Atco's record 'mediocre' in supplying cheap gas

Lack of incentives, refusal to hedge cited as key reasons

Bryant Avery, Journal Business Writer The Edmonton Journal

Journal Stock / (Natural Gas Costs)

Atco Gas has a mediocre record in recent years of supplying cheap natural gas to its 810,000 customers, even though the gas comes from Alberta fields.

Comparisons of three regulated utilities during three years show Atco with a middle-of-the-road performance.

"Could they have done better this year?" asked Nora Stewart, an energy expert at Sproule & Associates. "Yes, they could have."

There are few regulatory incentives for Atco to get gas at lower prices, said Consumers' Association adviser Jim Wachowich. Alberta regulations allow Atco to pass along cost changes directly to consumers, whether they go up or down. Stewart said another factor is Atco's refusal to "hedge" -- to lock in a future gas purchase.

"Hedging stabilizes prices," Stewart said. "Other companies hedged last summer when gas prices were low, and Atco did not."

SaskEnergy recently trumpeted its 2001 rates, calling them "the lowest prices in Canada," thanks to the "forward purchase" of gas last summer when wholesale prices were low.

A Saskatchewan home using 150 gigajoules of gas annually -- the benchmark used in Alberta -- would pay approximately $1,092 compared to $1,613 in northern Alberta.

(Southern Alberta rates are traditionally higher by another 12 per cent; the figures include gas, distribution and service charges, but not taxes or rebates.)

The SaskEnergy rate is now $4.52 per gigajoule, versus $8.772 approved for Atco Gas last week. Were it not for delivery costs that account for nearly 40 per cent of bills, SaskEnergy's rates would be even lower.

By comparison, Atco's delivery and service portion is only about 10 per cent of bills. Or to stress the reverse, Atco's gas charge is a much larger chunk of its price.

The comparative numbers varied in 1995 and 1997, when Canadian gas was cheap -- and not yet tied to export markets in Chicago and other United States cities.

An average Saskatchewan home spent $676 in 1995 and $669 in 1997. Average costs in northern Alberta were $534 in 1995 and $633 in 1997.

But if you blend northern and southern rates, Atco's prices were $621 and $737, respectively.

Saskatchewan's advantage in 2001 may be short-lived, SaskEnergy Vice-president Ken From said. Some time this year, the firm will apply to increase rates up to about $7 per gigajoule.

The timing and magnitude of the amended rate will depend on how rapidly SaskEnergy's debt swells. From said his company is now $26 million in the hole from having to purchase new, costlier gas to replenish supplies.

Atco Gas also has been buying gas at prices higher than its income from consumers. The company, which refused to comment until after regulatory hearings in mid-February, has estimated its current shortfall at $260 million since Dec. 1, 2000. That is when wholesale market prices soared, reaching a peak of $16.90 per gigajoule on Dec. 11.

Enbridge Consumers Gas customers are already paying more than Atco consumers, and face a further hike March 1, said spokesperson Mike Campbell. Enbridge supplies 1.5 million customers in Toronto, Ottawa and the Niagara area.

The 2001 Enbridge total tab is about $1,632 for a home using 150 gigajoules, a huge jump from its $881 annual charge in 1997 or $862 in 1995.

B.C. Gas customers will pay an average of $1,704 in 2001, according to a Vancouver Province report last week.

There's nothing wrong with Atco's overall purchasing methods, said critic Greg Garbutt, one of 13 energy consultants who formed the North Core Committee to advise non-industrial clients such as the Consumers' Coalition and the City of Edmonton.

"I don't have much of a problem with their purchasing strategy," he said. "Up to this year, they were doing well." Atco uses a mixture of long- and short-term contracts, plus spot-market purchases, to account for about 70 per cent of its distributed gas. Sixteen per cent comes from its storage caverns, which can contain 6.6 million gigajoules when full.

But the North Core complaint is directed at Atco's policy on its own gas fields. The utility has massive gas reserves to draw down at about $2 per gigajoule, he said.

"It's a rainy day fund of gas, and it's pouring out there right now," Garbutt said.

Atco has said in the past it prefers to produce its gas field slowly. It currently uses its own wells to cover 11 per cent of northern demand.

But Garbutt noted Burlington Resources Canada is offering $500 million for Atco's gas properties.

The terms of that sale are not acceptable, Garbutt said. Atco wants to receive 57 per cent of the sale proceeds. But if the reserves were retained and produced by Atco, Alberta consumers would enjoy 100 per cent of the benefit.

On Tuesday, Edmonton city council voted unanimously to oppose the sale and called for Atco to increase its production. Atco is scheduled to appear at an Alberta Energy and Utilities Board hearing starting Feb. 14.

http://www.edmontonjournal.com/news1/stories/010131/5094654.html

-- Martin Thompson (mthom1927@aol.com), January 31, 2001

Answers

Wednesday 31 January 2001 Energy payouts balloon to $4.1B

Scott Crowson, Calgary Herald

The Alberta government is offering a balm to soothe the sting of soaring natural gas prices by adding $852 million to its rebate program, bringing the total value of all gas and electricity rebates to more than $4.1 billion.

"This is rebating the people's money -- money from the people's resource," said Premier Ralph Klein. "People are saying they should see more benefits from a resource they own, especially at a time when the resource is valued so highly in the marketplace. These Albertans are right."

Retroactive to the beginning of the year and continuing through April, natural gas rebates for Alberta homeowners will increase to $150 a month from $50.

Tuesday's announcement was also welcome relief for landlords, condo boards, businesses, industrial operations and non-profit organizations. They'll be eligible for rebates of $6 per gigajoule for the first four months of the year.

The rebate will apply only to the first 5,000 gigajoules per month -- a maximum of $30,000. Landlords will be exempt from this cap.

The government has created a $5-million contingency fund using lottery revenue to assist those such as low-income seniors who need further help to survive the effects of increasing energy costs.

Klein said that when all the energy rebates are totalled, it amounts to $1,680 for the typical two-adult household. That includes the one- time $300 energy tax refund, the residential electricity rebate of $40 a month for one year and the natural gas rebates.

Klein said he expected natural gas prices to drop in May, when use traditionally declines, but added the government will monitor energy prices and "take action where necessary."

The additional rebates are a big relief for non-profit groups such as the Salvation Army.

The gas bill for its local addiction and rehabilitation centre, The Anchorage, tripled last month.

The facility, which provides emergency shelter to homeless Calgarians, was billed $2,960 for 885 gigajoules of gas in December 1999. Last month, the charge was $8,999 for 788 gigajoules.

"We're extremely thankful to have these rebates coming in," said Sally Ann spokeswoman Andrea Timmer. "The unfortunate reality is we only have so much money to run the facility and operate our programs. This lets us continue the quality of social services that we provide without having to make any cutbacks."

With the additional rebates, the gas bills for The Anchorage will still be up by about 40 per cent.

The rebates will help landlords, who are expected to pass on the savings to their tenants. But it might not be enough, said Gerry Baxter, executive director of the Calgary Apartment Association. Renters have already been hit with increases due to higher gas prices.

"This has really been a cause for great concern and a lot of turmoil in the industry," Baxter said. "When landlords get hit with these huge, huge increases, they have no alternative. The costs have to be passed on to the consumer."

Baxter noted that ATCO Gas, which delivers natural gas to 810,000 Alberta households, received regulatory approval last week to raise its rate by 50 per cent for 2001.

"(Klein's) announcement may help through these tough times right now, but if the increases continue, we may see another round of rent increases later this year," Baxter said. "How else do you stay in business?"

Alan J. MacFadyen, an energy economist with the University of Calgary, said he favoured rebates over subsidies.

"It eases the immediate pain without discouraging conservation efforts," the professor said. "If you subsidize the gas price, and try to make it easier for consumers that way, then you actually discourage people from looking for ways to conserve energy."

MacFadyen said the rebates wouldn't be needed for more than a few months, adding he expects the price spike will induce more production, thus bringing prices back down.

The Alberta Consumers Association criticized the rebates as being only a short-term solution.

"We'd like to see longer-term solutions put in place," said Larry Phillips, president of the Alberta organization. "We'd like to see a more ordered approach."

He said oil and gas royalties should go into a trust rather than general revenues after prices reach a certain level. The excess royalties could go into a heritage fund or rebate scheme through a formal process, Phillips suggested.

Money for the energy rebates is coming from general revenue and the government's power auctions last year.

The Alberta surplus is estimated at $6.75 billion, thanks largely to oil and gas royalties.

Despite the rebates, Klein said the government will still be able to make a "very substantial payment" this year on the $8-billion provincial debt.

Klein justified a new round of energy rebates by pointing to the results of a spending priorities survey.

Of the 120,000 people who responded, 73 per cent said the government should focus on tax cuts once it eliminates the provincial debt. This compared to a 44-per-cent rating for increased program spending on items such as health care and education.

Results from the It's Your Money survey, mailed to Alberta households in November, were released Tuesday.

They indicated that Albertans preferred energy rebates (65 per cent) over tax refunds (52 per cent) or annual dividends (55 per cent) when energy prices are high.

"The results are not terribly surprising and are consistent with previous surveys," said Troy Lanigan, acting Alberta director for the Canadian Taxpayers Federation. "Tax cuts have always come out ahead of increased or new spending."

Treasury department officials said the survey was accurate 99.7 times out of 100, plus or minus one per cent. Responses were validated to eliminate duplicated submissions.

http://www.calgaryherald.com/news/stories/010131/5094589.html

-- Martin Thompson (mthom1927@aol.com), January 31, 2001.

Something to keep in mind here is that under NAFTA Alberta cannot control gas prices or preferentially supply gas to Albertans without paying the going rate. "Hedging", ie Gambling, is the only way to smooth out the bumps. We (Alberta/Canada)used to have a requirement to prove that the volumes being exported were in excess of 25 years supply! We currently have less than 10 at these rates of export. KJ

-- Kevin (kevijeps@marathoncanada.com), January 31, 2001.