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News » Cover Story

Cold Comfort

Questar plays big games with gas rates. Thankfully, the watchdogs keep on watching.



Scott Brown was definitely in charge. Colored markers in hand, he commanded the whiteboard and, being a lawyer himself, he had the undivided attention of all the other lawyers and bureaucrats around the table.

Haplessly, Charles Coffin sat along the perimeter of the room, thumbing through his numbered graphing papers, some of his 40-year personal collection of natural-gas rates. Coffin thought he was going to a public hearing but turns out he was shuffled into a scheduling meeting where only the chalk talks. Brown, a gas company attorney, wasn’t there to listen to customers.

“I record everything,” Coffin says. This, apparently, is what a retired data processor does for fun'keeps track of how much a decatherm of gas costs over time.

“I’m just really having a hard time bringing it together and saying, ‘Yes, they’re being fair with us,’” says the 78-year-old Coffin, who this day didn’t bring along any papers earlier than 1998. That was when he, along with all other Utah ratepayers, was paying $4 per decatherm of gas. Now, it’s closer to $11.

If salaries inflated the same way as gas prices did, a $50,000-a-year job in ’98 would bring in $112,000 today. “I don’t know of anyone between ’98 and 2006 who had those kinds of increases,” he says.

But he probably hasn’t met Keith Rattie, whose total 2004 compensation as CEO of Questar Corp. was $1.7 million, or Allen Allred, who got $1.1 million for heading up Questar Gas. Then there are the unexercised stock options'millions of dollars worth.

Last year brought more good news for the company. Customer bills were about to go through the roof, and stockholders celebrated. Net income for the corporation was up 42 percent, to $325.7 million, from 2004. Net income for its regulated subsidiary Questar Gas Co. was up 14 percent, to $36 million'and that was before the big increases came in the mail.

No one would disagree about Questar’s prosperity and the customers’ burden, except, of course, Questar itself, which would have another carefully crafted spin on the scenario. Something like: It’s not our fault, but it could have something to do with our subsidiary, which we have nothing to do with anymore although we own all of its stock; and it could be the market’s fault, too, even though we own almost half of the gas fields we use. Let’s not forget that it’s your fault, too, being a customer who likes to conserve, and so you’re doing that and we’re just not getting as much money from you, which makes our stockholders really unhappy. It’s the regulators’ fault because they won’t let us pursue new strategies. And then, of course, there’s Katrina, Wilma and maybe … God to blame on the wholesale level.

The world of utility regulation is not what most people would call transparent'not by a long shot. And over the past year, it has gotten murkier and murkier. One of the first tasks Gov. Jon Huntsman Jr. accomplished when he came into office was to fire Roger Ball as head of the Utah Committee of Consumer Services. The committee’s charge is to advocate for “reasonable electric, natural gas and telephone rates on behalf of residential and small business customers.” Ball, apparently, was too much of a “bulldog” in this pursuit.

Although barely known outside the industry, Ball, a bookish and bespectacled Englishman, has earned disdain among utilities for his badger-like persistence. His firing has turned him into something of a cult hero who no longer sees the need to be diplomatic, if he ever did.

“What [Questar’s] up to is shifting risk away from stockholders towards their customers and at the same time coming up with a mechanism that will, in fact, give them a higher rate of return than they would otherwise get,” says Ball.

Just to confuse the issue, the governor has also called for an investigation into market manipulation. Ball doesn’t quite go that far, but he does cry foul.

“The utility is depending on a conjuring trick,” Ball says. “How does David Copperfield make a tiger disappear? By distracting the audience’s attention from the moment of manipulation.”

Obviously, getting sacked hasn’t humbled Ball. The committee he once led now views him with mild horror as it dances gingerly with Questar on a number of counts. Ball’s replacement, Leslie Reberg, was initially reviled as a former Questar lobbyist and political hack, but lately she’s been leading the committee on a collision course with that very company over one rate issue. Then again, she spearheaded a curious settlement on another Questar issue that appears headed to court.

And just to confuse matters, the Division of Public Utilities has been muscling around, making noise like the committee is a waste of money and time, and who needs it?

It’s hard for the average citizen to grasp, although it seems crystal clear to each of the players, none of whom agree with one another.

“Every time you think you’ve got to the bottom of something, there are more levels beneath it,” says Ball.

There was a time when the gas company was a warm fuzzy, when Utahns just called it “Mountain Fuel.” Endearingly.

In 1929, the first plume of natural gas made its way to Utah from the newly discovered gas fields of southwestern Wyoming. That was the state’s first pipeline, although there would be others'north from Clay Basin, south of Evanston to Coalville'all connecting into what would become an interstate network of pipelines along the Wasatch Front.

Mountain Fuel was a subsidiary of Western Public Service Corporation/Ohio Oil Company until 1935 when it consolidated into just Mountain Fuel. Then, in 1984, it got its new name and became a subsidiary under its “integrated energy holding company,” Questar Corp. Let’s just say this was the beginning of mass confusion.

The company was divided into a regulated piece'Questar Gas, the retail gas-distribution utility with some 800,000 customers in Utah and parts of Wyoming and Idaho, and Questar Pipeline with more than 3,000 miles of pipelines in the Western United States.

And then there’s the unregulated piece, which the company calls its main “growth” driver: Questar Market Resources, which does gas and oil exploration, development and production, and gas gathering and processing.

Suffice it to say that there are multiple issues surrounding these two concepts, and the Utah Supreme Court has weighed in on some of them. Even Questar recognizes the confusion, addressing it in a December 2005 press release: “Questar Gas Company (QGC) is not making record profits. The confusion lies in the fact that QGC, the distribution company that provides natural gas service to your home, is owned by a parent company called Questar Corporation. It is Questar Corporation, not the regulated utility QGC, that is reporting high returns.”

And how did this all happen? In fact, Questar has successfully spun off all its profit-makers so they are no longer regulated, and like a good Utah parent, it is still creating little Questars. One of its progeny is Questar Transportation Co., which has no employees exclusive to it, has no logo and has no assets other than a gas-processing plant in Castle Valley, where a whole lot of Questar Pipeline Co. employees hang out.

Of course, Questar is not the only corporation that plays paper games, but it’s not exactly your average entrepreneur, either. Marketing a life necessity like energy tends to highlight the stakes in those games. For the consumer, the Questar Problem is an essay question divided into three parts: What’s causing the high gas prices? Who pays for a carbon-dioxide-processing plant? And, is a conservation initiative actually going to stick it to the consumer? Of course they’re all interconnected.

Chad Jones, spokesman for Questar, is at his wit’s end. He has tried and tried to explain the gas-price problem to people. State regulators set the prices and it doesn’t have anything to do with the price on the open market. Well, not much, anyway, he says.

“Our rates are the lowest in the continental United States,” he says. “We pass our price on dollar for dollar to our customers just like any other business'without profit because our profits are capped.”

Questar Gas gets about half of its gas from Wexpro'yet another subsidiary'so the prices, although unregulated, are still pretty low. That’s largely because of two Supreme Court rulings that wouldn’t let the utility sell Wexpro’s gas on the growing interstate market, which is what Questar wanted to do.

In a nutshell, the court said that all the Wexpro gas had to go to Questar customers because they had been paying the costs of finding and drilling those wells, even though some of them produced nothing.

The company tries to explain Wexpro this way: “In response to a settlement between state regulators, consumer advocates and Questar Gas Company, the Commission required Questar Gas Company to retain its own production capability in the 1980s. Company-produced natural gas is provided to customers at cost rather than at market value; the cost of company-owned gas is currently far below market value, and this supply helps keep rates lower and more stable than otherwise.”

The catch is that there’s not enough gas to meet demand. So the company buys on the open market'and you know how squirrelly that can be. It’s those market-rate deals that are ripe for manipulation, especially since they are signed off as primarily “hedge contracts.”

Let’s say you’ve got 100 units, and 95 of them get sold in June for use maybe in December. That leaves five of them. The 95 are sold on contracts with floor and ceiling prices. The seller worries that the market might fall and the buyer worries that it might inflate, and nobody wants to lose money. So they agree that on some specific date, they will pay whatever the market cost for gas is then, but only within the floor-and-ceiling parameters.

On the big date, someone comes in and buys up the remaining five units and effectively sets the price. Or manipulates the market, depending on how you look at it.

The big problem is that Questar could have ameliorated the situation simply by drilling a lot more a lot earlier and spending resources to bring more Wexpro wells online, Ball says.

“Forty years ago, it was all one vertically integrated utility,” Ball says. “What they drilled for, they sold to us. There were no pipelines to take it anywhere else. It was a closed system.” Obviously, times have changed.

In the mid-’70s, Questar was producing about 80 percent of the gas it supplied to its customers. Since then, both demand and the number of customers has gone up, but Wexpro is only able to supply 50 percent of the gas now.

There are all kinds of quirky little tricks and “conspiracies” you could come up with. Take “weather normalization,” for instance. This program takes an average normal temperature over a 30-year period and charges for that. It’s intended to stabilize both costs and revenues.

“The fun part of that one is if cost goes down when the temperature goes up and we are enjoying global warming on a long-term trend, Questar is making out like bandits on weather normalization,” Ball says. “That’s what it looks like to me.”

A second issue is the one that actually compelled Ball to action, and put him at loggerheads with his former committee when it looked like the committee caved. This is the CO2 issue. Questar built this futuristic plant near Arches National Park to remove pesky carbon dioxide from coal-bed gas it began piping from Price.

“We have this wonderful new supply of clean gas smack dab in the middle of our state,” says Questar’s Jones. “We are using that gas as a potential to reduce customer rates between $8 million and $18 million a year.” But the gas has to be processed at the plant until all customers’ appliances can be inspected and adjusted. That will cost about $5 million a year.

Simple math means a net gain for consumers. At least on paper.

Perhaps coincidentally, Questar discontinued offering annual inspections of customer-gas appliances about nine months before the CO2 plant began operating. That leaves the cost up to the consumer. Questar says inspections are a safety issue, although it was the company that created the problem.

Neither Ball nor consumer advocate Claire Geddes were buying the company line, which has served to motivate its critics. A few years ago, the company was ordered to repay some $29 million that consumers had paid in association with the plant. Then suddenly the committee did a 180 on the issue and sided with Questar.

Officially, the committee was persuaded by Questar’s safety arguments, a company mantra for eight years. Observers believe that the committee simply saw no way out. Questar successfully fixed it so there’s no alternative.

The alternative, though, is simple, says Ball. Questar should just keep processing the gas. But neither the committee nor Questar want to hear from him. Ball and Geddes have been denied intervention in the case, despite gathering hundreds of names in support.

Among those names were some Questar shareholders whom Questar subpoenaed in what turned out to be a huge public-relations blunder. The company withdrew the subpoenas while making the shocking-but-true assertion that stockholders should care only if their stocks make money, not if customers’ bills are reasonable.

One of the questions is why Questar had to pursue this CO2 extraction in the first place. “Despite years of analysis encompassing several dockets, and despite its continuing support for the CO2 Stipulation, the division has never concluded that Questar Gas’s decision to pursue CO2 processing was prudent,” the request for intervention says.

But again, maybe it was prudent for stockholders. Customer appliances could all be adjusted so that Questar would no longer need to process its gas. Then, Ball says, the company could tear down the facility like a bunch of Legos and sell it to another company. For a profit, of course.

“(The gas) has to be processed until all customers are inspected,” says Jones. “There’s a cost, and that’s why three state agencies and every outside expert who’s looked at this disagrees with Mr. Ball.”

Now, only if the Supreme Court allows Ball and Geddes to intervene will the processing come into question.

You can see how magnanimous Questar is'just wanting to help the consumer. That’s the way it is with the third issue: the conservation tariff. This is the one where the committee came out swinging and all but accused Questar of trying to bribe the public.

First the dilemma: Customers are conserving energy. And this is bad, you ask? For the last 20 years, consumers have been buying fuel-efficient appliances and generally reducing the amount of gas they use. This means that Questar gets less money from each customer, and the company has trouble recovering its fixed costs.

Along comes Utah Clean Energy, which partners with Questar in a most unusual scheme. “At a time when customers are bearing the burden of higher energy costs, the Pilot Program represents a real opportunity to align the interests of the Company, customers, regulators and other interested parties and utilize conservation as an effective means to save energy and reduce costs,” Questar attorneys say in a joint filing with Utah Clean Energy and the Division of Public Utilities.

So what exactly is the opportunity? It is to encourage people to conserve even more. Utah Clean Energy believes Utahns could do 20 percent better by 2013, but they need some pushing.

In return for Questar’s proactive conservationism, regulators are expected to “decouple” gas rates from consumption. In other words, if Questar doesn’t get enough from its residential and commercial gas customers, it can pass the shortfall on to them.

Jones thinks it only makes sense. How many businesses, after all, make money by telling customers to use less of their product? The dilemma for Questar is how to cover its fixed costs. “There is no interest for us to tell people to use less gas,” he says.

That is the risk-shifting Ball suspects. And he’s not the only one this time. The committee’s lawyers, in a response to Questar’s joint filing, as much as call the deal a bribe: “There is no doubt that the Application’s focal point is a request for a full sales and revenue decoupling rate-making mechanism. All other requested relief is either secondary to this focus, or is an illusory enticement intended to distract the Commission from the rate change and ratepayer impacts due to this pass-through of non-gas distribution expenses.”

They’re not the only ones who suspect deregulation is the goal. “We’ve been told what a panacea deregulation is,” says Ball. “In California with Enron, would they have ever have gone broke if we’d known what they’re doing? Is that what’s happening to our wholesale market in gas?”

While all three Questar issues fight for center stage, the political backdrop seems to just get heavier and heavier. Is it Enron, is it greed or is it survival?

“People are offended if you propose to benefit a utility,” says Connie White, director of the Utah Department of Commerce Division of Public Utilities. White is pretty put out by all the political posturing, although she’s done a good bit herself.

White has been a frequent visitor at committee meetings where she’s been suggesting an almost unholy alliance. She wants the committee to defer to division staff for research and advice.

Last year, she and Geddes argued over the division’s role in utility matters. “She wants to streamline everything so utilities can walk in and get everything,” Geddes says. Certainly White wants the committee to sign off on the conservation tariff and maybe more.

“Statutorily, the committee is part of the division,” says White, who moved to the division from a spot on the Public Service Commission. “Nobody knows what that means. My staff talent is an incredible bargain, and instead they hire their [high-priced] consultants. … The committee is stepping over a dime to pick up a nickel.”

Reberg takes exception, saying the issues are often so complex that hiring experts is a necessity. “The Division of Public Utilities and the Committee on Consumer Services have different statutory missions, and there’s wisdom in carving out a role of advocacy for the classes the committee represents.”

Indeed, the division’s mission is to balance the financial health of utilities and customers. Given the Questar Problem, those customers may have less and less to represent as time goes on.

Deregulation puts the representation squarely in the hands of a special public'the public that owns the company.