Connecting state and local government leaders
The freezing temperatures that lingered over much of the country last month led to astronomical natural gas prices and put some cities on the verge of bankruptcy.
This story was originally posted by Stateline, an initiative of the Pew Charitable Trusts.
The tiny city of Denison, Kansas, came to the brink of insolvency so fast last month that its leaders hadn’t figured out how to begin the bankruptcy process.
“We don’t even know how to go under,” said Vickie Wold, the city council president. “How the city fails, what happens here—we’re just hoping and praying.”
Denison has fewer than 200 residents, and in a typical February, the city pays about $4,000 to provide them with natural gas to heat their homes. Last month, the bill came to $242,498.
“We can’t write that check,” Wold said. “There’s no way we can pay that, and we can’t pass it on to these people, some of whom are struggling to keep their utilities paid as it is.”
Many cities in the Midwest are facing a similar crisis. A variety of towns large and small operate their own municipal utilities, providing services such as gas, electricity and water to residents. Some small towns exist as political entities primarily to provide those services.
Much attention has been paid to a relatively small number of Texas customers who received massive gas bills during February’s storm. But in much of the country, municipal gas utilities and natural gas-powered electricity providers are the ones that owe huge amounts of money.
The polar vortex that hit on Presidents Day weekend limited the supply of natural gas, which drove up prices. As infrastructure failed at the same time demand for gas spiked, the cost for natural gas on some pipelines skyrocketed to hundreds of times its typical level, forcing cities and utilities to pay unheard-of prices or let their customers freeze.
Fortunately for Denison, Kansas lawmakers moved rapidly to create a loan program for struggling cities. The town just received $192,000 to cover costs from the storm, which it will pay back over 10 years. Other states are acting as well. Illinois and Minnesota have created or proposed loan programs to allow cities to pay their bills in the short term, while giving them years to spread out the costs to their customers.
In many areas, large utilities like Xcel Energy were also hit hard by the gas prices, but their cash reserves and ready access to capital make them less vulnerable than small towns with tiny budgets.
Kansas lawmakers are considering a bill to help large, investor-owned utilities manage their debt, but some already have borrowed money from the private sector to help with their storm costs. The sense of urgency for small towns facing bankruptcy was much greater, lawmakers said.
Some state attorneys general have announced investigations into whether price gouging contributed to the crisis, and the Federal Energy Regulatory Commission is also looking into possible market manipulation. Utility experts say it could take years to determine exactly what happened and who benefited—let alone if any illegal activity occurred.
Even if price gouging is found to be a factor, natural gas experts say the wild price swing is a function of the current market structure, where energy prices change daily, though the drastic nature of February’s spike was unprecedented.
In the meantime, cities say they’re trying to hang on. Officials predict it will take years to dig out from this crisis. And as climate change amplifies extreme weather events, they fear there’s little to protect them from a future disaster.
“This is a good opportunity to say, maybe we do need to be preparing more for these unbelievably large superstorms,” said Kimberly Gencur Svaty, a lobbyist for municipal utilities in Kansas. “Sometimes you have to have that scenario that's huge and eye-opening to get the regulators and the industry to say, ‘We cannot let this happen again.’”
‘A Dire Situation’
Roughly 1,000 municipalities nationwide have natural gas utilities, 53 of which are in Kansas.
Leaders in Kansas acted quickly to help their beleaguered cities in the aftermath of the storm. State lawmakers drafted a bill to create a $100 million low-interest loan program, allowing cities that operate their own utilities to borrow money to stay afloat while spreading the cost of the February crisis to customers out over 10 years. Less than 48 hours after the bill was introduced, Gov. Laura Kelly, a Democrat, signed it into law.
“Some of these cities were threatened with bankruptcy within a week if we didn't pass that bill,” said Kansas Speaker Pro Tempore Blaine Finch, a Republican. “It’s a dire situation, and we had a pretty breakneck pace to get that bill passed.”
Winfield, a south central Kansas city of 12,000, saw its costs for natural gas in February exceed $13 million, far above the $200,000 it usually pays.
“This is financially devastating, and it very likely sets us back many, many years,” said City Manager Taggart Wall. “It will be a long haul out of this.”
The city has received more than $12.7 million in loan relief from the state and has promised not to send “unpayable bills” to its customers. Residents in many cities will be paying higher bills simply because they used more gas in February, but municipalities are still trying to determine how to recoup their unprecedented costs without putting a huge burden on residents. Wall called the state aid “extremely critical,” but said it’s only a stopgap that will still leave the city with debt for years to come.
“Those six days in February are going to dictate the vast majority of what we do for the next six years,” said Colin Hansen, executive director of Kansas Municipal Utilities, an association that represents municipal-owned utilities across the state.
“[The loan program] was absolutely critical, but it is by no means a solution to the problem,” he said. “It enables a lot of cities that were using words like bankruptcy and insolvency to take a step back from that ledge, but all that does is spread the hurt out for many years.
“We’ve got a number of members that are very concerned if they can remain a viable community with this debt on their backs.”
So far, 50 Kansas cities have applied for $66 million in loan relief.
Other states have also provided aid. Illinois Gov. J.B. Pritzker, a Democrat, directed the state’s Finance Authority to create a $15 million low-interest loan program to help cities with their natural gas costs. The authority has received applications from 13 cities requesting more than $7 million. The cities will have three years to repay their loans.
“It absolutely has been a lifesaver,” said Heather Viele, general manager of the Interstate Municipal Gas Agency, an Illinois-based nonprofit that provides natural gas services in the Midwest. “I’ve never seen government work this fast. Some of our communities don’t have much reserves, and this enables them to spread out their customers’ payments over a longer period.”
In Minnesota, state Rep. Jamie Long, a Democrat, wants the state to offer cities zero-interest loans for up to five years to pay their natural gas bills. The bill would provide $15 million in loans to municipal utilities, with another $100 million designated for those utilities to provide bill credits to low-income customers.
“Municipal utilities have been hit particularly hard,” said Long, who chairs the House Climate and Energy Finance and Policy Committee. “We know a lot of low-income customers in the state are going to be seeing much higher bills. The average cost for a household ranges from $250 to $500, in a time when people are already bearing heavy costs due to the pandemic.”
He’s hopeful that his legislation, which was introduced March 15, will save cities and their customers from unbearable payments.
“The utilities have already taken the hit,” said Jack Kegel, CEO of the Minnesota Municipal Utilities Association. “It's the first time that anybody here has seen prices go up that much. By the time the polar vortex moved on, some municipal gas systems had spent their entire gas purchase budget for the year. Unless somebody else comes up with some money, all of it gets passed on to customers.”
'We Don't Have Much Left'
Cities that operate utilities in other states, including South Dakota and Oklahoma, were hit equally hard by the gas price spike, but lawmakers in those states have not yet introduced aid programs. That’s left places like Crooks, South Dakota, in deep trouble.
Crooks faced a February gas bill of more than $500,000, and the small town spent most of its savings to stay afloat. The town expects to pass the cost—about $350 per household—to its 900 customers over a six-month period.
“It took most of our reserves to pay the bill,” said Mayor Butch Oseby. “We don’t have much left. We had to pay it right away, and it’s going to take six months to get that money back. We’ll end up losing $75,000 to $100,000 over the deal.”
The South Dakota legislature ended its session earlier this month, and Senate President Pro Tempore Lee Schoenbeck, a Republican, said in an email that he did not anticipate any relief bills to help cities that were hit with high gas costs.
In Oklahoma, Senate President Pro Tempore Greg Treat, a Republican, has formed a Senate select committee to examine the issue. Aaron Cooper, Treat’s communications director, said legislation is “in the works” to mitigate the effects of high utility bills for families and businesses, though he did not specify if municipal utilities would receive direct or indirect relief. Once that legislation is finalized, a public hearing will be held in the select committee, he said.
Many attorneys general have said they’ll try to determine whether any laws were broken by energy providers during the weather crisis, and whether an investigation is warranted. They include Oklahoma’s Mike Hunter, Arkansas’ Leslie Rutledge and Kansas’ Derek Schmidt, all Republicans, along with Minnesota’s Keith Ellison, a Democrat.
Utility experts said it’s unclear whether the cost surges meet the legal definition of price gouging, and the complexity of the natural gas market will make it difficult to determine exactly what happened.
“It's unsatisfying to try to tell these member communities that we really don't know why it happened or where the dollars went, and we can't give you assurances that it won't happen again,” said Hansen, the Kansas utility leader. “It's really frustrating to not be able to point a finger at who benefited.”
Whether any laws were broken, city leaders say the crisis has exposed flaws in the system that need to be corrected.
“It doesn't pass the reasonable test to see the price of natural gas going from the $2 range (per dekatherm) to over $2,000,” said Dave Schryver, president and CEO of the American Public Gas Association, a trade group that represents public gas systems. “It is a commodity, but it's an essential service commodity.”
Officials in small towns say it would be impossible for them to withstand another crisis of this magnitude.
“If we get the loan and survive this, that's 10 years of making payments,” said Wold, the city councilor in Denison, Kansas. “Another issue like this and I don't we'd even be talking about trying to save it. We'd have to say, ‘That's it.’”
City leaders and utility experts alike say it’s unclear what changes need to be made to prevent future price surges, though such fixes would likely need to happen at the federal level. Several referenced Wall Street trading curbs that halt stock sales when the market reaches certain extremes as the type of mechanism that could be used in energy markets.
“Just like Wall Street has circuit breakers when things are going haywire, there ought to be something in the natural gas market so that a small city does not go bankrupt in two days’ time,” Hansen said. “They truly had no choice—you either turn off the gas to your town and people die or you pay the king’s ransom.”
Carl Pechman, director of the National Regulatory Research Institute, a research arm for state utility regulatory commissions, said the country has shifted rapidly from coal to natural gas for much of its electricity production. That’s left heating gas and electricity providers reliant on the same fuel, making it imperative for the two markets to increase their coordination.
“This was a perfect storm, but this is an industry that's used to having perfect storms and it's incumbent on this industry to prepare for perfect storms,” he said.
“At the end of the day, the industry can only have so many before customers and political leaders start questioning what's going on.”
Alex Brown is a staff writer at Stateline.