When that big freeze hit Texas in February, the Lone Star State couldn’t help but share its pain.
With its ill-equipped natural gas systems clocked by the cold, Texas’s exports across the Rio Grande froze up and 4.7 million customers in northern Mexico went without electricity – more than in Texas itself. The spot price of gas jumped 30-fold as far west as Southern California. And all the way up by the Canadian border, gas utilities in Minnesota that turned to the daily spot market to meet demand say they had to pay about $800 million more than planned over the course of just five days as the Texas freeze-up pinched off supplies.
“The ineptness and disregard for common-sense utility regulation in Texas makes my blood boil and keeps me up at night,” Katie Sieben, chairwoman of the Minnesota Public Utility Commission, said in an interview. “It is maddening and outrageous and completely inexcusable that Texas’s lack of sound utility regulation is having this impact on the rest of the country.”
The Texas market is so large – second only to California’s – and its natural gas industry is so predominant that when things go wrong there, the impacts can be felt across the country. And in a state that eschews regulation, driving energy producers to cut costs as deeply as they can to remain competitive, things went spectacularly wrong the week of Valentine’s Day.
Minnesota’s biggest gas companies are putting forward plans to recoup their expenses by adding a surcharge to customers’ bills, which the state utility commission would first have to approve. Normally, such adjustments to account for winter prices go into effect in September, but Minnesota’s biggest gas utility, Houston-based CenterPoint Energy, says the financial pinch is so great it wants to start billing customers next month – and charging them nearly 9% interest until the extraordinary costs are paid off.
At the same time, the company’s CEO, David Lesar, has been assuring investors that the company has access to plenty of cash and its weather-related costs nationally are not a concern.
In state after state, from the Gulf Coast to the Rockies, from the Ozarks to the shores of Lake Superior, utility regulators have launched investigations into what went wrong, and gas companies have moved to pass on their exceptional costs to customers. Investigators say they are on the lookout for evidence of price-gouging and market manipulation. In Minnesota, where the temperature dropped below minus-20 degrees in February and scarcely a single customer lost gas or electricity, state officials are struggling to come up with an equitable solution to a debacle made in Texas.
Gas prices in Minnesota rose to 70 times their normal level, as deliveries to the state’s main trading hub dropped by 39%.
“I don’t think we even yet truly understand what happened,” said state Sen. David Senjem, R-Rochester, a former Minnesota legislature majority leader. “I hope they realize they better get their system a little more solid,” he said of Texas. “Unfortunate. You could use stronger words, but I better not. They got caught, and the rest of us did, too.”
Senjem sponsored legislation, awaiting votes in the Senate and House, that would provide $115 million in state funds as relief for hard-pressed residents and municipally owned small utilities. He said he hopes federal funds from the American Rescue Plan act could also come into play.
Of the four major commercial gas utilities doing business in Minnesota, attention has focused on CenterPoint, because it is the largest, with 800,000 residential accounts; has pushed most aggressively for relief; and is based in Texas.
CenterPoint says it needs to impose a monthly surcharge on its customers for the next two years to recover the extra $500 million it spent on gas during that one week in February. Tacked onto the surcharge would be interest of 8.75%. The total, the company says, would amount to between $300 and $400 per residential account. And it wants to begin billing right away, even before the utility commission has sorted out its position on what CenterPoint calls the “February market event.”
That approach is similar to plans the company is apparently preparing to put forward in Oklahoma and Arkansas.
“We did not have any reliability issues on the delivery of gas here in Minnesota,” Amber Lee, the company’s Minnesota director of regulatory affairs, told a utility commission hearing. “And yet it was an extraordinary event.”
In a March 15 filing, CenterPoint said immediate relief was necessary “to ensure the continued financial health of the utility.” Without it, the company said, its credit rating would fall and its ability to borrow would suffer. On April 9, it said the issue was “of the utmost concern.”
That’s in contrast to the reassuring message delivered by Lesar, the CEO, in a call with investors a week after the cold snap.
“We believe we have ample liquidity from our credit facilities” to meet the costs associated with the freeze, he said. “We will incur modest additional interest expense related to some of these excess costs until they can be recovered. We view this more as an addressable working capital management challenge, which we will manage our way through.”
He boasted about the company’s relationships with state regulators, and said he expected them to come through for CenterPoint. “As we have mentioned many times, we are fortunate to work in constructive regulatory jurisdictions and fully expect these costs to be recoverable in a timely manner,” he said.
That, said Sieben, with the utility commission, “is a good argument for not allowing for carrying costs, isn’t it?”
CenterPoint argues that its push for immediate relief is to ease the burden on its customers, because the sooner the $500 million is paid off, the less the interest charges will be. Also, it says, any delay would affect its credit rating, leading to higher borrowing costs that would eventually be reflected in bills.
In Minnesota, as in states across the country, utilities’ legitimate expenses are passed on to customers. And Lesar’s sunny view of the company’s prospects is based on the expectation that regulators will be amenable to CenterPoint’s plans.
Ross Corson, a company spokesman, wrote in an email, “We are committed to addressing these extraordinary costs in a way that limits the impact on our customers while being financially responsible as a company.”
Minnesota’s second-largest gas company, Xcel Energy, also wants to spread the recovery of costs over two years – but said it would not charge interest, which it said would amount to $24.7 million on borrowing to cover its expenses. The company, based in Minneapolis, predicted a charge of about $250 per residential customer. Minnesota Energy Resources said it would hope to recover about $225 per customer. The smallest commercial utility, Greater Minnesota Gas, said it had enough of a supply in storage in February and was able to avoid the spot market.
The state’s Department of Commerce objects to CenterPoint’s request to begin the extra billing in May. “We have a process” that sets a September date for adjustments, Commissioner Grace Arnold said. “We don’t need to make an exception.”
She said her department intends to determine if the utility’s expenditures were reasonable and if its preparations were prudent. If so, she said, it’s appropriate to pass costs on to customers, but the analysis “will take a little bit of time.”
CenterPoint keeps a certain amount of gas in storage, buys some with futures contracts, and “hedges” more – paying a premium in advance to enjoy a predetermined price. But some portion of its purchases are always on the spot market, and it said that that amount was larger than normal in February because the cold weather locally drove up demand.
The state’s attorney general, Keith Ellison, a former Democratic member of Congress, has filed a strongly critical response to CenterPoint’s plan.
It notes that over the two-year payout schedule, the interest charged to customers would amount to $60 million, “at a time when many of them are already behind on their bills.”
CenterPoint argues that the interest charge reflects its own capital borrowing costs and that it is an appropriate item to add to its bills.
“The company has already had to pay most of the natural gas costs from February, but these costs will only be recovered over an extended period of time,” Corson wrote. “Until recovered, CenterPoint Energy must finance these costs through a combination of debt and equity. Given the unprecedented magnitude of this financial commitment, it is appropriate to include finance charges.”
Annie Levenson-Falk, executive director of a nonprofit called the Citizens Utility Board of Minnesota, asked in an interview why CenterPoint didn’t appeal for voluntary reductions in gas use when it saw prices spike.
She said the utilities should demonstrate why they had to rely so heavily on the spot market. But, she added, “there’s no getting around it – these are big costs that someone is going to have to incur.”
Natural gas, though, is an “essential good,” she said, adding that ordinary Minnesotans, collateral damage in the Texas disaster, are blameless.
“You know, somebody made a lot of money off people needing to heat their homes,” she said. “And that’s not right.”