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 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
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
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.
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.