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ALERT!
Natural Gas prices are rising!

Summary: Gas prices are higher this winter (2002-2003) due to a colder winter than last year, higher demand for space-heating, lower volume of gas storage, and high oil prices.

NATURAL GAS prices for the major gas distribution companies prices have gone up between 20 to 55% in March. The good news is that March is the last winter month. Although gas commodity prices may remain high, customers gas bills for April through October will be much smaller because there will be little heating usage.

The Public Service Commission (MD PSC) does not set the price of natural gas commodity service. While the MD PSC conducts annual reviews of the local distribution company’s (LDCs) gas commodity price, balance between supply and demand determines the market or regional price for natural gas. Any imbalance between supply and demand will affect the price for natural gas. For example, an increase in the demand for natural gas while supply remains constant will increase the price for natural gas. Based upon this fundamental supply-demand analysis, the factors that caused high gas prices for the winter 2002-2003 are colder weather, lower volume of working gas storage, lower production levels, higher oil prices and increased imports of natural gas.

Natural gas has long been relatively inexpensive compared to other fuels, especially oil, so consumers have been opting for natural gas heat and other appliances in increasing numbers during the last 25 to 30 years. In addition, many commercial and industrial customers have been choosing natural gas over oil; coal and other fuels because it is a low cost, clean burning fuel. Thus adding to the increase in the demand for natural gas.

The price of natural gas had been relatively low in prior years because several very mild winters dampened demand; consequently, there has been little incentive for natural gas producers to explore and drill for new supplies and production had been stagnant. However, in the last year or so, the cost of petroleum products has increased dramatically, which has sharply increased demand for natural gas during that time, especially among commercial and industrial customers.

According to the Energy Information Administration (EIA) of the U.S. Department of Energy, the Middle Atlantic and New England regions have experienced colder temperatures this winter 2002-2003 as compared with last winter 2001-2002. "For example, heating-degree-days (HDDs) in the Middle Atlantic Region through February 22, 2003, were almost 8 percent higher than normal and more than 36 percent above last year’s level" Colder temperatures during this winter led to higher space-heating demand.

Colder temperatures, coupled with high crude oil prices have increased the price of natural gas. High crude oil prices are caused by a decline in the supply of natural gas from Venezuela, and by the threat of war between the United States with Iraq. The price of crude oil in the U.S. reached approximately 440 a barrel at the end of February 2003, the highest level since Iraq’s invasion with Kuwait during the Persian Gulf War. The increase in crude oil price has caused a rise in the price of heating oil. For dual fuel customers using both gas and oil, higher natural gas wellhead prices have resulted in increased oil prices. According to an EIA Petroleum Report, the residential heating oil prices in Maryland for December 2002 and January and February 2003 were reported at 149 cents per gallon, 157.1 cents per gallon, and 181.9 cents per gallon, respectively.

Similarly, increased space-heating demand has led to low volumes of underground gas storage. Based on the Natural Gas Weekly Update of EIA, working gas in storage, as of February 21, 2003 was reported at 1,014 billion cubic feet (Bcf) or 33.4 percent below the 5-year average (1998-2002) of 1,522 Bcf.

Most of the natural gas consumed in the U.S. comes from domestic production. From January 2002 to October 2002, production of natural gas was 2.6 percent below the production levels of 2001. Between April 5, 2002 and February 21, 2003, rigs drilling for natural gas have increased by 30 percent from 591 rigs to 767 rigs. Taking into account the time lag between drilling and production, one would expect to see an increase in import demand for natural gas in the United States.

U.S. imports of natural gas (mostly from Canada) increased by 2 percent in the first ten months of 2002 as compared with the year 2001. The reopening of the Liquefied Natural Gas (LNG) Cove Point facility in Maryland later this year will definitely increase gas reserves in the United States. According to EIA, the four operating LNG facilities (Elba Island, GA; Everett, MA; Lake Charles, LA; and Cove Point, MD) are expected to store about 800 Bcf per year.

Increased demand for natural gas has led to high wellhead prices in the winter of 2002-2003. For the months of November 2002, December 2002, and January 2003 the average wellhead prices, as reported by EIA, were $3.50 per million Btu (MMBtu), $3.74 per MMBtu, and $4.08 per MMBtu, respectively. The forecasted wellhead prices for February, March and April 2003 are reported at $4.73 per MMBtu, $5.07 per MMBtu and $4.45 per MMBtu, respectively. As of March 4, 2003 the New York Mercantile Exchange (NYMEX) futures contract for April and May 2003, at the Henry Hub delivery points, are reported at $7.16 per MMBtu and $5.95 per MMBtu, respectively. March future contracts are usually traded between $5 and $6 per MMBtu.

Know what factors will impact your bill:

1. How you set the thermostat will control the amount of gas you use.
2. The market price of natural gas will control how much you pay for gas commodity service.
3. The regulated delivery price will determine how much you pay for the delivery of the gas commodity you purchased from the utility or gas supplier.
4. The weather will impact how long your unit has to operate to maintain your temperature setting.

What you can do to reduce your bill:

• Enroll in a budget-billing plan. Your gas utility company offers a budget-billing plan where you make the same level payment each month. By spreading your higher winter heating bills throughout the year, you won’t be burdened by a large bill all at once. If you purchase gas from a supplier, you ask your supplier if budget billing is available.
• Shop around. Contact your gas utility to obtain a list of competing gas suppliers and shop around for the lowest price.
• Conserve energy. Dress warmly and turn down your thermostat. For every degree that you lower your thermostat below 73 degrees, you will save approximately 4 percent on your heating bill. At night or when you are away from home it is recommended that you lower your thermostat to 62 degrees. If you have an unused room in the house you should turn off the radiator or close the register. Keep the damper on your fireplace closed when you do not have a fire going. If possible, install a programmable thermostat so you will not have to remember to lower the temperature at night.
• Weatherize your home.Make sure your home is well insulated and properly weatherized. You should winterize cracks and drafty windows and doors. Caulk or weather-strip where needed. Storm windows and doors are a must have for every energy smart household. For additional savings, have your furnace and water heater checked to make sure that they are in good working order. Clean or change your furnace filter monthly. A dirty filter can add 10 percent to your heating costs. Lower the temperature on your hot water heater. If your hot water heater feels warm to the touch, buy an insulation jacket to keep it cozy to further reduce your utility bills.

Maryland Public Service Commission
OFFICE OF EXTERNAL RELATIONS
6 St. Paul Street 
Baltimore, MD 21202
(800) 492-0474 in MD or (410) 767-8028