Natural Gas Consumers in U.S. Miss Full Benefit of Drop in Futures Prices

U.S. households that use natural gas for heating have missed out on part of a slump in futures this year as utilities wait as long as six months to update prices.

Gas futures fell as much as 41 percent through the end of October as production increases helped boost a stockpile surplus. Residential price declines averaged about 23 percent in the same period, according to a Bloomberg News survey of 15 utilities in the Northeast, Midwest and Texas.

The disparity between the drop in futures and household costs exists because utilities try to limit price swings through financial and physical contracts, sometimes years in advance, said Ken Costello, a principal with the National Regulatory Research Institute in Silver Spring, Maryland. Also, utilities adjust their retail rates as infrequently as every six months, depending on state regulations.

“Sometimes if the market price changes, the utility may not be able to reflect that in its prices until months later,” Costello said. “There are a lot of things going on that would cause the retail price to deviate from the market price.”

Homeowners were paying about 6.09 cents a therm, or about $6.09 per million British thermal units, for gas as of late October, based on the average of utility prices in the survey, down from $8.12 in January. A 41 percent drop would have put the price at about $4.79.

Natural gas futures for December delivery rose 8.1 cents, or 2.1 percent, to settle at $3.937 per million Btu today on the New York Mercantile Exchange.

Futures prices fell as low as $3.212 on Oct. 27 after touching $6.10 in early January, when colder-than-normal winter weather boosted fuel use. Gas closed at a record $15.378 per million Btu on Dec. 13, 2005, because of frigid weather across much of the country.

Utility Costs

Utilities can do more to ensure that consumers benefit from steep declines in natural gas prices, said David Bomke, the executive director of New York Energy Consumers Council Inc., a consumer advocacy group.

“Prices change daily, and fuel adjustments should be made monthly to reflect market conditions,” Bomke said. “Utility companies should develop a hedging strategy and then continue to practice that strategy with rigor to gain some historical perspective on whether it’s working or not.”

Utilities should also maintain a combination of long-term, medium-term and short-term supply contracts, he said.

Utility gas costs partly reflect physical contracts that are based on the wholesale price of gas for immediate delivery at a point close to the utility’s service territory, said Robert Ineson, senior director, North American natural gas for IHS CERA, a Cambridge, Massachusetts-based energy consulting company.

Purchase Strategies

CenterPoint Energy, which provides natural gas to 3.2 million customers in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas, buys about a third of its supply through contracts that vary in length from as little as a few months to as long as five years, according to Alicia Dixon, a spokeswoman for the Houston-based company.

“This year, as we do each year, we purchased about one third of our gas at the then-current monthly price, some of which went to storage at prices above today’s levels,” Dixon said. “One third is purchased using a hedge and the balance comes from storage.”

If state regulators support it, utilities may also attempt to limit price volatility by using financial contracts, including futures, options and swaps.

Utility Hedging

“In theory you’re minimizing price swings, but these tools are imperfect,” Ineson said.

Utilities hedge anywhere from 25 percent to 75 percent of their peak winter gas supply, said Chris McGill, the managing director of policy analysis for the American Gas Association in Washington. About 90 percent of natural-gas distribution companies use financial contracts to limit price volatility, McGill said.

Gas customers will see lower bills this winter as a result of falling fuel costs, said Eileen Dixon, a spokeswoman for DTE Energy Co. in Detroit. Prices for DTE residential customers will be about 20 percent lower this winter, compared with a year earlier, saving the average customer about $110, Dixon said.

Utilities pass the cost of buying natural gas, storing it and transporting it via pipelines on to consumers in the form of a charge called the purchased gas adjustment. In states with regulated electric and gas industries, utilities are required to seek periodic approval from regulators to change rates.

Cheaper Than 2009

The purchased gas adjustment includes transportation and distribution costs, which usually don’t change significantly from month to month, IHS CERA’s Ineson said.

Utilities purchase the bulk of their gas supply from April through October, after the end of the peak-demand winter heating season. If a gas company purchases quantities of the fuel in the spring or summer and prices decline through the fall, customers’ rates may be higher than the market price, according to CenterPoint’s Dixon.

“What a consumer is paying for gas through the local utility is only partially reflective of today’s market price,” said Bruce McDowell, a director of policy analysis in Washington for the American Gas Association.

To contact the reporter on this story: Christine Buurma in New York at Cbuurma1@bloomberg.net;

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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