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High Winter Prices Await Residential Market

High Winter Prices Await Residential Market

State regulators, LDCs, utilities and industry analysts are springing into action to prepare residential customers for the harsh reality of much higher natural gas bills next winter, especially if power generation demand for gas continues unabated and the winter heating season is unusually cold.

These will be the "important wild cards" in determining just how high gas prices, which have doubled since last year to more than $4 per Mcf, will be for customers in the months ahead, said Melanie A. Kendadine, acting director of the Department of Energy's Office of Policy, in a letter to the American Public Gas Association (APGA) last week. The letter was in response to APGA's request in mid-June for an investigation into recent gas price spikes.

In the meantime, the DOE "will continue to monitor developments in the nation's natural gas markets.....We will closely follow gas storage levels, which are currently below year-ago levels, but are still within the band defined by the average seasonal level experienced in recent years." In the end, "we believe there is a reasonable expectation that prices will moderate over time."

But others aren't so sure. "We could see 'sticker shock' from residential customers this winter if cold weather shows when gas prices have doubled. Regulators, Congress and even the presidential campaigns could all come into play, not to mention price caps, representing the 'ugly' if natural gas prices stay high for too long," said Merrill Lynch analyst Donato J. Eassey in a report, entitled "Natural Gas Supply and Demand --- The Good, the Bad and the Ugly."

"The current natural gas price environment is the most bullish we have ever seen for this time of year, with natural gas prices up 89% year-to-date and 91% from a year ago," he noted. Henry Hub spot gas prices averaged $4.29/Mcf in June and $3.43/Mcf for the quarter ended in June, according to the report.

Given that gas suppliers currently are buying gas for consumption next winter at these high prices, "it is likely that most consumers will pay significantly more for each unit of natural gas this winter than they did last winter," said the American Gas Association (AGA) in a recent white paper addressing the issue.

A number of LDCs already have contacted their customers to prepare them for gas increases of as much as 25-30% this coming winter, said Paul Wilkinson, AGA's vice president of policy analysis. But don't expect this to be the rule-of-thumb. He noted that he expects to see "a lot of variation" in gas prices next winter.

Wilkinson said he was encouraged by the drop in gas wellhead prices from $4.70 to about $4/Mcf over the past two weeks. He believes this shakeout will continue, as the industry is finally starting to see the effect of increased drilling on prices. But it's too late to have any effect on winter gas prices. "No matter what happens high winter prices will be with us," he said.

Nicor Gas is telling its customers to expect price increases of nearly 50% next winter, said spokesman Mike O'Mary. The LDC anticipates the average gas customer's bill for the October-to-March period will be $610, up $200 over last winter.

"We're trying to give our customers the heads up now so that the gas prices don't come as a surprise next winter," O'Mary told NGI. Nicor, he noted, has issued press releases alerting its customers to the higher prices, put out a special edition of its customer newsletter and has informed customers of special payment arrangements.

Some believe gas storage, which is "significantly lower" than a year ago, will keep prices further afloat next winter. While gas injected into storage during June was about 23% behind last year, the AGA report said "all indications are that [storage] will be up to targeted volumes by the onset of this winter."

O'Mary noted that Nicor Gas plans to have its storage full by the end of summer. "We're shopping for the best deals now." Of the 500 Bcf of gas that Nicor delivers each year, he estimated that 130 Bcf comes out of storage.

The high gas prices are sending LDCs and utilities to their state regulators with requests to pass through the costs. Cascade Natural Gas last week sought its first rate increase since 1994. It asked Washington state regulators for a $19.9 million increase to offset the higher purchased gas costs. It also filed to pass back credits, which have been deferred since August 1996, to offset some of the price increases to customers.

Puget Sound Energy Inc. of Bellevue, WA, asked regulators to pass through the rising gas costs as well. It is seeking an increase of 16.7 cents/therm for commercial, industrial and residential users. With this adjustment, the utility estimated that customer bills would jump about $13/month to $64/month, effective. Aug. 1.

A number of other LDCs, such as Laclede Gas in St. Louis, MO, and Nicor Gas of Naperville, IL, have made similar requests to their state regulators.

Susan Parker

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