Gas Utility Nudges Rate Up Wholesale Instability Cited

April 12, 2002
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A rise in wholesale costs means slightly higher monthly natural gas bills for residents and businesses in the Grand Haven-Spring Lake area.

After implementing two rate decreases earlier this year that collectively totaled more than 40 percent, Aquila Inc. – formerly known as Michigan Gas Utilities – put a 6 percent rate increase into effect on April 1. The increase took Aquila's natural gas rate from $3.93 per thousand cubic feet (Mcf) to $4.17 per Mcf.

Aquila has more than 156,000 residential and commercial customers in Michigan, about 37,500 of them in northwest Ottawa County, Allegan County and a small portion of southern Muskegon County.

The rate increase stems a sharp rise of more than 50 percent in wholesale rates since the end of January, said Paul Livernois, community relations director for the Monroe-base Aquila Inc. While the company is hopeful the trend will reverse itself, Livernois could not rule out anther retail rate increase if the wholesale market does not stabilize.

"We do not want to increase it anymore this year, but if the wholesale market doesn't settle down we may have to. But that would be a last resort," Livernois said.

In its current rate plan approved by the Michigan Public Service Commission, Aquila is capped at a maximum rate of $4.45 per Mcf. Any retail rate beyond the level the company seeks to implement requires a formal review by state regulators.

State law prohibits gas utilities from charging retail rates any higher than what they lay on the wholesale level.

While it did not bring rates to their pre-Jan. 1 level, the increase is in contrast to recent rate adjustments downward and marked the return of instability to the wholesale natural gas market. Major wholesale price spikes that began in late 2000 in the wake of high demand and short supply pushed retail rates up significantly before abating late last year as demand eased because of the recession and supply increased. At the end of 2001, prior to its two rate cuts in January and March, Aquila was charging customers $6.84 per Mcf.

The rising near-term wholesale prices came as a surprise, given the recent downward trend that was expected to continue through 2002 and push prices below $2 per Mcf.

The U.S. Department of Energy, in its April 8 short-term energy outlook, blamed uncertainties over the U.S. economic recovery, the greater tightening and potential disruption of the world oil market, an increase national in electricity production for gas-fired power plants, and the possible impact on supply due to a decline in exploration since last July.

The department's Energy Information Administration now expects wholesale prices to inch back upward this summer toward an average of $2.50 per Mcf, which compares to an average price of $4.00 per Mcf last year. Wholesale prices, driven the increased industrial demand brought on by a reviving economy and higher crude oil prices, are expected to push upward by 45 cents per Mcf in 2003.

All that points to customers having to get acclimated to the possibility of monthly or quarterly rates adjustments as utility's adjust their retail prices, either upward or downward, to reflect the wholesale market.

"We'd rather stay away from that if at all possible," Livernois said. "It makes it difficult for the customer. To keep it stable would be ideal."

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