The soaring price of natural gas has hit home for both consumers and businesses.

For We Energies customers, the cost to heat their homes jumped 50% last winter compared with the year before. And that increase came before a double-digit jump in prices projected for this winter.

For papermakers and manufacturers, energy costs also have taken a toll. Wausau Paper said its natural gas costs rose $1.1 million in the third quarter, compared with the same period in 2003. Badger Paper Mills Inc. of Peshtigo said in October that it is operating in a “high-cost environment” and that prices for pulp, employee health insurance and natural gas were “at historically high levels.”

The increases have frustrated and confused gas customers.

“They’ve got us over a barrel and we can’t do anything about it. No one’s obviously regulating the market. How are people going to afford this?” asked Dave Garacci of Milwaukee, who couldn’t believe the increase he saw on his bill this winter, even though he had recently installed an energy-efficient furnace.

“How are these people going to afford this? They’re paying through the nose for gasoline, paying through the nose for electricity, they’re paying through the nose for natural gas – and now food prices are going up. It’s a joke.”

Utilities don’t make money when natural gas prices surge; they simply pass those increases on to consumers. The power companies take steps throughout the year to cushion the price increases and try to avoid buying all of their natural gas at the prices traded on futures markets, said Bob Whitefoot, gas asset manager at We Energies.

“Customers still see something of an increase in their bill, but not nearly the increase that the market’s reflecting,” he said.

The company has long-term contracts for gas and buys fuel ahead of time for winter use. That gas is stored underground in Michigan repositories.

“On a normal winter day, roughly 40 percent of the gas that is in our system for customer consumption is from storage,” Whitefoot said. “As it gets cold, that amount goes up” to about 60% on a particularly cold day.

The higher price of gas also shows up on electric bills. Higher natural gas costs are the principal reason for rising electricity costs in Wisconsin since 1997, according to analyses by state regulators and customer groups. That’s come about as more natural gas-fired plants are built, and as utilities tap natural gas-fired plants to keep the lights on during hot summer days.

Consumer groups want state regulators to protect consumers from the passed-along fuel costs. Meanwhile, in Congress, GOP congressional leaders are exploring options to boost the supply of natural gas as part of an energy bill that President Bush wants passed.

Robert Garvin, a member of the state Public Service Commission appointed by then-Gov. Tommy G. Thompson, said action is needed in Washington to help boost supplies.

“We don’t control the fuel costs. To the extent we advance policies that promote greater supply, we’ll all be better off,” he said.
Demand soars for natural gas

The price of natural gas, as traded on the New York Mercantile Exchange, was relatively stable for much of the 1990s. But rising crude oil costs and the sheer growth in the use of natural gas have combined to send prices higher.

Adding to the price pressure is the increased reliance by utilities on natural gas to fuel power plants. Natural gas plants have been embraced because they cost less and take less time to build than coal plants and generate far less pollution.

As a result, more than 90% of all the new power plants built nationally in the last several years have been fueled by natural gas. In Wisconsin, one result is that 5% of the natural gas used is for the generation of electric power, up from 1% in the early 1990s. Reliability crises in the summers of 1997 and ’98 prompted construction of new gas-fired plants.

More gas-fired plants will open this year, including three in Wisconsin – the first of two We Energies plants in Port Washington, a Madison Gas & Electric Co. plant on the University of Wisconsin-Madison campus and a Calpine Corp. plant in Kaukauna. Nationally, the U.S. Department of Energy forecasts that the amount of natural gas used by power plants will increase by more than 50% by 2020.

The first spike in natural gas costs that hit home in Wisconsin occurred four years ago, in the winter of 2000-’01. Since then, volatile markets have sent prices soaring, and in late October, they surged to their highest levels since December 2000.

“Natural gas wellhead prices have doubled in the past half decade, and gas markets have moved into a permanent state of turmoil, with wild spikes around an upward spiral,” said Mark Cooper, director of research at the Consumer Federation of America.

“A hint of bad news sends prices skyrocketing, but good news does little to reduce the pressure.”
Industry wants to boost supply

Cooper’s group and industrial users of natural gas have called for investigations into potential manipulation of natural gas price futures trading.

But natural gas prices aren’t rising in a vacuum. They’ve often followed the prices of other fuels, including crude oil.

“One of the reasons why gas prices have gone up is because all forms of energy have gone up,” said John Flumerfelt, a spokesman for Calpine Corp. Calpine builds natural gas plants, including several that provide power to Wisconsin on hot summer days.

Steps to boost natural gas supply include increased drilling in the western United States, plans to step up drilling on federally owned lands, a new pipeline from Alaska and increased imports of liquefied natural gas from the Middle East, Africa or perhaps Russia.

High natural gas prices are causing major oil companies to consider major investments, both in liquefied natural gas projects and in more drilling. But drilling in existing areas isn’t as productive as it once was, because many of the best sources have been tapped.

Concern about improving natural gas supply is widespread, and the oil industry is lobbying Congress to take measures to support expanded drilling and enact more incentives for a pipeline to bring gas from Alaska. Others, including Calpine and the American Council for an Energy-Efficient Economy, see a need for policies that would encourage conservation and more efficient use of gas.

Prospects for expanded drilling in the West are mixed, as the Bush administration and environmental groups have sparred over permitting greater access to federal lands in the West. In addition, opposition to drilling on federal lands has been strong from environmental groups concerned that it could damage the habitats of deer, elk and grizzly bears.

Dozens of projects proposing to bring liquefied natural gas to supplement U.S. supplies are pending, though siting, environmental and safety concerns could stall some of those. Two projects are under construction, and there are enough industry players waiting to invest billions that it’s just a matter of time before liquefied natural gas plays a bigger role in meeting U.S. demand for natural gas, said George Gaspar, the longtime oil and gas analyst with Robert W. Baird & Co. in Milwaukee.

“LNG is coming,” he said. “About five years out we’re going to really start to see the LNG impact and the availability of gas from abroad.”