High rates are burned in for Columbia Gas
users

Toledo Blade
February 5, 2006
By Jon Chavez

Metro Toledo homeowners drool when they look across the Michigan border and see people paying as much as 33 percent less to heat their homes.

Even in northwest Ohio, among the traditional natural gas utilities, Columbia Gas of Ohio tends to be among the higher priced.

Although natural gas prices may stabilize, and perhaps even dip slightly,
officials of metro Toledo's most prominent heating fuel supplier state bluntly
that their prices will never be as low as Michigan's.

The reason: Columbia Gas is unable to tap cheaper natural gas supplies and
pay to transmit the fuel to northwest Ohio for less than it charges now, and
acquiring more storage to help ease the winter price boost also is too costly.

"Something has to change," said Rebecca Shepherd, of south Toledo, who
got a January heating bill of $327, almost double from a year ago. She asks
why the gas utility can't renegotiate its rates with its suppliers.

But Columbia Gas officials said that is not possible, given demand. They and
industry experts said little can be done to lower prices in the short-term.

Long-term prospects aren't much better, although some experts contend that
several moves eventually could prompt a slight drop in prices, but nowhere
near the 30 cents or 40 cents per 100 cubic feet of the late 1990s. Columbia
Gas today charges $1.28.

"Have we looked at alternatives? Absolutely," said Mike Anderson, director of
supply planning for Columbia Gas. He is the firm's guru on finding and
transmitting gas supplies for customers and on determining whether
additional, affordable storage facilities can be found.

Consumers Energy in Michigan charged 90 cents per 100 cubic feet last
month, when Columbia Gas charged $1.36. The Michigan utility gets 20
percent of its gas from Canada, which sells gas priced about 15 cents
cheaper than Gulf Coast suppliers who supply 90 percent of the gas sold by
Columbia Gas.

The utility, which has 1.4 million customers in Ohio and is part of NiSource
Inc. of Maryland, with 3.8 million gas customers in 32 states, is expected by
state regulators to buy lower-priced supplies.

Wyoming, and even Canada, but paying to transport it to northwest Ohio
would send its price to customers higher than those for current supplies,
experts said.

"Gas may be cheaper at the well in Alberta, Canada, but by the time it gets to
the market area, the cost is comparable to the gas coming from other areas,"
he said.

Ohio regulators require independent audits of Columbia Gas every two years,
but the last one indicated the company was supposed to consider using
Canadian or other supplies.

Customers of the area's biggest natural gas provider can select alternative
suppliers, but each of the nine other marketers currently has fixed rates
higher than Columbia Gas charges.

Today's customer prices are set largely on what Columbia Gas and others
did years ago.

The utility began in 1926 through mergers of several firms, built its Ohio pipe
system in the 1930s, and developed its underground gas storage fields— in
Ohio, West Virginia, and Pennsylvania— in the 1950s.

The Federal Energy Regulatory Commission and its predecessor exercised
control over where pipelines could go until 1978. Builders had to sign up long-term
customers beforehand to get federal approval to have the pipelines cross state lines.

Those pipelines, called legacy assets in the industry, are booked long-term
by a variety of utilities to move specified volumes each day. Competition to
use pipelines has become fierce, which means Columbia Gas sometimes has
to pay higher prices to renew its capacity, or lose it, possibly for good, to a
competitor, industry experts said.

Bidders for that capacity are not just other natural gas marketers, but also a
growing number of companies that run natural-gas-fueled standby electric
plants nationwide. The higher costs utilities pay for pipeline use are passed
on to customers.

The bulk of Columbia Gas' supplies move from eastern Texas and Louisiana
through pipelines of the Tennessee Gas Co. and of its sister company, the
Columbia Gulf Transmission Co.

It gets 7 percent of its supplies through the Panhandle Eastern pipeline from
Texas to Ohio, supplies which are cheaper than from its other Gulf Coast
suppliers. That pipeline connects to the Columbia Gas system on the west
side of the river in Maumee.

Asked why Columbia Gas doesn't buy more of that cheaper gas, Mr.
Anderson said the company cannot because the connection flows directly
into Columbia Gas' Toledo system, which has a smaller-sized pipe. That is a
bottleneck to adding gas volume and, Mr. Anderson said, building a larger
pipeline would be costly.

Similarly, Columbia Gas has considered buying cheaper natural gas from
Canada via a pipeline in the Chicago area and has studied cheaper supplies
available from Wyoming, where an investor group is proposing a pipeline to
eastern Ohio.

But so far, Mr. Anderson and other experts said, each of those ventures likely
would mean a higher price than Columbia Gas now charges.

If the Wyoming pipeline is completed, however, the additional gas available in
Ohio might help bring down overall fuel prices, benefitting all customers,
experts said.

Another option to new supply sources is for Columbia Gas to purchase bulk
quantities when prices are traditionally cheaper, in the spring or summer, and
store it until it is needed in the peak demand time in the winter.

The Blade found last fall that Columbia Gas tends to buy more natural gas on
the wholesale spot market than smaller northwest Ohio utilities.

But increasing storage is costly, experts agreed. Columbia Gas' storage sites
can hold about 55 days' worth of gas. Its underground sites in Ohio are made
of porous sandstone, which does not hold gas well or allow it to be easily
extracted.

As a result, the utility must add gas called base gas, which is never extracted,
to allow it to more easily remove stored gas to send to customers. That base
gas also must be paid for, as well as storage fees for the usable gas.

Those factors give Michigan an advantage. Its storage sites are mainly
limestone, which can hold about 90 days' worth of gas that is more easily
extracted. That helps the state's natural gas utilities keep costs lower for customers.

Michigan stored more than 1 billion cubic feet of natural gas in 2003, nearly twice what Ohio had in storage, according to the U.S. Energy Information
Administration. But Jeff Holyfield, a spokesman for Consumers Energy, in
Jackson, Mich., said utilities don't want to store too much gas because state
regulators may not allow them to recoup all of the storage costs from
customers.

Columbia Gas has studied whether it can lease storage space elsewhere, Mr.
Anderson said.

But most good-quality storage sites were developed in the 1950s and are
fully used, experts said. Newer sites are created when old gas fields are used
up, but to pump in base gas at today's prices, plus pay storage fees, means
they would cost more than Columbia Gas now pays, he said.

The bottom line, industry experts said, is that Columbia Gas can do little to
lower customer gas costs in the short term.

Still, Columbia Gas isn't hurting financially. It had a profit of $138 million on
operating revenues of $1.5 billion in 2004, the latest year available, according
to statements filed with the Public Utilities Commission of Ohio.

The parent company of Columbia Gas also is relatively healthy. NiSource
said it had a nearly $1 billion operating profit last year, about three-quarters
of which came from its gas distribution, transmission, and storage operations.
Its net profit was $307 million.

Regulators, however, typically don't require utilities to spend their own money
to add or replace pipelines; such work usually is recouped through higher
rates charged to customers.

There are some prospects for better prices on natural gas.

One is the new Wyoming pipeline, called the Rockies Express, which will
transport gas drilled from the Rocky Mountains that is significantly cheaper
than other sources.

Also, gas producers in the Southwest, including west Texas and New Mexico,
are proposing a pipeline heading east to connect with Panhandle Eastern's
terminal in East Texas. That gas likely will be cheaper than Columbia Gas'
supplies.

Mr. Anderson said his company won't book capacity on those lines now
because it wouldn't be cheaper once it is transported to Ohio. But these
added supplies, he said, could drive down prices nationwide, including those
Columbia Gas buys.

Another possibility is more liquefied natural gas, supplies shipped in a liquid
form from Asia and Africa.

New tankers can hold 3 billion cubic feet of natural gas. Experts said such
supplies are on the increase. But James Halloran, an energy analyst with
National City Private Client Group in Cleveland, said the proposed pipelines
and liquefied natural gas will at best stem higher prices overall for natural
gas.

Robert Chilton, an energy consultant at Gabel Associates, in Highland, N.J.,
cautioned that the days of cheap natural gas are gone. "You have
competition in the summertime now between electricity and those storing gas
for the winter," he said. "The summer prices are almost as high as the winter
prices now."