UNNATURAL GAS PRICES: EXPLORING THE UNUSUALLY HIGH COST OF NATURAL GAS

As AmerenUE engineers Allen Bues and Dennis Worley check the pressure reading on a steel wellhead rising from a Johnston City, Ill., prairie, they are standing above $6 million in natural gas.

The sharp increase in the price of the invisible gas -- at this site, stored in a 900-acre natural sandstone cavern beneath the wellhead -- has been receiving a great deal of scrutiny from the Missourians who will be purchasing it. For many, what used to be one of the smaller monthly utility bills has become a repeated three-figure nightmare.

In the last twelve months, natural gas prices have risen 300 percent, prompting Missouri governor Bob Holden to commission an energy task force and instruct Missouri Attorney General Jay Nixon to investigate the industry. A report is due out March 1.

Nixon, who met with executives from Missouri's largest natural gas utilities in St. Louis and Kansas City this month, reported that his initial examination has revealed no criminal misconduct, but an industry that has alternative-less customers at its mercy.

"We've not uncovered anything criminal, although the regulatory scheme here certainly benefits the monopoly," said Nixon. "All of the risk of high prices is on the back of the consumer, not the shareholders.

"People are paying three times the amount they were for their heating bill. This month's bills won't be good news."

As engineers, Worley and Bues, who oversee the Johnston City storage facility, have nothing to do with setting the prices that are billed to customers. However, leaving the wellhead, they offer their company's side of the debate.

Natural gas profits are regulated by the state government, explains Bues. If AmerenUE pays, say, $1 for it, they are required to charge their customers $1 for it. The way AmerenUE makes a profit is by charging a fee for the hardware -- the wellheads, compressors, dehydrators, and odor injectors -- that the corporation constructed to supply the gas to consumers.

"Every time there's a cold winter," says Worley, "it seems like somebody calls for an investigation and they find there was no gouging."

This month, AmerenUE reported record earnings of $457 million for year-end 2000, an increase of $72 million from 1999. Similar earnings reports from other companies prompted Nixon to conduct a hearing with Wall Street analysts in St. Louis last week.

AmerenUE is a subsidiary of the St. Louis-based Ameren Corp., which delivers electricity and natural gas to about 300,000 customers in Illinois and Missouri.

Supply and demand

What has raised the cost on the wholesale end, AmerenUE company spokesman Mike Cleary said, is a decreased national supply of natural gas.

This low supply was caused by such factors as the dampened gas exploration and production of the 1990s due to very low gas prices and the increased consumption this year of national reserves due to the cold winter. There also was an economic growth-induced increase in commercial and industrial requirements.

It's basic economics, Cleary said. Supply and demand.

And AmerenUE is passing on the increased cost required to obtain a commodity in high demand to its customers.

A possible issue of misconduct being investigated by the state is utility corporation buyers did not use appropriate discretion when purchasing the gas from wholesalers in preparation for this winter. Buyers typically employ "hedging" -- the process of purchasing their reserves when the price is reasonable and then storing the gas in facilities like the Johnston City cavern as a buffer against price spikes later in the year.

But at Nixon's meeting in Kansas City this month, Missouri Gas Energy Corp. president Steve Cattron said the technique has worked for the last three years, but this year, buyers weren't able to purchase their stockpiles at a low rate.

Last week, the Johnston City cavern was only half full with gas purchased at the lofty prices of the spot market. That's around 60 to 70-cents per hundred cubic feet -- a unit abbreviated as "ccf" by gas companies -- which will be about 80 to 90 cents retail. Ameren reports that the average household monthly winter usage begins at about 150 ccf, but much depends on the size of the home, the weather and how warm people want to be.

The human cost

State leaders pointing to utility companies and utility companies pointing to wholesalers is not solving anything for Scott, a Cape Girardeau social worker.

The skyrocketing natural gas prices caused this public assistance administrator to become a public assistance recipient himself.

Scott, who spoke on the condition that his last name not be used, recently asked the Cape Girardeau Salvation Army for help paying his gas bill. It's a gas bill that, he said, has more than doubled in the last twelve months.

Scott reported that even with the thermostat set for a constant 70-degrees F., the monthly winter gas bills for his two-story, four-bedroom family home have skyrocketed from an average of $100 to $260. He telephoned AmerenUE to complain.

"I called them up and I said, 'I hope you're recording this. This is horrendous'. But they've got me. You have to pay the bill," he said. "I'm a social worker. I don't make that much. It's a major strain on my family."

The Salvation Army paid his latest bill, he said.

Retiree Carl Patterson of Cape Girardeau did not require assistance paying last month's gas bill, which had about doubled from last year, he said. Like most, he can tighten his belt to afford the increase, but the money spent was intended for more enjoyable expenditures.

"That's $600 to $1,000 or more for heating this year we hoped to have in our budget," he said. "It will mean that we would have traveled a little more and shared it more with our family, like eating out and taking trips."

The thermostat of Patterson's one-story house is set at 68 degrees, he said, in anticipation that this month's bill will be more of the same, maybe worse.

The wood burning stove in the center of his house has been in use almost daily this winter, he said. He hardly lit it at all last year.

Crippled businesses

Manufacturers throughout Missouri are saying the soaring cost of natural gas is crippling their efforts to produce their goods cost-effectively.

Bill Large, the facilities engineering manager of the Dana Corporation in Cape Girardeau, reported that his gas bill has about doubled, and that the company is paying in excess of $40,000 a month.

For Dana, which produces light duty vehicle axles, there is no way around this expense, he said.

"It's a cost we cannot pass on to our customers. It severely effects us," said Large. "But we have to go on. Whatever it costs, we have to pay it, if we want to go on manufacturing our product."

John Spencer, a plant manager with Crane Plumbing -- a Nevada, Mo., company which makes toilets and other bathroom products -- reported cutting his employees back to four-day workweeks. A $20,000 natural gas bill one month last year was nearly $100,000 for the same month this winter, Spencer said.

"I really think on something that is a necessity, something the American economy depends on to remain stable, there should be government regulation as to how much these prices can escalate," he said.

Because these businesses are large consumers of natural gas, they could buy the gas directly from wholesalers. Smaller businesses don't have the luxury of being able to shop around. They are stuck with their local distributor, such as Missouri Gas Energy for southwest Missouri, or AmerenUE for Cape Girardeau.

Dennis Ryan runs two dry cleaning businesses, one in Joplin and another in Miami, Okla.

"Every dry cleaner has a boiler," he said. "That's what makes the steam to press the clothes."

At his Miami business, the gas bill went from $500 per month to more than $2,500 for one recent month.

Small business owners say there is no way they would survive if they jerked prices up as rapidly and as sharply as the gas companies have done to them.

"They really need to look closely at what kinds of expenses these people have to justify such a dramatic increase," Lou Anne Daniels, owner of The Brown Bag, a Joplin deli, told the Associated Press.

Her gas bill at the restaurant went from $25 during the summer to $400 in November. She is expecting even worse news when she gets her next bill.

And she said she is already starting to see the effects of high gas prices trickling in from her suppliers, such as the bakeries.

"My bread costs will probably go up," she said. "It is going to effect every price on everything."

The Associated Press contributed to this report.