The Ups and Downs of Natural Gas

Price surges in the cost of natural gas can usually be traced to just three reasons: excessive demand during heavy use periods such as an icy January blast, fewer gas reserves in storage and operational problems with pipelines or equipment. Those are the findings of the nation's energy experts who have studied the issue for years.

Using Less and Paying More

Most of us have probably heard a frustrated consumer say, "I turned down the thermostat and my gas bill still went up." That consumer may wrongly assume because of what happened, that conservation using less "doesn't pay."

But, experts who have studied the natural gas industry have found instances where lower use can translate into higher bills. In these situations, a consumer could reduce use because of a warmer period during the winter, but the per unit cost of the natural gas was considerably higher than in past seasons. This is just what happened in the winter of 1996-1997. In January 1997, the largest monthly increase in the cost of natural gas, 4.8 percent, was recorded.

Historically, situations that lead consumers to cry foul are those where higher than average gas costs coincide with higher than average use, especially during an extended period of cold weather. In these instances, it is not uncommon for bills to double. 

In 1997, the federal energy agency listed nearly 445,000 residential and 51,661 commercial customers in the state. Average prices paid for natural gas purchased from local distribution companies by residential and commercial customers were $5.69 and $4.88 per thousand cubic feet, respectively. The national average prices for natural gas were $6.94 and $5.79, respectively. 

Seasonal Juggling 

Natural gas reaches consumers every day through buried pipelines in America and around the world. All natural gas used comes from just three types of sources: domestic wells, withdrawals from storage or imports. During the summer, consumer demand can easily be met from domestic and imported sources with the excess being placed in storage facilities. In the winter, demand for gas almost always exceeds production and imports, so the gas in storage is used to meet seasonal heating needs.

In Nebraska, production from natural gas wells, primarily in the Panhandle, totaled only 1.66 billion cubic feet in 1997. Since gas produced in the state meets less than 2 percent of the needs, natural gas must be imported.

A Changing Industry

Since price ceilings on natural gas were removed in 1979, the industry has gradually been evolving. In 1993, the industry was fully deregulated. 

During the past 20 years, the price of natural gas has gone from a high, but stable environment to one that is considerably lower, but far more volatile. For example, the annual well head price of gas declined by more than 50 percent, adjusted for inflation, between 1983 and 1998. A recent example of volatility occurred on December 4, 1998, when the spot price at the national hub in Henry, Louisiana, hit the extremely low level of $1.01 per million British Thermal Units (BTUs) only to rise to $1.55 the next day. 

More Changes Coming?

Even though the natural gas industry was fully deregulated in 1993, less than half the states have allowed consumers supply choice options.  According to the American Gas Association, 54 million households use natural gas, but only 20 million can choose a natural gas supplier.

In Nebraska, only customers served by KN Energy in central and western Nebraska have a choice among five suppliers. As a result of the latest balloting by these natural gas consumers, about 22 percent of eligible natural gas customers chose a supplier other than their traditional one or an affiliated subsidiary.

Next year, the Legislature's Urban Affairs Committee will begin a multi-year study of deregulation issues and the natural gas industry.

Presently, there are four investor-owned utilities that serve nearly two-thirds of the customers in the state. Customers in 15 towns, including Omaha, are served by publicly-owned municipal systems.

M and A

Another trend that is reshaping the industry is mergers and acquisitions. Almost weekly, a natural gas or electric utility is involved in a merger or buyout of another gas or electric system.  Because publicly-owned gas and electric systems are prevalent in the state, these trends have been somewhat muted. In 1986, seven investor-owned natural gas systems operated in the state. Today, there are just four. The past several years have seen several systems Stuart, Wahoo, Scribner and Neligh  moving from being served by investor-owned

Editor's Note:  Material for this article was based in part on "Why Do Natural Gas Prices Fluctuate So Much?" from the Energy Information Administration.  More information on this subject can be obtained at www.eia.doe.gov

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