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Podcast: February 2021 natural gas price hike | Otter.ai

Podcast: February 2021 natural gas price hike

Sherman Smith25min

Speaker 1

00:04

In February 2021, it got really cold in Kansas, it was about 15 degrees below zero for more than a week. Natural gas prices shot up in terms of BTUs measurements from $2.54 on February 1 to 622 bucks by February 17. Then as if the market had been manipulated again, it dropped back to $2.46 by the end of the month. Well, the bills for all that are coming due. The Kansas Corporation Commission has decided the extraordinary costs paid by public utility companies for natural gas during that period will be largely covered by residential retail customers, were talking about 622 million spread over two to 10 years, your monthly bill is going up. The KCC is action raised many questions? Where are the investigations into price gouging? Was there a missed opportunity to negotiate a better solution on behalf of consumers? What prevents this from happening again in February of 2023, with the Kansas reflector today to delve into this complex, but meaningful issue is James sicura, an energy and public utility attorney with a keen interest in the work of the KCC. Welcome.

Unknown Speaker

01:11

Thank you. Pleasure to be with you.

Speaker 1

01:13

Thank you for taking the time. Mr. Speaker, I tried to explain a little bit about what was going on in that moment. But with your expertise, maybe we can set the scene a little bit better the stars aligned, so to speak in that period to produce a multi state energy crisis what was going on?

Speaker 2

01:29

Basically, there is an extended cold spell that was really pretty unusual. We have a lot of cold weather in the Midwest. So that's nothing new to us. But the cold smell extended longer than is typically the case, we started to get indications that that was going to be the case around the first week in February. So we had some notice on that. But then it hit and continued basically, we're going to call it from about February 11 to about February the 23rd.

Speaker 1

01:59

And, and so I remember I was able to stay warm in my home. But I think there was some concern about basically blackouts, not just rolling blackouts, but serious blackouts,

Speaker 2

02:10

oh, there was a large concern on that. And the way I put it into context is that we had a natural gas price, what we call the index price, it's a publicly available price on February one of $2.54 on February 12, that had risen to 50, excuse me, $44.78 per unit. And then on February 13, it rose to $329. And then finally, on February 17, it rose to $622. So that period of that 10 days between that I just mentioned to you, the price of natural gas per unit increased about 18,000%. And this is reflective of the public price markers. We had a lot of concern those of us of the business that those markers were to accurately reflecting what the cost of gas should have been. The the price markers are set by basically two groups. One is the Standard and Poor's index price. And the other is the Intercontinental exchange price. On the Standard and Poor's price. The $329 was set on seven trades of 50,000 units, that's compared to about 2.5 BCF units, on a per day delivered, and on the high price de of 622. There were two trades for $16,000.06 16,000 units. So we had an we had a very big concern. This is under 3%. And under 1% Of all the assets moving on the system, we thought it was statistically insignificant and inconclusive. And that why would anybody in the world set a price on 1% of the movements?

Speaker 1

04:04

Right. And so this this price fluctuation, this is extraordinary

Speaker 2

04:07

right is extraordinary, never to have been seen before. And bizarre in that

Speaker 1

04:13

the amount of natural gas surging through the pipelines at criss cross the state of Kansas. The volume was there just like there was before this crisis is

Speaker 2

04:24

the volume stayed the same throughout the crisis, which also cast more doubt on the legitimacy the pricing, because there was 2.5 BCF delivered by the main pipeline, Southern Star pipeline every day through here, there was nobody you could not possibly have gone out and drilled for more gas and brought that on in that period of time, which would justify perhaps some increased price. And if you look at the pipelines around Southern Star panel, Eastern is the most is the closest and deliver sem into Kansas City into Wichita, and that pipeline had prices Typically 20 to 40%, lower than Southern Star. So there were indications throughout this period, that the pricing was not accurate. I don't want to say it was unlawful. But if you're setting prices based on 1% of the trades, you're unlikely to get a legitimate price. And we believe strongly that was the case. And for that matter, I don't know that anybody that I know of believes that this pricing reflected the actual the any kind of supply demand at the time,

Speaker 1

05:33

okay, then that's an important point. People were able to stay warm in this moment. But the pending cost of staying warm has going to be massive. When when you touched upon this, but going back to in that moment, do you have any idea who was making the money? Was it the the natural gas suppliers in there in the middle?

Speaker 2

05:55

Well, we did have some indication of that. In the gas service case at the Kansas Corporation Commission, gas service contended and the Commission agreed that they had $373 million of additional costs for this basically seven day period, and about 75 to 80% of that was paid to four suppliers. The largest supplier was to NASA, which was paid $133 million. The second was the trading company mCherry, which was paid $70 million. The third was Southworth energy, which was 67 million. And the fourth was energy transfer, which is 40 million. So essentially, you didn't have a lot of different people profiting. You had basically four or five, that were profiting to an extraordinary event, extent during this seven day period. And the reason that that was the case was they control the neck gasify?

Speaker 1

06:55

Yeah, I guess the investigation of what was going on here by some authority, the circle of people that you don't want to talk to is relatively small, right. So given that utility companies that service Kansas have what I would just refer to as a built in profit guarantee. They too, would have to be paid to cover these extraordinary expenses, you actually represented hundreds of clients in terms of groups that tried to negotiate some sort of settlement for these extraordinary costs. That was less than the bill that arrived in the mail. You want to explain your role in this?

Speaker 2

07:33

Oh, absolutely. We represented over 500 clients, probably 200 school districts, members of the region's institutions of the state of Kansas, the faith community, Catholic Archdiocese, temples of the Jewish faith, Protestant entities, car dealerships, laundromats any, any that you can almost think of, and that of those 500 clients or more that we represented, not one of them paid the invoice price, we typically were able to negotiate 25% to 50% discounts for those, those clients. And that that was the case because the suppliers and the consumers came together. You know, the suppliers also recognized that they had to do their part here, because these were largely public institutions. I mean, we represented a homeless shelter, which in Kansas City, Missouri, which typically has a natural gas bill of $1,500 per month, and they received a gas bill for about $50,000. So we call the supplier and said, Do you not understand this is a homeless shelter. They're not passing on the cost of gas and goods and good. We were able to, without exception, negotiate beneficial resolutions for all of these clients. And what's importantly is the suppliers and the consumers came together and negotiated new and better service offerings for winners to come. In the case of schools, we were able to negotiate a five year fixed price contract at a very advantageous rate for them. And what's more important is they don't have to do any nomination, or any of that kind of technical issue. They can stick to education, and the suppliers handled all of that. So we feel that's a very good thing that came out of the negotiations, as well as very material discounts in the invoice

Speaker 1

09:35

an obvious question would be okay, so your your business, we'll just call them business interests there. Did some negotiation was there anybody that could have stepped in to negotiate on the behalf of me as a general consumer?

Speaker 2

09:49

Well, I can't speak for anyone else certainly. But the the largest buyers in the market, of course are the public utility companies right Kansas City eservice in Kansas, Spire, Missouri, in in Kansas City, Missouri, Black Hills and Atmos.

Speaker 1

10:07

So they could have perhaps use their influence to negotiate some sort of different resolution in terms of the $622 million bill, we're all gonna have to pay. They might have they might have done that, or is that just not their role?

Speaker 2

10:21

No, they, it seems to me that that was certainly a possibility for them. I think that rather than do that they appear to have made the decision that they would, that they want the legal course to run its play. Because for instance, if the attorney general or a private party like me, we're able to recover damages on behalf of residential users, then those damages would act as an offset to the amounts that are charged to ratepayers right now. So I think they forego would appear that they forgot a negotiation, and instead, put their put their future in the hands of the governmental or private entities that would pursue lawsuits. Well, they

Speaker 1

11:05

turned to the Kansas Corporation Commission, and submitted request for compensation they wanted they wanted to bill customers for the extra amounts that they paid for natural gas. And the three commissioners took the position that wholesale natural gas prices weren't regulated by the commission. So it couldn't delve into whether price gouging occurred. I guess they just assumed it was a market driven issue. Regardless, the KCC is now approved, a long list of claims by utility companies and consumers across the state are going to pay big

Speaker 2

11:36

while the KCC took the position that wholesale natural gas prices are regulated, are no longer regulated, excuse me, and that market manipulation is the exclusive jurisdiction of the Federal Energy Regulatory Commission. I did not agree with that. But the KCC did not rule in my favor on that issue. So the KCC investigation was basically to look at whether or not the company's follow their gas supply plan, which was presented and at least reviewed in detail by the KCC staff prior to the winter. They needed they looked at that issue. They then further looked at whether or not the invoices were as presented and paid. So they looked at that issue as well. But they declined to look at the issue of either market manipulation or to allow me to look into the index pricing issue, which we felt was at the heart of the mistaken or unlawful high prices in the state of Kansas. So at that point, we really were unable to go forward with the investigation at the KCC as we would have liked and we turned our attention instead to private litigation, which we instituted in Crawford County, Kansas. And in that case, the wonderful courageous people of mulberry Kansas refused to pay the extraordinary $300 gas prices to BP energy. And we brought an action therefore, under the Kansas anti profiteering statute. And so far, we have been successful in Crawford County on that issue, that the judge in Crawford County has ruled that individual ratepayers and citizens of mulberry could bring an action for gas prices that exceeded the anti profiteering statute. The Edit profiteering statute is really important in Kansas. It's based on actions subsequent to a declaration of emergency by the governor. The governor declared a natural gas emergency on February the 14th. And under the anti profiteering statute, no supplier is permitted to charge in excess of 25% more than the trading day price prior to the declaration of emergency. So that would reduce the prices that would be permitted under Kansas law, probably by at least 75% during this period of time, which would be a great, great benefit to the residential ratepayers throughout the state. So we're continuing in that regard to prosecute that case. And we encourage others to look at whether or not they could join us throughout the state, and that kind of an action. If you stop and think about it, the Kansas State law was designed precisely for what occurred here will save Kansans hundreds of millions of dollars, millions of dollars and that is is because there is no supply and demand balance and an emergency where people are threatened with freezing to death. The governor recognize that the KCC recognize that the IPCC actually

Speaker 1

15:14

said there's there's a hand here of market manipulation that is beyond our purview. That kind of pointed to the federal government taking a look at it for the Attorney General. Correct. And on that point, the Attorney General Derek Schmidt, he announced inquiry into this issue, but hasn't reported anything meaningful about 20 months. He's running for governor. I wonder why he hasn't made up, you know, standing on the hilltop waving the flag about price gouging?

Speaker 2

15:41

Well, I'm not certainly privy to that investigation. I am somewhat acquainted with the private counsel that they hired. They're very excellent. Counsel. So my my thought would be that they're proceeding a pace with that investigation. I think it is important to note that the remedies available to the Attorney General are somewhat different than to private parties like us. The statute in Kansas provides for recovery of fines and penalties for violation of the anti profiteering act, and also the False Claims Act in Kansas. So I would suspect that that is the focus, as it should be under the law. But those also would yield hundreds of millions of dollars penalties potentially,

Speaker 1

16:25

oh, perhaps it's useful just to have somebody authoritative, declare what happened. And that might lead political people, the Kansas legislature to try to figure out some other better solution. I wonder if we could back up just a minute here. And we've been talking about natural gas utilities and supply. But electric utilities had a role in this cold weather event. And I wondered if you would just touch on that.

Speaker 2

16:50

Absolutely. In the case of evergy, Kansas Central, which would be to peak, Lawrence, Wichita, they are seeking to recover purchase power costs, and natural gas costs, I believe, of about $120 million. And that is basically because during that period of time, they have less available to them than normally their traditional, their traditional generation facilities, when performed as about as projected, but at low rate, coal in the cold weather sometimes freezes up the coal pile. So so they had some problems there. And in the fall back really is natural gas. Natural gas, electric fire generation is a very quick ramp up and you can manage the electric power needs pretty much throughout the region, by natural gas. And natural gas was increasingly expensive at that time. And people like evergy, and some of the other cooperatives in the West, either could not get natural gas, or it was very expensive if they could, which sent the power costs up. And more importantly, in the southwest Power Pool. In Topeka, and Kansas City, I believe we had about six hours or rolling blackouts where we had no electricity, which had never happened before. And one of the things that should come out of this whole whole experience is that we should have all types of failsafe to make sure that we don't have electric blackouts again. And the problem that we're all dealing with, in all honesty, is that the Southwest Power Pool predicted that we had 53,000 megawatts of electric power available to us in the winter, including February 2021. And because of the gas supply failures, they declared a stage three emergency level at 37,000 megawatts with rolling blackouts. So the plan supply did not come through. And there should be extraordinary detailed review of that. Plus failsafe plans for that not to happen in the future

Unknown Speaker

19:16

and southwest power pools of 14 states. Yes, they got growing but

Speaker 2

19:20

southwest Power Pool. You're right currently has 14 states. They recently expanded to Saskatchewan Canada is so much common with the Canadian, right and they're also likely to expand next year to the west. So what started out as the Mocha and Power Pool, which was two states looking after each other will become maybe 20 or 25 states. 1300 Miles searching more than 1500 miles that is correct. There's one thing I ought to mention to on this point. A power pool is just what it says people share resources and in the February period of 2021. Actually, Kansas was producing more power, as I understand that was used by the citizens of the state of Kansas. But because we were in a power pool, we had to share that with others and share the world in blackout as well.

Speaker 1

20:17

We had to be generous, and then also pay for it. So what you're the bottom line, the electric utility part here is the 622 million is about natural gas. extraordinary costs, and the electric utility costs are still that bill still coming in for us.

Speaker 2

20:32

That will, I need to say the the 100 and 20 million is included in the 622. Oh, okay. Sorry, the that the that will be repaid, I believe, starting in April of 23. over a two year period. Okay. So you are correct the residentials in Topeka, and Lawrence of Wichita will have a double dip of added costs, they'll be paying both added gas costs and added electric costs.

Speaker 1

21:01

That raises a question like what are what are gas prices right now? Like?

Speaker 2

21:06

Yeah, that's a really good question. The part of the problem we have in the Midwest is, in my opinion, seven star gas pipeline is a supply poor pipeline. And it also has competitive competitors as to where gas supply goes, this lack of winter supply has caused the price is generally to increase. And I have done an examination, which indicates that this winter's prices will be about 25%, higher than last winters prices. And a similar examination done by the US Energy Information Administration predicts about 27% increase this year compared to last year, what I would say to you is that does not include the added $5 a month. So that'll if you're looking at what your gas price will be this year on a per unit basis, or per monthly basis, compared to last year, you can calculate probably about a 30% increase.

Speaker 1

22:13

You say the $5 that's related to the cold weather snap. That is right. That's correct. All right. Mr. Just occurred, given your expertise. And all of this just can you highlight a few reforms that you might suggest to our friends across the street in the legislature or anybody else?

Speaker 2

22:32

Well, I think the reforms are, are basically two or three in nature. I think that physical storage has become increasingly more valuable. And that it would be good for Kansas to have more gas and storage for these kinds of events in the winter. There's nothing like a physical hedge against an extraordinary circumstance. So I would encourage more gas to be bought ahead at reasonable non emergency prices to be placed into storage. I would also argue that we should have extreme cooperation between electric utilities and gas utilities, they should not be in the market competing with each other for natural gas at a time of emergency that they need that the KCC needs to set everyone down and make sure they're working together. Because when they don't work together, it has a very high probability of increasing the prices for everyone. So that would be the second. The third that I would say is we we this is just a general philosophical basis, the commercial residential faith communities hospitals, that are buying their own natural gas and the market that has worked very well, we need to continue and encourage that. Our studies show that that saves about a third compared to what the regulated utility price is. And that market not only has worked well, but it's working better now that we've come together and and had really better market market responses to customers needs and in the cases of schools and universities and public bodies of all types, reducing the cost of natural gas helps keep the tax burden down and and the expenses down for the critically needed public services.

Speaker 1

24:36

We're gonna have to leave it there Mr. Zucker, James, agora and energy and public utility attorney. Thank you for your time. Thanks for helping us wade through this. My pleasure to be with you. Thank you. Thank you.

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