By STEVE EVERLY - The Kansas City Star
Date: 01/20/01 22:15

As natural gas prices rose in December, traders at the New York Mercantile
Exchange kept one eye on the weather forecast and another on a weekly gas
storage number.

The storage figures showed utilities withdrawing huge amounts of gas, and the
forecast was for frigid weather. Traders put the two together, anticipated a
supply crunch and drove gas prices to record heights.

"Traders do that all the time; they're looking forward," said William Burson,
a trader. "It makes the market for natural gas."

But the market's response perplexed Chris McGill, the American Gas
Association's director of gas supply and transportation. He had compiled the
storage numbers since they were first published in 1994, and in his view the
numbers were being misinterpreted to show a situation far bleaker than
reality.

"It's a little frustrating that they don't take the time to understand what
we are reporting," McGill said.

As consumer outrage builds over high heating bills, the hunt for reasons --
and culprits -- is on. Some within the natural gas industry are pointing
fingers at Wall Street.

Stephen Adik, senior vice president of the Indiana utility NiSource, recently
stepped before an industry conference and blamed the market's speculators for
the rise in gas prices.

"It's my firm belief ... that today's gas prices are being manipulated," Adik
told the trade magazine Public Utilities Fortnightly.

In California, where natural gas spikes have contributed to an electric
utility crisis, six investigations are looking into the power industry.

Closer to home, observers note that utilities and regulators share the blame
for this winter's startling gas bills, having failed to protect their
customers and constituents from such price spikes.

Most utilities, often with the acquiescence of regulators, failed to take
precautions such as fixed-rate contracts and hedging -- a sort of price
insurance -- that could have protected their customers by locking in gas
prices before they soared.

"We're passing on our gas costs, which we have no control over," said Paul
Snider, a spokesman for Missouri Gas Energy.

But critics say the utilities shirked their responsibility to customers.

"There's been a failure of risk management by utilities, and that needs to
change," said Ed Krapels, director of gas power services for Energy Security
Analysis Inc., an energy consulting firm in Wakefield, Mass.

Hot topic

Consumers know one thing for certain: Their heating bills are up sharply. In
many circles, little else is discussed.

The Rev. Vincent Fraser of Glad Tidings Assembly of God in Kansas City is
facing a $1,456 December bill for heating the church -- more than double the
previous December's bill. Church members are suffering from higher bills as
well.

The Sunday collection is down, said Fraser, who might have to forgo part of
his salary. For the first time, the church is unable to meet its financial
pledge to overseas missionaries because the money is going to heating.

"It's the talk of the town here," he said.

A year ago that wasn't a fear. Wholesale gas prices hovered just above $2 per
thousand cubic feet -- a level that producers say didn't make it worthwhile
to drill for gas. Utilities were even cutting the gas prices paid by
customers.

But trouble was brewing. By spring, gas prices were hitting $4 per thousand
cubic feet, just as utilities were beginning to buy gas to put into storage
for winter.

There was a dip in the fall, but then prices rebounded. By early November,
prices were at $5 per thousand cubic feet. The federal Energy Information
Administration was predicting sufficient but tight gas supplies and heating
bills that would be 30 percent to 40 percent higher.

But $10 gas was coming. Below-normal temperatures hit much of the country,
including the Kansas City area, and fears about tight supplies roiled the gas
markets.

"It's all about the weather," said Krapels of Energy Security Analysis.

Wholesale prices exploded to $10 per thousand cubic feet, led by the New York
traders. Natural gas sealed its reputation as the most price-volatile
commodity in the world.

Setting the price

In the 1980s, the federal government took the caps off the wellhead price of
gas, allowing it to float. In 1990, the New York Mercantile began trading
contracts for future delivery of natural gas, and that market soon had
widespread influence over gas prices.

The futures contracts are bought and sold for delivery of natural gas as soon
as next month or as far ahead as three years. Suppliers can lock in sale
prices for the gas they expect to produce. And big gas consumers, from
utilities to companies such as Farmland Industries Inc., can lock in what
they pay for the gas they expect to use.

There are also speculators who trade the futures contracts with no intention
of actually buying or selling the gas -- and often with little real knowledge
of natural gas.

But if they get on the right side of a price trend, traders don't need to
know much about gas -- or whatever commodity they're trading. Like all
futures, the gas contracts are purchased on credit. That leverage adds to
their volatility and to the traders' ability to make or lose a lot of money
in a short time.

As December began, the price of natural gas on the futures market was less
than $7 per thousand cubic feet. By the end of the month it was nearly $10.
Much of the spark for the rally came from the American Gas Association's
weekly storage numbers.

Utilities buy ahead and store as much as 50 percent of the gas they expect to
need in the winter.

Going into the winter, the storage levels were about 5 percent less than
average, in part because some utilities were holding off on purchasing, in
hopes that the summer's unusually high $4 to $5 prices would drop.

Still, the American Gas Association offered assurances that supplies would be
sufficient. But when below-normal temperatures arrived in November, the
concerns increased among traders that supplies could be insufficient.

Then the American Gas Association reported the lowest year-end storage
numbers since they were first published in 1994. Still, said the
association's McGill, there was sufficient gas in storage.

But some utility executives didn't share that view. William Eliason, vice
president of Kansas Gas Service, said that if December's cold snap had
continued into January, there could have been a real problem meeting demand.

"I was getting worried," he said.

Then suddenly the market turned when January's weather turned warmer.
Wednesday's storage numbers were better than expected, and futures prices
dropped more than $1 per thousand cubic feet.

Just passing through

Some utilities said there was little else to do about the price increase but
pass their fuel costs on to customers.

Among area utilities, Kansas Gas Service increased its customers' cost-of-gas
charge earlier this month to $8.68 per thousand cubic feet. And Missouri Gas
Energy has requested an increase to $9.81, to begin Wednesday.

Sheila Lumpe, chairwoman of the Missouri Public Service Commission, said last
month that because utilities passed along their wholesale costs, little could
be done besides urging consumers to join a level-payment plan and to conserve
energy.

Kansas Gas Service had a small hedging program in place, which is expected to
save an average customer about $25 this winter.

Missouri Gas Energy has no hedging program. It waited until fall to seek an
extension of the program and then decided to pass when regulators would not
guarantee that it could recover its hedging costs.

Now utilities are being asked to justify the decisions that have left
customers with such high gas bills. And regulators are being asked whether
they should abandon the practice of letting utilities pass along their fuel
costs.

On Friday, Doug Micheel, senior counsel of the Missouri Office of the Public
Counsel, said his office would ask the Missouri Public Service Commission to
perform an emergency audit of Missouri Gas Energy's gas purchasing practices.

"Consumers are taking all the risk," Micheel said. "It's time to consider
some changes."

To reach Steve Everly, call (816) 234-4455 or send e-mail to
severly@kcstar.com.

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