Utilities

Citizens drops plan to use synthetic gas: Indianapolis utility says it can tap other suppliers and pay favorable prices

March 10, 2008

Citizens Gas has closed the valve on plans to buy synthetic natural gas from a $1.5 billion coal gasification plant slated for southwestern Indiana, leaving two other Indiana utilities as the initial customers.

The Indianapolis gas utility attributed the pullout to the diversification of its gas supply since the Indiana Gasification LLC project was announced in October 2006.

Citizens also signaled it would look at buying more supply through a gas purchasing authority it and two other municipal utilities created last year to obtain natural gas at below-market prices.

Those familiar with the gasification project said Citizens' pullout won't jeopardize what they said will be the nation's first plant to make pipeline-quality gas from high-sulfur Eastern coal.

Citizens planned to buy up to 3 billion cubic feet a year, but that is just a sliver of the 40 bcf of synthetic gas the three utilities were to buy.

The other utilities are Merrillvillebased Northern Indiana Public Service Co. and Evansville-based Vectren Corp., which serves central and southern Indiana gas customers.

Citizens, with 265,000 customers in Marion County, had planned to buy up to 10 percent of its gas annually from Indiana Gasification.

Citizens' withdrawal is not problematic because it hadn't made any investment related to the synthetic gas project, said utility spokesman Dan Considine.

Indiana Gasification may file utility supply contracts with the Indiana Utility Regulatory Commission within a month, said an insider.

When the gasification plant was announced in 2006, it was hailed as a boon to the Indiana coal industry and as a discount source of gas to utilities.

Indiana Gasification proposed that utilities would be able to buy its synthetic gas at $6.10 per 1 million BTUs for the first 15 years. At the time, gas futures traded at just over $7; today, it's closer to $9.50.

But Citizens' interest has cooled over the last year. The opening of the Heartland Pipeline in southwestern Indiana, a project of Citizens and affiliate ProLiance Energy, has given it access to natural gas from Canada and from Western states, at an annual savings of $3 million.

And last year, Citizens, along with municipal utilities in Batesville and Lapel, formed the Indiana Municipal Gas Purchasing Authority. Recent changes in federal Treasury and tax codes allow municipal utilities to make long-term gas purchases by issuing tax-exempt bonds.

Citizens' $300 million pre-paid gas purchase is at a discount to market of 44 cents per dekatherm over the next 15 years.

"In this case, at a $24 million savings," Considine said.

"As the synthetic natural gas project evolved, the price structure they were quoting became less certain," he said. "The pre-paid program is giving us a guaranteed savings."

In general, gasification has had "just too many unknowns," said Dave Menzer, utility coordinator at Citizens Action Coalition.

The utility watchdog group is appealing the IURC's approval of another gasification project in the state-Duke Energy's $2 billion coal gasification electric generating plant scheduled to open in Edwardsport in 2012. That plant will boost Duke electric rates an average of 16 percent by 2012.

NIPSCO's proposed 30-year contract to buy synthetic gas from Indiana Gasification to generate electricity could leave ratepayers on the hook for a long time.

"Our people have grave concerns the price paid for syngas will not compare well to the price for natural gas," said Jack Wickes, an attorney at Lewis & Kappes representing industrial electric users.

Indiana Gasification's backers argue that the plant will mitigate volatility common to the natural gas market.

Futures prices and forecasts suggest that natural-gas market prices will be higher "for most, if not all, of the contract period," William Rosenberg, president of E3 Gasification LLC, one of the investors in the plant, told the IURC.
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