Gas Bills Puzzle Some Oklahoma City-Area Customers.

By Rick Robinson, The Daily Oklahoman Knight Ridder/Tribune Business News

Dec. 14--Local resident R.W. Fryar has been scratching his head about his recent bill from Oklahoma Natural Gas Co.

Fryar, a retiree who lives in Midwest City, is an observant man.

He's been looking at the "current cost of gas" line on his November bill, which says ONG paid $4.961 for a "dekatherm" -- about a thousand cubic feet -- of natural gas.

And he's been wondering how ONG's gas can be almost $5, when natural gas prices published by The Oklahoman have been in the mid-$2 range lately and haven't gone much over $3 for months.

Fryar said he sought an explanation from ONG customer service.

He was told the reason for the discrepancy was that the company must buy its gas months in advance.

"I talked to them, but I didn't like the answer," he said. "I got the impression that it was an excuse rather than a explanation."

Fryar isn't alone. Many Oklahomans have been baffled by what seems to be the high cost of gas on their bills from ONG.

They've been told that ONG must "pass through" its natural gas costs directly to the customer without making a penny of profit.

The utility makes its money mostly on the "customer charge" and "delivery fee" parts of the bill.

ONG, a unit of Tulsa-based ONEOK Inc., is Oklahoma's main gas utility, serving about 85 percent of Oklahoma households.

William Eliason, vice president for gas strategy for ONG, recently offered a more complete explanation of the cost-of-gas charges.

Be warned, however. Examining utility gas-buying practices can get complicated.

Eliason explained that the natural gas prices most people see -- like the $2.25 Oklahoma monthly index price for December or the $2.756 futures price on the cover of today's Business section -- are "wellhead" prices. That's what gas costs right out of the ground, before it goes into a pipeline.

But getting that wellhead gas to consumers' homes and businesses costs ONG extra.

"I'm not trying to confuse you," he added apologetically.

There are two main types of extra costs, Eliason said: Reservation costs and "hedging" or "forward-pricing" costs. They result from the two main ways ONG gets its gas.

The first way involves reserving gas using "index-plus" contracts. During the summer, ONG uses these contracts to reserve gas for winter delivery. The company will eventually buy about 60 percent of this winter's gas through index-plus contracts.

ONG buys index-plus gas at industry-wide "index prices," most of which change monthly. Then suppliers add an extra charge -- the "plus." ONG says this premium charge varies from supplier to supplier.

Index prices for gas can be cheap, as they are now. Or they can quickly soar, as they did last January, when the monthly index price ONG had to pay went to a record $10 per dekatherm.

When ONG contracts for index-plus gas, it pays suppliers a reservation fee. That fee also gets tacked onto the cost of gas.

Generally, ONG reserves lots of index-plus gas, enough to keep customers warm even if the weather gets really cold.

Naturally, the more gas ONG actually ends up buying, the less the reservation fee costs per unit of gas.

"If you use all the gas that you reserve, then the reservation fee is really a rather small component," Eliason said.

This November, the weather was warm, and ONG didn't sell much gas of the gas it reserved. As a result, the reservation fee cost per unit was pretty large -- 59 cents.

The second way ONG gets its gas is to buy it -- not reserve it -- in advance. The company locks in moderate prices by buying gas at a set price during the summer, for delivery later during the winter months.

The virtue of this strategy is that the prices will be predictable. They may not be as low as index-plus prices, but they won't soar either, which index-plus prices can do. ONG bought about 40 percent of this winter's gas through this method, called "physical hedging" or "forward pricing."

"Forward pricing is not so much to try to beat the market and get the lowest possible price, as it is to reduce volatility in gas prices," said Don Sherry, an ONG spokesman.

The difference is that forward-priced gas is owned by the utility and essentially must be used. The index-plus gas is merely reserved, and the utility can take as much or as little as it needs, depending largely on the weather.

Last winter, when prices were high, ONG didn't hedge any gas.

ONG depended on index-plus gas, which soared in price. The Oklahoma Corporation Commission, which regulates ONG and other state utilities, called ONG on the carpet, saying essentially that ONG's lack of hedging worsened customers' exposure to last winter's price surge.

The Corporation Commission wound up disallowing $34.6 million in ONG's gas costs from last winter. ONG says it did nothing wrong and is appealing the commission's ruling to the Oklahoma Supreme Court.

This year, Eliason explains, ONG began hedging gas in April. It rode the gas market down, buying at various prices between $5.35 and $2.68 for delivery in the winter months.

But ONG hedged the majority of its gas early on in the summer, when prices were higher. The utility was apparently in a hurry to lock in prices, fearing they might soar again as they did the previous summer.

Consequently, the average price of ONG's hedged gas for this winter will be about $4.30.

"You just don't know which way the market is going to go, Sherry said.

There are other costs involved in the "cost of gas."

Transportation is one of them.

Transportation is what ONG must pay to use pipelines like the Williams Cos. or ONEOK Gas Transmission pipelines. Basically, Eliason says, ONG is leasing that pipeline.

But most transportation charges go into the delivery fee on a customer's bill. A little bit goes into the "cost of gas" item on the bill, and a little bit into the "customer charge."

Like the reservation fee, the per-unit cost of transportation drops if ONG buys more gas during a given month.

So, finally, here's the breakdown of that $4.961 "cost of gas"

that showed up on November bills:

The actual price that ONG paid for that gas was $3.56 per dekatherm. Of that total, ONG spent $1.56 on index-plus gas, and spent $2 for hedged gas.

Add to that the 59 cent reservation fee for the index-plus gas.

Also add 75 cents that ONG is still collecting because it undercharged customers during last winter's record high gas costs -- which is the expense that the Corporation Commission disputes. ONG is collecting another 6 cents for more recent undercharges.

The benefit of this two-tier approach is that the price to consumers will stay relatively low if gas wellhead prices soar, as they did last winter, Eliason said. However, the drawback is that if wellhead prices stay low, the price to consumers will remain relatively high -- as the $4.961 price shows.

Remember, the "cost of gas" is only one line on your bill. There are six other line-items in the bill. Those items have been added over the years by the utility and by state regulators to try to make bills more open, accessible and clear.

But, admits ONG's Sherry, "all of it is just an effort at transparency. I realize that for some people it's more confusing than enlightening."

To see more of The Daily Oklahoman, or to subscribe to the newspaper, go to http://www.oklahoman.com

(c) 2001, The Daily Oklahoman. Distributed by Knight Ridder/Tribune Business News.

OKE,

Gas Bills Puzzle Some Oklahoma City-Area Customers.

By Rick Robinson, The Daily Oklahoman Knight Ridder/Tribune Business News

Dec. 14--Local resident R.W. Fryar has been scratching his head about his recent bill from Oklahoma Natural Gas Co.

Fryar, a retiree who lives in Midwest City, is an observant man.

He's been looking at the "current cost of gas" line on his November bill, which says ONG paid $4.961 for a "dekatherm" -- about a thousand cubic feet -- of natural gas.

And he's been wondering how ONG's gas can be almost $5, when natural gas prices published by The Oklahoman have been in the mid-$2 range lately and haven't gone much over $3 for months.

Fryar said he sought an explanation from ONG customer service.

He was told the reason for the discrepancy was that the company must buy its gas months in advance.

"I talked to them, but I didn't like the answer," he said. "I got the impression that it was an excuse rather than a explanation."

Fryar isn't alone. Many Oklahomans have been baffled by what seems to be the high cost of gas on their bills from ONG.

They've been told that ONG must "pass through" its natural gas costs directly to the customer without making a penny of profit.

The utility makes its money mostly on the "customer charge" and "delivery fee" parts of the bill.

ONG, a unit of Tulsa-based ONEOK Inc., is Oklahoma's main gas utility, serving about 85 percent of Oklahoma households.

William Eliason, vice president for gas strategy for ONG, recently offered a more complete explanation of the cost-of-gas charges.

Be warned, however. Examining utility gas-buying practices can get complicated.

Eliason explained that the natural gas prices most people see -- like the $2.25 Oklahoma monthly index price for December or the $2.756 futures price on the cover of today's Business section -- are "wellhead" prices. That's what gas costs right out of the ground, before it goes into a pipeline.

But getting that wellhead gas to consumers' homes and businesses costs ONG extra.

"I'm not trying to confuse you," he added apologetically.

There are two main types of extra costs, Eliason said: Reservation costs and "hedging" or "forward-pricing" costs. They result from the two main ways ONG gets its gas.

The first way involves reserving gas using "index-plus" contracts. During the summer, ONG uses these contracts to reserve gas for winter delivery. The company will eventually buy about 60 percent of this winter's gas through index-plus contracts.

ONG buys index-plus gas at industry-wide "index prices," most of which change monthly. Then suppliers add an extra charge -- the "plus." ONG says this premium charge varies from supplier to supplier.

Index prices for gas can be cheap, as they are now. Or they can quickly soar, as they did last January, when the monthly index price ONG had to pay went to a record $10 per dekatherm.

When ONG contracts for index-plus gas, it pays suppliers a reservation fee. That fee also gets tacked onto the cost of gas.

Generally, ONG reserves lots of index-plus gas, enough to keep customers warm even if the weather gets really cold.

Naturally, the more gas ONG actually ends up buying, the less the reservation fee costs per unit of gas.

"If you use all the gas that you reserve, then the reservation fee is really a rather small component," Eliason said.

This November, the weather was warm, and ONG didn't sell much gas of the gas it reserved. As a result, the reservation fee cost per unit was pretty large -- 59 cents.

The second way ONG gets its gas is to buy it -- not reserve it -- in advance. The company locks in moderate prices by buying gas at a set price during the summer, for delivery later during the winter months.

The virtue of this strategy is that the prices will be predictable. They may not be as low as index-plus prices, but they won't soar either, which index-plus prices can do. ONG bought about 40 percent of this winter's gas through this method, called "physical hedging" or "forward pricing."

"Forward pricing is not so much to try to beat the market and get the lowest possible price, as it is to reduce volatility in gas prices," said Don Sherry, an ONG spokesman.

The difference is that forward-priced gas is owned by the utility and essentially must be used. The index-plus gas is merely reserved, and the utility can take as much or as little as it needs, depending largely on the weather.

Last winter, when prices were high, ONG didn't hedge any gas.

ONG depended on index-plus gas, which soared in price. The Oklahoma Corporation Commission, which regulates ONG and other state utilities, called ONG on the carpet, saying essentially that ONG's lack of hedging worsened customers' exposure to last winter's price surge.

The Corporation Commission wound up disallowing $34.6 million in ONG's gas costs from last winter. ONG says it did nothing wrong and is appealing the commission's ruling to the Oklahoma Supreme Court.

This year, Eliason explains, ONG began hedging gas in April. It rode the gas market down, buying at various prices between $5.35 and $2.68 for delivery in the winter months.

But ONG hedged the majority of its gas early on in the summer, when prices were higher. The utility was apparently in a hurry to lock in prices, fearing they might soar again as they did the previous summer.

Consequently, the average price of ONG's hedged gas for this winter will be about $4.30.

"You just don't know which way the market is going to go, Sherry said.

There are other costs involved in the "cost of gas."

Transportation is one of them.

Transportation is what ONG must pay to use pipelines like the Williams Cos. or ONEOK Gas Transmission pipelines. Basically, Eliason says, ONG is leasing that pipeline.

But most transportation charges go into the delivery fee on a customer's bill. A little bit goes into the "cost of gas" item on the bill, and a little bit into the "customer charge."

Like the reservation fee, the per-unit cost of transportation drops if ONG buys more gas during a given month.

So, finally, here's the breakdown of that $4.961 "cost of gas"

that showed up on November bills:

The actual price that ONG paid for that gas was $3.56 per dekatherm. Of that total, ONG spent $1.56 on index-plus gas, and spent $2 for hedged gas.

Add to that the 59 cent reservation fee for the index-plus gas.

Also add 75 cents that ONG is still collecting because it undercharged customers during last winter's record high gas costs -- which is the expense that the Corporation Commission disputes. ONG is collecting another 6 cents for more recent undercharges.

The benefit of this two-tier approach is that the price to consumers will stay relatively low if gas wellhead prices soar, as they did last winter, Eliason said. However, the drawback is that if wellhead prices stay low, the price to consumers will remain relatively high -- as the $4.961 price shows.

Remember, the "cost of gas" is only one line on your bill. There are six other line-items in the bill. Those items have been added over the years by the utility and by state regulators to try to make bills more open, accessible and clear.

But, admits ONG's Sherry, "all of it is just an effort at transparency. I realize that for some people it's more confusing than enlightening."

To see more of The Daily Oklahoman, or to subscribe to the newspaper, go to http://www.oklahoman.com

(c) 2001, The Daily Oklahoman. Distributed by Knight Ridder/Tribune Business News.

OKE,