Natural gas wellhead prices are way down from their peak last summer. This is documented by the New York Times (“Natural Gas, Suddenly Abundant, Is Cheaper” by Clifford Krauss, March 20, 2009, http://www.nytimes.com/2009/03/21/business/energy-environment/21gas.html?_r=1&th&emc=th), as well as many other sources. In the United States, spot gas prices are around $4.30 per dekatherm down from a peak of more than $13 last year. World spot prices for LNG cargoes have come down by more than two-thirds since last summer according to this NYT article.
Meanwhile, back in the world of natural gas retail semi-competition, my local gas utility (or more accurately, the marketing arm of my utility) has offered me a fixed price of $87/month for either a one or a two year contract. I’m sure other users have been offered similar contracts for a different fixed rate than what I was offered. I am not sure how this number is developed, although the advertisement told me it was based upon past usage for my household. I do not know if competitors have access to the information, but perhaps I should contact my regulatory authority to find out. I am somewhat concerned that my gas company gives access to my usage data without my specific permission. I had assumed a “Chinese wall” between the utility and its marketing arm.
The winter heating season is almost over and I suspect part of my 2009 winter bill includes gas prices that are much higher than today’s spot price, given that there are almost always lags between cost occurrence and cost recovery. The gas company could sign long term agreements with suppliers, most likely for some amount greater than the spot price, and lock in the supply it needs to serve my needs over the next year or two, depending upon which time period I chose. I am not going to sign up for this fixed rate, because I think my yearly expenditures will be lower if I am billed monthly as I am now. But some customers most likely will, because this fixed price “protects” them from price increases . So the gas company will do well, and some producers who need the cash flow, will do better than they would have otherwise.
There is one thing that is troubling me. If customers sign up for a fixed monthly bill, what is the incentive for them to lower the thermostat at night, add insulation, keep the water heater at a lower temperature, etc? I am sure the gas company will send plenty of reminders about how everyone must save energy together with conservation tips, but any energy saving the customers do will flow to the gas company’s bottom line. If I were paying a fixed price, I’d sleep with the thermostat on 70 F instead of 62 in January. I simply would not care how much gas I used, because, well… I am insured against higher prices. Moral hazard and all that theoretical stuff.
If the public has an interest in long term energy conservation, are fixed rate contracts really in the public’s interest? Energy conservation, meet energy competition, 2009 style. Al Gore, take notice. The globe may become warmer.
HEK