John Quain, chair of the Pennsylvania Public Utility Commission, who helped draft legislation to introduce electric competition in his state, predicts that natural gas deregulation is next on the...
Gas Price Volatility: Of Winters Past and Futures Market
withdraw significant gas volumes from storage "so early in the season." The A.G.A. ascribes that reluctance in part to "the role storage played in sustaining demand during the extended cold that [had] occurred" throughout the prior winter of 1995-96. It also cites index pricing practices as a cause for high prices in 1996-97. It notes that pricing for "substantial volumes of LDC gas supply" traditionally are based on first-of-the-month indices, despite bargains that may arise later in the month in the "aftermarket," and questioned whether the indices were set entirely at arm's length, or were supported by sufficient volume.
Were LDCs at fault? On one hand, the evidence discounts the idea that unregulated gas marketers manipulated the market. Schlesinger notes in his study that gas market concentration as measured by the Herfindahl-Hirschman Index fell each year from 1992 through 1996. He adds that 303 gas marketing companies were operating in unregulated North American gas markets by May 1997. The EIA puts the HHI for gas marketing firms at 243 for 1996, %n5%n far below the figure of 1,800 suggested in the Justice Department's Merger Guidelines as a sign of a highly concentrated market.
Nevertheless, while the EIA won't say that LDCs messed up, a study it released in August %n6%n seemed to offer no other reasonable conclusion for the 1996-97 winter heating season.
EIA agrees that at the start, after inventories had shrunk in the winter before (keeping prices high during the 1996 summer injection season); LDCs may have feared they would be caught short of storage toward the end of the coming winter. The EIA adds, however, that disruptions in railroad dispatch related to the merger between Southern Pacific and Union Pacific, appeared to have delayed coal shipments to power producers in Texas, adding to the pressure on gas prices. %n7%n Overall, the EIA finds that LDCs shunned withdrawals from downstream storage in the East Consuming Region (much of that storage is owned by the LDCs themselves). Instead, the LDCs turned to the spot market for supply in December, despite the high cost, rather than draw down storage volumes so early in the heating season, and even though storage was cheaper than spot prices. With the significant drop in December 1996 storage withdrawals, relative to the prior year, storage levels in the East Consuming Region equaled, and in some weeks actually exceeded, year-earlier values when prices were lower. The spot price for the Henry Hub in December 1996 averaged $3.78.
The EIA adds that "institutional factors" played a role: "Effective price signals to residential consumers are masked by specialized residential billing procedures, such as levelized billings, that are designed to avoid unexpected large increases in the monthly cost when possible." Why, for instance, should LDCs feel concern over high spot prices if they can pass along the expenses through gas cost recovery rates or a purchased gas adjustment clause?
Overall, according to the EIA, residential consumers paid $23.2 billion for natural gas during the 1996-97 heating season (em up from $21.2 billion the year before, representing an increase of more than