Hedging programs promise protection against energy-market price spikes, and they can be important to the regulatory goal of sustainable, lowest long-term service cost. But how much price...
Gas Storage: What Moves the Market & What Doesn't
other variables were both negative. The two variables were the weekly spot prices during the heating season minus the weighted-average price of gas during the preceding non-heating season, and the proxy variable for the ratio of inventory levels to expected demand. In addition, the T-value for the proxy variable for the inventory to expected demand ratio had an absolute value less than 1.6, which indicated that the estimated regression coefficient for this variable is not statistically different from zero. Therefore, we dropped this variable from consideration and focused on the modified model specified below.
Our modified regression equation:
Year-to-year differences in withdrawals for each week = a + b 3 (year-to-year differences in temperature for each week) + c 3 (price differences for each week) + a random error term for each week.
When we ran this regression, we obtained an R-squared value of 0.78. Thus, the two proposed independent variables "captured," or explained, about 78 percent of the variability in year-to-year differences in withdrawals. In other words, changes in amounts of gas withdrawn from storage during the same week of consecutive heating seasons, at least in A.G.A.'s Consuming East region, are strongly dependent on differences in weekly average temperatures (associated with our four "observation" cities of New York, Pittsburgh, Chicago and Kansas City) for the same week of consecutive heating seasons, and on the difference in price between weekly heating season spot prices and an average non-heating season spot price. Our regression results yielded the following estimation equation:
Withdrawal differences = 6.3 + 4.1 3 (Temperature differences) - 4.0 3 (Price differences). The T-values for the three estimated quantities are as follows:
Constant or Intercept: 1.97, coefficient of temperature differences: 14.41, coefficient of price differences: -2.86.
Interpreting the Results
The negative sign of the price difference coefficient proved to be opposite to what we had expected. We had reasoned that if heating season spot prices exceeded some estimate of the cost of stored gas, then the owners of that gas would tend to withdraw more from storage. But just the opposite was true: As the difference between heating season spot prices minus injection season average prices increased, withdrawals tended to fall.
This result may reflect our having estimated one equation when at least two equations estimated jointly would have been better. One equation would represent the relationship between price and supplies of gas to market, which includes not only withdrawals but also other available supplies of gas, such as imports and domestic production. These variables would represent gas that was previously contracted for but which the holder would be willing to release. It also would represent additional gas coming from Canada and domestic production that had not been contracted out. But actual measurements or good proxies are not available for these variables. The second equation would be similar to the equation estimated here.
Another interpretation of the negative sign on price is that owners of stored gas in this industry have risk-averse tendencies. As the heating season progressed, if and when spot prices rose, owners of stored gas expected prices either