Minnesota AG says utilities mismanaged natural gas price spike in February

Minnesota Attorney General Keith Ellison's office has concluded that the state's utilities mismanaged natural gas procurement after a historic winter storm in the South, leading them to overbill their customers for $380 million in wholesale gas costs.

The office said Wednesday it is recommending the state Public Utilities Commission (PUC) allow utilities to recover only 53% of the roughly $800 million in costs they are trying to pass down to consumers, saying the companies could have reduced their wholesale gas bills during the run-up — but failed to do so.

"While Minnesota utilities did not cause Winter Storm Uri or the run-up in natural gas prices, they should have reacted forcefully to the pricing emergency and used every tool at their disposal to reduce costs," Ellison said in a statement.

Wholesale gas prices in Minnesota and many other states soared in February when the storm hit Texas and other natural gas-producing states. Temperatures plunged, gas field equipment froze up and supply cratered just as demand soared.

At the same time, Minnesota and the Upper Midwest was locked in its own deep freeze. The state's gas utilities ended up scrambling for gas supplies as Midwestern wholesale prices rose at least 4,500%.

CenterPoint, the state's largest gas utility, had first estimated it would pass down roughly $500 million in storm-related gas costs, or $354 per average household. That number has been revised to $470 million, which means the household effect should be less.

This spring, Xcel, Minnesota's second-largest gas provider, estimated ratepayers' tab to be $215 million, or $270 per household; MERC, the third-largest gas utility, $75 million for $225 to $250 per household; Great Plains Gas, a small western Minnesota utility, $11 million or $310 per household.

Ellison's office recommends that the PUC allow CenterPoint and MERC to recover nearly 40% of those costs; Great Plains 14 %; and Xcel 84%.

In its investigation, the Attorney General's Office concluded that it "uncovered numerous instances in which Minnesota's natural gas utilities could have reduced natural gas purchases during the price spike but failed to do so."

Minnesota consumers should not have to pay for the utilities' "mismanagement," Ellison said.

The office's investigation of the price run-up was filed Tuesday with the PUC. The commission is conducting its own inquiry, and takes into account investigations by the Attorney General's Office and the Minnesota Department of Commerce.

The state's biggest gas utilities defended their practices in light of the attorney general's report.

"We are troubled by the implication that, during prolonged subzero temperatures, we should have put safe and reliable natural gas service at risk due to cost concerns," Houston-based CenterPoint said in a statement.

"We acted reasonably and prudently to serve our customers while managing costs, and we respect the Public Utilities Commission process that will review all the evidence."

Minneapolis-based Xcel said it "took many steps to mitigate the high costs." The utility said in a statement, "While we understand the [attorney general's] concerns, we intend to fully address them as the Commission's process continues."

MERC, an arm of Milwaukee-based WEC Energy group, said it "took proactive steps to reduce costs for customers. ... Our approach saved customers more than $120 million."

In Minnesota, like most states, wholesale commodity gas costs are passed through directly to consumers, without a markup from the utility. Consumers benefit from lower prices and are hurt by higher prices.

Usually, swings in gas prices tend to even out, but not this time.

With the pass-through arrangement, "utilities do not have a natural incentive to minimize fuel costs," the Attorney General's Office said in a PUC filing Wednesday. "They can usually expect to recover whatever they pay."

This arrangement led to a "business-as-usual approach" by the gas utilities during the February price spike, the filing said.

In May, the state Department of Commerce concluded that the utilities should not be allowed to collect $90 million of the roughly $800 million in extra gas costs from the winter storm.

The Commerce Department said the utilities failed to draw enough gas from storage during the supply crisis, relying too much on the stretched natural gas spot market. The utilities dispute that.

Storing natural gas is a hedge against rising prices. Utilities buy gas in the summer when prices are cheaper and inject it into underground storage spaces for winter use.

The Attorney General's Office concluded, too, that the utilities failed to fully deploy gas storage, agreeing with the Commerce Department's $90 million disallowance. It also found that the utilities didn't adequately "maintain a diverse mix of suppliers and pricing arrangements for gas."

Specifically, Ellison's office contends some utilities didn't maximize efforts to import Canadian gas, which was far cheaper, during the crisis. It also said utilities didn't try hard enough to buy fixed-price spot market contracts, relying too much on variable-priced contracts, which turned out to be more expensive.

The Attorney General's Office also said the gas utilities didn't "curtail" enough natural gas. Some commercial customers have contracts that allow utilities to curtail gas during times of tight supply — in exchange for lower rates generally.

In addition, Ellison's office faulted the utilities for not notifying their customers of the price spike so that they could voluntarily reduce consumption.