Texas groups call for protection against high gas prices

By Ann de Rouffignac
OGJ Online Staff

HOUSTON, July 19 -- When the Texas electricity market opens in 2002, Reliant HL&P customers' bills can increase with gas prices, but won't necessarily fall when gas prices come down, warned representatives of cities and consumer and industrial groups.

Hearings that will determine the fuel factor to be incorporated into the maximum electric rate Reliant HL&P can charge in January, the so-called "price-to-beat," are taking place in Austin July 18 and 19.

The city of Houston asked the Texas Public Utility Commission for "assurance" customers of Reliant's marketing affiliate will not pay rates based on high natural gas prices, even when gas prices fall.

"In setting the fuel factor, the commission should provide some guidelines which assure Reliant's ratepayers that they will not have to pay rates based on current high gas prices, if there is a significant downward change in the market price of natural gas," the city said.

Reliant filed for a fuel factor based on gas prices of $4.66/MMbtu for 2002, said Paul Gastineau, director of regulatory affairs for Reliant HL&P, a unit of Reliant Energy Inc., Houston.

Gas prices have fallen drastically since Reliant's filing and are still skidding. The fuel factor is supposed to be based on the projected price of gas in 2002.

The New York Mercantile Exchange gas futures contract for 2002 averaged $3.83/MMbtu earlier this week. The volatility of gas prices demonstrates the danger of setting a fuel factor based on gas prices that won't ever be reconciled, said Clarence Johnson, director regulatory analysis for Office of Public Utility Counsel.

Reliant can request an adjustment of the fuel factor based on a 4% change in a certain measure of gas prices. There is no provision in the fuel factor rules that requires a downward adjustment. As a result, there's a danger the fuel factor will be ratcheted up and remain at higher levels, even when natural gas prices come back down, the city said in filed testimony.

Capitalizing on volatility
Gas prices have been especially volatile during the past year, the city said. The January 2001 Henry Hub natural gas futures contract closed at about $10/MMbtu. But futures prices have dropped almost 70% since then, according to the Wall Street Journal.

The August 2001 contract settled at $3.06/MMbtu on July 17. Gas futures contracts for the rest of the year were trading below $4. The natural gas futures price for all months in 2002 and even 2003 remains below $4/MMbtu.

Trying to guess what gas prices will be isn't easy. But under regulation, a fuel reconciliation process protected both ratepayers and the utilities against the risk of rising and falling gas prices. Ratepayers received refunds for overpayment or they could be assessed surcharges for underpayments. Now the only protection for consumers after deregulation from rising gas lies with the competitive market, consumer advocates said.

While gas futures contracts prices can vary wildly, the fuel factor rule allows adjustments with as little as a 4% change in the price of gas based on a 10-day rolling average.

The city of Houston said its calculations showed how the price-to-beat adjustment rule could lead to overcharges in a volatile market. On Mar. 15, 2001, the futures price for the January 2002 contract was $5.34/MMbtu, the city said.

Using a 10-day rolling average ending June 18, 2001, resulted in a price of $4.73/MMbtu for the January 2002 contract -- a 11.42% difference. Similarly, the July 2002 contract traded at $4.48 on Mar. 15, 2001. But the 10-day average ending June 18, 2001 yielded a price of $4.01 for the July 2002 contract--a 10.4% difference.

"At price levels of $4/MMbtu a 4% increase is only 16¢/MMbtu," the city said its filing. "This volatile market is likely to present frequent instances of 4% changes in the averaged 10-day rolling price."