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Fortnightly Magazine - May 1 1997

[spot] market. But the sellers saw them coming."

What did that mean, I asked? Were the LDCs plucked like pigeons? Did the marketers eat their lunch?

Herbert demurred: "It was just smart behavior on the part of producers and marketers."

"Remember," he cautioned, that "storage includes storage in producing areas, and this winter the producers brought down their own storage to very low levels. The LDCs saw that drop, feared a shortage, and decided to buy on the spot, rather than draw down their own storage closer to their retail markets.

"You see, in the two previous winters [1994-95, and '95-96], which were somewhat warm, producers and marketers got caught holding too much gas. So they got smart this past winter, and held down their inventories. It was smart behavior. But I don't think it was intentional." (Translation: The producers and marketers did not set out to hoodwink the LDCs.)

Should LDCs give up the spot market and go back to the old way, locking in prices under traditional, long-term firm contracts?

In February, the Colorado Public Utilities Commission opened PUC Docket 97I-033G to consider opening retail gas markets to competition. In comments filed in that docket, the PUC staff raised the same problems cited in New Mexico and Illinois, suggesting that the problem lay in the short-term nature of spot markets:

"Staff is unsure whether significant price reductions can be realized through unbundling. ... The recent spike in natural gas prices in November 1996 is a good example.

"In this example, spot prices were around $1.20/MMBtu in the last heating season [1995-96] but shot up to a high of $4.50 in this ['96-97] season. Furthermore, under regulation, Public Service Co. of Colorado has reduced its gas cost by over $100 million between the period October 1993 and November 1996.

"Even if competition may lead to lower prices, the lower prices will be on an average basis over a number of years, taking into consideration the price volatility of the natural gas market."

"Unscrupulous Suppliers"

To aid the Colorado policymakers in their investigation of gas markets, the consulting firm Hagler Bailly conducted a feasibility study which was later released for comments. Among many other technical (and thought-provoking) points, the study raised the specter of "unscrupulous suppliers"--marketers who sign up residential gas customers and then fail to deliver supplies when required. The firm interviewed a number of stakeholders, discovering some sentiment for more regulation:

"[A]t least one supplier indicated a willingness to submit to regulation by the Commission and to live by the same rules established for utilities. ... Commission oversight would be considered by customers as some sort of ... 'Seal of Approval' granted by the state."

Enron then fired back in its own set of comments--not to disparage Hagler Bailly, but to dissuade the PUC from issuing more rules:

"The Report suggests ... limiting the number of license granted to screen out 'unscrupulous suppliers' ...[C]onsumer protections, however well intentioned, will never be as effective as smart shoppers who can take care of themselves."

So how smart are shoppers?

Back in Washington,