Utilities and Technology

Plant to be a real gas for price stability?: Utilities betting gasification will ease volatility

December 4, 2006

Two gas utilities serving central Indiana say they want to buy synthetic gas from a proposed coal gasification plant downstate to provide a hedge against price volatility.

Citizens Gas & Coke Utility, which serves 266,000 Marion County customers, plans to buy up to 3 billion cubic feet of gas a year from Indiana Gasification LLC. The amount is equivalent to about 10 percent of Citizens' annual demand for natural gas.

Meanwhile, Evansville-based Vectren Energy Delivery of Indiana, which has 550,000 customers in central and southern Indiana, proposes buying 12 billion cubic feet of synthetic gas. That's about 20 percent of its annual demand.

"You're not subject to the major supply disruptions" of hurricanes, said Citizens spokesman Dan Considine. "It would be one step we could take to help alleviate volatility ... because it's a secure supply."

At one point last year, after Hurricane Katrina disrupted supplies from the Gulf of Mexico, natural gas futures trading on the New York Mercantile Exchange soared to $14 from $8.

"Natural gas volatility on the national scale has been incredibly painful," said Vectren Corp. spokesman and lobbyist Mike Roeder.

Indiana Gasification is majority-owned by New York-based Leucadia National Corp., an investment firm whose $5 billion in holdings range from wineries to telecommunications firms.

The plant is also to be built with debt secured by a federal loan guaranty.

Major details about the plant, including its exact location, haven't yet been filed with the Indiana Utility Regulatory Commission.

But according to its proposal filed with the IURC, Indiana Gasification proposes selling gas to the utilities starting at about $6.10 per 1 million BTUs, during the first 15 years.

Lately, gas futures have been just over $7.

Utilities have been trying to broaden their supplies. This month, for example, Citizens will begin receiving cheaper gas from the West and Canada via its new Heartland Gas Pipeline, in western Indiana.

Gas utilities are also mindful of regulators' pressure to diversify their supplies.

In 2001, the IURC rejected a request by Vectren's Indiana Gas unit to recover nearly $4 million from customers to cover its cost of rising gas prices.

The utility's "planning and procurement process was inadequate to address the extreme volatility and price increases present in the gas supply market," the IURC said at the time.

It added that the rejection was to send "a strong message to natural gas companies that purchasing practices will be closely examined."

"What we call it is 'hindsight review,'" Roeder said.

Vectren has other incentives for supporting the plant. The utility owns mines in Pike, Warrick and Knox counties that could supply coal to the facility.

Vectren also might find the plant useful for its electricity generation division. Although it hasn't committed to buying its gas for such a use, Vectren estimates it will need an additional 150 megawatts after 2010.

Merrillville-based Northern Indiana Public Service Co. has agreed to buy gas from Indiana Gasification for generating electricity and for its gas distribution utility-a combined total of 25 billion cubic feet per year.

The $1.5 billion gasification plant slated for southwestern Indiana includes a 134-megawatt capacity steam turbine electricgenerating unit. Use of synthetic gas to make electricity is a way to level demand for gas during summer months.

One potentially sticky issue is that Indiana Gasification has asked the IURC to decline jurisdiction over the company and over construction, ownership and operation-saying it would be "unnecessary and would be a waste of the commission's resources."

Meanwhile, Vectren and North Carolina-based Duke Energy-formerly the Cinergy operations in Indiana-have asked the commission for a certificate to build a 630-megawatt coal gasification power plant at Duke's existing Edwardsport plant in Knox County.

A coalition of public interest groups, including Citizens Action Coalition, has asked regulators to reject the plant, saying the technology is unproven and cheaper alternatives exist.

The Knox County plant also would increase demand for Indiana's high-sulfur coal, which is costly to use in its raw state because plants that burn it need extensive pollution controls.
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