“If economic activity does not rebound and we have a warm winter, perhaps a price spike can be averted one more year, thanks to the storage overhang,” Peoples Energy Chairman Thomas Patrick predicted, but the overall trend is toward greater demand and declining supply.

Last year’s mild winter and reasonable prices gave customers and LDCs a chance to catch up, but “production capacity is declining, rig counts are down well below the level at which production can stabilize. We are building toward another price spike,” Patrick said in the keynote address at last Tuesday’s LDC Forum in Chicago.

Local distribution companies are doing what they can to shield customers from excessive price spikes. “We can no longer rely heavily or exclusively on the short-term market.” He pointed out that when the market spiked in 1999, demand dropped 10%. Peoples is hedging its core market — with Nymex hedges, rather than swaps and derivatives, and looking for some form of extended fixed-price contracts with producers. However, so far producers have insisted on indexing long-term pacts, Patrick told NGI. “We would like more options.”

Assessing the market developments of the last year, Patrick said that LDCs and producers are increasingly going to have to fill the gap left by the collapse of wholesale marketers. That collapse was brought on in part by the traders’ failure to account for the cost of credit and performance risk. LDCs can bring to the table market knowledge, assets, operating experience, strong credit, relationships with other industry segments and reliability.

Patrick pointed out that for one particular package of gas it was seeking, Peoples received bids from 15 suppliers last year, and only six for the same package this year. The six included two marketers, one producer and three LDC or utility affiliates, an indication of the new trend.

Peoples Energy’s distribution companies serve more than a million customers in the Chicago area. The company also has an oil and gas production unit based in Houston.

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