The Henwood Edge

Cratering Natural Gas Prices Not Reaching the Beleaguered Consumer

I heat my home with natural gas, like many homeowners in the northeast. Unlike many homeowners, I spent almost twenty years trading natural gas futures. I know a thing or two about where it comes from, how it’s processed, priced, and delivered.

But I took a look at my latest gas bill and couldn’t make heads or tails of it. Or understand why it was so damn high.

 While oil prices have climbed and the cost of gasoline going through the roof, natural gas prices have fallen to ten-year lows. If you listen to the news, you’ll hear that the low price of natural gas has provided ‘welcome relief’ for the beleaguered consumer. But look at your bill. If it looks like mine, where’s the relief?

 I opened my bill from Elizabethtown Gas and couldn’t figure it out. It’s been years since I really looked at my gas bill, but I’m smart enough to have kept the old ones.  I went through my records for the past two years, sat down, and built a spreadsheet.  Yes, I have the spare time to do this.

 Let’s start with the bill itself.  It shows the amount of gas I used during the month and then converts that number into “therms.” That threw me. I bought and sold this stuff for decades, but in those contracts nat gas is measured in mmBTUs, or millions of British Thermal Units.  On the back on my bill it tells me that 1 Therm = 100,000 Btus.  Simple enough: 10 Therms = 1 mmBTU.   I can now convert the price on my bill to the price of natural gas traded on the open market.

 If only it were that simple. My gas bill is then broken down into three categories, each of which charges me a different rate multiplied by the number of therms I used during the billing cycle.  The rates listed below all came from my last bill from Elizabethtown Gas. (March 9, 2012)

1. The first category is not labeled and shows a charge of $0.3337 multiplied by the number of therms .  When I inquired about this charge I was told it was the delivery charge for the gas. In other words, the rate the company dings me for the privilege of purchasing their gas, padded for profit. Converting the delivery cost to mmBTUs, I am being charged $3.337 per mmBTU to have the gas delivered to my house.
2. The second category is the ‘Basic Gas’ charge.  Quoting from my bill, and every person I spoke with at Elizabethtown Gas: “This covers the cost of gas we purchase for customers and is adjusted periodically to reflect increases or decreases in the wholesale price of gas.  This is a direct pass-through.  We earn no profit from this charge.”  The number of therms consumed is multiplied by the rate of $0.6417.   Again, converting that number to mmBTUs, this means I am paying another $6.417 per mmBTU for the actual natural gas consumed.
3. The third category is the Consolidated Adjustment Charge (CAC).  This represents a combination of charges and credits for programs that benefit the customer or community and can include a possible charge or credit reflecting the weather from the previous winter.  Credits for margin sharing are also included in this charge.  This is the smallest of the charges and is $0.0513 per Therm .  Converting to mmBTUs, the CAC is $0.513 per mmBTU.
4. There is also an $8.00 monthly service charge added to the bill.  This final charge “covers the basic fixed costs of providing you with natural gas.”

Adding the first three categories together brought me to this equation: $3.337 (delivery charge) + $6.417 (basic gas) + $0.513 (CAC charge) = $10.267 per mmBTU.

That’s messed up.  Consider this: the cash price for natural gas at NY Citygate has been running around $2.300 per mmBTU this month, which means I am paying almost four times the rate at which gas can be purchased on the open market.

I am not suggesting that there is any wrongdoing taking place at any of these entities, I am merely pointing out that on the open market, natural gas futures prices have been below $4.00 per mmBTU for the past two years and residential consumers have been paying upwards of $10.00 per mmBTU during this time.  The tremendously low price of natural gas due to the explosion of domestic supply in the form of shale gas is not having any meaningful impact on the average consumer.

 To be fair, in June of 2011, Elizabethtown Gas won its bid for a reduction in its Periodic Basic Gas Supply Service Rate from the New Jersey Board of Public Utilities, amounting to 8.9% in savings.  But those savings are only realized on one part of the gas bill.  Since October, the delivery charge actually increased from roughly $0.3074 per therm to its current level of $0.3337 per therm.

 So it feels like I’m getting ripped off.

 And there’s something else I found very interesting.  The wholesaler that Elizabethtown Gas purchases its natural gas from (and passes that cost directly to the consumer) is Sequent Energy Management.  Both Sequent and Elizabethtown Gas are owned by AGL Resources.  When asked about this relationship, AGL responded: “The price charged by Elizabethtown Gas, set to recover the annual cost of gas to serve consumers, is inclusive of pipeline transportation, storage and fuel charges as filed and approved by the Federal Energy Regulatory Commission.”  Another interesting fact is that Sequent Energy Resources pays Elizabethtown Gas 5 million dollars a year for the right to sell it natural gas.  What I find confusing is that there is already a charge on my bill for the delivery costs of bringing the gas to my home and I pay an $8.00 monthly service charge as well. One part of a holding company supplies gas to another part of the same company and I get stuck with the bill.

 To be clear, all of these rates and charges are regulated by both the Federal Energy Regulatory Commission (FERC) and the NJ BPU, and any changes must approved by those agencies.

In the gasoline market, there is generally about a $0.70 difference between the price traded on the CME and the average price nationally that consumers pay at the pump.  With gasoline futures running around $3.35 on the CME, The AAA national average for regular gasoline has been in the $3.80 -$3.90 range for the past week.  The current difference represents a mark-up of approximately 13 to 16 percent.  Compare that to natural gas – with a futures price of $2.30/mmBTU and the consumer price of $10.26/ mmBTU – and you see a mark-up of over 400%. That mark up blew me away.

 I understand that there is a mark-up on every product the consumer purchases, and that companies are in business to make money. But it appears that the consumer is getting the short end of the stick in both cases, with high oil prices meaning we pay more at the pump, and rock-bottom nat gas prices offering no relief from my local provider.