Low gas prices reduce consumer costs at Southeast utilities

By Kristi E. Swartz | 09/22/2015 07:11 AM EDT

Once clinging to its coal fleet, Southern Co.’s Georgia Power Co. has said a forced move to natural gas would drive up prices for its customers. Now the utility touts its transformation away from a predominantly coal-based utility to one with a more diverse fleet, largely because it just asked utility regulators for permission to reduce what customers are paying for fuel by 11 percent.

Once clinging to its coal fleet, Southern Co.’s Georgia Power Co. has said a forced move to natural gas would drive up prices for its customers.

Now the utility touts its transformation away from a predominantly coal-based utility to one with a more diverse fleet, largely because it just asked utility regulators for permission to reduce what customers are paying for fuel by 11 percent.

"Due to proactive planning and a commitment to a diverse fuel mix, the company is able to take advantage of lower natural gas prices," Georgia Power spokesman John Kraft said.


Utilities do not profit from fuel; any increase or decrease is passed through directly to customers. For Georgia Power’s customers, the proposed $3-$4 monthly drop is good news to offset gradual increases for the utility’s nuclear expansion project.

"We are pleased anytime that we can pass along lower fuel costs to customers," Kraft said.

As natural gas prices continue to fall, utilities are lining up in front of regulators saying they can reduce what their customers pay for fuel each month. All four of Florida’s investor-owned utilities have filed for fuel rate decreases because of lower natural gas prices. The federally owned Tennessee Valley Authority said its fuel costs have averaged around 2 cents a kilowatt-hour for most of 2015, largely for the same reason.

Besides natural gas prices being low, utilities are using more of it as many begin to transition away from coal toward cleaner sources of electricity to comply with federal environmental rules.

"It’s either that, or what else. Renewables," said Paul Patterson, a utility analyst with Glenrock Associates Inc.

One notable example of that transformation comes from another Southern Co. utility. Florida’s Gulf Power Co., which serves the Panhandle, has cut its coal use in almost half from 76 percent in 2008 to 40 percent now.

The company’s natural gas consumption has more than doubled from 24 percent in 2008 to 60 percent now.

"There has been a significant shift away from coal to natural gas as natural-gas-fired generation has become less expensive to operate," said company spokesman Rick DelaHaya.

Nationwide, electric utilities — particularly ones that relied mostly on coal — have said shutting down coal plants or equipping them with pollution controls would be expensive. What’s more, a sharp transformation to natural gas without the infrastructure to support it would drive up prices, they said.

Electric companies have used both arguments against federal environmental rules such as U.S. EPA’s Clean Power Plan, which targets carbon emissions at existing power plants.

Christi Tezak, managing partner at ClearView Energy Partners, said the argument to keep at least some coal is more about basic grid reliability. EPA did not assign any value to coal, even in regard to fuel security, which frustrated coal users, she said.

"The operators are saying, ‘I’d rather have some coal in my portfolio so, if all else fails, I can run to that to keep the lights on,’" she said. "Reasonable people have reasonable concerns, so they are cautious of what they said is an overreliance of natural gas to the exclusion of coal."

Tezak said she’s detected that concern coming from Southeast utility regulators.

"I think one of the things utilities want regulators to be cognizant of is the benefits of fuel diversity," she said.

One example of that is Georgia, which is adding nuclear to its fleet as well as solar, wind and biomass in incremental amounts.

"The fuel diversity message is one that’s validated by what we have, where we’ve been and where we’re going to be," said Georgia Public Service Commissioner Stan Wise. "Fortunately with the diversity of fuel and even with using more and more natural gas to generate electricity, the company is able to make this filing."

Risky business

Currently low natural gas prices could lead the PSC to push for more fuel hedging.

Wise said hedging is risky because there’s no guarantee. But he sees advantages.

"I think you have to acknowledge going in there are risks if you go the wrong way," he said in an interview with EnergyWire.

That has happened in Florida, which started a hedging program years ago.

Florida’s investor-owned utilities have been participating in hedging programs since 2002. Figures from the Office of Public Counsel show that’s led to a cumulative total loss of about $6 billion.

The losses have been greater at two of the regulated utilities that have heavily relied on natural gas for years: Florida Power & Light Co. and Duke Energy Florida.

The losses largely have to do with sharply falling natural gas prices. Estimates on customer growth and electricity sales also may be a factor, but the agency hasn’t dug deeply into that, said Charles Rehwinkel, an attorney with Florida’s Office of Public Counsel, which represents consumers in utility matters.

"They say it’s not designed to generate savings. Over the long haul, it’s supposed to level out," Rewhinkel said. "You win some, you lose some. We’ve been losing a lot."

Rewhinkel said his office has reached the point of "enough is enough," he said.

"We just think the need for hedging is not as palatable as it was compared with a time that fuel prices — natural gas prices — were as volatile," he said. "Volatility has left the market, and you just don’t have the wild price spikes that they had."

The utilities argue fuel hedging locks in prices and reduces uncertainty in future fuel costs. But hedging doesn’t get rid of all of the volatility, particularly when it comes to natural gas, which is the most subject to wild price swings compared with other sources of electricity.

Rewhinkel acknowledges the utilities’ argument of price certainty, especially with large, industrial customers that use significantly more electricity than homeowners or businesses.

"But they are doing it with customer money, so they are agnostic about it. It doesn’t come out of their hide," he said.

FPL said OPC is targeting natural gas only, leaving out other parts of the utility’s hedging program. This ignores some of the savings that have happened in other areas, FPL spokeswoman Sarah Gatewood said.

Every day FPL buys a small part of its future fuel at market prices, but it does not hedge all of its fuel in advance, Gatewood said.

"Leaving a portion of the projected natural gas needs unhedged allows customers the flexibility to benefit from lower natural gas prices," she said.

Mixed results

The gains and losses among the four investor-owned utilities vary because each one has a different generating mix. The companies also don’t hedge the entire natural gas supply.

Duke Energy Florida argues the results from hedging are in line with what’s expected because of natural gas prices at or near a historic low. Future supply and demand issues could make them go up in the future.

"DEF cannot predict what future prices will be, but with its current hedging activities, DEF customers would be partially protected from rises in fuel prices over time," said Suzanne Grant, a Duke spokeswoman.

"Because of the risk mitigation benefits, specifically concerning natural gas, which makes up the largest portion of Florida’s fuel portfolio, we believe hedging — a standard practice in the utility industry across the nation — continues to be a prudent course of action," she said.

Gulf Power is the smallest of Florida’s IOUs. This means even with its sharp swing to natural gas, the utility still has fewer natural gas plants in its fleet compared with the others. This is one of the reasons Gulf’s hedging losses were not as severe, DelaHaya said.

TECO Energy Inc.’s Tampa Electric utility stands behind its 50-50 coal-gas mix, arguing that until recently natural gas prices have been higher than coal in the winter.

Florida gets the majority of its fuel from natural gas, but as a peninsula, the state has few options on how to get it. FPL and Duke Energy Florida consider the proposed Sabal Trail pipeline as one way to handle that situation.

The pipeline would start in Alabama and run through Georgia, garnering strong opposition from landowners and others there. Florida’s utilities argue they will need more options to get natural gas into the state as demand increases, however.

FPL also has turned to investing in shale gas operations in the Midwest. The utility is partnering with PetroQuest Energy Inc. to develop up to 38 natural gas production wells in Oklahoma’s Woodford shale.

The project is expected to pay for itself and generate an additional $50 million to $100 million in net fuel savings for FPL customers. A recent filing with the PSC showed savings would come in around $49.2 million, drawing additional criticism from Florida’s public counsel.

Gatewood said the company gave a range of estimated savings based on several factors, including natural gas prices at the time. Lower natural gas prices have reduced those savings, but the new amount of 49.2 million is well within that projected range, she said.