Natural Gas Prices An Overview and a Look Ahead to the 2007-2008 Heating Season
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Natural Gas PricesAn Overview and a Look Ahead to the
2007-2008 Heating Season
News Media & Public Briefing
October 30, 2007
Andrew MelnykovychCommunications Director
Kentucky Public Service Commission
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[email protected]@ky.gov
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Natural gas prices during the 2007-2008
heating seasonwill continue the trend of
steadily rising pricessteadily rising pricesthat began seven years ago
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• Structure of the natural gas industryStructure of the natural gas industry
• How natural gas rates are setHow natural gas rates are set
• The natural gas marketThe natural gas market
• Recent trends in gas pricesRecent trends in gas prices
• What’s ahead for 2007/2008What’s ahead for 2007/2008
• What consumers can doWhat consumers can do
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Structure of the natural gas industry
• Producers/processors - Wholesale prices unregulated
• Interstate pipeline companies - Federally regulated
• Local distribution companies (LDCs)
- State regulation
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Natural gas ratesThree components
• Distribution system
• Pipeline delivery cost
• Wholesale price
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Distribution system component
• Reflects cost of delivering gas to consumer - Operations and maintenance costs - Customer service costs, inc. billing - Personnel, overhead, etc. - Fair, just & reasonable profit
• Determined by PSC through ratemaking - 3 of 5 largest LDCs – rate changes since July
• Second-largest component - %age varies
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Pipeline delivery cost• Cost of moving gas from well to local distribution system
• Smallest component - less than 10%
• Regulated by Federal Energy Regulatory Commission
• Passed on directly to consumers
• No profit for local distribution company
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Wholesale cost• Deregulation began in 1970s to stimulate gas production during energy crisis – deregulation complete in 1993
• Fluctuates with supply and demand
• Biggest part of retail gas price -about three-fourths
• Direct pass-through to consumer via gas cost adjustment (GCA)
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Gas cost adjustment• Allows LDCs to recover wholesale cost
• Does NOT include markup for LDCs - simple pass-through of wholesale cost to consumers
• Reviewed by PSC for accuracy
• Typically adjusted quarterly - prospective
• Includes rolling adjustment for over or under recovery of costs in previous periods
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The largest and most The largest and most frequent changes in frequent changes in
retail gas rates are due retail gas rates are due to gas cost adjustments, to gas cost adjustments,
which are driven by which are driven by conditions in the conditions in the
wholesale gas market.wholesale gas market.
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The NaturalThe Natural
Gas MarketGas Market
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Natural Gas Pipelines
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The Natural Gas MarketKey Points
• National market - regional differences
• Traded as a commodity
• Prices are market-driven
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PricingSpot market
- Short-term price
- At delivery point (Henry Hub)
Futures market
- For set quantity at set price on set date
- Forward-looking
- NYMEX
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Supply factors• Production
-Diminishing on per-well basis
- Lags behind demand
• Imports (LNG) - growing component
• Stored gas - typically about half of winter usage comes from storage
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Demand factors• Weather
- Principal home heating fuel
• Electric generation usage
- Increasing - both peaking & baseload
• Industrial usage
- Most sensitive to price (fertilizer, etc.)
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Recent market trends• Increasing demand
• Pipeline capacity constraints
• Increased price volatility
• More demand in summer due to peaking electric generation
• Higher summer prices
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2005-2006Unprecedented supply Unprecedented supply
disruptionsdisruptions
Unprecedented price Unprecedented price spikespike
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Henry Hub Price - 1989 to present
0
4
8
12
16
Year1990 1995 2000 2005
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Looking aheadLooking ahead
to 2007-2008to 2007-2008
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Where we are• No supply disruptions on Gulf Coast
• Ample gas in storage despite high summer demand
• Summer gas prices somewhat higher than 2006
• Market fairly stable
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44% of Kentucky households
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Price forecast• Latest Gas Cost Adjustments filed by most major Kentucky LDCs are higher than a year ago
• Base rates are higher at 3 of 5 LDCs
• Stored gas is somewhat more expensive than last year
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Natural gas bills during the 2007-2008 heating seasonwill be somewhat higher
than a year ago
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Current gas costsGas Cost Adjustment - per 1000 cubic feet
LDC Nov. 2002 Nov. 2006 Nov. 2007 total%
Atmos $4.83 $8.79 $9.39 94%
Columbia $4.78 $8.37 $10.19 113%
Delta $5.60 $9.98 $9.93 77%
LG&E $5.36 $7.67 $8.95 67%
Duke $3.92 $8.44 $8.84 126%
(as of 11-1-07)
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Current gas costsTotal gas bill – “typical customer” – 10 mcf/mo
LDC Nov. 2006 Nov. 2007 % change
Atmos* $107.27 $115.14 7%
Columbia** $99.10 $129.95 31%
Delta* $151.35 $156.39 3%
Duke $123.24 $127.22 3%
LG&E $100.72 $113.45 13%(as of 11-1-07)
* Base rate adjustment in 2007
** Base rate/rate structure adjustment in 2007
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No prospect for significant further
declines in the immediate future.
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10% of Kentucky households
Sept. 2003 - $.50/gal
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3% of Kentucky households
Sept. 2003 - $.70/gal
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Winter heating costs:Winter heating costs:• Weather – will drive consumption
• Consumption will drive wholesale costs
• Ultimately, individual bills will be determined by individual consumption
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Reducing
home heating
costs
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Conservation• Turn down thermostat
- Going from 72 degrees to 68 degrees can save 15% or more on your gas bill
- Programmable thermostats can save even more
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WeatherizationSubstantial saving are possible if you:
• Caulk around windows, doors
• Replace worn
weather stripping
• Seal openings
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Weatherization• Install storm windows
• Cover windows
with plastic
• Add insulation
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Energy audits• Identify problem areas
• Suggest corrective actions
• Offered by most major utilities
• Often free or nominal charge
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Budget billing• Annual averaging of monthly bill
• Removes seasonal fluctuations
• Allows predictable budgeting
• Annual or rolling “true up”
• Does NOT cut costs
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Low-income Assistance• Administered through Cabinet for Health & Family Services - local Community Action Agencies
• Weatherization assistance - eligibility based on income; many utilities provide matching funds
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Low-Income Home Energy
Assistance Program (LIHEAP)
• 150,000 households each year
• Two programs - Subsidy & Crisis - Subsidy - Nov.-Dec. - 90,000-110,000 households
- Crisis - Jan.-March - 50,000-60,000 households
Low-income assistance also is provided by many local non-profit agencies. Utility companies also have low-income assistance programs (Winterhelp -LG&E; Atmos Cares)
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Resources• Office of Energy Policy - Energy statistics - Energy efficiency and conservation programs• Cabinet for Health & Family Services - Weatherization assistance - LIHEAP information• University of Kentucky & others - Energy research
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On the Web• Office of Energy Policyhttp://www.energy.ky.gov/dre3/ • Cabinet for Health & Family Services - Weatherization assistance http://chfs.ky.gov/dcbs/dfs/Weatherization.htm - LIHEAP informationhttp://chfs.ky.gov/dcbs/dfs/LIHEAP.htm• Public Service Commission - General information, consumer complaintshttp://psc.ky.gov
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Contact information:
Andrew MelnykovychCommunications Director
Kentucky Public Service Commission211 Sower Boulevard, Frankfort KY 40602
502-564-3940 [email protected]
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[email protected]@ky.gov