The overriding issue for consumers and local distribution companies (LDCs) who bought natural gas during the 2002-2003 heating season was availability, but the paramount concern this past heating season was cost, according to an American Gas Association (AGA) survey of LDCs’ purchasing and pricing strategies during the most recent winter.

The AGA culled data from 43 AGA-member LDCs in 27 states, nine of which have service territories west of the Mississippi River and the bulk of which are located in the East. The 43 companies accounted for about 25% of the natural gas delivered by AGA-member utilities during the five-month heating season.

The Winter Heating Season Performance Study found the companies had an aggregate peak-day sendout capacity of 37.6 MDth during the 2003-2004 heating season, which was 80% of the peak-day volume of 46.79 MDth that they had planned for during the period. Individual companies had an average peak-day sendout of 874,555 Dth.

“It should be no surprise that purchases moved by firm transportation provided much of the gas to consumers for the peak-day and peak-month,” the survey noted. Forty-two of 43 companies reported that firm supplies were a key part of their gas supply portfolios, including 24 companies that said between 26-50% of their required peak-day volumes came from firm supplies, it said.

Thirty-five LDCs said that up to 50% of their peak-day supplies originated from pipelines or other storage. About 70% of the companies said they used long-term agreements, defined as one year or longer, in their gas supply portfolios, with 10 companies reporting that long-term agreements accounted for more than 50% of their purchased gas on a peak day.

LDCs said the majority of their gas was purchased from producers, producer marketing affiliates and independent marketers, more than any other classes of supply aggregators.

As for the pricing strategies of LDCs last winter heating season, “it is clear that first-of-the-month index pricing dominates the market for long- and mid-term supply agreements,” the AGA survey said. It noted, however, that this year’s number of surveyed companies, though smaller than last year’s (43 companies compared to 65 companies), included more references to fixed price arrangements.

For long-term supplies, 28 of 42 companies said they used first-of-the-month (FOM) pricing for a portion of their supplies, including 12 companies that used FOM for 76-100% of long-term gas purchases, according to the AGA survey.

Mid-term purchases (more than one month, less than one year) were reported by 34 companies to most often be tied to FOM indexes for significant volumes of gas, the AGA said. In addition, fixed-price and daily mechanisms were used by 14 companies for mid-term purchases.

Thirty-three companies surveyed (70%) indicated they used financial instruments to hedge at least a portion of their supply purchases during the most recent heating season, up significantly from two years ago when 17 of 31 companies (55%) said they hedged.

Of the 40 LDCs who responded to the question, 14 indicated that they planned to hedge more of their purchased gas volumes during the upcoming 2004-2005 winter heating season, the survey said.

Forty of the surveyed companies said that weather-induced demand compelled them to use storage services during the past heating season. However, they also cited “no-notice requirements (34 companies), pipeline operational flow orders (20 companies), ‘must-turn’ provisions (20 companies) and arbitrage opportunities (17 companies) as reasons to maintain storage services within their gas supply portfolio” during the October through April period.

Likewise, 40 companies reported they used FOM index pricing to purchase gas for injection into storage, with 19 of the companies indicating that 76-100% of gas into storage was based on FOM prices.

Fourteen LDCs reported they were reviewing the potential for physically adding underground storage, while 10 were considering peak-shaving facility expansion during the next five years.

For the nation as a whole, working gas inventories at the end of March 2004 were significantly higher than inventories for the year-earlier period (by more than 350 Bcf) and pointed to less gas required for net storage injections during the 2004 refill season, the survey said. All of the additional gas in storage at the end of the 2003-2004 heating season was located in the Consuming Region East and Producing Region.

Transportation-only customers, such as marketers, have assumed a higher profile among all customers served by LDCs, according to the AGA. At the same time, the survey indicated that more LDCs have become active in the capacity-release market.

From April 2003 to March of this year, 22-24 of the companies released between one and 25% of their unused pipeline capacity on a monthly basis to the secondary market.

©Copyright 2004 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.