Colder-than-normal weather, combined with low storage levels and the expanding gas appetite of power generators, were responsible for the high natural gas prices that Ohio customers saw last winter, according to a report by the staff of the Public Utilities Commission of Ohio (PUCO) that was released last week. The situation took its toll on both customers and the state’s gas choice programs.
The study — “Natural Gas Price Issues in Ohio” — showed that what Ohioans experienced during the 2000-2001 winter was also felt by the rest of the unprepared nation. Demand for gas during the winter skyrocketed as a result of the”convergence of several critical factors.” The sudden upshot in demand left the supply-side unable to respond quickly, and in response, gas prices increased to the much higher market-clearing level.
“Unfortunately, this adjustment was partially caused by — and occurred during — a winter heating season that was much colder than normal in Ohio and elsewhere,” the staff said.
Other events that contributed to the imbalance were lower than normal gas storage levels heading into the winter, the growth in demand for gas to fuel power generation facilities and the growth in demand from commercial and industrial consumers, which had been using more gas because of the “prolonged period of growth in the U.S. economy,” the report stated. All of this led to the supply of gas being tighter and more restricted than it has been in the past, which forced gas prices skyward.
The situation had an adverse effect on the three natural gas choice programs in the state, which serve 650,000 residential and 55,000 commercial customers. The PUCO staff said rising gas prices made it difficult for competitive suppliers to make a margin, forcing some to break their contracts with their customers by failing to supply gas, thus being terminated from the program. Others just left the gas program voluntarily, while some unilaterally changed the terms of their customer contracts.
Ohio has seen its fair share of marketer shakeout, which is still underway. Over the last year, marketers Energy Max, Summit Natural Gas and The Energy Cooperative were all terminated from the gas choice program (see NGI, Oct. 30, 2000; Feb. 12), while Pooled Energy, Firestone and D&L all voluntarily exited the program. Many customers were forced to find an alternative supplier, or return to their utility, making many people in the state wary of the natural gas choice movement together.
“Equally important to information for consumers is credibility, which underlies consumer confidence,” the report stated. “Recent competitive suppliers’ marketing practices, failures to supply gas, and failures to honor fixed-price contracts have engendered skepticism. Competitive suppliers’ advertising and promotional mix may, in the future, need to emphasize staying power, stability, and the ability to meet contractual commitments. Of course, in order to succeed, competitive suppliers need to live up to such promises.”
To try to clear up some of the issues revolving around Ohio’s choice programs, the state legislature, in response to concerns from consumers and the Ohio Consumer’s Council (OCC), decided that there needed to be a governing body to police competitive suppliers. To help customer choice thrive in the state, the general assembly passed (see NGI, Jan. 22; March 5), and Ohio Gov. Bob Taft signed a new law that will effectively give the PUCO the authority to investigate complaints by consumers, or on its own initiative, to identify whether a competitive supplier has failed to comply with certain newly enacted rules governing the choice programs. Under the amended Substitute House Bill 9, the commission will be able to enforce new rules, and order competitive suppliers to pay restitution to its customers if the supplier is in default. The rules include:
The new law also allows the aggregation of consumers by governmental entities. The staff pointed out that since similar aggregation has already occurred in the electric industry, the knowledge and experience gained by governmental entities from electric choice may assist in “jump starting” governmental aggregation in Ohio’s competitive natural gas market.
With regard to the overall gas price problem that Ohioans face along with the rest of the nation, the staff of PUCO suggests that market forces are already at work to fix the supply imbalance by putting more drilling rigs in the ground to step up production.
“However, bringing supply and demand into balance is not an easy task,” the report warns. “The Ohio LDCs and competitive suppliers are [assessing] and should assess the events of the last several months to avoid similar recurrences, particularly in times of extreme weather.” The staff recommended that LDCs begin using risk management tools such as hedging to try to “bring greater certainty” to the cost of gas to be included in Ohio’s gas cost recovery rates. The staff also recommended that the use off any risk management tool should be included as part of the cost of gas so that all of the transaction costs and all of the results receive the same consideration for recovery.
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