Investing in shale gas projects may be the new way utilities in the Southeast secure more natural gas as they continue to transition away from coal, analysts say.

But consumer advocates worry that a Florida decision last week may set a dangerous precedent for how electric companies recover the cost of those investments.

Florida utility regulators signed off on Florida Power & Light Co.'s investment in an Oklahoma shale gas project, which the utility says will help secure low-cost natural gas for its power plants. The Florida Public Service Commission also agreed to FPL's request to recover the costs of that investment plus earn a return, which is unusual for fuel projects.

FPL is the state's largest utility and gets more than 60 percent of its electricity from natural gas. That number is expected to grow as the state starts working to meet a proposed U.S. EPA rule that targets carbon emissions from existing power plants.

Natural gas demand is expected to rise sharply as the Southeast continues to move away from coal. Florida has a unique problem, however. As a peninsula, the state has few options to get natural gas.

Building another gas pipeline into the Gulf Coast state is one answer. Investing in gas drilling projects outside the region is another, FPL says.

"Our goal is to get natural gas for our power plants at the lowest possible price for our customers," FPL spokeswoman Sarah Gatewood said.

Natural gas is generally cheap when compared to other fuels, but it's also subject to price swings. Securing a stake in upstream gas drilling projects could decrease that price volatility for utilities and their customers, one analyst said.

"It's an extreme form of hedging," said Paul Patterson, a utility analyst with Glenrock Associates. "It clearly helps the customers when prices are high."

Of course, those prices also could fall, Patterson points out. "There's no guarantee."

Duke, Southern ponder gas ownership

Duke Energy Florida is looking at similar projects but has not made any hard decisions, a company spokesman said. How the Florida PSC handled FPL's request is one factor.

"Our company would only consider investments in natural gas infrastructure in similar circumstances if there were clear benefits that would reduce the fuel portion of our customers' power bill," Duke Energy Florida spokesman Sterling Ivey said in an emailed statement.

Atlanta-based Southern Co., which owns utilities in Alabama, Florida, Georgia and Mississippi, is also exploring possibilities.

"Southern Co. continues to explore the option of shale gas reserve ownership but has not yet made a final decision," company spokeswoman Jeannice Hall said.

Southern, once coal-heavy, now gets about 38 percent of its electricity from the fossil fuel. The amount of electricity Southern gets from gas has jumped sharply to 42 percent, up from 15 percent years ago, according to company figures.

Southern has added so much natural gas to its electricity mix that the company is now the third-largest consumer of gas in the United States. But company officials frequently cite reasons why gas isn't the sole energy solution for the nation. Unresolved environmental concerns about fracking and price volatility, especially in the wake of rising demand, are just some of the reasons.

Another reason to be cautious, companies say, is the need for more pipeline infrastructure.

The Florida PSC's decision Thursday was part of an annual review of the state's regulated utilities' fuel costs. Consumer advocates strongly opposed FPL's request to recover the $191 million in cost plus earn the utility's allowed 10.5 percent return on the shale gas project.

The state's regulated utilities are allowed to earn a return from items that help deliver fuel, such as rail cars, said Charles Rehwinkel, an attorney with Florida's Office of Public Counsel, which represents consumers before the PSC. State statute prohibits them from profiting off upstream gas and coal reserves. This makes Thursday's decision "groundbreaking," Rehwinkel said.

"FPL has figured out a way to take a byproduct and convert it to a profit center for FPL," he said.

There's an additional request pending. FPL is asking regulators to approve the utility spending up to $750 million to explore additional shale gas investments. That amount is 25 percent of the utility's annual fuel costs, which are roughly $3 billion, spokeswoman Gatewood said.

Consumer advocates argue the PSC's decision allows FPL to shift the risk of the shale gas investments away from shareholders and onto customers.

"To have ratepayers shoulder the risk for speculative prospecting in other states, which is clearly a risky business ... use your shareholder money and stop putting ratepayer money at risk," said Stephen Smith, executive director for the Southern Alliance for Clean Energy.

FPL wants to recover the $191 million over the life of the project, which currently is set for 30 years. That amount won't be divided up evenly over 30 years, however. FPL plans to ask for $45.7 million the first year, but that amount is expected to drop later as drilling costs drop off and are replaced by operating and maintenance costs, which are lower, Gatewood said.

FPL considers the shale gas project to be an investment that should be treated like other shareholder investments, such as upgrading power plants, Gatewood said. This is the utility's argument for being able to earn a return on top of the costs.

Customers will save between $50 million and $100 million in fuel costs over the long term, Gatewood said.

She makes another point, which may be a key argument for the utility as demand for natural gas rises. The fuel that FPL buys now is whatever the market price is and also includes a markup from producers, drillers and transporters along the way. By being involved early at the production level, FPL can cap those markups at the company's rate of return, Gatewood said.

Risky business

The bigger worry about cost is if the shale gas venture fails, said Rehwinkel at the Office of Public Counsel. If FPL contracts with a gas provider, and that gas isn't delivered, the utility may have to pay more on the spot market, he points out.

If FPL's own venture fails, it will still need to go back out and get that natural gas, but it will earn the 10.5 percent return on its original investment, he said.

"They are going to have to replace the gas, and it's going to cost them twice," Rehwinkel said. "That's how the customers are on the hook."

Phillip May, CEO at two of Entergy Corp.'s Louisiana utility subsidiaries, said he was aware of some discussions about putting "gas in the ground" into the rate base. Such an approach could be attractive in terms of allowing a "long-term hedge against natural gas volatility and price," he said.

May, who runs Entergy Louisiana and Entergy Gulf States Louisiana, said the Louisiana Public Service Commission (LPSC) allows some gas hedging that can help mitigate the effects of, for example, a winter spike but not necessarily address a longer-term trend. Having gas in the ground could add a new dimension.

"It is something that we're interested in," May said. "We have a commission that has expressed interest in hedging gas over a longer term. Ultimately, this decision will be based upon what the LPSC's policy objectives are and whether or not hedging that over the long term -- something they have expressed interest in -- meets our customers' needs, our stakeholders in general and of course the needs of the shareholders."

Eric Skrmetta, a commissioner at the LPSC, said a company seeking a gas investment would need to submit a proposal to the commission for approval. He cited a goal of making the fuel supply to utilities as available and inexpensive as possible, noting past looks at hedging and storage.

He said the "new concept of taking positions in the ground is something that myself and other people have suggested," noting gas fields in states such as Louisiana and Texas.

Skrmetta said there could be "small amounts of hedging, small amounts of storage and small amounts of positions in the ground." The price would need to be right, he said.

Entergy also owns utilities in Arkansas, Mississippi and Texas. The company has made no decision on whether those utilities would pursue shale gas projects.

"Entergy's utilities have historically looked at ways to protect customers from volatility in natural gas prices, and acquiring gas in the ground assets may be an option to provide that protection over the long term with the potential to save customers money," the company said in an emailed statement. "However, those types of decisions are dependent on a number of specific factors for each utility, and we have no details to share at this time."