In the winter of 1996-97, the story was much the same for utilities across the United States. Index prices for gas hit highs of $4.29/MMBtu in December and $4.12/MMBtu in January, based on the Natural Gas Week composite spot wellhead price. At the same time, residential loads increased because of extreme cold.

Utilities in turn had to raise the price they charge for gas and customers saw red when they received their monthly gas bills. Commissions in a number of states, including Ohio and Illinois, investigated gas purchasing practices.

As local distribution companies (LDCs) prepare for the coming winter, they are taking a number of steps to try to prevent a reoccurrence of last winter's problems.

Many utilities say they plan to make greater use of hedging or try to sign more long-term contracts to minimize the amount of gas they must buy on the spot market. Sources at several of the utilities surveyed note that in the past their state commissions encouraged them to buy more spot gas.

Some utilities report they have contracted for additional storage capacity or at least are making certain that the capacity they have is full heading into cold weather.

As of Oct. 31, according to the American Gas Association's (AGA) most recent storage survey, total U.S. storage was 88% full at 2,807 Bcf -- with about 100 Bcf more in storage than last year. Most significantly, storage in the western consuming region was under 70% full at this time last year, compared with 96% full last week.

Major education efforts are also under way in a number of areas. Utilities are putting notices in bills that gas prices are expected to be high again this winter, based on the futures market. Lobbyists for utilities are explaining the dynamic to state legislatures and utility commissions.

A survey of utilities in areas where prices to consumers went up last winter by Natural Gas Week found wide variations in the levels of concerns, as well as the strategies, of the utilities.

* Perhaps no utility in the nation was hammered more severely by the public reaction to price increases than Public Service Co. of New Mexico (PNM), which was inundated with complaints from consumers after it raised its gas price adjuster to 41.21¢/therm for January, up from an average of 16¢/therm for all of 1996 because of sharp price increases for gas in the region.

This year, PNM has gotten out in front of possible complaints, starting a customer education plan in February to explain that PNM passes along what it pays for gas to consumers and does not make a profit on the commodity. PNM also has sent out advisories warning that projections are New Mexico prices will be high again.

"The spikes last year had a tremendous impact on our customers," said Karin Stengal, spokeswoman for PNM. "We're sharing with customers that gas prices are supposed to be high again this year."

PNM is stressing several "Energywise" options for making higher gas prices easier to take. Under a new "Gas Choice" option, customers contract directly with suppliers for gas. Under the "Reliabill" program, customers pay the same total bill to PNM each month.

PNM also is buying more gas based on long-term contracts, the company said.

* In Denver, Public Service Co. of Colorado (PSC), also fielded complaints after raising its adjuster last winter to reflect unusually high index prices for Rockies gas.

Kurt Haeger, manager of gas supply and planning, said the company has a storage project under way to add storage capacity and help keep prices stable.

"We are also buying a fair amount more of fixed price gas this winter," Haeger said. "It will help but it won't eliminate [price uncertainty]. The only way to eliminate it is to fix everything at a price certain."

* UtiliCorp United Inc., a corporation with utility customers in eight states, is both changing its gas purchase strategies and conducting an information campaign to explain the changes.

"What we're doing in most of our states is instead of relying on spot were going to a lot more storage and fixed-price contracts," said Al Butkus, the company's spokesman.

"It used to be we primarily went spot when gas was plentiful," Butkus noted. "It's our view that demand and supply are becoming more in line. The proverbial gas bubble that's been around for 20 years is disappearing." Butkus said the purpose of the information campaign is to communicate to the

public, regulators and legislators "that we have changed our strategy and why we changed it and to help them understand what we're doing in the

marketplace."

* Western Resources Inc., a company with gas customers in Kansas and Oklahoma, "experienced the same type of reaction that most companies did" when it raised its monthly adjuster last winter to make up for higher prices.

This year, the company plans at least two bill inserts to tell customers "where we predict prices might be going based on the futures market," Bill Eliason, president of the gas service division, said.

As for the company's gas purchasing strategy, "we're doing some things to a greater degree," Eliason said.

"Our storage is completely full right now....We are as full as we can be," he said. "We probably won't participate in any spot or daily gas [purchases] unless prices are advantageous."
 
 

AGA Predicts Some Key Changes

Brian White, director of gas transportation for the AGA, foresees three major trends based on his conversations with gas supply directors at numerous member companies.

First, White expects utilities to use storage differently. Last winter, he noted, many utilities were reluctant to pull gas early based on the lessons learned in the previous year. In 1995-96, many areas were hit by late cold weather that taxed the system heading into the spring.

Last year, in comparison, utilities were more reticent about pulling gas early in the season, but the worst weather hit in December and January.

"We've got more gas in storage, but the main thing you might see is if we get a cold period in November and December utilities will go into storage more than the year before," White predicted. "Last year, you had a lot of people out in the market. I think that contributed to what we saw in November and

December."

Second, White sees more utilities locking in prices through contracts tied to the New York Mercantile Exchange (Nymex), which he sees as also being a force to "moderate some of the volatility."

Third, White expects a growing trend of utilities offering all of their customers the ability to sign on to a fixed price payment plan, which should help lessen consumer complaints.

"The downside [for customers] is if the market crashes you might not participate in the drop as much," he said.

In June, AGA released a policy paper looking at LDC purchasing practices. Among its conclusions:

* A large amount of peak day supply for LDCs -- 40% -- comes from underground storage. About one-fourth of supply from storage comes from facilities owned and operated by the LDC. Most utilities still don't own storage. Another 40% is provided by firm pipeline transportation. Only 2% of peak day purchases consist of purchases from a producer or marketer at the citygate, about the same as the amount from local production.

* Even for peak day purchases of gas, LDCs obtained 55% of their supply through long-term contracts of a year or more. Another 31% are based on contracts running from one month to a year, while 6% are monthly and 7% are daily spot purchases.

* Most long-term gas contracts, 81%, are based on first-of-the-month index prices. Weekly index prices (5%), fixed-multi-month (2%) and daily spot (8%) prices all play a smaller role. For short-term purchases, 41% of contracts are based on a daily spot price and 37% based on the first-of-the-month index price.

--Howard Buskirk