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Drilling rig

A QEP Resources drilling rig sits on the Pinedale Anticline on May 2, 2012.

Buy local. It’s a slogan usually reserved for selling food or crafts. But for more than three decades, 1 million natural gas customers in Idaho, Utah and southwestern Wyoming have been doing just that.

The arrangement is a hallmark of Questar Corp., a Salt Lake City-based gas utility. Roughly 65 percent of the gas it supplies is drilled and pumped by its subsidiary, Wexpro, in the high desert of western Wyoming and northern Utah. And by many accounts, the deal has been a successful one for both consumers and the company. When Questar went to renew the arrangement in 2012, it was approved by state regulators.

Two recent developments could alter the equation, however. Dominion Resources Inc., a Richmond, Virginia-based utility, has proposed buying Questar for $4.4 billion, prompting questions of whether it would continue to operate Wexpro. The acquisition still has to be approved by state regulators.

And now a second Cowboy State utility, Black Hills Corp., wants its own gas-supply program. Regulators have long looked favorably on Questar’s arrangement with Wexpro, but some are raising questions over whether Black Hills’ proposal will provide the same benefit to its consumers. The South Dakota-based utility, which recently completed the acquisition of rival SourceGas, now serves 65 percent of Wyoming natural gas consumers.

Industry experts have a term for utilities that own a regulated gas supply. They call it cost-of-service gas.

Most natural gas exploration and production companies sell on the spot market — where trades are made daily — or through long-term contracts. Cost-of-service companies like Wexpro are different. They are regulated, in Wexpro’s case by officials in Wyoming and Utah. And the bargain essentially comes down to this: If it is cheaper to drill gas and provide it to Questar, Wexpro drills. If it’s cheaper for Questar to buy gas elsewhere, Questar buys gas elsewhere.

The utility gets a guaranteed return on investment, up to 20 percent on drilling costs and 8 percent on the cost of acquiring properties. Consumers get a steady supply of cheap gas. If Wexpro makes too much money, Questar is required to send it back to customers.

One of the big questions financial analysts had when Dominion executives announced the Questar acquisition last month was what they were going to do with Wexpro. It’s not an immaterial question for Wyomingites, either. More than 140 people worked for Wexpro as of the end of 2015.

Dominion Chairman and CEO Thomas F. Farrell responded like this: “We’re not going to be going off into the (exploration and production) business. We’ll maintain – it’s our view the Wexpro business needs to be maintained for the benefit of the customers of Questar.”

But that’s only half the story. The Black Hills Corp. proposal for a similar arrangement may not offer the same benefit to ratepayers, said Bryce Freeman, administrator of the Office of Consumer Advocate.

Questar’s agreement requires the company to buy gas when it’s cheaper to do so. Black Hills’ proposal is more akin to an accelerated drilling strategy, he said, one that would secure a locked-in rate of return for the Rapid City-based utility’s currently unregulated oil and gas subsidiary, Black Hills Exploration and Production.

Put differently, Black Hills Exploration and Production is now subject to a natural gas market experiencing its lowest prices in 17 years. The utility would rather get a regulated rate of return. At least, that is how Freeman sees it.

“They have labeled this thing a hedging program,” he said. “But a true hedging program would be to leave the gas in the ground until it’s more expensive to buy it on the market.”

Black Hills, naturally, sees things differently. Their argument boils down to this: Natural gas prices are low, which means the company can now lock in future reserves for cheap.

Estimates submitted by the company to state regulators predict natural gas prices will rise from $3.54 per million British Thermal Unit this year to as much as $10.43 in 2035. By comparison, natural gas futures were trading at $1.69 on the New York Stock Exchange Friday.

“Black Hills continues to support its proposed program to provide long-term stability for natural gas costs for its customers,” Sharon Fain, a spokeswoman for the utility, wrote in an email to the Star-Tribune.

Black Hills’ 2015 financial filing provides further details. It notes the company is assessing its operations in Colorado’s Piceance Basin, which accounts for 50 percent of its oil and gas reserves, for inclusion in a cost-of-service program. Roughly 25 percent of the utility’s reserves are based in Wyoming’s Powder River Basin.

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Follow energy reporter Benjamin Storrow on Twitter @bstorrow

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