Utilities and Manufacturing & Technology

New Citizens chief faces tough crowd: High gas prices, cranky industrial customers await Lykins

October 3, 2005

For seven days each July, Carey Lykins hikes a leg over his Trek touring bike in hopes of conquering Iowa. The [Des Moines] Register's Annual Great Bicycle Ride Across Iowa is a grueling 471 miles between the Missouri and the Mississippi Rivers.

"It can be brutally hot, but it's a real adventure," said the 53-year-old Lykins.

The same could be said for the tour Lykins began Oct. 1 as president and CEO of Citizens Gas & Coke Utility. The 32-year Citizens employee who began as a pipe-fitter's helper replaces retiring CEO David Griffiths.

Lykins takes the corporate hot seat while warning customers of substantially higher gas bills this winter. Lykins also must ease heightened tensions between locally based Citizens and some of its biggest industrial customers in Marion County.

"It's going to be a difficult year, no doubt about it."

Last month, the industrials prevailed against Citizens in two cases before the Indiana Utility Regulatory Commission in which Citizens proposed hiking charges. They argued that Citizens is putting the economic interests of its unregulated affiliates, such as gas marketer ProLiance Energy, ahead of customers.

"I think it's going to be a real challenge for him going forward to find the proper balance," said Todd Richardson, an attorney at Lewis & Kappes representing Indiana Industrial Energy Consumers, which includes Detroit-based General Motors Corp. and London-based Rolls-Royce. "We feel we have to be quite vigilant."

Pricing pressures

But what would be the thermonuclear of hot seats for Lykins and Citizens is if low-income customers freeze this winter as natural gas prices soar.

Lykins, who resembles a bespectacled version of racing's Bobby Rahal, said short-term job No. 1 is "to get the word out to customers that, 'We're not kidding; energy is going to be expensive.'

"Probably the biggest thing is [for customers] to sign up for our budget plan," Lykins said.

Lately, his people have been meeting with Gov. Mitch Daniels' people about whether there might be some state assistance that could mitigate the sting for low-income customers, in addition to the utility's existing low-income programs.

Lykins said Citizens tried to blunt the impact of higher gas prices by purchasing gas at fixed prices earlier in the year. Lately, the price of gas per dekatherm-an amount of energy equivalent to 1 million Btu-has been around $12 on the New York Mercantile Exchange.

Citizens bought gas earlier for about $9 a dekatherm, which should save $94 million. For the average residential heating customer, that should translate into a savings of $255 between now and March, or roughly 25 percent.

By contrast, prices in September 2004 were $4.86 per dekatherm. Blame the price explosion on the rising demand for gas by industry and by electric utilities, and two recent hurricanes.

Lykins won't say how much more he expects gas to cost this winter until the utility releases its seasonal forecast Oct. 12.

If high natural gas prices weren't enough, Lykins takes the helm as Citizens seeks to boost its gas delivery fee to customers, a separate line on bills on top of the actual price of gas. Citizens hasn't raised the delivery fee in 14 years.

The proposed 9.6-percent increase would boost Citizens' $352 million operating revenue another $38.5 million. The average residential customer would pay $89 more a year. But the industrial customers group estimates big customers collectively could pay $5 million more per year.

Citizens' filing with the IURC also would remove the connection between gas sales volume and the recovery of its fixed operating costs. Rates could be adjusted up or down to ensure Citizens recovers fixed costs regardless of fluctuations in gas usage during a particular year, Lykins said.

As it stands, Citizens has little incentive to encourage customers to conserve gas because the less gas used, the less Citizens collects toward its fixed operating costs.

One of Lykins' lobbying points will be that, if the decoupling is approved by the commission, Citizens could triple the spending on energy conservation to $1.5 million from around $600,000 today. "Then we can actively put some money behind conservation."

Architect of diversification

The city gas utility, a public charitable trust that has no shareholders in the traditional sense, has diversified over the last two decades, with Lykins as one of the key architects.

Citizens, he recently testified in an IURC hearing, had limited growth potential in Marion County, where it serves 266,000 customers.

"We had gas rates that were set to provide the funds to operate the business at a point in time, but we had no residual income from other sources, had no way to raise money from other sources except ratepayers and bondholders."

One of the solutions to diversifying revenue streams was to create ProLiance, a marketing firm that sells gas to manufacturers in 18 Midwestern and Southeastern states and to utilities, including Citizens.

Citizens owns roughly half of Pro-Liance. Evansville utility company Vectren Corp. owns the rest.

Citizen's original investment in Pro-Liance was $500,000; today, its equity stake is worth $50 million to $60 million, Lykins estimates.

Lately, industrial customers have been taking a bead on ProLiance and on another Citizens affiliate, Citizens Thermal, which generates steam used by downtown buildings for heating and cooling.

Irate industrials

Industrials prevailed in two recent cases involving Citizens subsidiaries. In one, the customers complained that Citizens was subsidizing ProLiance, citing a 2003 case in which the marketing firm borrowed gas from Citizens to sell to other buyers.

The IURC said there was no justification for an exclusive and preferential gas lending program to affiliate ProLiance. The IURC ordered a credit to gas customers of $400,000 more than Citizens had planned to shell out, as a windfall from the gas swap.

Citizens also lost a round before the commission last month involving its Citizens Thermal. Industrials balked at a proposed increase in the price of steam. The price would have risen because another Citizens affiliate-its east-side coke manufacturing plant-wanted to jack up the price of coke gas it supplied to Thermal.

Citizens' unregulated entities "create a rather fascinating regulatory puzzle the commission is sorting through with the last two orders," said Richardson, the attorney for industrial customers.

Lykins said misperceptions still abound about ProLiance and other unregulated arms of Citizens. He recently called for a meeting with industrial interests to help clear up the confusion.

"It's become a lot more contentious than I would like," he said.

Richardson called Lykins "a bright, approachable person. We are hopeful he's someone we are able to work with."

A jarring start

Lykins has had to learn to play well with Citizens' diverse constituencies, from customers to regulators. When he started at the company in the early 1970s, he had to please pipe fitters fond of playing tricks on a college-bound boy. One of them handed him a jackhammer but neglected to mention that he should hold on loosely if he didn't want to be spitting out teeth.

Lykins has spent the last several months trying to make sure employees work well with one another and with customers. The utility has been emphasizing diversity efforts, both in trying to foster advancement within the company and also in expanding opportunities with minority suppliers.

Providing better career opportunities for all employees pays dividends in customer satisfaction, Lykins said. Citizens last year won first place in a J.D. Power survey for customer satisfaction among Midwest utilities.
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