How a deep freeze in the South burned Minnesota consumers

When a deep freeze hit the South in February, the natural gas market essentially failed Minnesotans, leaving them on the hook for an unprecedented $800 million in extra charges.

Under state law, utilities pass down wholesale gas costs, which skyrocketed in February. Many Minnesota consumers will pony up at least 50% more than they pay annually for their heating bills.

Customers of CenterPoint Energy, the state's largest gas utility, will be hit the hardest: $354 for the average residential household. The state's second- and third-largest gas utilities, Xcel Energy and MERC, expect surcharges of $270 and between $225 to $250, respectively.

"The [surcharge] is not acceptable, and I have a lot of anger about this," Katie Sieben, chairwoman of the Minnesota Public Utilities Commission (PUC), said at a recent meeting.

The huge tab is rooted in failures in gas-producing regions like Texas, where temperatures plunged and equipment froze. Supply cratered just as demand soared.

But the gas-supply plans of utilities in Minnesota and many other states also came up short during the crisis.

Their fixed-price supply contracts and their insurance against price spikes — hedging and gas storage — wasn't enough to avoid relying heavily on an overheated gas spot market, where key Midwestern prices rose at least 4,500%.

The system did not work, PUC Commissioner Joe Sullivan said at the same meeting.

"It's pretty binary, and it is very frustrating," he said. "We are going to the Legislature and asking for a lot of money for ratepayers and it is very painful."

That legislation is pending amid calls for spending $100 million to help low-income gas customers cover the charges.

Along with the state's gas utilities, the PUC is on the hot seat to prevent such a fiasco from recurring.

"It is their job more than anybody's," said Ryan Kellogg, professor at the University of Chicago's Energy Policy Institute. "They are ultimately accountable."

The PUC, like many state utility regulators, is investigating the price spike, as are federal agencies.

Minnesota has allowed gas utilities to pass down wholesale gas costs, including spot market gyrations, with no markup for 30 years.

The practice is common in many states. The rationale: Regulated utilities shouldn't be responsible for wholesale gas costs beyond their control.

So, the utilities are now finalizing proposed customer payment plans for February.

MERC, an arm of Milwaukee-based WEC Energy Group, wants to follow the 12-month payment period authorized by the state.

Houston-based CenterPoint and Minneapolis-based Xcel have asked the PUC for a 24-month payback period to cushion the blow. Great Plains Gas, a small utility in western Minnesota, has proposed a 28-month plan.

CenterPoint also wants to levy a finance fee, which would tack on $40 to its average charge of $354.

The company said it must finance its gas costs until they are recovered from ratepayers.

CenterPoint, whose largest operations are in Texas and Minnesota, has said the big freeze will affect its cash flow and liquidity, and could hamper its ability to get financing on favorable terms.

But the Minnesota Attorney General's Office opposes the finance charge, calling it "unconscionable."

The Minnesota Department of Commerce also argues against it.

On average, gas costs account for 36% of a Minnesota customer's gas bill, according to the Commerce Department.

Commodity gas prices have generally declined since the late 2000s as fracking unleashed a surfeit of supply.

There have been significant short-term price spikes, but nothing like what happened during the week of Feb. 11.

For five days, much of the country suffered temperatures that were 15 degrees below normal, from Texas in the south to Montana in the west and to Great Lakes states including Minnesota in the east.

Minnesota utilities had no problems keeping gas flowing, and such reliability is critical to regulators.

As for the price spike, utilities noted its unparalleled nature, saying it could not be predicted.

But analysts said the price run-up showed the risks of a pass-through to consumers.

"If companies are protected from taking a hit in an extreme price event, it disincentivizes their willingness to invest in a mitigation scheme," said Jim Krane, an energy studies fellow at Rice University's Baker Institute in Houston.

Alfred Marcus, a professor at the University of Minnesota's Carlson School of Management, said the PUC should look at capping consumers' exposure to gas costs. "You should have some limit."

Marcus and other analysts said extreme weather events like the February freeze are becoming more common due to climate change — and utilities need to account for them in their gas supply modeling.

"The data we have is based on a physical climate that is past — it is not the same climate we have today and going forward," Marcus said.

Much of the gas destined for Minnesota — particularly the Twin Cities — is delivered by Northern Natural Gas, the nation's largest interstate pipeline operator and an arm of Berkshire Hathaway.

Northern sources much of its gas from states that were hammered by the cold snap. Interstate pipeline rates are federally regulated, but gas costs are not.

Utilities buy gas from multiple sources. CenterPoint has four major suppliers, the largest is Macquarie Energy, an arm of Australia's largest investment bank that has an energy trading operation in Minnetonka.

Macquarie Group announced a windfall profit of up to $215 million from gas and power trading during the February crisis.

Gas utilities protect themselves from price spikes by a practice called hedging. For instance, a utility can buy a call option with a physical gas supplier or in the financial markets, locking in supply at a specified price.

Storing natural gas is another form of hedging. Utilities buy gas in the summer when prices are cheaper and inject it into underground storage spaces for winter use.

Storage gas accounted for 26% of CenterPoint's supply plan for this winter, a PUC filing said.

Between CenterPoint's hedging strategy and its storage capacity, the company counted on stable prices for 48% of its winter gas supply in Minnesota.

About half of Xcel's supply was hedged, and 60% of MERC's.

The remainder of each utilities' planned supply is divided between fixed-price contracts and spot market purchases. CenterPoint and Xcel count on spot markets for 33% of supply, a common industry ratio.

But the spot market exposure proved disastrous during the big freeze.

CenterPoint and Xcel said in separate statements they are re-evaluating their gas-supply ratios in light of the big price run-up. "We will learn from this experience," Xcel said.

In Duluth, where residents get gas from the city's municipal utility, February's gas price explosion had little effect. The utility's 27,000 customers saw only a 3 to 4% increase in their February gas bill. The Duluth utility normally buys about one-third of its gas on the spot market. "You want to take advantage of the daily market because sometimes the daily is the best price," said Pete Upton, Duluth's gas operations supervisor.

Indeed, locking in too much gas on longer-term contracts — or overreliance on hedging — can actually increase costs passed down to customers.

But unlike Minnesota's big investor-owned utilities, the Duluth utility does not rely primarily on the Northern Natural Gas pipeline.

Duluth shifted its sourcing strategy a few years ago after a wholesale gas price spike at the Ventura, Iowa, trading hub on Northern's system. Ventura and Northern's Demarcation hub near Clifton, Kan., are the two main trading points for gas flowing into Minnesota. Duluth still uses Northern, but it increased its draw from Great Lakes Transmission, one of two pipelines that directly carry Canadian gas to Minnesota.

Gas on the Great Lakes and Viking pipelines is priced at the Emerson, Manitoba, trading hub.

While spot prices at Ventura and Demarcation went crazy during the February freeze, Emerson prices rose modestly. "We have the ability to supply our city with either pipe," Upton said. "We have more flexibility."

CenterPoint and Xcel have connections to Canadian pipelines, too. But neither can pull enough gas off those pipelines to switch supplies like Duluth.

Faribault-based Greater Minnesota Gas, which serves 9,500 rural customers, also largely avoided the February price run-up.

It's the only one of Minnesota's five investor-owned utilities that's not part of the PUC's gas investigation.

Just 3 to 4% of Greater Minnesota Gas' purchases in February were on the daily market. Chief Executive Greg Palmer said the utility consciously tries to avoid buying on spot markets in colder months.

"There is a risk to not buying spot gas, and there is a lost opportunity when prices drop," Palmer acknowledged. "But on a very cold day when prices are going up, you wish you had them locked in."

Mike Hughlett • 612-673-7003