Oil & Gas News

Oklahomans are stuck with a $4.5 billion energy bill, here’s why

Energy

By: Jack Money – The Oklahoman – You can pay me now or pay me later for the energy you use.

That’s the message being sent by power providers seeking to recover nearly $4.5 billion from Oklahoma customers for costs related to February’s winter storm. And despite objections from members of the community and some state legislators, Oklahomans ultimately are going to have to foot the bill.

Legislators recently approved a plan to shift those expenses into long-term bonds, effectively spreading the repayment out over time. This will prevent huge, short-term spikes to consumers’ utility bills, but it also means Oklahomans will be seeing higher bills for a decade or longer.

“Whether customers pay all at once or using an installment plan, the fact remains: the people of Oklahoma will pay for this,” said State Rep. Andy Fugate, D-Del City. “The current bill merely converts that payment from a lump sum into a utility tax.”

Fugate filed an unsuccessful amendment to recapture the profits marketers of natural gas and electricity made during the recent ice storm in an effort to relieve some of the costs on consumers. Fugate and Rep. Mickey Dollens, D-Oklahoma City, both want the price spikes for electricity and natural gas during the storm investigated.

“During the recent ice storm, utility suppliers manipulated markets to overcharge Oklahomans by $4.5 billion in just a matter of days. That’s $1.5 billion more than we will budget this year for all of Oklahoma’s public-school children,” Fugate said. “It’s outrageous that we are moving to pay this without also working to get any of this money back.”

“If the ongoing investigation concludes energy providers manipulated the market to profit off February’s Arctic blast, Attorney General (Mike) Hunter must stand up for the people who elected him and do everything in his power to reclaim their hard-earned dollars,” Dollens said.

Analysts, meanwhile, maintain that energy-related transaction costs before, during, and after the storm were based on supply and demand fundamentals and regulatory schemes that impact how people pay for the energy they use.

“You can’t have your cake and eat it, too,” said Bernadette Johnson, a senior vice president at Enverus, which follows power and renewables markets.

How regulatory schemes impacted storm’s costs

Consumers in the upper Midwest, Northeast,Energy and Mid-Atlantic regions of the nation typically pay a higher average monthly cost for the energy they consume. This energy can be both electricity or natural gas used to power a home.

Regional grid operators for systems covering those areas of the country require power providers to keep excess energy supplies available in a reserve capacity, regardless of whether they are needed.

It costs money to keep those energy supplies on tap, and revenues collected through a “reservation” fee compensate those standby providers.

But the Southwest Power Pool (SPP), the regional transmission operator for transmission lines covering Oklahoma and parts or all of 13 other states between here and Canada, has no such requirement.

Instead, it leaves that determination to regulators in each state it covers.

This keeps average energy costs among the lowest in the nation — until something like February’s storm happens.

How does cold weather impact energy prices?

Much of the nation’s mid-section stretching from Texas all the way to the Canadian border saw wildly increasing energy costs during February’s unusually cold weather as fuel suppliers and consumers (namely power providers) attempted to secure adequate supplies for anticipated needs.

Oklahoma, whose power providers rely heavily on natural gas to generate electricity, was no exception.

The per million British thermal units (mmBtu) delivery price for natural gas on ONEOK’s gas transmission system within the state more than doubled even before the really cold weather had arrived, going from $4.16 on Feb. 10 to $8.60 the following day, according to data provided by Enverus.

But it didn’t stop there.

On Feb. 12, its price increased nearly tenfold, to $77.91. The price on Feb. 13 climbed to $367.85, then $944.78 on Feb. 14, and spot pricing on the system peaked on Feb. 15 at $1,192.86.

The real-time pricing market for electrical energy operated by the SPP saw similar cost hikes.

The cost per megawatt-hour of electricity (that’s enough electricity to power about 800 homes for an hour) was highest on Feb. 15, at $2,302.39, about three times higher than Valentine’s Day price of $758.40.

While power supplies were only briefly interrupted across the Southwest Power Pool on Feb. 15 and 16, both regulated and non-regulated Oklahoma power providers incurred an estimated $4.5 billion in additional costs to keep that energy flowing (a hard number is still being calculated).

Energy businesses profit from Oklahoma winter storm

Companies in the business of buying and selling energy benefited most significantly from the energy price swings during the February storm.

Those include pure energy marketing firms like Oklahoma City-based Clearwater Enterprises, which had some stored gas available for sale on the region’s natural gas system as demands for the fuel climbed both before and during the storm.

Many such firms buy natural gas when it is cheap, pay to have it stored, and then sell it when demand pushes delivery prices higher, both during routine daily demand peaks and during extraordinary events.

Usually, profit margins are fractional and the companies move large amounts of energy to conduct profitable transactions.

Other companies that benefited included oil and gas producers who were able to keep their wells operating during the storm and midstream companies that buy raw gas from well producers and gather, process and store it before selling it to downstream users like utilities and major consumers. ONEOK is a publicly-traded company based in Oklahoma that fits that category.

On Tuesday, ONEOK reported quarterly results showing it earned a net income during the first quarter of $386.2 million, compared with a net loss of $141.9 million in the same period in 2020.

There are many factors contributing to the difference from one year to the next, including non-cash impairment charges, better average prices of natural gas even before the storm, and more.

But ONEOK was also able to sell 5.2 billion cubic feet of natural gas it had in storage to customers during the first quarter of this year, compared to just 1.2 billion cubic feet to the same quarter last year.

Obviously, the company was able to sell that gas for considerably more than what it cost to gather, process, and store.

Tony Say, Clearwater’s president, said opportunities for firms like his to make windfall-size profits during the storm would have depended upon how much gas they had in storage and how much gas they could access to move.

Larger companies like ONEOK probably benefited most, he agreed, but he believes criticisms of the system are patently unfair, regardless of who made what.

“People always have issues whenever an event like what we saw in February happens,” Say commented, “but you never hear anyone complaining or call for the government to step in to stabilize the market when prices for gas are at the other end of the spectrum.”

Meanwhile, ONEOK’s customers are seeking to boost the amount of storage they hold on its system, ONEOK Chief Operating Officer Kevin Burdick said.

“Our ability to provide reliable service throughout the extreme weather highlights the importance of market-connected pipelines and storage assets and the value of these vital services.”

Energy

Should Oklahoma customers be left with the bill?

Energy market analysts often find themselves discussing the underlying issue of what is considered fair for consumers.

But they stress the bottom line of every discussion is a conclusion that energy isn’t free.

“At the end of the day, somebody has to pay for it,” said Enverus’ Johnson.

Johnson said several factors played heavily into the excessive power prices that Texans and Oklahomans are being asked to pay because of February’s storm.

The most significant driver behind those cost spikes was what happened with natural gas prices on gas transmission markets in Oklahoma and elsewhere.

Oklahoma and Texas, she noted, typically have enough natural gas supply available during winter months to continue exporting the fuel to other areas of the country and the North American continent.

But during February, the fuel’s rapid escalation in value happened because power providers in those two states found themselves without enough natural gas to meet localized demands caused by the particularly cold weather.

“This was a record event during which buyers are competing for limited volume and were pulling gas in a different direction than what is typical for winter flow patterns. The prices we saw were a result of that pull,” she said.

Plus, there were no market restraints that would slow rapid accelerations or decelerations in the fuel’s value, given that Congress deregulated the market in the early 1990s.

As a result, today’s trading environment is “one of the best real-world examples of a free marketplace, where players have easy entries and exits, tons of information from gas flow data that posts every single day, an ability for anybody to own space on pipelines, to move gas from one place to another, to invest in pipeline infrastructure and to sell long-term capacity,” she said.

The other factor that played into what happened involves regulatory regimes impacting wholesale electricity markets, she noted.

The explosive growth in renewables, meanwhile, adds “nuance” to markets where the interplay between long-term dispatchable resources and renewables must be considered.

“99.9% of the time, people in Oklahoma and Texas are enjoying some of the lowest prices for energy in the world,” Johnson said. “At many times of a day or even for certain times of the year, prices for wholesale energy are very low, or even running in negative ranges.

“But on those few days when prices shoot up, then all of the sudden, you see these complaints that everyone is corrupt or is unfairly making money off of consumers,” Johnson said. “The consumer pays it, whether it is through an average higher cost or price spikes.”

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