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Regulators Order Maryland Utilities to Buy Winter Gas Now

In an effort to lower heating bills next winter, the Maryland Public Service Commission (PSC) has ordered each of the state's utilities to purchase 40% of its summer gas injection needs immediately for delivery between now and October.

"Given the unprecedented volatility of natural gas prices, the commission finds that ratepayers will benefit and will be protected against price spikes due to heat, hurricanes, cold weather and many other uncertainties affecting gas and power prices by a strategy of purchasing a portion of the company's summer injection needs at the current low market prices," the PSC said.

In a series of orders the PSC directed Baltimore Gas & Electric Co., Washington Gas Light Co., Columbia Gas of Maryland, Chesapeake Utilities Corp. and Easton Utilities Commission to take actions -- other than options -- to assure that 40% of their summer natural gas injection volumes for delivery between April and October "will reflect pricing that reflects a Henry Hub price of $4.32 or less per MMBtu plus basis cost." The PSC ordered the utilities to report by April 15 what actions they take and the prices they pay for the gas and associated transactional costs.

PSC staff had argued that current futures prices appear to provide the utilities with an opportunity to lock in the cost of natural gas at a substantial discount from prices experienced over the last three winter seasons. A majority of the utilities indicated that they did not intend to change their standard procurement practices, the PSC said.

While acknowledging that nobody can predict future gas prices with precision the utilities, the commission and PSC staff all agreed that gas bought now, at or about the current futures price in the low $4/MMBtu range, would be bought well below the prices at which summer injection gas was purchased in 2008, the PSC said.

"If the gas utilities fail to take advantage of current natural gas prices, they may lose an opportunity to lock in lower costs for ratepayers for the 2009-10 winter heating season," the PSC said.

Front-month natural gas futures prices have fallen precipitously since last summer. After futures peaked at $13.694/MMBtu on July 2, 2008, prompt-month natural gas values have plummeted approximately 73% to $3.684 on Wednesday. On Thursday, April natural gas futures were boosted by a slightly larger than expected withdrawal report for the week ended March 13, closing out the regular session at $4.174 (see Daily GPI, March 20a).

Some analysts have predicted that prices will fall through the year. Bentek Energy recently said increases in domestic production, new pipeline infrastructure and the shifting sources of imports will create a "bonanza" for natural gas buyers in the Northeast (see Daily GPI, March 20b). Raymond James & Associates Inc. said booming production from shale plays and the ongoing recession could deliver a "price meltdown" this summer, with sub-$3/Mcf natural gas almost a certainty (see Daily GPI, March 17). And the Energy Information Administration (EIA)'s latest Short-Term Outlook said natural gas prices, production and consumption in the United States are expected to continue on a downward trend, with the Henry Hub gas spot price projected to fall nearly 50% to an average of $4.70/Mcf this year from an average of $9.13/Mcf in 2008 before rising to an average of $5.90 in 2010 (see Daily GPI, March 11). The Henry Hub spot price averaged $4.65/Mcf in February, 75 cents/Mcf below the average spot price in January, EIA said.

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