Vectren To Protect Customers From Proposed Plant Costs

Customers of Vectren and other natural gas utilities in Indiana are likely to see the costs passed down to them from a proposed substitute natural gas plant to be build in Rockport, Indiana.

According to Vectren, the plant, which is being developed by Indiana Gasification, an affiliate of New York-based holding company Leucadia Corporation, is estimated, based upon current natural gas prices, to cost the State of Indiana nearly $1.1 billion in its first eight years of operation. The plant would convert coal to pipeline-quality natural gas. The developers of the plant reached a deal with the state of Indiana last year via the Indiana Finance Authority to buy all of the plant's manufactured gas and then resell it into the open market.

Under a 30-year agreement, if the manufactured gas does not sell in the open market at a price above the contract price that is projected to escalate each year for the contract period, then Indiana's natural gas customers, including those of Vectren, will see a charge on their monthly natural gas bills to make up the shortfall. The SNG plant developers have provided a projected average SNG price discounted to 2008 dollars over the entire contract term, but they have refused to publicly say what the actual price of the manufactured gas will be each year. In the event the plant's manufactured gas beats the current market price, customers would share in that gain.

The plant alone is expected to cost nearly $3 billion to build, and the developers of the SNG plant are now seeking a federal loan guarantee, similar to the one provided to Solyndra, the bankrupt solar panel manufacturer, to help with construction of the plant and a 440-mile pipeline to transport the plant's carbon dioxide output, the cost of which is not yet public.

The state legislature required that Indiana Gasification guarantee savings for customers before the plant could go forward. Indiana Gasification has publicly said that the requirement that they provide a guarantee only means they promise they will make a commitment and not that they actually fulfill their commitment. In furtherance of their "promise," Indiana Gasification has proposed to fund an account of $150 million. Given the forecasted low price of natural gas and the fact that Indiana gas customers are allocated 100 percent of the market losses the state incurs, this account will likely be exhausted within about the first year of the SNG plant's operation after which customers will start to see a new line item charge on their bill to ensure the losses are refunded to the State of Indiana that will then make the developer whole. It is expected that the developer will make a profit even if the state loses money.

Based on the expected losses from the State's resale of the SNG in the first eight years:

· a Vectren residential customer would likely pay an additional $375 on their gas bills to cover these losses;

· an average size small business customer would likely pay up to an additional $2,000 on their bills; and

· a small industrial customer would likely pay up to an additional $250,000 on their bills.

Other similar projects around the country are being abandoned due to the fundamental change that has occurred in the natural gas marketplace. Proposed SNG plants in Illinois and Mississippi have experienced setbacks and some have even been canceled. As an example, Leucadia, which had planned to develop an Illinois plant, abandoned it after the state rejected a proposed law that would have required gas utilities and their customers to take the output from the plant.

Although the plant received state regulatory approval to move forward last fall, Vectren, consumer advocates, environmental organizations and other natural gas utilities in the state continue to work on behalf of Hoosiers to ensure they are protected from bearing these costs. These groups, including Vectren, have also appealed the contract's approval to the Indiana Court of Appeals.

Among issues under consideration by the court include:

· what customers - residential, commercial and/or industrial - are affected and subject to the IFA's losses;

· whether the contract approved by the IURC complies with state law;

· when the customer savings guarantee must take place, if at all; and

· how the savings guarantee will be achieved.

Indiana Gasification and the IFA have requested oral argument before the Indiana Court of Appeals. All parties are now awaiting dates to be set.