Natural Gas Pricing 101, Part 2: Natural gas supply and your bill   

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How does Avista pass the costs of natural gas through to you? (Hint: we don’t mark it up!)
 
Click to view full image
Click on the above image to enlarge the breakdown
example of a customer's natural gas bill.
You may have heard some good news Avista shared last week with our Idaho customers. We filed requests with the Idaho Public Utilities Commission to decrease natural gas and electric prices. If the request is approved, this will be the second natural gas price reduction this year in Idaho and natural gas rates will have decreased by more than 14 percent overall in 2012.

If you’re an Avista natural gas customer, you have some of the lowest natural gas rates in the Northwest, and the wholesale natural gas costs in your bill have also dropped significantly in recent years. In fact, through rate decreases proposed by Avista and approved by state regulators, Avista customers have seen the wholesale price of natural gas decrease by almost 50 percent since 2008.

But a 50 percent drop in wholesale prices doesn’t equate to a 50 percent reduction in your natural gas bill, because the rates you pay cover much more than just the wholesale cost of natural gas itself.

In our article last week,”Natural Gas Pricing 101, Part 1: Natural Gas Supply,” we explained how the combined costs of purchasing natural gas on the wholesale market and having it transported to our distribution system for delivery to you is about 55 percent of your natural gas bill – or 55 cents of every dollar you pay for natural gas. We work hard to keep these costs as stable and low as possible.

Click to enlarge
Avista customer's have seen the wholesale price of
natural gas decrease by almost 50 percent since 2008.
Let’s break that 55 percent down even further. The wholesale cost of the natural gas itself is about 38 percent of your natural gas bill. Avista does not make a profit on the cost of natural gas that is purchased to meet customer needs. You pay what we pay. Another 17 percent of your natural gas bill is the costs of transporting the natural gas on pipelines from the source or supply basins to our distribution system for delivery to you. While we also don’t mark up or make a profit on transportation costs, they are fixed, and have not declined like the cost of the gas itself has in recent years.

The remaining portion of your bill, about 45 percent, covers 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. 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, and we’ll talk more about that in our next article.

What exactly is a Purchased Gas Adjustment (PGA)?
So how do we pass wholesale natural gas and transportation costs through to you, whether it’s increases or decreases in wholesale prices, or changing transportation costs? We call it a Purchased Gas Cost Adjustment, or PGA.

Our customers love the benefits they get from natural gas, but they don’t want surprises, especially in their energy bills. Imagine if your natural gas prices fluctuated like gasoline prices do. You might see your natural gas rates rise and fall several times in a month.

To keep this from happening, once each year Avista requests an adjustment in the natural gas rates our customers pay, to reflect our actual costs of purchasing natural gas on the wholesale market and transporting it to our system for delivery. These PGA requests to the utility commissions in Washington, Idaho and Oregon are usually made annually in August or September, and the new rates take effect by winter. Additionally, when wholesale prices of natural gas change significantly, we can make requests at other times of the year.
 
When costs are down, it’s good news for our customers, and we want to pass these price decreases on as quickly as we can. So far in 2012, Avista has filed out-of-cycle PGA requests with the utility commissions in Washington and Idaho, as well as our regular annual request in Idaho to reduce natural gas prices. Decreases took effect March 1 for our first requests, and, if approved, a second decrease for Idaho customers will take effect Oct. 1.

In fact, since 2009, Avista has filed 20 PGA requests for our customers; seven in Washington, nine in Idaho and four in Oregon – of those, 14 were to reduce gas prices based on declining wholesale natural gas costs. We expect to file our regular annual PGA requests in Washington and Oregon in the coming months. These changes in natural gas costs and the PGA rate adjustments do not increase or decrease Avista’s earnings and must be approved by state regulatory commissions.

Electric customers benefit
Coyote Springs 2
Coyote Springs 2, pictured above, is a natural gas
fired plant that generates electricity for customers.
The declining cost of natural gas also benefits electric customers through lower overall power supply costs. When it costs Avista less to purchase the natural gas we use to fuel our natural gas-fired generation plants, we can pass those savings onto you as well. In the general rate request we filed in Washington state in April, due in part to declining natural gas prices, we proposed a one-year Energy Recovery Mechanism rebate to reflect the overall decrease in costs to generate electricity for Washington customers. Also, as part of our Idaho requests last week, we proposed a Power Cost Adjustment reduction for our Idaho customers.

So whether you are an electric or natural gas customer of Avista (or both), you’re seeing the benefits of natural gas abundance and low prices, and you have been for some time. But what does it take to deliver natural gas to your home and provide the service to keep it safe and reliable, and how are the costs of the “the pipes and people” it takes to do that reflected in your natural gas rates? We’ll talk more about that in our next article, “Natural Gas Pricing 101, Part 3: Natural Gas Delivery and Your Bill."

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  8/8/2012
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