Clean-coal gas deal could charge up NIPSCO bills for NW Indiana customers, Hearings start today

Posted by Laura Arnold  /   May 02, 2011  /   Posted in 2011 Indiana General Assembly, Indiana Utility Regulatory Commission (IURC), Uncategorized  /   No Comments

Original article:

By Keith Benman, (219) 933-3326 |Posted: Sunday, May 1, 2011 12:00 am | (31) Comments

The state's plan to have more than 1.7 million Hoosier utility customers subsidize a proposed clean-coal gasification plant is splitting the state's utilities and pushing some into alliances with consumer groups.

Downstate natural gas utility Vectren is vigorously opposing the plan "on behalf of its customers," claiming it could cost Hoosier utility customers more than $1 billion.

NIPSCO is not taking a position for or against the state's plan. However, Frank Shambo, a NIPSCO vice president, has submitted testimony supporting the state's claim the project could help protect utility customers from volatile natural gas prices.

The split among utilities is being driven by a proposed 30-year sales contract between the Indiana Finance Authority and Indiana Gasification LLC, the plant's developer. The two are asking state regulators to approve the contract.

That contract has the Indiana Finance Authority, a state agency, buying almost all synthetic natural gas produced by the $2.65 billion clean-coal plant to be built in downstate Rockport by Indiana Gasification LLC, a subsidiary of publicly traded New York investment group Leucadia National Corp.

The IFA has submitted testimony diametrically opposed to Vectren's and that of six other natural gas utilities, stating the sales deal will save the state's utility customers $500 million over the 30-year term of the contract.

Gov. Mitch Daniels continues to be an enthusiastic supporter of the plan, maintaining the arrangement between Indiana Gasification and the IFA will help "hedge" or buffer volatile natural gas prices for utility customers across the state.

"There is all kind of evidence to believe this will be a huge winner for ratepayers," Daniels said in an interview with The Times two weeks ago. "But we've always been cautious to say let's just view it as a good hedge. And that's a smart thing to do."

The Indiana Utility Regulatory Commission has held three public hearings on the contract between the IFA and Indiana Gasification in the past two weeks. Evidentiary hearings before the IURC start Monday in Indianapolis.

A number of utilities, consumer advocates and environmental groups have been just as passionate as Daniels about the deal, only they are denouncing it.

"This is nothing other than a group of crony capitalists getting together and using the legislative process to make themselves rich," said Kerwin Olson, project director for the Citizens Action Coalition. "Ratepayers are receiving nothing in this deal other than a charge tacked onto their bills to benefit Leucadia investors."

Olson also points out the state's utility customers never actually get to use the synthetic natural gas, because it is sold to a third-party energy shipper.

The arrangement

No one denies the arrangement is complex. Basically, IFA will buy almost all of the synthetic natural gas produced at the Indiana Gasification plant based on a formula in which the price of coal is the largest variable. The IFA then will sell that gas to an energy shipper at the market price for natural gas – which changes daily in response to supply and demand.

If the price of natural gas is above the price the IFA paid for the synthetic gas, the IFA realizes a profit. If natural gas is cheaper than the synthetic natural gas, the IFA racks up a loss.

Half of any profit would be passed to the state's more than 1.7 million utility customers through credits on their bills. Indiana Gasification gets the other half. Customers also could share in profits from the sale of byproducts such as exotic gases produced by the plant.

Any loss IFA suffers would be passed to utility customers in the form of a bill surcharge, effectively reimbursing IFA for its loss. How much in surcharges versus how much in credits utility customers will rack up over 30 years is the chief point of contention.

Vectren has submitted testimony contending the IFA's deal with Indiana Gasification could increase individual residential utility customers' bills $34.56 per year on average. Commercial customers could see a bill increase of $144 per year on average and industrial customers could see an increase of up to $16,819 per year, according to Vectren's testimony.

The largest users of natural gas, such as large steel mills, are exempt from the plan under legislation passed by the General Assembly.

Chief IFA witness Jennifer Alvey, a former finance director at the agency, stated the average customer would save $8.48 per year on their gas bill over the life of the contract in testimony filed in the case.

The price of natural gas on wholesale markets is currently hovering around $4.20 per million British thermal units. Estimates of the price of the synthetic natural gas Indiana Gasification will produce vary between $6 and $7 per million Btus.

The Indiana Gasification plant will convert coal into substitute natural gas by applying heat and pressure to the coal while limiting its actual combustion. The gas produced can be used just like natural gas to power electric turbines or make synthetic fuels.

Points of contention

Much of the testimony in the case revolves around different forecasts of natural gas prices. An expert witness for Indiana Gasification describes official U.S. Energy Information Agency forecasts of stable natural gas prices for years to come as "essentially worthless."

"All of this is based on the fact we believe that the history of (natural) gas prices will continue to be one of the most volatile commodity prices that there is," said Mark Lubbers, Indiana Gasification project manager for Leucadia. 

But Vectren, six smaller utilities, and consumer and environmental groups argue new means of extracting natural gas from shale deposits have led to the most plentiful supplies and lowest prices in decades.

Those against the project also point out the IFA contract could leave utility customers on the hook for increases in taxes as well as the cost of future government regulations placed on the plant.

On its side of the deal, Indiana Gasification is required to build a reserve fund of $150 million to reduce the size of any surcharges utility customers may find on their bills.

The contract also contains what IFA terms a guarantee of savings. If utility customers do not realize $100 million in net savings over the 30 years, IFA can extend the Indiana Gasification contract and buy the gas at a discounted price. Any profit IFA makes it could pass on to utility customers until they realize $100 million in savings. Or IFA can take possession of the plant and sell it, passing on proceeds to customers.

The contract's opponents all say Alvey's claims of a guaranteed return to customers is smoke and mirrors. They say a "guarantee" that doesn't require any savings for a period of 30 years, and perhaps longer, guarantees nothing.

The states largest gas utilities

Here are the largest natural gas utilities that would be subject to the state's plan for providing subsidies for Indiana Gasification's clean coal plant:

NIPSCO: 721,000 customers

Vectren: 675,000 customers

Citizens: 261,000 customers

Source: Indiana Utility Regulatory Commission

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