Fines waived, costs cut for companies who hijacked natural gas in Kansas freeze disaster
Kansas utility regulators have unanimously approved forgiving hundreds of millions of dollars in penalties and natural gas costs for a handful of large gas marketers and customers who hijacked enough gas to heat about 200,000 homes during a freeze disaster in February of last year.
Those 28 marketers and customers could have faced a maximum of $888 million in fines and gas costs for misappropriating gas during an emergency, but they and the Kansas Corporation Commission negotiated that down to about $65 million in the settlement.
They’ll pay no fines, and will only have to pay for the gas they took at rates deeply discounted from what Kansas Gas Service was paying for gas at the time, as it struggled to maintain service for all of its 640,000 customers.
The identities of the affected companies are being kept secret by the commission to avoid disclosing their business dealings.
Comments from the commissioners at Thursday’s meeting centered mostly on explaining why commissioners think the settlement is fair and thanking the parties for negotiating an agreement.
“It’s my understanding that this negotiated settlement took days and days and a lot of hours and there was give and take on all sides,” said Commissioner Susan Duffy. “I believe it represents a good resolution of this issue.”
The settlement approval clears a hurdle for Kansas Gas Service to begin collecting more than $366 million in extraordinary costs from the freeze disaster, known as Winter Storm Uri.
The settlement establishes that $313.7 million of that $366 million will be borne by the gas company’s regular customers.
That is expected to add a flat charge of $5 to $9 to customer bills for the next five to 10 years.
To understand the settlement, you need to understand that Kansas Gas Service has two types of customers:
▪ “Sales” customers, who buy their gas from KGS directly. The sales class includes residential users and most commercial businesses and represents about 99% of the customers on the system.
▪ “Transportation” customers, larger users who buy gas directly from well operators or through gas marketing firms, and pay KGS to deliver the gas to them through its distribution system. While they are fewer in number — about 6,200 — transportation customers account for about 54% of the gas that moves through the KGS system.
Buying gas directly usually saves transportation customers money, but in February 2021, the opposite happened.
Temperatures plummeted and stayed down for nine days, freezing wells and causing shortages from the Dakotas to Texas.
Prices for gas on the open market rose from about $3 per decatherm to an unprecedented and previously unimaginable peak of $622 per decatherm, and transportation customers and marketers couldn’t get enough gas to cover what they were taking out.
During the emergency, they took 223,000 decatherms of gas more than they were entitled to, according to KCC records.
Each misappropriated decatherm was approximately enough to heat an ordinary Wichita home for the entire month, including the storm emergency period.
When transportation customers and their marketers take more than they put in during a gas emergency, they’re required by a regulatory tariff to pay the daily spot price for the gas they took, plus a penalty of either 2.5 or 10 times the cost of that gas, depending on the severity of the emergency.
For the 28 companies covered by the settlement, that would have added up to $888 million.
KGS asked the commission for permission to waive the penalties and KCC staff agreed.
“Absent the unanimous settlement agreement, the penalties under the tariff would be so large it would risk sending many of the marketers and individually balanced transportation customers into bankruptcy, which would have a detrimental impact on the Kansas economy,” said KCC staff attorney Brian Fedotin. “If KGS was unable to collect the penalties from the marketers and individually balanced transportation customers, its sales customers, which include residential and small commercial customers, would bear the cost of all purchased gas used during the (emergency) days.”
Also waived was a tariff requirement that the transportation customers and marketers pay for the extra gas they took at the daily spot market price, which would have totaled up to about $117 million, according to KCC records.
In negotiations, that was reduced to the price that regular sales customers were paying for their gas, much of which had been bought before the emergency to insulate them from price spikes.
That was good enough for 27 of the 28 customers covered by the settlement, but one marketer, Houston-based Symmetry Energy Solutions, held out until their cost was reduced from $32.1 million to $26 million.
KCC negotiators agreed to that further reduction, giving Symmetry gas at a price less than what the sales customers will have to pay, “because that is the maximum amount that we could get Symmetry to agree to in negotiations,” according to written testimony filed in the case by Justin Grady, the KCC’s accounting chief.
Of the $65.4 million the companies agreed to pay for the misappropriated gas, $52.4 million will go to offset the costs to be paid by sales customers, reducing their liability to $313.7 million.
The other $13 million from the settlement will go to gas marketers who put more gas into the system than they took out on some days during the emergency.
“What this (settlement) order does, I believe in a very fair and judicious manner, it puts responsibility back on the transportation customers to pay a negotiated amount to cover their costs of the gas so that residential customers are not stuck with that,” Duffy said Thursday.
This story was originally published March 3, 2022 at 2:42 PM.
