Vectren Attacks on Indiana Gasification Project Are Suspicious
(October 9, 2012) - Indiana Gasification (IG) today answered critics of its
gas plant to be built here in Spencer County. IG is responding to
recent comments made by State Senate Minority Leader Vi Simpson, who
last week stated,
"I don't think it's appropriate for the state on behalf of the ratepayers to speculate in the natural gas market."
IG co-developer Bill Rosenberg answered. "Under the status quo, the state leaves ratepayers
100 percent exposed
to volatile swings in the commodity markets. There couldn't be
anything more risky for ratepayers than what the state already does.
That's precisely what the IG project addresses. For a fraction of
supply, it replaces the economics of gas with the economics of coal,
which is much more stable," Rosenberg said.
said Simpson was probably referring to the fact that the state acts as
to achieve this supply diversification. "Senator Simpson said that the
IG-IFA contract was against all the free market principles she believes
in. But forcing consumers to remain captive to a state-sanctioned
monopoly is hardly a free market. The IG project
will bring a dose of competition that will benefit everyone," Rosenberg said.
an op-ed in the Sunday edition of the Indianapolis Star, Rosenberg and IG Project Director Mark Lubbers answered recent criticisms leveled at the IG plant by Vectren
Corporation. The previous week Vectren publicized a claim that the IG project would cost ratepayers more than a
billion dollars in the first eight years of operation when in fact the
IG project guarantees consumers will save $100 million over the course
of its contract with the state.
"Vectren cooked the books," said Lubbers. "And Vectren understands completely why its analysis
is flawed. They know that thinly traded futures options are no predictor of future gas prices.They
that if gas prices are as low as they say, then coal prices will also
be low and the price of substitute natural gas (SNG) has to be adjusted
downward. And Vectren
that the only right way to assess the economics for the consumer is to consider the entire gas bill, not just the 17 percent of
the gas bill represented by IG's gas."
"It is quite curious," said Lubbers. "Here is a company with no apparent stake in this policy
pulling out all the stops to kill this project. There is definitely more to this story."
said that it was highly suspicious that Vectren was trying to kill a
will provide billions of dollars in economic benefits to Indiana over
the term of the contract. "Since Vectren is trying to kill the plant,"
Rosenberg said, "the economic analysis that's really needed would
compare what will happen to ratepayers if they are
left 100 percent captive to Vectren. And if you run those numbers you stumble into
some amazing facts."
When Vectren calculated its
so-called "consumer losses," it compared
SNG price to the Henry Hub (HH) price for natural gas, the price set at
a major transportation center off the coast of Louisiana. But Vectren
customers don't pay the HH price; they pay Vectren's cost of gas, which
is the amount it pays to its unregulated
subsidiary, ProLiance. (Vectren purchased 97% of its gas from ProLiance
last year, up from 71% in 2007.)
According to Vectren's 2011 Annual Report, the average price paid by Vectren for its gas
over the last five years is $7/MMbtu. On average, this is $1.37
more than the HH price.
Data from Vectren's Annual Report and government sources show:
has paid an average price for natural gas that is 24 percent, or $1.37
Btu above Henry Hub prices over the last five years (sources: Vectren's
2011 Annual Report, page 15, and EIA Henry Hub price data).
Vectren's gas purchases, 97 percent of which were from its own ProLiance subsidiary in 2011,
cost $628 million more than HH prices over five years (sources:Vectren Annual Reports and EIA Henry Hub price data).
Vectren continues to lose money from its natural gas investments at an alarming rate. It lost
$23 million in 2011, $7.9 million in 2010 and $2.3 million in 2009 from its investment in ProLiance (source:Vectren's
Annual Report, page 48). Year-to-date through June 30, 2012,Vectren
lost $11.1 million from ProLiance (Vectren press release,
August 1, 2012).
Rosenberg said the
transportation cost from Henry Hub would only be a fraction of the $1.37
mark-up and that it wasn't easy to tell what the rest is. "For the
entire period under review, Chicago City Gate prices were within pennies
of the HH price and it doesn't
cost much to move gas from Chicago to the Vectren service territory, so there's a lot of cost to explain," he
and Lubbers said that it doesn't appear that Vectren's business
practices are aligned
with its customers. In contrast, the Indiana Gasification contract with
the state assures complete alignment of interests between the company
and the consumer, including the fact that IG's entire net worth could be
forfeited to meet its consumer savings guarantee
of $100 million.That is why the Indiana
Utility Regulatory Commission (IURC) found
that the Indiana Gasification project will provide "unprecedented
consumer protections," not cost consumers $1.1 billion as Vectren
In addition, the Indiana Gasification project will diversify the supply of natural gas for
Indiana consumers, reducing exposure to volatile natural gas prices and keeping billions of Hoosier dollars in the state while bolstering America's energy security and leading
the way on environmental quality.
The Indiana coal-gasification plant obligates Indiana customers to pay for the plant's gas, which
would add $1.1 billion to utility bills over eight years. Vectren
all residential gas customers would see their gas bills increase an
average of about $3.90 per month during the period for a total cost of
$375 per consumer.
False. Vectren is inappropriately relying on a thinly traded options
market as a predictor of market prices 10 or more years in the future.
The options market is not a predictor of future prices and is so thinly
traded more than about three years out that it
is pure hyperbole to use as a price indicator (Attachment 1).
reality is that natural gas prices are highly uncertain and subject to
spikes, which is a reason why the Indiana Gasification project makes so
much sense. The Indiana Utility Regulatory Commission said it best after
considering thousands of pages of testimony leading to its approval of
the SNG Agreement:
find there is only one clear and undisputable conclusion that can be
is that there is considerable uncertainty with future natural gas supply
and prices, and gas prices are volatile and unpredictable. Even natural
gas experts have diametrically opposed views on future market and
pricing expectations. The SNG Contract must be
considered in light of this undeniable uncertainty. Fundamentally, the
Commission views price uncertainty as supporting the case for supply
is making up numbers based on made up numbers. What is not a made up
number is that
Vectren's cost of natural gas over the last five years has averaged
$7/MMBtu, which is $1.37/MMBtu (24%) higher than Henry Hub prices (the
options market Vectren is basing its future prices on are options traded
around Henry Hub prices) and resulted in $628
million of added cost over the period (Attachment 2).
for natural gas traded in Chicago were nearly identical to Henry Hub
this period. Vectren purchases the vast majority of its gas (97% in
2011) from its own unregulated affiliate at much higher prices.
Indiana Gasification project is contractually guaranteed to save
consumers $100 million
over 30 years. Nobody knows for certain what natural gas prices will be
in five years when the Indiana Gasification plant begins commercial
production, but there is significant evidence they will be much higher
- natural gas drilling has fallen drastically because it is uneconomical (Attachment
the power industry is using more and more natural gas as coal plants
are replaced, and efforts are underway to begin exporting gas from the
"When this project was first announced, it made a lot of sense because
there wasn't this same amount of gas in the marketplace as there is
today," Vectren CEO Carl Chapman said. "Times have changed. Shale gas
has driven the cost of natural gas lower. The plant
is not right at this time."
The plant is not open "at this time." It would not begin commercial production for five years.
of natural gas in recent years, largely due to overdrilling of shale
gas, has depressed current prices. However, substantial evidence now
shows that shale gas producers "are
losing our shirts," as ExxonMobil CEO Rex Tillerson said last summer, and have dramatically curtailed drilling.
SEC filings from major producers indicate the average cost of production is around $7/MMBtu(Attachment 4).
This is with nothing added for profit. Companies are in distress,
cutting and shifting production, selling assets, and taking write downs.
Markets do correct, and in the energy industry corrections create price
spikes and volatility
- these cyclical trends are what Indiana Gasification's project will help protect consumers against.
It is now projected shale gas will provide more
than 50 percent of
all U.S. natural gas in the future and that all other major supply
sources in the U.S. (as well as imports from Canada and Mexico) will
decline or remain flat(Attachment
recent report by the U.S. Geological Survey summarized its assessments
of gas recovery
(estimated ultimate recovery, or EUR) expected from various shale gas
plays. The USGS assessment indicates substantially lower expected gas
recovery (about 50% lower) than the estimates used by the Energy
"The Energy Information Administration projects prices to remain below
$5 until 2023," said Teri Viswanath of investment banker BNP Paribas in
The Energy Information Administration (EIA) provides a variety of
different scenarios for forecasting future gas prices. In its most
recent Annual Energy Outlook, the EIA included 30
different forecast scenarios(Attachment 6).
In a scenario consistent with recent findings about shale gas production, gas prices rise to $7.95 per MBTU by 2023.The
reality is, however, the EIA has a terrible track record predicting natural gas prices - its
own self-evaluation shows it does worse predicting natural gas prices than any other
energy commodity and has a track record of significantly underpredicting
All long-term energy price forecasts are driven by a vast array of
underlying assumptions that make accurate forecasts almost impossible,
which is why EIA and others produce so many different scenarios. Many
analysts agree that a
higher price scenario is likely
due to increasing demand and lower production as more is learned about shale gas production and economic uncertainties.
state makes a profit, the money would be split evenly between Leucadia
and natural gas customers who would see their rates reduced. But if the
state loses money on the deal, ratepayers would make up the entire loss
in their utility bills.
a reference to the market differential that will be calculated each
month during the contract, and it is not correct. Which party benefits
from the profits or bears the losses is dependent on the cumulative
performance to date. If there are losses, the first
$150 million are covered by the Consumer Protection Reserve established
by IG for the benefit of ratepayers. Losses beyond the $150 million are
covered by ratepayers. If there is a profit, 100
it goes first to whichever party has a negative cumulative account. If
both IG and IFA are cumulatively negative or positive, the profit is
The abundant supply of shale gas led Illinois Gov. Pat Quinn last month
to veto legislation that would have forced many Illinois gas ratepayers
to help finance another synthetic gas plant proposed by Leucadia.
The State of Illinois in July fully approved 30-year SNG contracts
between two major gas utility companies and another Leucadia affiliate,
representing an economic structure similar to the Indiana Gasification
contracts. These contracts have been vetted by
numerous state agencies, with capital costs, operating costs and rate of
return fully scrutinized and approved. Governor Quinn vetoed a bill in
August that would have made technical changes to some of the
allocations of costs underlying those contracts. However,
the current contracts do continue in effect and the governor has stated publically
that he wants the project to go forward. Previously the governor
signed four other
bills into law supporting the project. The Chicago project is exploring
options for moving forward, and Leucadia remains committed to the
Indiana Gasification has publicly said that the requirement that it
provide a guarantee only means that IG promises that it will make a
commitment and not that IG will actually fulfill its commitment. In
furtherance of its "promise," Indiana Gasification has
proposed to fund an account of $150 million.
This is completely false. The guarantee of savings is far more than a
promise. The guarantee is secured by a lien held on the plant by the
IFA. The unrefuted testimony in the IURC consideration of the IFA-IG
contract is that the nominal value of the plant at
the end of the contract is $4.5 billion, which is more than even the
worst-case scenario presented to the IURC by Vectren.
The $150 million Consumer Protection Reserve (CPR) is IN
to the savings guarantee, not "in furtherance of it." The CPR simply
provides an extra layer of protection in the early years of the contract
when the IFA
believed it was most likely that the SNG price might be higher than the
volatile spot market price.
"Using today's NYMEX price, we (Vectren) can purchase gas years into the future below the SNG cost."
How many futures market contracts to take delivery on gas during the
first 10 years of the plant's life (2018-2028) does Vectren or Proliance
hold? If Vectren "can" do this, they should be locking in these low
prices NOW to fill the 83 percent of supply that
they are still responsible for.
"The developers of the SNG plant are now seeking a federal loan guarantee similar to the one provided to Solyndra."
Response:False. The loan guarantee that would help finance the SNG plant is NOT "similar
to the one provided to Solyndra."The
IG loan guarantee is a Section 1703 loan guarantee
(passed and signed into law in 2005). Solyndra received a loan guarantee
under the Section 1705 program (passed and signed into law in 2009).
Under section 1703, the project must be rated by outside ratings agencies (like S&P or Moody's)
and the borrower must pay any credit subsidy fee to cover the risk of default.
In the 1705 loan guarantee program that Solyndra participated in, Congress
paid for the credit subsidy that borrowers owed, inviting abuse by projects that were not credit-worthy.