Default Gas Supply Rate Trends for New England Utilities

For most New Englanders September is a time to enjoy what remains of the warm weather, begin another season of Patriots football, and start thinking about the upcoming heating season. Early September is a great time to get your heating equipment serviced and budget for expected heating costs. Nearly all natural gas consumers in New England (except a handful of municipal systems) have the choice between the local utility and competitive gas suppliers for the commodity portion of their natural gas requirements. 

Over the last year or so, many small and medium sized natural gas consumers have realized that the default supply costs offered by the utilities are better than the offers from competitive energy suppliers. This is especially true for winter heating loads where natural gas usage is concentrated between November and March. The default supply price offered by natural gas utilities can go by many names. In New Hampshire and Massachusetts, its known as the Cost of Gas (COG). In Connecticut, its called the Purchased Gas Adjustment (PGA). In Rhode Island, its known as the Gas Cost Recovery (GCR). The graph below shows the default natural gas supply rates offered by various New England utilities to a medium size commercial customer who uses natural gas primarily for winter space heating.

 

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Despite the geographic proximity of these various utilities, you'll note significant variations in the seasonal cost patterns. National Grid in Rhode Island changes the GCR infrequently and holds it steady for many months at a time. Unitil's New Hampshire gas division tends to have the highest COG due to constraints associated with the utility's geographic location and the composition of the COG. All of the other utilities tend to follow a similar pattern where natural gas supply costs go up in the fall and drop in the spring. Oftentimes, the natural gas supply cost offered by Massachusetts and Connecticut utilities is below market during the spring and summer months. This trend of below market supply costs during certain warm months has repeated itself over the last few years and is a result of the way the utilities are regulated. They are prohibited from making a profit on the sale of the natural gas commodity and instead earn their rate of return through the distribution rates. At the conclusion of the winter heating season, if they have over-collected revenues from consumers relative to the actual costs of their natural gas supply portfolio, then they will refund any overcharges to consumers in the form of below market rates until any surplus has been dissipated. 

The natural gas supply prices offered by New England utilities will reflect the broader regional natural gas price environment, but there is a lag between current market conditions and the supply rates offered by the utilities. Note that the rates for last winter do not reflect the volatility and high prices experienced in the New England spot market during that time period. In addition, although the utilities are prohibited from making a profit on the sale of natural gas to customers, they are not prohibited from engaging in prudent hedging, risk management practices, and utilization of existing long-term contracts for pipeline capacity. Existing long term contracts for pipeline capacity, when included in the utility's calculation for default natural gas supply costs, currently have the effect of reducing the winter basis component of the gas supply price relative to current market prices. Each utility is unique and this phenomena varies in its price impact on natural gas supply costs offered by each utility in the region.

For a small to medium size consumer with a natural gas load primarily driven by winter heating, the reduced cost of basis enabled by existing long term pipeline capacity contracts embedded in the utility gas supply portfolio can make the utility a better option than competitive supply (at least in this market). When a consumer gets a quote from a third party energy supplier, the quote is driven by the individual cost to serve which will reflect current basis quotes, current NYMEX natural gas quotes, and the amount of peaking and storage capacity that must be acquired to serve the account. The graph below shows the current quotes for basis swaps on the Algonquin natural gas pipeline.

Algonquin pipeline monthly basis swap price data from 9/6/2013. NYMEX OTC symbol NYMEX.B4

Algonquin pipeline monthly basis swap price data from 9/6/2013. NYMEX OTC symbol NYMEX.B4

Note that January 2014 basis is trading just below $0.80/therm. If the NYMEX contract for January 2014 is approximately $0.40/therm and capacity and supplier margin for a winter heating driven gas load add another $0.10/therm to the total cost to serve, then a typical winter heating consumer could see a quote from a competitive energy supplier of $1.30/therm for the month of January 2014. Over the course of the winter heating season, a smaller natural gas consumer with a load driven by space heating requirements will likely see quotes for natural gas supply in excess of $1/therm. While its possible that they may still beat the utility (and you'll only know this in hindsight), it's unlikely. For large natural gas consumers, competitive supply is often the better option, but for the smaller consumers who need natural gas for heating, just taking the utility default gas supply option is looking better and better.