Opinion

Who wins in a predatory market? The wolves, naturally.

September 26, 2021 3:33 am

A weeklong cold wave in February sparked an energy crisis which drove the price of natural gas to 200 times its price a few days before. Because wholesale natural gas is unregulated, a handful of companies were able to charge what the market would bear, and Kansas consumers will likely be paying off the $1 billion bill for years to come. (Max McCoy/Kansas Reflector)

The billion-dollar question of who got rich from the February cold wave has been answered, despite the best efforts of the state’s regulatory commission and our largest natural gas utility to keep that information secret.

Need a hint? Those who made bank were rich already.

It wasn’t scrappy small entrepreneurs who rolled up their sleeves and worked extra hard to make sure your house stayed warm. Your neighbors aren’t likely to be among the lucky few who, in a chaotic and unpredictable wholesale energy market, were able to keep the natural gas flowing at rates that peaked at 244 times normal. But your neighbors and you, as Kansas consumers, will be paying the heating bill for that unexpectedly cold week in February for years to come.

It’s like we all had one of those household catastrophes that sometimes comes along — the transmission in your car goes out, the sewer line in the back yard has to excavated, the roof starts leaking — and you’re short on cash, so you use plastic to keep things running at home. But imagine you had no choice of who to call for repairs, what they would do, or even what credit card to use. That’s what happened to all of us because the wholesale natural gas market is unregulated, with no circuit breakers to protect us from disaster pricing.

Imagine you had no choice of who to call for repairs, what they would do, or even what credit card to use. That's what happened to all of us because the wholesale natural gas market is unregulated, with no circuit breakers to protect us from disaster pricing.

– Max McCoy

The winners are some of the largest natural gas marketing and trading companies that you’ve probably never heard of: Tenaska, an Omaha-based energy marketing firm, $133 million; Macquarie, an Australian “physical gas marketer,” $70 million; and Southwest Energy, a Texas limited partnership, $68 million. These three companies invoiced the lion’s share of billings to Kansas Gas Service, the state’s largest natural gas utility, according to documents held by the Kansas Corporation Commission.

Billings from the trio amount to 73% of the $371 million in additional gas purchases by KGS to maintain service to consumers in February. When other purchases by the state’s utilities are totaled, the bill comes to a cold $1 billion.

How do we know the names of the companies and the amounts KGS was billed?

Thank Jim Zakoura, an Overland Park attorney and eagle-eyed consumer advocate, who found them, unredacted and in the public record, in “Exhibit MLR-3” in prefiled testimony submitted by KGS. The exhibit gives the total dollar amounts billed, but not the per unit rate for natural gas.

Zakoura, who represents the Natural Gas Customer Transportation Coalition, on Wednesday referenced the information in documents he filed asking the KCC to reconsider an earlier decision that deemed the identities of suppliers, and their invoices, confidential.

Zakoura told me he wasn’t trying to leak supplier data, he just wanted the commission to have all the necessary information. The identities and dollar amounts of February’s additional natural gas suppliers were already in the public record, he said, so he wasn’t risking being sanctioned for violating a non-disclosure agreement imposed by the KCC.

“All relevant information needs to be before the commission,” Zakoura said, “so they can make an informed decision. Their (previous) ruling centered around whether it was confidential information, and maintained as confidential. So the commission needs to have this information before it to reassess the order.”

Because KGS did not redact Exhibit MLR-3 in its prefiled testimony, the point is moot.

The testimony, by Matt L. Robbins, director of gas supply for KGS, was related to a requested rate plan that would pass along the wholesale costs, and interest, of February’s price hike to consumers over a period of up to 10 years. The plan would “securitize” the amount, which means that the costs would be bundled and sold to a third party as a bond. Consumers would see their monthly utility bill increase from $5 to $17, depending on the details of the plan ultimately approved.

The KCC hasn’t ruled yet on the rate request.

In addition to the three suppliers already mentioned, Exhibit MLR-3 also lists the following vendors: ETC, $40 million; Rockpoint,$20.5; Mieco, $11.6; BP, $8.7 million; and Koch, $5.3 million.

“Kansas Gas Service considers the contracts and invoicing surrounding the winning bids to be confidential,” a KGS spokeswoman, Dawn Tripp, told me last month. The invoices are available to commission staff, the attorney general’s office, consumer and business groups — but not to the public.

Zakoura argued, in an earlier motion, that the interests of transparency and the public good required the commission to disclose just who profited from the cold wave. No dice, the KCC ruled Sept. 9. That data amounted to trade secrets and, if made public, would hurt the utility’s ability to negotiate and secure natural gas supplies. Zakoura and others who had access to the data were forbidden from disclosing it.

The commission also denied another Zakoura motion, to subpoena the S&P Global Platts Gas Daily, an index to daily gas transactions that effectively sets the wholesale price. Nope, the KCC said. It’s not up to the commission to investigate whether there was market manipulation in the price of wholesale natural gas. That’s the job of the Federal Energy Regulatory Commission.

The FERC announced in February that it was examining market activity to determine if price gouging had taken place, but so far there’s been no word on what, if anything, the federal commission has found. I emailed FERC weeks ago asking about the status of its examination but received no response. I don’t expect one, either, as any investigation would be looking for criminal activity and would therefore be “non-public.”

Kansas Attorney General Derek Schmidt said his office would look into the natural gas cost spikes. (Noah Taborda/Kansas Reflector)

A couple of weeks ago, Kansas Attorney General Derek Schmidt said the natural gas spikes appeared to “violate Kansas law.” Schmidt said his office would seek to hire an outside firm with expertise in the “complicated natural gas marketplace” to further the inquiry into price gouging. Because the governor had declared a state of emergency, unjustified price increases in necessary goods and services were illegal. While Schmidt’s announcement indicated his office might be willing to pursue legal action, it’s a long way from something seeming wrong to filing an actual lawsuit. And when the state’s attorney general says he’s turning to outside help to unravel the complexities of the spikes, what chance do ordinary Kansans have to understand the market?

Instead, we have to depend on others to advocate for us.

The complexity of the natural gas market, and the patchwork nature of current regulation, work against consumers. You can’t fight what you don’t understand.

A few dollars more a month on your natural gas bill might not seem like much, but the point is just how close the natural gas market brought us to catastrophe. Yes, it was cold in February — northeast Kansas had 10 days of temperatures below 15 degrees — and while it was uncommon, it wasn’t unforeseeable. But the cold wave threatened to tip us over into real catastrophe because natural gas, which has been cheap and plentiful, suddenly became expensive and scarce. The market was doing what unregulated markets do, which is not such a big deal if you’re talking about classic cars or that Mickey Mantle baseball card you had as a kid but now suspect your brother swiped. But when it’s food or water or the stuff used to keep you warm during a winter storm? Things get serious pretty quick. That’s why we have laws against profiteering during a disaster.

“No one forced these suppliers to charge $622.78 per unit for a product that sold for about $2.50 just 12 days earlier,” Zakoura said. “That was their choice. There were many suppliers in the natural gas market that looked at their costs of production and said, a reasonable profit is fine, but I’m not going to increase my prices by 24,000% during a winter weather disaster, just because my contract says I can. Where is the humanity in that kind of market?”

Zakoura said it’s important to investigate how wholesale prices are set. The index is based on a few transactions voluntarily reported by confidential sources, he said, and it may be the pricing is simply inaccurate.

“We would hope (the index) would reflect actual arm’s length trades among nonaffiliated people,” he said, “but I have no information to say that’s right or wrong. In fact, I have no information at all.”

On Feb. 1, natural gas was $2.54 per unit. By Feb. 17, it was $622.78.

That’s a 24,419% increase.

Such astronomical numbers are nearly impossible to grasp, particularly when you’re dealing with an unfamiliar commodity. But think of a gallon of milk. Let’s say that gallon costs, on average, $3.71. If a price hike similar to February’s natural gas spike hit your corner market, that gallon of milk would cost you $910.

Clearly, the market is broken.

If we’re lucky, and if we keep pressing, we might eventually get a fix, a circuit breaker built into the system that would make sure there was an ample supply of natural gas and prevent catastrophic price hikes. We really don’t have a natural gas problem, because we’re sitting on ample amounts of the stuff, and 2019 and 2020 were record years for production. What we have is a problem with the tangle of pipelines and suppliers and traders and marketeers in delivering natural gas to home meters.

Alarmingly, indicators are that things may get bad again this winter.

Natural gas prices are creeping up, with domestic prices doubling in recent months, and the Wall Street Journal said the global market appears “unnatural.” It would take only another week of bad weather and price spikes to kick off the kind of economic disaster that, during a time of pandemic and social unrest, might tip us over into a weather-driven economic disaster not seen since the Great Depression.

Brother, can you spare $910 for a gallon of milk?

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Max McCoy
Max McCoy

Max McCoy is an award-winning author and journalist. A native Kansan, he started his career at the Pittsburg Morning Sun and was soon writing for national magazines. His investigative stories on unsolved murders, serial killers and hate groups earned him first-place awards from the Associated Press Managing Editors and other organizations. McCoy has also written more than 20 books, the most recent of which is "Elevations: A Personal Exploration of the Arkansas River," named a Kansas Notable Book by the state library. "Elevations" also won the National Outdoor Book Award, in the history/biography category. Max teaches journalism at Emporia State University.

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