NARUC panel sees need for regulators to insulate against Texas-style gas price spikes

Published on February 15, 2022 by Hil Anderson

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The natural gas market can be a rollercoaster ride for both buyers and sellers, but it can be a little too unsettling for electric utilities and state regulators who must deal with the consumer sticker shock left when the ride gets too unruly.

The gap between unregulated wellhead prices for natural gas and the highly regulated price of electricity at the retail level presents a formidable quandary when it comes to dividing up the staggering bills that can result from unexpected surges in power demand, such as the one that occurred when a freakish cold spell slammed Texas one year ago, leaving behind a financial implosion that spread to several other states along with enough political consternation to fill a bank vault.

“What happened in Texas didn’t stay in Texas,” said Robert W. Gee, longtime energy regulator and president of the Washington consulting firm Gee Strategies Group, LLC. “It also exacerbated some long-standing vulnerabilities.”

A particularly vexing vulnerability for utility companies is responding to a surge in electricity demand at the same time wholesale gas prices are spiking higher. And panelists at the National Association of Regulatory Utility Commissioners (NARUC) Winter Policy Summit, held this week on the one-year anniversary of the brutal Texas storm, agreed that eliminating that vulnerability would not necessarily be an easy fix for regulators.

“Your tool chest is rather limited,” said Gee.

“There is no magic bullet,” added Amber Lee, Director of Regulatory Affairs for CenterPoint Energy in Minnesota, a company that felt the cost reverberations from the Texas crisis despite being on the other side of the country.

The Feb. 14 panel focused on the dilemma created a year ago when a brutal winter system more suited for Minnesota marched into Texas and then stuck around like an unwanted guest. The bitter cold caused electric heating demand to spike at the same time non-winterized gas wells and other infrastructure were freezing up and falling offline. The result was widespread power outages that lasted for days turned normally sultry Texas into an icebox.  More than 4.5 million electric customers lost power for extended periods of time, and nearly 250 people died as a result; some unofficial estimates of the death toll are as high as 700.

At the same time, the flow of gas from the Permian Basin in West Texas to customers in other states was also slashed, leaving far-away generating companies and utilities such as CenterPoint to compete for spot-market gas, which is not subject to any price controls and can be sold for what the market will bear.

A significant trouble spot rests at the point where regulated utilities and unregulated gas sellers meet, particularly in the volatile spot market. “The gas industry is a very different industry than electric utilities,” Gee said. “Their business is to make money by producing gas.”

While the spot market can provide occasional bargains for power companies, it can also create times when prices soar and cause sticker shock throughout the market. “We were all very surprised at it. What had been trading for a dollar was trading for $100,” said Senior Assistant Arkansas Attorney General Christina Baker, lead attorney for the state’s Consumer Utilities Rate Advocacy Division.

The situation left some utilities, particularly smaller municipal companies operating on purchased-power deals with minimal hedging programs, in a lurch. “I don’t think anyone was prepared for the costs that were moved onto the customer bills,” Baker said. “Those costs were put onto their customer bills almost immediately.”

From a regulatory perspective, it would be ideal to firm up coordination between utilities and gas producers to ensure that supplies are available and price increases are limited. “The only real and comprehensive way is making sure the producers bear that risk rather than the regulated utilities,” said Travis Kavulla, Vice President of Regulatory Affairs at NRG Energy.

The chances of a producer in the boom-and-bust gas industry agreeing to assume all the risk in exchange for a capped price would likely receive a tepid response at best from the gas drillers. That leaves utilities with the option of simply balancing their portfolios with non-gas generation to the best of their abilities while better informing the public that another black swan like last year’s Texas freeze could cost a lot of money, and the public will have to pony up to cover the losses and that there will be a strategy in place to spread out their payments over several months.