LakePoint Energy is not only committed to helping its customers manage but also to understand the many variables that affect the price of natural gas.   The energy marketplace can be confusing to navigate for novices and seasoned customers alike.   Customers need good information to be able to make a good energy decisions.  As a leader in the industry, LakePoint Energy believes that customer education is mission critical in the energy market and that there is no question so basic that a client should not ask us or so sophisticated that that we should not be prepared with a response.

PRICING

Basis of natural gas rates

Like many other commodities, the price of natural gas is impacted by supply and demand.  Weather conditions have an impact. Extreme or lengthy winters raise demand.  Severe weather conditions, like hurricanes, can diminish natural gas production and impact supply.  All of these conditions factor in to the GCR rate.

Suppliers do their best to cushion the impact of gas prices for customers, in fact many suppliers purchase and store large quantities of natural gas in the summer.

What is a MCF and What is a ccf?

Both MCFs and ccfs are the units of measure that natural gas is billed and these units of measure are the industry standard.   Natural gas is measured and sold to the end user by measuring the volume in cubic feet.  One cubic foot of natural gas would fit in a cube that is 12 inches square and 12 inches high.  Utility companies measure and price gas in units of 100 cubic feet which is referred to as a “ccf” If you use 1,000 cubic feet of natural gas in a billing period, you will actually see your usage as 10 ccf on your bill. When customers receive their natural gas bill, it identifies the number of MCF/ccfs of natural gas that the customer used that month, along with the amount perMCF/ccf that the customer is paying for each unit of natural gas  for that billing period.

Is natural gas a good value?

The answer is yes – natural gas continues to remain a good value when compared with other fossil fuels, i.e. propane and heating oil.  On an apples to apples comparison, natural gas provides the best value for your heating dollar.

U.S. market mechanisms

The natural gas market in the United States is comprised of the financial (futures) market, which is based on the NYMEX futures contract, and the physical market, which is the price paid for actual deliveries of natural gas and individual delivery points around the United States.

Futures market

The standardized NYMEX natural gas futures contract is for delivery of 10,000 mmBtu (10,000 million Btu) of energy (approximately 10,000,000 cubic feet (280,000 m3) of gas) at Henry Hub in Louisiana over a given delivery month consisting of a varying amount of days. As a coarse approximation, 1000 ft3 of natural gas ≈ 1 MMBtu ≈ 1 GJ. Monthly contracts expire 3–5 days in advance of the first day of the delivery month, at which points traders may either settle their positions financially with other traders in the market or choose to “go physical” and accept delivery of physical natural gas.

Physical market

Physical prices at the beginning of any calendar month at any particular delivery location are based on the final settled forward financial price for a given delivery period, plus the settled “basis” value for that location.  Once a forward contract period has expired, gas is then traded daily in a “day ahead market” wherein prices for any particular day are determined on the preceding day by traders using localized supply and demand conditions, in particular weather forecasts, at a particular delivery location.  The average of all of the individual daily markets in a given month is then referred to as the “index” price for that month at that particular location and it is not uncommon for the index price for a particular month to vary greatly from the settled futures price (plus basis) from a month earlier.

Once a particular day’s gas obligations are finalized in the day-ahead market, traders will work together with counterparties and pipeline representatives to “schedule” the flows of gas into and out of individual pipelines and meters. Because injections must equal withdrawals, pipeline scheduling and regulations are a major driver of trading activities and quite often the financial penalties inflicted by pipelines onto shippers who violate their terms of service are well in excess of losses a trader may otherwise incur in the market correcting the problem.

Basis market

Because market conditions vary between Henry Hub and the roughly 40 or so physical trading locations around United States, financial traders also usually transact simultaneously in financial “basis” contracts intended to approximate these difference in geography and local market conditions. The rules around

VOLATILTY

Price volatility describes how quickly or widely prices can change.  The energy industry  refers to this in terms of electricity and/or natural gas supply prices as they relate to consumer demand.

Forecasting

Natural gas price forecasting is simply the process of using mathematical models to predict what prices will be in the future.  Forecasting is used by suppliers and outside consultants to guide price driven decisions for their companies and their clients.

Natural gas demand

The demand for natural gas is mainly driven by weather, demographics, economic growth, storage and exports.

Weather

Weather conditions can have a major impact on natural gas demand and supply.  Cold temperatures in the winter increase the demand for space heating with natural gas in commercial and residential buildings.  Likewise, hot temperatures in the summer increase the demand for air conditioning, which also creates an increase in the demand for natural gas at electrical utilities.

Demographics

Recent demographic trends indicate an increased population movement to the Southern and Western states.  These areas are generally characterized by warmer weather, thus we could expect a decrease in demand for heating in the winter, but an increase in demand for cooling in the summer.  As electricity currently supplies most of the cooling energy requirements, and natural gas supplies most of the energy used for heating, population movement may decrease the demand for natural gas for these customers. However, as more power plants are fueled by natural gas, natural gas demand could in fact increase.

Economic growth

The state of the economy directly impacts the demand for natural gas in the short term.  When the economy is booming, output from the industrial sectors generally increases.  On the other hand, when the economy is experiencing a down turn, output from industrial sectors drops.  These fluctuations in industrial output accompanying the economy affects the amount of natural gas needed by these industrial users.

CHARGES

What do the charges on my natural gas bill mean?

The Natural Gas Rates that appear on your monthly bill have these main components:

Monthly Customer Service Charge:  A fixed “non-gas” monthly charge that varies by type of service.  It covers the cost to provide safe, reliable gas service to our customers.  It includes the cost to maintain and read meters, maintain the natural gas distribution system and administer billing.

Gas Distribution Charge:  The price to deliver the natural gas you use to your home.  This charge is based on the amount of gas you use during the billing period.

2011-U-16993 UETM Surcharge:  A surcharge that allows utilities to recover costs from uncollectible debt expense incurred in the prior year.  This surcharge is based on the amount of  gas you use during the billing period.

Energy Optimization:  A surcharge that allows utilities to develop and offer an Energy Optimization program that provides rebates, incentives and energy efficiency education to our customers.  This credit/surcharge is based on the amount of gas you use   during the billing period.

Gas Cost Recovery (GCR):  The price you pay for the natural gas that you used.  The GCR rate can change  monthly and is the largest portion of a typical heating bill.  It’s based on costs incurred by utilities to purchase gas supply and is the same price we   pay.  Learn more about this charge below.  Note: If you participate in the Gas Customer Choice (GCC) program, the gas component on your bill is represented by the GCC supplier charge.  Utilities simply bill for this charge, collect payment and reimburses the GCC supplier.  Gas choice customers should contact their alternative gas supplier with questions about their cost of gas.

Monthly U-16999 IRM Surcharge:  The Infrastructure Recovery Mechanism (IRM) is a surcharge that allows utilities to recover costs related to gas main, pipeline and meter improvements.