Utility interest in gas reserves grows

OREANDA-NEWS. June 09, 2015. US electric utilities are exploring ways to invest in natural gas reserves to lock in future fuel costs, a recognition of the industry's growing appetite for the generating fuel that will only increase as federal standards restrict air emissions and water use by coal plants.

With a promise of \\$50mn in customer savings, NextEra's Florida utility obtained regulatory approval late last year for its plan to invest \\$191mn in a joint venture with PetroQuest Energy to produce gas in Oklahoma.

Entergy's utilities in Louisiana are exploring ways to invest up to \\$300mn to secure a portion of their annual \\$3bn gas supply to keep up with a boom in power demand from industrial companies expanding along the Gulf coast. Louisiana's Public Service Commission (PSC) has proposed a long-term gas hedging pilot. Details are still being discussed.

Closely watching this activity are Duke Energy, Xcel, Southern Co., Portland General and a number of public power agencies.

"It is an idea that has merit as natural gas becomes more important to us, especially given its volatility relative to other fuels," Southern chief executive Tom Fanning said in April.

Some utilities have long owned coal mines, allowing them greater control over fuel costs. Other utilities have been able to sign long-term supply agreements for coal that provide stability, but natural gas supply contracts have historically been for shorter terms and tend to be more volatile. The US shale gas production boom has driven down prices, making gas much more competitive with coal.

"Long-term natural gas contracts should not be considered as an attempt to beat the spot market on any one day," America's Natural Gas Alliance said in a Louisiana filing. "Rather, these contracts can play a role in portfolio strategy designed to deliver price stability and predictability for a portion of a utility's gas needs."

One hurdle will be finding gas producers and marketers able to create products that meet utility needs and state regulatory scrutiny, Larry Kellerman, a former Goldman Sachs partner and power business entrepreneur, told attendees at the recent Argus US Natural Gas Markets conference.

"Utilities can say 'I want to do this,' but it will take counter-parties who are smart and aggressive to fashion offerings," said Kellerman, founder of Twenty-First Century Utilities.

Kellerman said producers need to find ways to overcome utility executives' deep reluctance to rely on gas as a long-term fuel source because of its historic volatility and an industry regulatory model that rewards capital investment over operating expenditures.

"Make it easy for them to buy," he said. "Go to them. Otherwise it will be a one-off market."

Key to utility acceptance will be the ability to capitalize production-related investments, not simply pass costs along to customers, as fuel costs are typically handled.

Kellerman said the regulatory treatment of nuclear fuel as a capital expense that is recovered through rate-based mechanisms should serve as a template so that regulators don't penalize utilities when a long-term gas investment does not appear attractive in the short-term.

Critics have already begun to oppose utility moves to acquire gas reserves, however.

Florida's state consumer advocate has challenged the Florida Public Service Commission's authority to allow cost recovery for gas production investment.

In Louisiana, Entergy and others object to the perceived mandatory nature of the PSC's pilot proposal while industrial users want the ability to procure gas themselves to meet their electrical needs.