August 28, 2017

What Price Synthetic Gas? Part 2

Written By

Part one of “What Price Synthetic Gas?” described the history and some of the terms of a proposed 30-year contract obligating the State of Indiana to purchase synthetic natural gas (SNG) from a private developer.  Savings and costs resulting from the contract, the extent of which will be determined by the market price each month for natural gas, will be passed through to most gas customers in Indiana. The private developer agreed to cover the first $150 million in losses, but based on current market prices for natural gas, that cushion would be dissipated relatively quickly after the plant is up and running, and the proposed contract exposes Indiana’s gas customers to the possibility of having to pay for several years – perhaps decades – of losses. Indeed, if the contract ever does generate savings, such benefits would not flow through to customers until after the developers have recouped all of the money previously spent to cover the first $150 million in losses.

Indiana law governing this contract requires that it guarantee customers will save money. The State and the developers of the proposed SNG plant, Indiana Gasification LLC, agreed to track credits and charges over the contract’s 30-year life. If after 30 years total savings for all affected customers don’t add up to at least $100 million, then the developers reserved for themselves the option of paying the difference.  Assuming they elect not to do so, then the state has two options:  it can either extend the life of the contract on somewhat more favorable terms in the hope that “guaranteed” savings eventually are realized for a future generation of customers, or it can force the sale of the 30+ year-old plant and get in line for any proceeds of the sale. No provision was made for reimbursing the potentially hundreds of thousands of gas customers who die or leave the state after incurring large losses before the end of the 30-year contract. 

Where do you think you’ll be in the year 2045?

Over the objections of several gas utilities and consumer groups, the Indiana Utility Regulatory Commission (IURC) approved the contract. The objecting parties appealed, and the IURC’s approval was overturned by the Indiana Court of Appeals in late 2012.  The Indiana Supreme Court has accepted the appeal and heard the parties’ oral arguments in early September, 2013. In the meantime, the Indiana General Assembly passed a law in 2013 making it even clearer that the requirement for guaranteed savings cannot be met by allowing losses to accumulate and deferring payment on the guarantee until the end of the 30-year contract. Whether this law will apply to this project may depend on how the Indiana Supreme Court resolves the pending appeal. The parties and Indiana’s gas customers should know by early 2014 whether this project will go forward.