The Michigan Public Service Commission (MPSC) has approved an amended gas cost recovery (GCR) plan for Michigan Consolidated Gas Co. (Mich Con), reducing the recoverable amount for 2002 by more than $26 million, and criticizing the company’s policy of decreasing low cost storage reserves to serve customers in 2001 and signing higher fixed priced contracts for 2002.

The Michigan Commission found that Mich Con’s decision to deplete its gas reserves during 2001, when the retail price of its gas was frozen at $2.95 per Mcf, and to purchase replacement gas at a significantly higher cost for distribution to its retail customers in 2002, when the retail price of its gas was no longer capped, was unreasonable.

MPSC noted that a three-year GCR plan submitted by Mich Con for 1999-2001 capped customer costs at $2.95/Mcf, with Mich Con taking the risk/reward path of guaranteeing that rate, and either making or losing money depending on wholesale gas costs. In the first two years of the program Mich Con made $45 million and $25 million. When gas prices started rising in late 2000 and continued high in early 2001, however, Mich Con stood to lose money.

In March 2001 the company changed its policy of putting gas in storage in the summer for winter use, according to records produced in a hearing. At that point Mich Con decided to use about 17.5 Bcf of 40/cent/Mcf gas from storage to help meet the requirements of customers through the rest of the year. Even using some storage gas to meet its overall 199.5 Bcf annual requirements, the company still lost $28 million from higher prices in 2001.

Using the storage gas also meant Mich Con had to sign on supplies for 2002. In April 2001 the company, fearing further price increases, signed on 40% of its first quarter 2002 supply requirements, or 32 Bcf, at fixed prices and by October 2001, it had 100% of 2002 supply signed on at fixed prices.

Commission witnesses contended that instead of bearing the risk of a rise in commodity prices during its three-year program, the distributor drew down cheap storage gas to unreasonable levels in order to moderate the market prices it was having to pay. The MPSC noted that Mich Con had guaranteed the $2.95 retail price with full knowledge of gas market volatility.

In an order issued March 12, the MPSC amended Mich Con’s 2002 gas cost recovery plan and factors to be used to reconcile gas cost recovery expenses and revenues. It determined that Mich Con’s allowable 2002 gas costs should be reduced by $26,529,000 to protect ratepayers. In so doing, the Commission heeded recommendations made by its Staff, the Attorney General, the Residential Ratepayer Consortium (RRC), and the Michigan Community Action Agency Association, all of whom had argued that Mich Con’s 2002 gas acquisition strategy was flawed.

The Commission also concluded that it should issue a warning to Mich Con that continued adherence by the company to a gas acquisition strategy, which fixed the price for almost 100% of anticipated sales for 2002 by the end of October 2001 at an unusually high cost, would likely lead to additional disallowances in future proceedings. Mich Con used a hurdle strategy using 12-month Nymex strip futures contracts to establish pricing points. When prices hit a hurdle price it is a signal to start locking in supply and prices.

The RRC said Mich Con’s hurdle pricing strategy must be revised to use two downward hurdles of $2.50 and $3.00 and two upward hurdles of $3.50 and $4.00, provided that there is a monthly cap on the volume of gas that may be purchased in any given month.

Mich Con said that its acquisition strategy reflected similar conclusions reached by other Michigan gas utilities and was supported by market indicators. Its hurdle pricing strategy uses a combination of historical price trends and the current NYMEX forward curve, which when plotted as a logarithmic trend analysis smoothes out market volatility. According to Mich Con, the RRC’s criticisms are based on hindsight and current market conditions, which are not appropriate means to determine that Mich Con’s reliance on the hurdle pricing mechanism was unreasonable.

While not discrediting the hurdle strategy, the MPSC criticized Mich Con’s execution of it, which led to locking in prices for all of 2002 by October 2001.

©Copyright 2003 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.