Residential Natural Gas Prices:
Information for Consumers
Introduction
Typically, residential natural gas consumers have a couple of basic questions as the winter approaches: How much will natural gas cost, and will there be enough available this winter heating season? The answers to these questions depend on ever-changing conditions in national and local markets for natural gas. Further, the far-reaching regulatory reform of the natural gas industry, begun over two decades ago, has the potential for more direct impact on residential customers as deregulation expands at the State level.
At the present time, assuming normal winter weather (and no catastrophic disruptions of supply), supplies of natural gas should be sufficient to satisfy all residential consumers’ needs (although there is always the possibility of isolated shortages due to unusual regional or local conditions). According to its Winter Fuels Outlook: 2002-2003, October 2002, the Energy Information Administration (EIA) estimates that the representative average residential price of natural gas will be about 6 percent higher than last winter, and that the total amount paid for gas consumed by residential customers during this winter will be about 19 percent more than last winter. These estimates are based on two assumptions: first, that a return to normal winter temperatures will result in colder weather than the relatively mild weather of last winter thereby increasing the amount of gas used per household; second, that along with increased gas use per customer, the increased overall demand is expected to result in higher prices.
In order to understand why your natural gas bills will be higher, it is helpful to understand a little about the commodity itself and the marketplace.
Where Does Your Natural
Gas Come From?
The vast majority of the natural gas used in the United States comes from domestic gas production. The remainder comes from imports, primarily from Canada, and withdrawals from storage facilities. Domestic gas production and imported gas are generally more than enough to satisfy customer needs during the summer, allowing a portion of supplies to be placed into storage facilities. Withdrawals of gas from storage provide the additional supplies needed to meet increased total demand when the additional requirements for winter-time space heating causes total demand to exceed production and import capabilities.
Natural gas is injected into pipelines every day and transported to millions of consumers all over the country. Much of it travels long distances from production areas to population centers through interstate pipelines owned and operated by pipeline companies. Natural gas is actually delivered to residential customers, and many other categories of end-use consumers, through the complex network of pipes owned and operated by local distribution companies (LDCs). The LDCs receive supplies into their systems from the pipelines at locations known as citygates.
Prior to regulatory reform (also termed “industry restructuring”), producers sold gas to the pipeline companies, who sold it to the LDCs, who sold it to residential and other customers. With restructuring, pipeline companies no longer perform the “merchant function”–that is, they no longer purchase gas for resale. Instead, they merely transport gas for buyers (such as factories, electric utilities, LDCs) and sellers (such as producers or marketers). Thus, LDCs now can choose among a variety of sellers of natural gas, whereas before they could only buy gas from one source–the pipeline.
Prior to restructuring at the State level (LDCs are subject to regulation by State public utility commissions), an LDC’s residential customers could only buy gas from one source–the LDC. Now, a number of states have implemented, or are testing or considering, alternative programs for LDCs’ residential customers. Commonly called “customer choice” programs, they make it possible for residential customers to choose a separate supplier other than their LDC from which to buy the gas. The consumer’s LDC, as the owner/operator of the distribution network, would deliver the gas as always, but charge only for its delivery. The consumer would see a separate item on the LDC’s bill, or might receive a separate bill, for the cost of the gas charged by the seller. The potential benefit to the individual homeowner is to be able to purchase gas at a lower price than that offered by the LDC.
What Are Residential Customers Paying For In Their
Natural Gas Bills?
The price of natural gas consists of three main parts (all cost estimates include a number of taxes):
Transmission costs - to move the gas by pipeline from where it is produced (e.g., the Gulf Coast) to the citygate of the customer's local gas company.
Distribution costs - to
bring the gas from your local gas company’s citygate to your house. This
tends to be the largest portion of the price to the
customer.
Commodity
costs- the cost of the gas itself. The local gas company passes
the commodity cost to the residential consumer without any additional
markup.
On a weighted-average basis over the past 3 heating seasons, commodity costs were almost 45 percent of the delivered price, followed by distribution to customers at nearly 42 percent, with transmission costs averaging close to 14 percent. It may seem peculiar that residential consumers pay more per unit of gas for local distribution than for interstate transportation of the natural gas over a longer distance. While interstate pipelines require large capital investments, the volume of gas that flows through these pipelines is quite large, resulting in lower unit costs. Local distribution of gas, on the other hand, is more costly, at least in part because a massive network is required to deliver relatively smaller gas volumes to large numbers of customers. The large infrastructure relative to the flow of gas results in higher capital and operating costs per unit. Additionally, local distribution costs typically include a number of taxes.
Figure 1. Breakdown of Natural Gas
Prices Paid by Residential Consumers
During the Heating
Season
Thus, transmission and distribution costs usually account for over one-half of the price of natural gas. However, in the winter of 2000/2001 the commodity cost was the largest portion because the price of natural gas rose significantly late in 2000 and stayed high through much of the first half of 2001 (Figure 1). Increased consumption (especially for electric generation), a decline in natural gas productive capacity, and relatively low storage levels contributed to the unusually steep rise in prices. Further, exceptionally cold weather in November and December 2000 resulted in spot prices exceeding $10 per million British thermal units (Btu) on a few days in late December and early January 2001, far exceeding the highest price ($2.84) recorded during those same months a year earlier.
How Much Will Natural
Gas Cost This Winter?
Each year, EIA projects the average price, consumption, and total cost of natural gas during the upcoming winter for a typical household in the Midwest. (The Midwest is used because nearly 63 percent of its 32.7 million households heat their homes with natural gas–the highest concentration of any region.) For the heating season of 2002- 2003, EIA estimates that Midwest homeowners will pay about $0.76 per therm (1 therm=100,000 Btu, which is the heat content of about 100 cubic feet of gas), or about $7.78 per Mcf, for natural gas this winter (Table 1).
With gas prices projected to rise by 6 percent, and a projected increase of over 12 percent in gas use, gas expenditures for the representative household would increase 19 percent over last winter (Figure 2). Any forecast is uncertain, and changes to key factors could alter the forecast significantly. Key factors that may affect market prices and consumption regardless of region include:
A prolonged cold spell or even a brief
episode of severe winter weather would increase per-household use
of gas and total demand in the high-consumption winter
months.
Disruptions of the pipeline delivery
system would affect deliverability of natural gas.
Problems in other energy supplies, such as a prolonged outage of a nuclear or coal-fired power plant, could increase use of gas-fired generators, thus increasing gas demand.
Figure 2 Total U.S. Residential
Natural Gas Expenditures
Although increased commodity prices are passed along to consumers, residential bills enjoy some protection from sudden, severe price fluctuations. This is partially because residential bills reflect monthly average prices rather than daily market prices. Also, transmission and distribution services make up a large fraction of residential bills. In addition, residential customers have a number of steps they can take to mitigate the impact of commodity price changes.
What Can
Residential
Customers Do?
- Residential customers can stabilize monthly bills by participating
in yearly budget plans offered by their local gas company, which help
alleviate the effects of higher prices by spreading the costs evenly
throughout the year.
- Consumers can obtain a home energy audit to ensure that all
appliances and space-heating equipment are running efficiently before
the heating season begins.
- Homeowners can reduce their energy needs by ensuring they have
proper insulation in their homes and for their water heaters, and by
reducing the temperature settings on their thermostats, especially when
they are not at home.
- In addition, both Federal and State energy assistance programs are available to natural gas customers who have a limited budget. For example, the Low Income Home Energy Assistance Program (LIHEAP) is a Federal program that distributes funds to States to help low-income households pay heating bills. Additional State energy assistance and fuel fund programs may be available to help households pay energy bills during a winter emergency. To find out if you qualify for assistance in your State, see: http://www.acf.dhhs.gov/ programs/liheap/states.htm or contact your local gas company.
For the latest update on natural gas demand, prices, and
inventories, see our “Natural Gas Update”
section of the EIA web
site at:
http://tonto.eia.doe.gov/oog/info/ngw/ngupdate.asp
For
information on the status of natural gas residential choice programs in
each state,
see our web site at: http://www.eia.doe.gov/oil_gas/natural_gas/restructure/
restructure.html
The Energy Information Administration (EIA)
is an independent statistical agency within
the U.S. Department of
Energy whose sole purpose is to provide reliable and unbiased energy
information.
EIA Web Site:
www.eia.doe.gov
For further information,
contact:
National Energy Information Center
Washington, DC
20585
Telephone: 202-586-8800
E-Mail: infoctr@eia.doe.gov