Washington Utilities and Transportation Commission
The cost of energy is an extremely complex issue. The past several decades have seen periods of instability in energy markets and consumer prices reflect these adjustments.
Electricity is delivered to you by the local utility through a network of transmission and distribution lines, often referred to as the “grid.” Most of the existing grid was built during a highly structured, highly regulated era that began in the 1930s and was designed to insure that everyone in the United States had reasonable access to electricity service. The utilities built power plants and connected the plants to the grid. The utility customers generally paid for developing and maintaining the grid through fees authorized and regulated by state regulatory commissions.
Your electricity costs are based on the availability of fuel used for power generation and the transmission necessary to deliver the power to you, as well as construction costs of plants and the associated expense for operation and maintenance. Supply and demand for fuel and transmission, international events and changes in weather also can affect the price of your electricity.
There are multiple factors involved in explaining why costs have risen so quickly over previous decades:
There are several steps that consumers can take to reduce their electric bill. Conservation and increased efficiency are popular methods. Conserving electricity not only lowers electricity bills, it also reduces the cost utilities must pay to meet load growth. You can reduce your usage by turning off lights and appliances when they are not being used and add additional weather insulation to doors and windows if necessary. Visit www.energysavers.gov for a free home energy audit. Check with you local utility to find out about the programs they have to help you reduce your monthly bill, such as budget billing. For more energy efficiency information, click here.
The good news is natural gas prices are lower at the end of 2009. Natural gas customers can expect lower bills on average this winter (2009/2010) compared to last year. Plentiful domestic natural gas supplies and lower wellhead prices will drive bills down this winter and provide relief for natural gas customers struggling in a troubled economy. In the long term natural gas rates are expected to continue to rise through 2025. Regional demand for natural gas is projected to grow more than 50 percent by 2025.
After a period of high prices, national domestic natural gas prices have plunged 42 percent since early July 2008. This is due to a combination of weaker summer demand, storage reserves recovering from last winter’s high demand combined with speculators (U.S. Senate Report) backing out of the market due to both of these events. Recovery of storage supplies and prices declines have been supported by increases in domestic natural gas production from shale deposits and conventional domestic wells, as well as the recent fall in oil prices.
Regionally, the completion of the Rocky Express pipeline that brings Rocky Mountain natural gas supplies eastward has levelized the price of natural gas shipped to the Northwest. Domestic production from shale deposits as well as double digit increases in production of conventional wells in the Rockies has caused some stabilization in the current prices. However, the jury is still out on how big shale is going to be on the long term outlook of natural gas prices. Shale deposits are still more expensive to drill then conventional sources. For more information read Seattle Times August 25, 2008 article: Natural gas prices fall as shale yields bounty.
About half of Washington’s natural-gas supplies come from Alberta and British Columbia provinces in Canada and the other half from Rocky Mountain production sites such as Wyoming.
The two basic components in the cost of your natural-gas service are:
The cost of transportation, storage and distribution of the natural gas includes maintaining pipes and meters, billing customers and allowing an opportunity for a reasonable level of profit for the company’s investment in its network of distribution pipelines. The commission reviews each utility’s request for higher rates.
Your utility purchases its gas supply through an unregulated wholesale-commodity market, using a mix of long-term and short-term contracts with independent suppliers. The price you pay for natural gas reflects what your company actually pays for the fuel. Your utility is not entitled to make a profit on the gas-supply portion of your bill.
The commission uses a process called the Purchased Gas Cost Adjustment (PGA) mechanism to keep track of how much utilities spend on acquiring natural-gas supplies. The first part of the process involves the company looking forward and establishing the best projection for the price of natural gas in the upcoming year. The second part of the process looks back and calculates the difference between the previous projection and the actual price. Customers receive a credit if the PGA collected too much from customers. If not enough money is collected, a surcharge is applied to your energy bill.
The price of natural gas in customer’s rates is set by the forward market prices for natural gas plus the difference between the actual cost of gas used during the previous year and the previous forward estimates of the price of gas set a year ago. Sometimes that difference can be positive and sometimes it can be negative.
The price the public hears for natural gas is the wholesale spot (daily) market price. For any given year, gas utilities buy a portion of its gas supply for its customers 3 years in advance. Another portion of the gas supply is purchased 1-2 years ahead and about one third to one fourth of the gas is bought during the season in which it is used.
So the actual price of the gas customers must pay is a blend of all those purchases over the previous several years
Commodity costs to Northwest customers have tripled in the past seven years. There are a number of factors that influence the cost of natural gas.
The fundamental factor driving up wholesale natural-gas costs is increased demand. More people are using natural gas to heat their homes. More natural gas is being used to generate electricity. New pipelines have opened, making it easier to transport Canadian gas and Rocky Mountain gas to the Midwest where demand is very high. The competing factors for natural gas drive up prices. When prices rise speculators gamble on the trend of rising prices and drive prices higher. This creates both higher prices and volatile prices. When natural-gas supplies exceed demand, wholesale prices decline often quickly and dramatically.