 was imprudent. The storage situation in California in winter 2000-2001 was one of the major reasons gas prices at the California border soared to nearly $70/MMBtu.

Because of Southwest’s mismanagement of its storage capacity, the CPUC has disallowed Southwest’s recovery of $2.7 million in gas costs, which should be refunded to customers in proportion to their gas use that winter. There are 10,400 customers in Southwest’s service territory in California. The $2.7 million reduction yields, on average, a $26 refund per customer. However, the refund is based on last winter’s consumption, so the refund customers will see depends on their bills. It will be about 4% of the November 2000 to March 2001 bills.

From January 2000 to June 2001, natural gas prices rose to unprecedented levels and hit their highest levels that winter. From December 1997 to December 2000 Southwest’s gas procurement rate for its southern division had been set at $2.21/Dth. After the PUC approved Southwest’s request to change its procurement rates on a monthly basis to reflect its costs, Southwest increased its rates in December 2000 to $8.62/Dth and kept raising it up to $15.76/Dth in March 2001. The increase had a dramatic effect on the utility’s customers.

The CPUC determined that Southwest could have avoided the significant impact on consumers by storing more gas for winter use — Southwest had only used about 11% or 0.17 Bcf of its storage capacity. Also, rates could have been lower had Southwest used financial instruments such as futures contracts to hedge the price of winter gas, the CPUC said.

“We’re disappointed in the decision and its magnitude,” said Southwest spokesman Roger Buehrer, noting, however, that the utility does not plan to appeal the decision. “We’re glad it’s behind us now, and we’re looking forward to rebuilding our relationships in the community as a good company and a good neighbor.

“It was a mess that winter. We weren’t alone,” he noted. “This really is a story of supply and demand. We were coming off a hot summer and the power industry used a lot of gas. That demand drove up prices. We traditionally put gas in storage in summer to meet peak day needs in the winter, but because of the high summer prices we opted to not put gas into storage. The market indicators showed that prices would go down in the fall, but they didn’t, and instead remained high and went to record highs above $60 in December.

“We and our customers were caught holding the bag,” said Buehrer.

Regarding the CPUC’s criticism about not using futures Buehrer said the utility had believed since the early 1990s that California regulators were against utilities using the futures market or long-term supply agreements. Its storage management plan going into the winter 2000-2001 was based on the guidance that regulators had provided for a decade. The utility has since broadened its portfolio to include long-term contracts, futures contracts and a variety of other supply and risk management mechanisms.

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