Vectren Responds to Indiana Gasification
By: Michael C. Fehn
Updated: October 10, 2012
The battle between Vectren and another potential natural gas supplier continues to heat up.
Vectren and Indiana Gasification have been waging a public campaign over the pros and cons of Indiana Gasification's coal-to-natural gas plant proposed for Rockport.
Vectren claims Indiana's natural gas customers bare all of the financial risks of the plant if it does not perform as expected.
They also claim supporters are using 2008 numbers in their projections, and not accounting for inflation.
Vectren's complete response to Indiana Gasification is below.
For Indiana Gasification's side of the story, click here.
------------------------------------------------------------------------------------------
Vectren's rebuttal statement related to the "Indiana Gasification
Answers Critics" news release issued on Oct. 9
Official statement from Mike Roeder, Vectren's vice president of corporate communications and
government affairs: "Together with a coalition of several other gas utilities and interested consumer
groups, we will continue to work on behalf of natural gas customers in the State of Indiana, including our 680,000 customers, to protect them from this risky, uneconomic project. As proposed, the contract between Indiana Gasification and the Indiana Finance Authority (IFA) for the IFA's purchase of the plant's substitute natural gas (SNG) places all the risk on the backs of the 1.8 million natural gas customers in our state. Given the state of the natural gas marketplace, this project is contrary to market forces, could cost Hoosiers billions, and, as currently structured, makes no sense to proceed with at this time.
We are disappointed that Indiana Gasification continues to focus its time and efforts on attacking Vectren rather than attempting to demonstrate the so-called merits of its project. We have always had a very disciplined portfolio approach to purchasing natural gas on behalf of our customers, which is similar to other gas utilities in Indiana and across the country, and these purchases are scrutinized on an ongoing basis and are subject to approval each quarter by the Indiana Utility Regulatory Commission (IURC). Our gas acquisition strategy, combined with the very low, stable natural gas market, has led to customer bill amounts that have decreased by nearly 40 percent since the winter of 2008-2009, and, today, natural gas bills sit at a decade-low. If the Indiana Gasification project is allowed to proceed, the projected losses that will be passed on to Hoosiers by the IFA will partially offset the significant consumer savings that have been achieved.
We stand behind our estimates regarding the substantial cost burden this project will place on Hoosiers. Because of the significant negative impact this project will have on Hoosiers, we will continue to oppose it and represent our customers in those efforts."
Key facts
-------------
Fact: As proposed, Indiana Gasification, the developer of the SNG plant in Rockport, reached a deal with the State of Indiana in 2011 through the IFA to buy all of the plant's manufactured gas and then resell it into the open market. Under a 30-year agreement, if the manufactured gas does not sell in the open market at a price above the contract price, then all of Indiana's 1.8 million natural gas customers will see a separate charge on their monthly natural gas bills to make up the shortfall during the contract term. In the event the plant's manufactured gas beats the current market price, customers would share in that gain.
Fact: The concept of this plant originated at a time, in the middle of the last decade, when natural gas prices were at record highs and there were national fears that we were going to run out of natural gas. Since 2009, the available supply and price of natural gas has changed dramatically. Thanks to the emergence of shale gas, our nation's natural gas supply has grown to record levels, which has caused prices to hover near record lows. More importantly, multiple independent forecasts conclude that prices are likely to remain low for the next two decades and beyond. Today, the price of gas is around $3.40 per unit/dekatherm. (See Exhibit A.)
Fact: Indiana Gasification has said the projected average SNG price discounted to 2008 dollars over the entire contract term is $6.60 per unit. This figure is misleading. When the plant is projected to open in 2017, the price will be substantially higher, and furthermore, it will escalate every year with inflation. What will be the price of the SNG when and if the plant opens in 2017 and each year thereafter? Indiana Gasification refuses to publicly say what the actual price of the manufactured gas will be each year. When that price is compared to the actual market price of gas, that refusal is understandable on Indiana Gasification's part. In a filing with the Indiana Utility Regulatory Commission (IURC), the IFA illustrated the price. (see Exhibit B).
Fact: Vectren's estimates on how much the State of Indiana will lose upon the re-sale of the SNG in the first eight years do not rely on a "thinly traded options market" as Indiana Gasification alleges. Gas can be purchased now for delivery up to 10 years into the future. The prices for these purchases are not forecasted prices, but actual prices that can be locked in today. Moreover, Indiana Gasification has admitted that even using its own forecasts, it would take years before the SNG could drop below market prices.
Fact: Vectren purchases natural gas on behalf of its customers using a portfolio approach. This strategy consists of buying gas in the market at different times and from multiple sources and is designed to help mitigate the impact of commodity price changes. A blend of spot market purchases, purchases made for future delivery and summer purchases that have been placed in storage facilitate this mitigation process. These purchases are subject to ongoing audit and scrutiny by Indiana regulators. Vectren's utilities are not allowed to profit from the purchase and sale of natural gas. Gas costs are recovered from customers on a dollar-for-dollar basis, and only after being reviewed and approved by the IURC. Through the regulatory process, Vectren's gas costs that are passed on to customers include the costs of the natural gas together with the demand costs to reserve interstate pipeline transportation and storage capacity, the
variable costs to transport gas to the utility's system, including fuel retention, unaccounted-for gas costs, bad debt costs and any over or under collections of prior period gas costs. Hence, New York Mercantile Exchange (NYMEX) Henry Hub prices do not tie to any Indiana utility regulated gas cost rate. These kinds of costs are incurred by all gas utilities.
Fact: The rates of Vectren's two Indiana gas utilities are very competitive. For example, Vectren Energy Delivery of Indiana - South's residential customer bills rank among the lowest 25 percent in the state, while residential bills for Vectren Energy Delivery of Indiana - North's customers are typically lower than similar bills for half the gas utilities in Indiana.
Fact: Vectren's utilities receipt of portfolio management services from ProLiance Energy (ProLiance) has been subject to the oversight of the IURC for years and since the inception of that service relationship back in the mid-1990s. Vectren and Citizens Energy Group formed ProLiance as a joint venture in 1996. The two companies identified potential gas cost savings resulting from the joint management of their interstate gas supply portfolios and contracted with ProLiance to provide services to them at a reduced cost. To date, as has been established before the IURC, Vectren's and Citizens' Indiana gas customers have enjoyed a cumulative savings of more than $200 Million due to ProLiance's management of the
utilities' gas supply services.
Fact: The Indiana law that pertains to this project requires Indiana Gasification to provide a guarantee of savings for customers. Indiana Gasification has proposed to fund an account of $150 million relating to this guarantee. Given the current and forecasted low price of natural gas and the fact that Indiana gas customers are allocated 100 percent of the market losses the IFA will incur when the SNG is sold into the market at a price below what the IFA will pay Indiana Gasification, this account will likely be exhausted within about the first year of the SNG plant's operation. Recognizing this is a distinct possibility, Indiana Gasification has also proposed to give the plant to the State if the project costs Hoosiers money over the 30-year contract. After 30 years, it should be obvious that if the plant is not competitive and has cost Hoosiers money it will not be of much value. In fact, in the appeal of the IURC decision relating to the contract between IFA and Indiana Gasification, they boldly said the Legislature's requirement of a "guarantee" is met once Indiana Gasification promises to do something and it doesn't matter if Indiana Gasification ever fulfills that promise.
Fact: Although the contract between the IFA and Indiana Gasification received state regulatory approval last fall, Vectren, consumer advocates, environmental organizations and several other natural gas utilities in the state continue to work on behalf of Hoosiers to ensure they are protected from bearing these costs.
These groups, including Vectren, have appealed the approval of the contract to the Indiana Court of
Appeals. Indiana Gasification and the IFA have requested oral argument before the Indiana Court of
Appeals. All parties are now awaiting dates to be set.
Other gas companies involved in opposition to the project include:
1. Community Natural Gas Company
2. Indiana Natural Gas Corporation
3. Midwest Natural Gas Corporation
4. Ohio Valley Gas Corporation
5. Ohio Valley Gas, Inc.
6. Sycamore Gas Company
About Vectren
---------------------
Vectren Corporation (NYSE: VVC) is an energy holding company headquartered in Evansville, Ind.
Vectren's energy delivery subsidiaries provide gas and/or electricity to more than 1 million customers in adjoining service territories that cover nearly two-thirds of Indiana and west central Ohio. Vectren's nonutility subsidiaries and affiliates currently offer energy-related products and services to customers throughout the U.S. These include infrastructure services, energy services, coal mining and energy marketing. To learn more about Vectren, visit www.vectren.com.
Vectren and Indiana Gasification have been waging a public campaign over the pros and cons of Indiana Gasification's coal-to-natural gas plant proposed for Rockport.
Vectren claims Indiana's natural gas customers bare all of the financial risks of the plant if it does not perform as expected.
They also claim supporters are using 2008 numbers in their projections, and not accounting for inflation.
Vectren's complete response to Indiana Gasification is below.
For Indiana Gasification's side of the story, click here.
------------------------------------------------------------------------------------------
Vectren's rebuttal statement related to the "Indiana Gasification
Answers Critics" news release issued on Oct. 9
Official statement from Mike Roeder, Vectren's vice president of corporate communications and
government affairs: "Together with a coalition of several other gas utilities and interested consumer
groups, we will continue to work on behalf of natural gas customers in the State of Indiana, including our 680,000 customers, to protect them from this risky, uneconomic project. As proposed, the contract between Indiana Gasification and the Indiana Finance Authority (IFA) for the IFA's purchase of the plant's substitute natural gas (SNG) places all the risk on the backs of the 1.8 million natural gas customers in our state. Given the state of the natural gas marketplace, this project is contrary to market forces, could cost Hoosiers billions, and, as currently structured, makes no sense to proceed with at this time.
We are disappointed that Indiana Gasification continues to focus its time and efforts on attacking Vectren rather than attempting to demonstrate the so-called merits of its project. We have always had a very disciplined portfolio approach to purchasing natural gas on behalf of our customers, which is similar to other gas utilities in Indiana and across the country, and these purchases are scrutinized on an ongoing basis and are subject to approval each quarter by the Indiana Utility Regulatory Commission (IURC). Our gas acquisition strategy, combined with the very low, stable natural gas market, has led to customer bill amounts that have decreased by nearly 40 percent since the winter of 2008-2009, and, today, natural gas bills sit at a decade-low. If the Indiana Gasification project is allowed to proceed, the projected losses that will be passed on to Hoosiers by the IFA will partially offset the significant consumer savings that have been achieved.
We stand behind our estimates regarding the substantial cost burden this project will place on Hoosiers. Because of the significant negative impact this project will have on Hoosiers, we will continue to oppose it and represent our customers in those efforts."
Key facts
-------------
Fact: As proposed, Indiana Gasification, the developer of the SNG plant in Rockport, reached a deal with the State of Indiana in 2011 through the IFA to buy all of the plant's manufactured gas and then resell it into the open market. Under a 30-year agreement, if the manufactured gas does not sell in the open market at a price above the contract price, then all of Indiana's 1.8 million natural gas customers will see a separate charge on their monthly natural gas bills to make up the shortfall during the contract term. In the event the plant's manufactured gas beats the current market price, customers would share in that gain.
Fact: The concept of this plant originated at a time, in the middle of the last decade, when natural gas prices were at record highs and there were national fears that we were going to run out of natural gas. Since 2009, the available supply and price of natural gas has changed dramatically. Thanks to the emergence of shale gas, our nation's natural gas supply has grown to record levels, which has caused prices to hover near record lows. More importantly, multiple independent forecasts conclude that prices are likely to remain low for the next two decades and beyond. Today, the price of gas is around $3.40 per unit/dekatherm. (See Exhibit A.)
Fact: Indiana Gasification has said the projected average SNG price discounted to 2008 dollars over the entire contract term is $6.60 per unit. This figure is misleading. When the plant is projected to open in 2017, the price will be substantially higher, and furthermore, it will escalate every year with inflation. What will be the price of the SNG when and if the plant opens in 2017 and each year thereafter? Indiana Gasification refuses to publicly say what the actual price of the manufactured gas will be each year. When that price is compared to the actual market price of gas, that refusal is understandable on Indiana Gasification's part. In a filing with the Indiana Utility Regulatory Commission (IURC), the IFA illustrated the price. (see Exhibit B).
Fact: Vectren's estimates on how much the State of Indiana will lose upon the re-sale of the SNG in the first eight years do not rely on a "thinly traded options market" as Indiana Gasification alleges. Gas can be purchased now for delivery up to 10 years into the future. The prices for these purchases are not forecasted prices, but actual prices that can be locked in today. Moreover, Indiana Gasification has admitted that even using its own forecasts, it would take years before the SNG could drop below market prices.
Fact: Vectren purchases natural gas on behalf of its customers using a portfolio approach. This strategy consists of buying gas in the market at different times and from multiple sources and is designed to help mitigate the impact of commodity price changes. A blend of spot market purchases, purchases made for future delivery and summer purchases that have been placed in storage facilitate this mitigation process. These purchases are subject to ongoing audit and scrutiny by Indiana regulators. Vectren's utilities are not allowed to profit from the purchase and sale of natural gas. Gas costs are recovered from customers on a dollar-for-dollar basis, and only after being reviewed and approved by the IURC. Through the regulatory process, Vectren's gas costs that are passed on to customers include the costs of the natural gas together with the demand costs to reserve interstate pipeline transportation and storage capacity, the
variable costs to transport gas to the utility's system, including fuel retention, unaccounted-for gas costs, bad debt costs and any over or under collections of prior period gas costs. Hence, New York Mercantile Exchange (NYMEX) Henry Hub prices do not tie to any Indiana utility regulated gas cost rate. These kinds of costs are incurred by all gas utilities.
Fact: The rates of Vectren's two Indiana gas utilities are very competitive. For example, Vectren Energy Delivery of Indiana - South's residential customer bills rank among the lowest 25 percent in the state, while residential bills for Vectren Energy Delivery of Indiana - North's customers are typically lower than similar bills for half the gas utilities in Indiana.
Fact: Vectren's utilities receipt of portfolio management services from ProLiance Energy (ProLiance) has been subject to the oversight of the IURC for years and since the inception of that service relationship back in the mid-1990s. Vectren and Citizens Energy Group formed ProLiance as a joint venture in 1996. The two companies identified potential gas cost savings resulting from the joint management of their interstate gas supply portfolios and contracted with ProLiance to provide services to them at a reduced cost. To date, as has been established before the IURC, Vectren's and Citizens' Indiana gas customers have enjoyed a cumulative savings of more than $200 Million due to ProLiance's management of the
utilities' gas supply services.
Fact: The Indiana law that pertains to this project requires Indiana Gasification to provide a guarantee of savings for customers. Indiana Gasification has proposed to fund an account of $150 million relating to this guarantee. Given the current and forecasted low price of natural gas and the fact that Indiana gas customers are allocated 100 percent of the market losses the IFA will incur when the SNG is sold into the market at a price below what the IFA will pay Indiana Gasification, this account will likely be exhausted within about the first year of the SNG plant's operation. Recognizing this is a distinct possibility, Indiana Gasification has also proposed to give the plant to the State if the project costs Hoosiers money over the 30-year contract. After 30 years, it should be obvious that if the plant is not competitive and has cost Hoosiers money it will not be of much value. In fact, in the appeal of the IURC decision relating to the contract between IFA and Indiana Gasification, they boldly said the Legislature's requirement of a "guarantee" is met once Indiana Gasification promises to do something and it doesn't matter if Indiana Gasification ever fulfills that promise.
Fact: Although the contract between the IFA and Indiana Gasification received state regulatory approval last fall, Vectren, consumer advocates, environmental organizations and several other natural gas utilities in the state continue to work on behalf of Hoosiers to ensure they are protected from bearing these costs.
These groups, including Vectren, have appealed the approval of the contract to the Indiana Court of
Appeals. Indiana Gasification and the IFA have requested oral argument before the Indiana Court of
Appeals. All parties are now awaiting dates to be set.
Other gas companies involved in opposition to the project include:
1. Community Natural Gas Company
2. Indiana Natural Gas Corporation
3. Midwest Natural Gas Corporation
4. Ohio Valley Gas Corporation
5. Ohio Valley Gas, Inc.
6. Sycamore Gas Company
About Vectren
---------------------
Vectren Corporation (NYSE: VVC) is an energy holding company headquartered in Evansville, Ind.
Vectren's energy delivery subsidiaries provide gas and/or electricity to more than 1 million customers in adjoining service territories that cover nearly two-thirds of Indiana and west central Ohio. Vectren's nonutility subsidiaries and affiliates currently offer energy-related products and services to customers throughout the U.S. These include infrastructure services, energy services, coal mining and energy marketing. To learn more about Vectren, visit www.vectren.com.
