LEXINGTON, Ky. – Just as the case in Texas, where some customers saw their electric bills soar to nearly $10,000 after the recent winter storm, Kentucky’s natural gas market is not regulated. 

The price hike in Texas during the storm that left more than 4 million people without power and heat occurred after a dwindling supply and increased demand and use of natural gas sent prices skyrocketing in a place that rarely experiences such weather. Kentucky is no stranger to cold weather and power outages, and even with the way the natural gas industry operates in the Bluegrass State, there are regulations in place to prevent what’s happening in Texas from taking place in the commonwealth.

While Kentucky’s electric grid is regulated, Texas’ is not, and the winter storm caused the wholesale price of energy in the Houston area to increase from $22 per hour to nearly $9,000 after the failure of not only natural gas but also coal and nuclear energy systems. Even with the deregulation of Kentucky’s natural gas market, which was approved in 2000 by the PSC in an attempt to allow customers to choose their energy supplier, a Texas-like increase in the price of natural gas, or any increase for that matter, must be approved by the Kentucky Public Service Commission (PSC). Kentucky’s natural gas market is also regulated at the federal level by the Federal Energy Regulatory Commission (FERC), which is now investigating the sudden price increase in Texas.

Karen Wilson, an adviser to and spokesperson for the PSC, said it is always possible for inclement weather to cause supply shortages in the natural gas market and to drive prices higher than expected. While Kentucky, the same as all other states, has a deregulated natural gas market, the prices of natural gas for consumption and electrical generation are thoroughly examined by the PSC before any rate goes into effect. 

“Kentucky Revised Statute 278.040 gives the Kentucky Commission exclusive jurisdiction over the regulation of rates and services of utilities including those that provide natural gas,” she said in an emailed response. “Natural gas utilities operating in Kentucky use a Purchase Gas Adjustment (PGA) recovery mechanism for natural gas consumption. The PGA permits jurisdictional natural gas distribution utilities to regularly adjust the price of natural gas supplied to consumers to reflect the utility’s cost of purchasing that gas and transporting it via pipeline to their system. Every local distribution company files a quarterly gas cost report that is readily available on the Kentucky Commission’s website. The utilities are not allowed to earn a profit from the gas cost recovery mechanism, and the rate is set to reflect the costs of natural gas and pipeline transportation costs on a dollar-for-dollar basis. The Kentucky Commission performs direct reviews of the natural gas distribution companies on their natural gas procurement practices to make sure they are actively seeking gas at reasonable prices.” 

Additionally, Wilson said, natural gas distribution companies employ storage, and physical and financial hedges, including long-term contracts, to help mitigate volatile spot prices should they occur. 

“Utilities are required to fully document all of their natural gas costs, including purchase, storage, and transportation,” she said. “This includes providing contracts and other materials to the Kentucky Commission. By statute (KRS 278.274), the Kentucky Commission has the authority to review a natural gas utility’s purchasing practices and disallow costs that are the result of imprudent purchasing practices. Historically when a spike of natural gas price occurs, typically from a decrease in the supply due to inclement weather conditions, the Kentucky Commission has spread out the cost over a reasonable period of time to ensure that Kentucky customers do not experience an escalation in their natural gas bill, especially during the winter months when heating is essential. The Kentucky Commission is in contact with its local distribution companies to track any impacts from the volatility that occurred in February to ensure that Kentucky ratepayers are not harmed.”

Natural gas suppliers in Kentucky must submit a request to the PSC for what’s called a Gas Cost Adjustment when attempting to increase prices. The PSC approved such a request from Columbia Gas of Kentucky on Monday, March 1, for a 3.74% increase to reflect current market conditions. A company spokesperson said the increase will remain in effect until the next scheduled adjustment this coming June.

Seth Blumsack, a professor of energy and environmental economics and international affairs at Penn State University has been studying deregulation in the energy sector for more than 20 years, said decisions made by regulators in Texas did not result in the capability of their systems to handle such a cold-weather crisis. Kentucky Oil and Gas Association Executive Director Ryan Watts said there is a “low probability” that what happened in Texas could happen in Kentucky and highlighted “stark differences” between the two states.

“For one, we are a regulated utility – we have regulated utilities in Kentucky,” he said. “And two, if somehow a utility went down, we could pull that market supply from the Utica or Marcellus Shale in Pennsylvania, West Virginia, or Ohio. We get some of our natural gas from the Gulf of Mexico, too. We have abundant natural gas in Kentucky and from those supply chains. That's why prices are remarkably low right now, and, I think Kentuckians won't see that curtailment they did see in other places during the ice storm.”

It would be nearly impossible for Kentucky’s utility providers to raise prices during a widespread outage, Watts said, because of the level of protection provided by the Kentucky PSC and FERC. 

“Everything has to go through the PSC with their tariffs,” he said. “By federal law, wholesale gas prices aren’t regulated, but gas utility companies cannot make a profit from their gas, so they're only going to charge what the wholesale prices are and because we have an ample supply with our connections to other markets, I don't believe Kentucky will ever see what we saw happen in Texas.”

Natasha Collins is a spokesperson for Louisville Gas and Electric Company and Kentucky Utilities, which serves more than 329,000 natural gas customers in Jefferson and surrounding counties. She said as is the case with all regulated utilities, the company’s rates are set through the PSC and no changes can be made without its approval. 

Natural gas is second to coal in Kentucky with regard to energy consumption. Kentucky's natural gas-fired electricity generation reached a record 14.8 million megawatt-hours in 2019 and accounts for about one-fifth of the state’s net electric generation. Kentucky had the ninth-lowest average electricity retail price of any state in 2019 and the second-lowest price for a state east of the Mississippi River.

There are about 16,000 producing natural gas wells in 33 Kentucky counties and nearly a million residential, commercial and industrial natural gas customers.