If Jane Austen were writing this column, she would begin something like this: "It is a truth university acknowledged, that a natural gas distributor in possession of a good franchise must be in want of an electric utility to merge with."

That's the rule of electric/gas convergence. But as an editor, my instinct when I uncover such a "rule" tell me to look for a reason why it ain't so. That's why I got such a kick from a recent conversation with Sheldon Silver, the speaker of the New York State Assembly. Silver has opposed efforts by Governor Pataki to guarantee that electric utilities can recover any costs left stranded by competition. He spent a few minutes with me to explain why New York instead should focus on customer choice and cutting electric rates. But along the way he also gave me as good a reason as I've heard yet to oppose the idea allowing electric and natural gas utilities to merge their business.

"One of the ideas that should be considered," said Silver, "is separating natural gas and electric assets.

"While there is some synergy to be gained by combining ... competition might be best achieved by separating gas and electric companies, the same way some would separate electric generation, transmission and distribution."

I asked Silver about the proposed merger between Brooklyn Union Gas and Long Island Lighting Co., and gas/electric mergers in general:

"I do acknowledge certain synergies in cost savings, but in areas like Long Island, where the ability to compete in generation is limited, competition between different forms of energy may be significant in keeping rates low."

Gambling on the Spot

Remember the 1980s? Remember long-term purchased gas contracts that were priced above market, and how gas distributors were advised to move to shorter-term deals? Well, look what happened when gas prices spiked on spot markets this past winter.

In March, regulators in Illinois opened a case to investigate last winter's high gas prices. Among other things, the commission will look at what local gas companies did not mitigate the higher spot prices, including filling storage, hedging in the futures market and contracting for the future delivery of gas.

In other words, why didn't they lock a lower price?

A similar story has emerged in New Mexico, where in February the state utility commission cited high gas prices and criticized Public Service Co. of New Mexico for moving about "99 percent" of its gas portfolio into the spot market.

Wondering what was going on, I called John Herbert, senior economist at the U.S. Energy Information Administration and an expert on gas storage and commodity markets. As a matter of fact, Herbert told me he had been the first witness called by the Illinois commission when it held hearings on the matter.

"This past winter was somewhat unique," said Herbert, "and it wasn't just to do with the spot market:

"From talking to the LDCs [it seems] there was a lot of concern over gas in storage. Instead of drawing down storage, they were going out into the cash [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, at the EIA, John Herbert expresses amazement that consumers are able to find his telephone number and talk his ear off when prices soar.

"This winter, when prices shot up, I got phone calls from senior citizens in Ohio who knew how to read their bills real well. So I explained to them what was going on.

"They thought it was the oil companies coming back to stick it to them again, like back in the 1970s.

"It's a bit more complicated than that,"

Editor

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