Owning gas reserves benefits consumers?
Ken Costello serves as principal researcher for energy and environment at the National Regulatory Research Institute. Contact him at kcostello@nrri.org.
Vertical arrangements are a long-term commitment in which a utility owns gas reserves or engages in a joint venture with an affiliated gas producer. Under ownership, a utility would acquire a non-operating interest in gas reserves.
"Utilities proposing vertical integration estimate the savings to be extremely small relative to their total purchased-gas costs." – Ken Costello
The utility becomes a partner with the operating entity. The utility typically pays upfront capital expenditures to fund reserves development and often a portion of the operating costs. In return, the utility acquires an interest in gas reserves located in specific gas fields. The length of an agreement ranges from five years to multi-decade.
A growing number of natural gas and electric utilities are looking at owning gas reserves and other vertical arrangements as a long-term hedge, with the secondary benefit of saving their customers fuel costs over time. Currently only a handful of utilities have such arrangements, and for some the relative amount of gas supply from vertical arrangements is small. But it is likely that they will become more popular in the future, if only because they offer utilities a new source of earnings.