Fixed-rate gas program raises questions

By Scott Sloan

HERALD-LEADER BUSINESS WRITER

When natural gas prices go up, your bill doesn't. Sounds like a homeowner's dream.

But when prices go down, your bill doesn't.

With natural gas prices falling dramatically nationwide, Central Kentucky residents who are enrolled in the Columbia Gas of Kentucky Customer Choice program, which allows them to buy gas from other companies that offer fixed-rate long-term contracts, have found that Columbia's prices are now cheaper than some of the contracts they once signed hoping to lock in cheap fuel prices.

It's a situation that has raised questions on the wisdom of locking in prices in short-term and long-term contracts over what is generally a highly volatile commodity.

Under the Choice program, customers can buy from MXenergy or IGS Energy.

MXenergy, as of Friday, offered residential customers a rate of $12.30 per Mcf, or thousand cubic feet, if they sign a one-year contract. A three-year contract is offered at $12.80 per Mcf. The average Columbia customer uses about 96 Mcf annually, said spokeswoman Lisa Smith, though she noted that usage varies widely depending on the energy efficiency of a home.

IGS Energy offers rates of $9.29 per Mcf through the end of October, then $11.69 per Mcf through March 2007.

Except for IGS Energy's October rate, all the rates are higher than the $10.0239 per Mcf now charged by Columbia.

That price represents Columbia's expected gas cost through November. If the company pays more for its gas, that cost is passed on to customers through an adjustment.

An adjustment actually has reduced the rate now charged to Columbia customers, who have been with the company for the past year, to $8.3670 because Columbia overestimated its past gas costs.

The costs are estimated each quarter. The next forecast will be filed in November.

If Columbia's rates stay consistent, savings by typical customers could approach $100 or more over the winter heating season compared to the gas marketers' charges.

But a listing of rates does not provide a context to the industry, a context that Lexington resident Mike Agin said he wished had been available earlier this year when he wanted to make an informed decision about whether to join the program.

Agin signed a one-year contract with IGS Energy in February, agreeing to pay $14.49 per Mcf.

A month before he signed the contract, he was paying $15.35 at Columbia, he said.

"If this Choice program is actually a choice, we need a lot more information as consumers," Agin said, noting he found very little information readily available about trends in natural gas pricing.

"I don't feel comfortable that I have the knowledge of the industry to make a correct decision."

Some of the confusion of the program, according to customers who discussed their experiences with the Herald-Leader, stemmed from a move early on by the marketers to promise rates cheaper than Columbia's.

A strategy shift

When the Customer Choice program started in 2000, IGS Energy promised gas that cost 10 percent less than Columbia's. But that price-based marketing strategy evolved into an emphasis on price security as market prices became more volatile, said Vice President Doug Austin.

MXenergy's chief executive officer echoed Austin's comment.

"We don't guarantee price savings ... that would be misleading. What we do guarantee is price protection," said Jeffrey Mayer.

Historically, companies like MXenergy bought natural gas in the long term, taking advantage of lower prices as short-term natural gas prices tended to be higher.

But a mild winter last year left the supply of natural gas high, with 11 percent more gas in storage than the average for the previous five years, the U.S. Energy Department's Energy Information Administration reported this month.

Ample supply, coupled with expectations of a warmer-than-average winter, has the agency forecasting that natural gas-heated households will spend an average of $826 over the winter, down more than 12 percent from last year.

Fuel costs are expected to average $12.23 per Mcf for winter -- October to the end of March -- compared to $14.64 per Mcf last winter.

MXenergy's Mayer contends, though, that natural gas rates are more likely to increase going forward, as the excess supply will be burned off if the United States has a normal winter or if additional power generation uses up more natural gas.

He pointed to an increase in the spot and futures market price of natural gas over the last week as an indication of a general rise. The Energy Information Administration, in its weekly report, attributed the spot market increases to utilities buying up those supplies rather than dipping into stored gas before the onset of heating season.

An uncertain future

Beyond temperatures, though, is the great unknown. Mayer and others note that the future could bring colder temperatures or hurricanes such as those that crippled natural gas production and led to high prices last year.

Paying more now to reduce future uncertainty can be valuable to certain customers, said Ken Troske, director of the Center for Business and Economic Research at the University of Kentucky.

Businesses can use the fixed-price contracts to better budget their costs going forward. And consumers on fixed incomes could benefit as well, he said.

Choice program customer Tom Eul of Lexington said he appreciates the peace of mind.

Eul said he's been with IGS Energy for three years and saved at least $200 last year by locking in lower rates.

"You just never know what's going to happen. If you don't try to hedge your bets a little bit, you could find yourself in a world of hurt," he said.

Troske did note, though, that if something in the market has fundamentally changed, "you always want to re-evaluate it."

If Choice program customers decide to return to Columbia Gas, they can exit their contracts.

In the terms and conditions listed online, MXenergy says it charges customers $50 to exit early. IGS Energy says consumers must give it 30 days notice in writing.

Enrollment in the program has declined dramatically in recent years.

At its peak in January 2002, more than 52,000 customers were enrolled. As of October, only 29,773 of the 138,000 eligible Columbia customers were in the program, said Columbia's Smith.

That general decline in participation is also occurring nationwide; the Energy Information Administration reported enrollment in Choice programs has dropped each of the last two years. The EIA attributed the drop to volatile prices that "apparently reduced interest and confidence in marketer pricing options."

Still, Columbia's 21 percent participation rate is greater than the 11 percent rate nationwide as of last December, according to the EIA.

Mayer said the appeal of the Choice programs remains high, noting his company has received more calls in recent weeks from potential customers.