‘Caught flat-footed’: Energy experts, lawsuits claim CPS has itself to blame for $700 million in natural gas bills

Influx of natural gas deliveries started Feb. 11, days after experts began predicting energy infrastructure could be impacted by winter blast

SAN ANTONIO – CPS Energy has filed 18 lawsuits against entities it claims contributed to massive natural gas bills it racked up during February’s winter storm. However, energy experts and officials from some of the companies targeted by the suits say the utility’s poor risk management is to blame.

At issue are hundreds of millions of dollars of natural gas purchased by CPS in mid-February on the spot market, after the price per unit had skyrocketed.

CPS claims in lawsuits that natural gas providers overcharged and even price gouged. But defendants and outside experts say that CPS should have been better prepared and purchased natural gas before the prices skyrocketed to avoid the financial catastrophe that occurred.

CPS Energy President and CEO Paula Gold-Williams said last month bills racked up from purchasing the fuel to continue heating homes and running its plants during the storm had topped off at around $840 million. Gold-Williams, during a March 12 press conference announcing a lawsuit against the state grid operator, Electric Reliability Council of Texas (ERCOT), said the figure had been reduced to under $700 million after the utility was able to remove contracts for natural gas that was purchased but never delivered.

Records obtained by the Defenders show CPS received natural gas deliveries that jumped in quantity starting Feb. 11 — days before the storm hit but days after some experts had already started predicting the blast could impact the infrastructure of utility companies.

Internal records show an increase in natural gas deliveries to CPS Energy on Feb. 11. (KSAT)

By then, the price of natural gas on the spot market had already nearly doubled, according to the U.S. Energy Information Administration.

In a Feb. 10 news release, the same day CPS received only 180,000 MMBtu (units of natural gas in Million British Thermal Units) of purchased natural gas, officials of the utility conceded the incoming arctic airmass could affect its equipment as well as the ERCOT grid.

On that critical day of storm preparation, records show the amount of natural gas delivered to CPS actually decreased from the day before, when the utility received 190,000 units of purchased natural gas.

Days later, the frigid air not only impacted utility infrastructure but pushed the natural gas usage of CPS customers and its power plants to record levels.

A CPS spokesperson last month said natural gas usage exceeded 600,000 MMBtu daily for eight straight days, breaking the all-time usage record six of those eight days.

When the spot market price of natural gas peaked on Feb. 17, CPS Energy received well over 400,000 units of fuel, some through contracts that had the utility paying more than 192 times what it had paid for the same commodity just a few days earlier, records show.

CPS officials refused to make Gold-Williams or Kevin Pollo, interim vice president of energy supply & market operations, available for interviews for this story.

Last week officials with the utility agreed to make two other members of its senior leadership team available for a virtual interview: Chief Power Sustainability & Business Development Officer Frank Almaraz and Chief Customer Engagement Officer Rudy Garza.

Officials canceled the scheduled interview a day later, citing “active complex litigation matters.”

CPS Energy President and CEO Paula Gold-Williams speaks with the media March 12. (KSAT)

During a CPS board meeting last month, Gold-Williams said the utility currently has around five billion cubic feet (Bcf) of natural gas storage, but is now looking at possibly expanding the storage capability to 12 Bcf.

Gold-Williams said during the virtual meeting March 29 that 12 Bcf would create a 10-day natural gas storage capacity for CPS, but that the utility would also need to increase its ability to pull out large quantities of natural gas at one time.

CPS officials, to date, have not told the Defenders how many units of natural gas were stored ahead of the winter blast or were able to be used to help meet the massive demand.

CPS officials have also not responded to inquiries from the Defenders asking for a breakdown of how much natural gas purchased in the days leading up to the storm and then during it was used by its power plants and by its customers.

One energy executive, who only agreed to speak with the Defenders on the condition of anonymity since their company is associated with CPS, said the utility also failed to effectively hedge its long-term projections in a way that would have properly enabled it to make better energy preparations days ahead of the storm.

“Hedging costs money. It’s insurance. These companies failed to undertake what would be considered appropriate risk management,” said University of Houston Energy Fellow Ed Hirs during a March 9 interview with the Defenders.

“They should be rolling the hedge every year. It’s not necessary that they actually have the contract for the delivery of the natural gas, but they have the offsetting futures contract,” said Hirs.

A futures contract allows a buyer of a commodity like natural gas to lock in a predetermined price, while actually taking delivery and paying for it at a future date.

Offsetting a futures contract is the process of canceling the trade before taking delivery of the commodity, causing either a loss or profit on the trade, depending on the price when the trade was initiated and then offset.

Hirs said energy companies can use other financial instruments such as call options to reduce their exposure to rising natural gas costs, “so that they would pick up a reward in the financial market for the expenditure that they have to make in the spot market.”

“Absolutely. They were caught flat-footed. I’m sure they didn’t expect the market to go this way, but it did. Were there protections that could have ameliorated this exposure? Probably so,” said Hirs, when asked specifically about CPS’ exposure to high natural gas prices.

Arash Asrari, assistant professor of engineering at Southern Illinois University Carbondale, said the state’s over reliance on natural gas contributed to the nightmare financial scenario for companies forced to buy it on the spot market as the price peaked.

“The reserve power is expensive, specifically when you rely on natural gas,” said Asrari.

Lawsuits piling up

Last month, CPS Energy sued ERCOT over what it described as massive overcharges for energy purchased during February’s storm.

The suit is now one of nearly 20 filed by the utility in Bexar County in an attempt to drastically lower what it owes for the natural gas purchases.

In a suit filed March 19 against the Houston Pipe Line Company and Oasis Pipeline, two of CPS’ natural gas suppliers, attorneys representing the utility accused the companies of price-gouging.

Records show CPS Energy agreed to pay as much as $500 per unit of natural gas. (KSAT)

Signed contracts for the delivery of natural gas attached to the suit show CPS was paying the companies as much as $500 per unit of natural gas during the storm. That figure represents a massive increase from the $2.60 per unit price CPS was paying suppliers just days before the storm’s arrival.

“For context, charging $500/MMBtu for natural gas—which is a more than 15,000% increase from pre-event prices—is the equivalent of charging $7,000 for a tank of gasoline that would ordinarily cost less than $50 to fill,” the suit states.

Attorneys for CPS, while acknowledging that its analysis of gas prices is ongoing, claim that any amount charged over $38.83 per unit is unlawful.

Feb. 23, just days after the storm ended, CPS claims it received a letter from Houston Pipe Line Company and Oasis’ parent company, Energy Transfer, showing that it owed them more than $317,000,000. Attorneys for CPS called the letter a “bad-faith attempt” to speed up the collection of the “unlawful price amounts.”

The suit claims around 83 percent of Houston Pipe Line Company’s and Oasis’ charges for natural gas are unlawful.

The companies, in a response to the lawsuit filed last week, claim CPS is attempting to divert attention away from its own poor risk management and failure to prepare for high natural gas demand during the severe storm.

“CPS purchased this gas with eyes wide open, aware of the status and pricing of the gas markets. It confirmed in writing the price and volume of each trade to defendants, matching defendants’ own confirmations. Now the bills have come due and CPS, as it seems to have intended from the start, wants to leave others holding the bag and shift the political and regulatory fallout away from itself,” attorneys for energy companies wrote in the counterclaim.

“CPS evidently had put in place no or very few plans to deal with the impending severe winter weather and the resulting impact on commodity prices. Instead, CPS accepted the risk of volatile market prices. CPS had chosen to buy natural gas on daily floating prices, which can swing up or down based on the prices set by willing buyers and willing sellers – a risky choice that left CPS exposed to the competitive gas market and winter storm-caused price increases,” the counterclaim states, claiming that CPS ignored opportunities to buy gas at lower prices.

The filing from Houston Pipe Line Company and Oasis also mentions Austin Energy, a public utility serving the city of Austin, which actually reported a massive profit after selling excess power during the storm.

Austin Energy officials after the winter blast subsided estimated a net revenue from the storm of $54 million.

A spokeswoman for the utility said last week via email net revenue continues to look positive, but could fluctuate higher or lower depending on legislative and market actions.

Austin Energy serves more than 500,000 customers, about one quarter the number of customers CPS serves.

Gold-Williams, during the March 12 press event, said the size of the two utilities played a big role in the massive financial discrepancy between the two utilities after they emerged from the storm.

“Our community consumes much more in terms of the commodity of the fuel, as well as the power,” said Gold-Williams.


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