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Rate Volatility

While delivery rates are fairly stable, usually going years between changes, gas costs are extremely volatile. Natural gas is an unregulated commodity and the price is determined by market forces, primarily supply and demand. While the Commission has approved policies and services designed to reduce that volatility, the Commission does not regulate the price of natural gas or the rates for interstate pipelines and underground storage used in providing gas to New Hampshire. Utilities do not profit from high gas costs, they may only recover the actual commodity cost.

Some natural gas consumers follow NYMEX natural gas commodity futures prices in publications such as the Wall Street Journal or on the web and try to correlate those prices with the gas supply charge on their monthly gas utility bill. Local news organizations may pick up national news stories reporting higher or lower NYMEX prices compared to prior years. Unfortunately, determining the cost of gas rate on your monthly bill is more complicated than a comparison with current NYMEX pricing. There are many factors that can impact the cost of gas rate on your monthly bill that would not be reflected in the NYMEX futures prices posted in various publications and on the web.

It is important to note that gas utilities are allowed to recoup all gas supply costs that are prudently incurred and used to meet customer requirements. Each gas utility has a gas supply portfolio designed specifically to meet its customer requirements in a most efficient and economical way. The gas utilities are required to dispatch gas from their available supplies on a “least cost” basis. These gas supply costs are then passed on to the customers at the same costs that the gas utilities were charged. In other words, the gas utilities do not profit from the cost of gas commodity portion of your gas bill. The cost of gas rate is set at a level which will allow for the gas utility to recover its costs, not to generate a profit.

In New Hampshire, the regulated gas utilities are required to submit a forecast for their projected cost of gas rates twice each year. The summer (off-peak) period cost of gas rate is effective May through October and the winter (peak) period rate is for November through April. Once the cost of gas forecast has been thoroughly scrutinized by commission staff and the summer or winter period rates have been approved by the Commission, monthly adjustments to the approved rates are allowed, if necessary, within defined parameters which enable the gas utilities to match gas supply costs with gas cost revenues. Normally, the winter period cost of gas rates, beginning on November 1st, are noticeably higher than the summer period rates because it requires more costly investments in resources to get the gas to New Hampshire.

Here are some of the contributing factors for this differential between NYMEX posted pricing and New Hampshire summer and winter period cost of gas rates:

  • NYMEX natural gas futures prices reflect the supply price at a major trading hub known as Henry Hub, which is located in Louisiana. There are various interstate pipeline charges that gas shippers, including gas utilities, incur to get the gas from Henry Hub to New Hampshire, thus NH gas utilities’ cost of gas rates will be inherently higher than published NYMEX prices. This price differential between two geographic locations is commonly referred to as a “basis”, which essentially places a value on the cost to transport gas supply from one point to another. Gas utilities typically contract for firm (guaranteed availability) pipeline capacity which enables them to provide reliable service, but also requires the utilities to pay fixed costs for that capacity, usually throughout the year, whether or not the capacity is being fully used each day. In some cases, summer pipeline capacity is available at much less expensive rates than winter period pipeline capacity because the interstate pipelines are not being fully utilized during summer periods. These lower costs can translate into lower summer period cost of gas rates.
  • NH gas utilities are required to provide safe and reliable service to their firm ratepayers. This means they must have contracts for an assortment of more costly supply resources to serve winter period load requirements than for summer periods. These resources include a variety of firm pipeline, underground storage and winter peaking gas supply assets. Winter peaking gas supply contracts are typically structured to meet load requirements during the coldest 10, 20 or 30 days of the winter period and are usually the most expensive resources in a supply portfolio. These assorted supply resources usually include both fixed demand and commodity costs. These costs need to be factored into the winter period cost of gas rate calculations and tend to make the winter period cost of gas rate more expensive than the summer rate. Without these firm contracted winter period resources, the gas utilities would not be able to provide the required service reliability on the coldest days.
  • In New Hampshire, gas utilities pre-purchase significant volumes of production area gas supply during each summer period and inject the gas into natural gas storage facilities in New York, Pennsylvania, Michigan and Ontario, which are closer to the markets in the northeast. Common North American production areas include the Gulf of Mexico/Texas/Louisiana area, the Rocky Mountains, Appalachia, western Canada and Canadian Maritimes supply basins. The storage gas commodity is priced based on actual costs at the time it was purchased for injection into storage and also includes the related pipeline transportation and storage facility costs. When this gas commodity is withdrawn from storage during the winter months the average inventory price of the storage gas withdrawals is factored into the cost of gas rate used for billing purposes. This storage gas commodity price, for reasons stated above, may not correlate with current winter period market prices.
  • The NH gas utilities are required to hedge a portion of their winter period gas supply requirements under pre-approved, structured hedging policies which are designed to stabilize the cost of gas rates to NH consumers. These hedging policies require the gas utilities to essentially lock in the price of small portions their winter period gas supply requirements each month, up to 18 months in advance of when the gas supply will be utilized. This activity is designed to mitigate gas commodity price volatility, but can also somewhat distort the cost of gas rate on your monthly bill to a higher or lower level than current NYMEX gas pricing that may be reported online or in the news.
  • Gas utilities have LNG and/or propane air peakshaving gas plants located strategically on their distribution systems. These peakshaving plants include buildings that house the electronic controls and boilers, and secure outside yards that provide space for vaporizors that convert liquefied gas supplies into gas vapor, multiple storage tanks for the liquefied gas supplies and air compressors to push the vaporized gases into the distribution pipes. These peakshaving plants are used to provide a last source of gas supply to utility customers when all other more traditional sources of pipeline gas supplies are being fully utilized or not available. All costs associated with these peakshaving facilities are factored into the winter period cost of gas rates, increasing the unit cost reflected on your monthly gas bill.
  • As noted earlier, gas utilities are allowed to recover all of the prudently incurred gas supply costs. This is achieved by regularly adjusting the cost of gas rate to meet the forecasted gas cost estimate. At the end of each cost of gas period these gas costs and revenues are fully reconciled and reviewed by commission staff. Any over- or under-collection imbalances from the closed cost of gas period are then carried forward to the same period the following year. For example, an under-collection imbalance from a recently closed winter period means the utility’s gas costs exceeded gas cost revenues and would result in the under-recovered cost imbalance being passed on to the following winter period, with interest, thus artificially increasing the costs for the new winter period. Conversely, an over-recovery from a prior period would have the reverse effect, thus lowering the current period cost of gas rate.

Last updated 12/04/09