Sunday, January 28, 2001

Heat bills send shivers

Natural gas prices hit all-time high with no relief in sight

By Mike Boyer
The Cincinnati Enquirer

        January home heating bills, due out soon, could be worse than last month's -- which were double and triple last winter's.

        The governors of Ohio and Kentucky want help for people who are struggling to pay their bills.

        Consumer advocates want a probe into why natural gas rates are at historic highs.

        And it's only just begun: Tight natural gas supplies are expected to keep prices for the fuel that heats our homes and runs our businesses at record highs for at least another year or two.

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        Households paying utility bills won't suffer alone. Farms and factories that define the Midwest will pay higher fuel costs, too. Consumers may have to pay for costlier food and all types of manufactured goods — from automobiles to lawn mower wheels.

        “We're going to be saddled with higher prices for some time, and that may be 18 to 24 months,” says L.C. “Randy” Randolph Jr., vice president of gas operations for Cinergy Corp., which serves 480,000 residential and business customers in the Tristate.

        All of which should come as no surprise.

        Robert Tongren, Ohio's consumer counsel, says industry analysts have been warning about the possibility of a natural gas crunch for years, but warmer-than-normal winters masked the problem.

        This winter's frigid weather made those dire forecasts a reality as homeowners turned up the heat and industry made a run on diminished gas supplies.

        “It's not just a local or state of Ohio problem,” Mr. Randolph says. “It's a nationwide problem.”

Available — for a price

        Analysts are quick to point out that there is no natural gas shortage. But supplies are tight.

        Cinergy, which produces no natural gas of its own, says it can get all the gas it needs — but at a price. Cinergy operates as Cincinnati Gas & Electric Co. in Ohio, Union Light, Heat & Power Co. in Northern Kentucky and Lawrenceburg Gas in Indiana.

        Cincinnati Gas & Electric took the unprecedented step last month of asking Ohio regulators for a second gas rate increase in as many months. Normally, rates are adjusted every three months - sometimes up, sometimes down - depending on the market price for gas.

        The increase that took effect Jan. 2 pushed up the “gas cost recovery rate” that determines up to 80 percent of a residential bill. The rate is now the highest in the utility's history: $7.67 per thousand cubic feet of gas used — or 28 percent higher than December's rate and twice the $3.79 rate in effect last January.

        The rate reflects the utility's actual cost, plus taxes and adjustments, to buy gas from suppliers. The cost can be passed on to consumers once it's approved by state regulators such as the Public Utilities Commission of Ohio.

        “We're not profiting off it,” Mr. Randolph says. “It's very painful. I hate personally seeing prices this high. It's not good for our economy or the community.”

        Cinergy utilities will go back to state regulators in Ohio and Kentucky this week to file new proposed gas rates for the three months beginning March 1.

        Mr. Randolph says the company doesn't know yet what those rates will be.

        “It could be up just a little bit. It could be down,” Mr. Randolph says. “It really depends on what the futures prices are at the time we calculate it.”

A crisis is born

        So how did we get in this fix?

        This winter's gas crunch has its roots in the federal government's removal of price controls on natural gas, beginning 20 years ago.

        The idea was to encourage aggressive companies to find and develop new gas fields and deliver the fuel to the nation's homes and businesses at competitive prices.

        At the same time, the government began pushing use of clean-burning natural gas as an alternative to dirty coal and oil. A national resolve to become energy independent from foreign countries, coupled with a strengthening U.S. economy, led to a further surge in demand for natural gas.

        Deregulation did lead to increased supplies and a drop in gas prices. But over time, the consistently low prices gave producers little incentive to drill domestically and develop reserves.

        Meanwhile, demand continued to grow. Today, 63 percent of Greater Cincinnati homes rely on gas for heat. About 16 percent of the nation's electricity is generated by gas, and the percentage is growing. Forty percent of U.S. natural gas is consumed by factories and other industrial users, many of which are concentrated in the Midwest.

        The mismatch between growing demand and steady supply was a clash waiting to happen, analysts say. And it did, in December, which in Cincinnati was the fourth coldest on record.

        As consumers nationwide clamored for the fuel to heat their homes and run their businesses, gas held in U.S. underground storage fell to 1.73 trillion cubic feet, the lowest level since the American Gas Association began tracking inventories seven years ago.

        Some analysts expect inventories to fall to 500 billion cubic feet by winter's end. Replenishing those inventories is expected to keep prices high during the warm months when prices typically fall and utilities and other large industrial users buy gas for next year.

        The market price for gas currently stands at $7 to $8 per million BTUs (British Thermal Units). The price shot up to $10 in December, compared with $2 to $2.50 through much of the past decade.

        Mr. Randolph, who has been in the natural gas business since the mid-1970s, says that kind of price movement is unprecedented. He expects the price to hover around $4 to $6 per million BTUs for the next 18 to 24 months.

        “I don't think anyone was anticipating the kind of prices we saw,” he says.

Ripple effect

        Analysts are warning that the gas crunch could lead to higher prices for food and all types of manufactured goods.

        The reason: Natural gas is a basic ingredient in everything from agricultural fertilizer to plastics.

        Just since December:

        • Terra Industries Inc., a major Iowa farm fertilizer producer, temporarily closed three of its eight ammonia plants — an indication of possible trouble across the agricultural Midwest. The high cost of natural gas made producing ammonia, a key element in nitrogen fertilizer, a money-losing proposition.

        Highland County, Ohio, farmer Ken Davis paid $155 a ton to lock in a supply of nitrogen fertilizer right before Christmas. He was concerned it might not be available at any price come spring planting season. The same fertilizer cost $92 a ton a year ago, he says.

        Mr. Davis, who grows corn and soybeans on 1,500 acres, says a shortage of nitrogen fertilizer could lead to smaller corn crops and higher prices.

        The Fertilizer Institute, a Washington, D.C., industry trade group, cautions further that the spike in natural gas prices threatens "severe" problems for farmers this spring planting season.

        • Performance Plastics Inc., an Oakley company that forms sophisticated valves and gears from high-strength plastics, is planning now for higher prices for raw materials that go into a variety of plastic parts.

        Price hikes already are being seen in some lower grades of plastic, company president Tom Mendel says.

        • Higher natural gas prices will add about $8 to the cost of a ton of steel produced this year by NS Group Inc., a Newport steel producer. That will add about 1.6 percent to production costs, says Rene J. Robichaud, company president and chief executive.

        Plus there's an ironic twist: NS Group expects to sell significant amounts of drilling pipe to natural gas producers looking to replenish supplies. Demand could push up the price for his company's pipe by 10 to 15 percent, Mr. Robichaud says.


Do something — but what?

        The sharp spike in gas rates across the country has triggered calls for government action.

        Ohio Gov. Bob Taft announced in his State of the State address Wednesday that Ohioans meeting certain income levels will be able to apply for grants of up to $250 to help pay their winter fuel bills, starting Monday. Qualifying: families of four making $34,100 a year, couples earning $22,500 and and individuals earning $16,700.

        Kentucky Gov. Paul Patton received approval for $4.7 million — triple last year's state allocation — to help families in need.

        Ohio lawmakers also are talking about spreading gas rate increases over 12 months instead of passing them on all at once to consumers. Any relief along these lines would have to be approved by the Public Utilities Commission.

        Commission chairman Alan Schriber thinks this is a bad idea. Because gas prices are likely to remain high, spreading out today's price hikes will only make tomorrow's bills worse, he says. And if next winter is even colder than this winter, those bills would be even harder to take, he says.

        Says Mr. Tongren, Ohio's statewide advocate for residential utility customers: “It's like the commercial says. You either pay now or pay later.”

        Mr. Tongren wants a “thorough examination of what's going on.” He has asked the Public Utilities Commission to investigate the cause of the natural gas price hikes.

        Mr. Schriber, who lives in Wyoming, says his agency has seen no evidence that gas utilities are gouging customers.

        “We have a statutory obligation to make sure the purchasing practices of the utilities are prudent, and secondly, that what they pay is exactly what gets passed on. And we're doing that,” Mr. Schriber says.

        Ohio State Sen. Scott Oelslager, R-Canton, has asked Mr. Taft to waive through March the gas tax that adds about $5 to every $100 assessed on residential home heating bills.

        Attempts to regulate the gas market would be a mistake, Mr. Schriber says. That would only lead to a repeat of the energy crisis in the late 1970s, the last time gas prices were regulated.

        “There simply was no gas,” Mr. Schriber says. “In the late 1970s and early 1980s, there was a crisis because there was a shortage of gas. There were lots of curtailments. It was a very difficult situation.”


- Heat bills send shivers
E-mail your questions
Thousands looking for help
Frequently asked questions
Cinergy sleuths find ways to save
Q&A with Cincinnati energy executives
The good news: stable electric rates
Agency helps renters save on heat costs
How homeowners cope:
The Britton/Bourke home
The Ehrstine/Koss home
The Evans home
The Fischer home
The Hess/Ziegenhardt home
The Smithermans home