The recent experience of MichCon illustrates what happens when forecasters at gas distribution companies guess wrong.
Stuart L. Harshbarger Ph.D., is president of Utech Economic Consulting Inc., in Grosse Pointe Park, Michigan. He was formerly with PricewaterhouseCoopers LLP, the U.S. Department of Energy, and the Washington Gas Light Company.
A recent decision by the Michigan Public Service Commission regarding gas cost recovery for Michigan Consolidated Gas Company (MichCon) highlights an important public policy question: What is the optimal supply acquisition strategy for a regulated gas utility to provide consumers with a reliable gas supply at a competitive price? MichCon is the gas utility that serves metropolitan Detroit, and until 2002, it was charging many of its customers $2.95 per thousand cubic feet (Mcf) in the form of a gas cost recovery (GCR) commodity charge. GCR is a pass-through to consumers of the total cost of MichCon's portfolio of natural gas supply resources consisting of gas in storage, spot market purchases, and fixed price or contract gas whose price is typically locked in many months before being consumed. The fixed price contracts reflect a pricing mechanism that allows MichCon to "lock-in" the delivered price of gas in advance to hedge against future price volatility in the spot market.
In the spring and summer of 2001, analysts at MichCon believed that the cost of natural gas on the spot market during the coming winter of 2001/2002 would again be high-as was the case during the winter of 2000/2001-and decided to lock-in the pricing of approximately 75 percent of its anticipated natural gas supply requirements for 2002.1