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Natural Gas Pricing 101, Part 1: Wholesale Prices   


Natural gas
Avista customers see benefits of natural gas abundance
You’ve probably seen the headlines: “Natural gas prices fall to 10-year low,” or “Natural gas prices continue to drop.” But are these headlines really telling the whole story, and what do they mean to you as a natural gas customer of Avista? We’ve been talking about natural gas as a cleaner, more efficient and reliable source of energy for a long time now, but what about the economics of natural gas? How do new sources of natural gas affect wholesale costs, and how does that translate to your energy bill?

The good news is if you are an Avista customer, you have been seeing the benefits of increased natural gas supply and lower prices for some time. Through rate decreases proposed by Avista and approved by state regulators, Avista customers have seen the wholesale price of natural gas decrease by more than 48 percent since 2008.

But the relationship between headline-making wholesale prices and what you see on your bill each month is not always that clear cut. Over the next few weeks through this natural gas pricing series, we’ll discuss the cost components that make up a customer’s natural gas bill and try to clear it up a bit.

Natural gas bills include wholesale gas costs, interstate pipeline transportation costs and costs for equipment and people to get the natural gas to the customer
There are three main drivers of your natural gas energy bill: Whole sale gas costs; fixed transportation costs; equipment and people
There are three main drivers of your natural gas
energy bill: Whole sale gas costs; fixed
transportation costs; equipment and people.
Click to see the full chart.
There are three main drivers of your natural gas energy bill:
1. The cost of purchasing natural gas on the wholesale market is about 38 cents of every dollar you pay for natural gas. This cost is passed through to you without any mark-up or profit to Avista.
2. The cost to transport the natural gas on pipelines from the source or supply basins to Avista’s system is about 17 cents of every dollar you pay for natural gas.  This cost is also passed through without any mark-up or profit to Avista.
3. The cost of the equipment and people it takes to safely and reliably deliver natural gas through our distribution system to your home or business is about 45 cents of every dollar you pay for natural gas. State regulators provide Avista the opportunity to earn a fair return, or profit, on the investment our shareholders have made in the facilities used to provide service to you.
You probably don’t think much about it when your gas furnace kicks on, or when you turn on your gas stove or use water that is heated with natural gas. But, like electricity, it’s taken a journey to get to you. Before we can deliver it to your home, Avista has to first purchase the natural gas and have it transported through large pipelines over long distances to our delivery system. The combined costs of purchasing and transporting natural gas to our system for delivery to you make up more than half of your natural gas bill. Avista doesn’t mark up these costs or make any money on this – customers pay what we pay.

When we purchase natural gas from the wholesale market, our goal is to secure reliable gas supply at the lowest cost so we can keep your costs as stable and low as possible.

Natural gas – grown at home
Natural gas is an abundant resource found throughout the United States and Canada. Since 2007, domestic natural gas production has increased, primarily due to the advances in natural gas drilling that have allowed production from previously untapped shale gas formations throughout North America. The Energy Information Administration now estimates that at today’s consumption levels there is enough natural gas to last the United States almost 100 years.

Avista is fortunate to be located near two prolific natural gas supply basins; the Western Canadian Sedimentary Basin, primarily located in Alberta and British Columbia, and the Rocky Mountain basin in Wyoming, Utah and Colorado. Not only is the North American natural gas resource base vast, the American Gas Association describes it as “a home‐grown North American fuel whose efficient use by power plants, homes and businesses contributes to cleaner air.” Beyond the comfort and warmth it brings to our homes, natural gas is also recognized for its environmental attributes and contribution to American energy independence.

Wholesale prices are market driven
Click to see full chart
Over the past decade, wholesale
natural gas prices have been volatile,
at times increasing sharply and then
dropping just as sharply.
Click to see full chart.
Natural gas is a commodity. Ultimately the cost is set by the market. As in most free markets, natural gas prices are primarily influenced by supply and demand. Over the past decade, wholesale natural gas prices have been volatile, at times increasing sharply and then dropping just as sharply. Factors that have contributed to the volatility of natural gas prices including supply, demand, severe weather events like Hurricanes Katrina and Rita in 2005, and access to shale natural gas supply.

Avista’s purchasing plans provide more stability and help keep costs low
Avista wants what our customers want: an adequate supply of natural gas at affordable prices. Our goal is to strike a balance of ensuring reliable supply at competitive prices for our customers, and stabilizing natural gas prices so our customers see fewer fluctuations in their energy bills. Our employees in natural gas purchasing work every day to do this in several ways:

• We purchase natural gas from the supply basins mentioned above. These purchases are a mix of fixed price long-term, medium-term, and near-term purchases, which allow us to lock in prices for the future, and purchases on the short term market (also called the “cash” or “spot” market).
• We secure capacity rights on six large pipelines to assure delivery of supply from the supply basins to Avista’s distribution system.
• We’re part owner of Jackson Prairie, an underground storage facility in Washington State, so we can purchase natural gas and store it until we need it. We often purchase natural gas during warm‐weather months, when it traditionally costs less, and store it for delivery to our customers for use on those cold winter days.

Our natural gas purchasing plans are reviewed and revised annually to reflect evolving market conditions. Sound purchasing practices and decades of experience have helped us keep costs lower and more stable for our customers. In fact, Avista is paying some of the lowest wholesale natural gas prices among our utility peers in the region. It means our customers have some of the lowest natural gas rates in the northwest.

We’re also thinking ahead. Periodically Avista updates our 20-year outlook, which looks at how we can meet our customers’ natural gas needs over the long term, in a reliable manner at the lowest cost. We call this our Integrated Resource Plan. We updated it in 2009, and we are currently in the process of completing our 2012 plan, which will be available at the end of the year.

Coming Up
As we mentioned earlier in the article, the combined costs of purchasing and transporting natural gas to our system for delivery to you can be more than half of your natural gas bill. These costs can also affect your electric bill. In our next article, “Natural Gas Pricing 101, Part 2: Natural Gas Supply and Your Bill,” we’ll explain more about how, with approval by state regulators, we pass these costs directly through to customers.

Later, we’ll discuss the remaining portion of your natural gas bill. “Natural Gas Pricing 101, Part 3: Natural Gas Delivery and Your Bill” will explain how your energy rates are also driven by the rising costs of the equipment and people it takes to get natural gas to your home safely and reliably.
Read the series
Natural Gas Pricing 101, Part 1: Wholesale Prices
Natural Gas Pricing 101, Part 2: Natural gas supply and your bill
Natural Gas Pricing 101, Part 3: Natural gas delivery and your bill
Posted by  System Account  on  7/30/2012
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