Gas producers and utilities have all but abandoned R&D and marketing. Is it too late to reverse the death spiral, or can the industry learn from other check-off marketing successes?
The Gas Executives Forum: Gas Pains
Commodity price upheavals are energizing gas utilities to evolve their business models.
of the additional supplies we need. Typically, we source a little each month, to build a portfolio of prices we’ve locked in. We leave about one-third or one-half to mark to index prices, because we can’t be sure prices will be higher next winter.
We’ve had good cooperation and support from regulators on this approach.
Fortnightly: How do volatile gas prices affect Questar’s strategic outlook?
Allred: We are seeing continued decline in use of gas per customer. For an LDC whose recovered costs do not vary with volumes, that can create severe bottom-line pressures.
This is particularly a problem at a time of high commodity prices, because some people in the regulatory process want to make up the price difference by cutting our returns. That is a troubling trend, especially for an LDC that is trying to expand its network to keep up with a growing customer base. It could mean the capital isn’t available for those investments.
In 2005, for the first time in eight years, we earned our allowed return—which is about 10 percent—in Wyoming and Utah. That’s a good sign for ratepayers, because it allows us to attract investment. But investors are expecting returns in the 11 to 12 percent range, and they have alternatives to invest in besides LDC that have similar risks. If commissions don’t allow a competitive return, investors will deploy their capital where they can get it.
Fortnightly: What capital investments do you expect to make in Questar’s gas-distribution system? What’s the status of your rate case?
Allred: It’s an active docket. We filed before the first of the year for a construction-enabling tariff. We worked with Utah regulators for three years, and thought we were close to an agreement. But the consumer advocate raised issues, and now we have hearings scheduled in May and June.
We expect to add 25,000 to 30,000 customers a year. With that growth, combined with the need to upgrade distribution systems to replace lines that need replacing, we are looking at capital investments in the $80 million to $100 million range each year.
Fortnightly: What are you telling investors about growth prospects for Questar Gas?
Allred: We’ve been honest with investors and said we will see 3 to 5 percent growth at best. Of course, our parent company combines our returns with the rest of Questar, and most of the growth is occurring on the E&P side. The E&P business is growing by about 10 percent, year-over-year. We are always looking to do acquisitions, but over the last couple of years we have achieved those growth levels by expanding resources and production.
Fortnightly: What regulatory priorities lead your agenda?
Allred: We are working with regulators on rate designs that will better align the interests of LDCs with customers and help promote conservation and demand-management measures. This design can be a high fixed charge or a tracking mechanism that sets rates on usage per customer, so we can recover fixed costs in a way that is not directly connected to volume. This is a problem that needs to be solved.