State regulators, LDCs, utilities and industry analysts have allsprung into action to prepare residential customers for muchhigher natural gas bills next winter, especially if powergeneration demand for gas continues unabated and the winter weatherturns unusally cold.

These will be the “important wild cards” in determining just howhigh gas prices, which have doubled since last year to more than $4per Mcf, will be for customers in the months ahead, said Melanie A.Kendadine, acting director of the Department of Energy’s Office ofPolicy, in a letter to the American Public Gas Association (APGA)last week.

In the meantime, “we will continue to monitor developments inthe nation’s natural gas markets…..We will closely follow gasstorage levels, which are currently below year-ago levels but arestill within the band defined by the average seasonal levelexperienced in recent years.” In the end, “we believe there is areasonable expectation that prices will moderate over time.”

But others aren’t so sure. “We could see ‘sticker shock’ fromresidential customers this winter if cold weather shows when gasprices have doubled. Regulators, Congress and even the presidentialcampaigns could all come into play, not to mention price caps,representing the ‘ugly’ if natural gas prices stay high for toolong,” said Merrill Lynch analyst Donato J. Eassey in a report,entitled “Natural Gas Supply and Demand — The Good, the Bad andthe Ugly.”

“The current natural gas price environment is the most bullishwe have ever seen for this time of year, with natural gas prices up89% year-to-date and 91% from a year ago,” he noted. Henry Hub spotgas prices averaged $4.29/Mcf in June and $3.43/Mcf for the quarterended in June, according to the report.

Given that gas suppliers currently are buying gas forconsumption next winter at these high prices, “it is likely thatmost consumers will pay significantly more for each unit of naturalgas this winter than they did last winter,” said the American GasAssociation (AGA) in a recent white paper addressing the issue.

A number of LDCs already have contacted their customers toprepare them for gas increases of as much as 25-30% this comingwinter, said Paul Wilkinson, AGA’s vice president of policyanalysis.

Wilkinson said he was encouraged by the drop in gas wellheadprices from $4.70 to about $4/Mcf over the past two weeks. Hebelieves this shakeout will continue, as the industry is finallystarting to see the effect of increased drilling on prices. Butit’s too late to have any effect on winter gas prices. “No matterwhat happens high winter prices will be with us,” he said.

Nicor Gas is telling its customers to expect prices increases ofnearly 50% next winter, said spokesman Mike O’Mary. The LDCanticipates the average gas customer’s bill for theOctober-to-March period will be $610, up $200 over last winter.However, it could be much worse if there’s no let-up in gas pricesand winter is unusually cold.

“We’re trying to give our customers the heads up now so that thegas prices don’t come as a surprise next winter,” O’Mary told NGI.Nicor, he noted, has issued press releases alerting its customersto the higher prices, put out a special edition of its customernewsletter and has informed customers of special paymentarrangements.

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

O’Mary noted that Nicor Gas plans to have its storage full bythe end of summer. “We’re shopping for the best deals now.” Of the500 Bcf of gas that Nicor delivers each year, he estimated that 130Bcf comes out of storage.

The high gas prices are sending LDCs and utilities to theirstate regulators with requests to pass through the costs. CascadeNatural Gas last week sought its first rate increase since 1994. Itasked Washington state regulators for a $19.9 million increase tooffset the higher purchased gas costs. It also filed to pass backcredits, which have been deferred since August 1996, to offset someof the price increases to customers.

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

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