Utilities ordered to buy next winter's natural gas now
The Public Service Commission just made a big bet on natural gas, overruling consumer advocates and its own staff, by ordering utilities to buy much of next winter’s gas at today’s cost rather than waiting for prices to possibly fall even further.
Natural gas prices have plunged along with all energy costs. PSC staff, the Office of People’s Counsel and Maryland utilities all wanted to buy gas as usual, filling pipes month by month between now and October and paying the spot price each time. Locking in now, they argued, would prevent utilities "from buying at even lower prices in the months to come," according to a PSC order filed Tuesday.
But the commissioners, having witnessed last summer’s natural-gas spike, ordered Baltimore Gas and Electric and other utilities to lock in prices for 40 percent of next winter’s needs at today’s price. Consumers will still save a ton compared with this winter’s cost, they said, and they’ll be partly protected if another hurricane disrupts supplies this summer and fall.
It may backfire on consumers. Wholesale gas prices have already plunged 60 percent from last summer and are 15 percent under their average for the last five years. But if the recession deepens they’ll have even further to fall.
UPDATE: Energy consultant Robert McCullough, on the PSC's decision to seize on today's prices, via email:
"I think they got it right. Natural gas tends to follow oil which as, very strangely, started to increase in price after an announcement from OPEC last weekend that they are maintaining output against a market with falling demand."
Comments
Have a look at this article from Bloomberg on the supply side of things.
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It reports that gas companies are closing wells off and that hedge funds are shorting gas. Only time will tell whether the PSC position is correct. Buying now isn't without merit (whether they know it or not). Also consider what BGE, the People Counsel and etc. would advise if the situation were reversed and prices were rising. Would it be to buy now in case the price continues to climb. If it is good deal, but not the best deal, then I could live with it.
Posted by: Larry | March 20, 2009 9:35 AM
It may be better to simply sign a year contract with WGES for 72cents a therm.
Posted by: Peter | March 20, 2009 10:01 AM
Peter,
If I live in Baltimore County can I get a contract with WGES? I like the price you quoted.
Posted by: bill | March 20, 2009 11:02 AM
Jay- My guess is that somehow everyone's heating bills will be similar to this year's despite the NG market tanking. BGE uses their own version of math.
Posted by: Biggus | March 20, 2009 11:11 AM
Peter is right about the WGES deal: go here: https://www.wges.com/portal/select.php
Posted by: Jay | March 20, 2009 11:11 AM
Why didn't they consider buying natural gas futures or options for next winter? That involves some risk, but it would involve less than locking into a contractual price now. If they had an underwater option, for example, they could just let it expire (losing the contract price) and buy at the lower price later (or buy an option with a lower price later). Southwest Airlines has used a similar hedging program to control their fuel costs for years with great success.
Posted by: Mike | March 20, 2009 12:00 PM
Haven't the politicians (or quasi-politicians) created enough problems already?
Now, the PSC, headed by a Lawyer, is making bets that the price of gas is reasonably low relative to some future period. This almost guarantees that the price of future spot gas will be much lower then it is now.
Then again, even a blind squirrel finds a nut occassionally.
I would reccommend that the politicians let BGE or other energy professionals decide the best time to lock in prices.
Then again, that will never work, largely because it makes sense. And we all know that in the land of Martin O'Maryland making sense really isn't the priority. Getting re-elected is.
Posted by: Jack | March 20, 2009 2:44 PM
Natural gas today at the wholesale level is selling for just over $4.00 per 1000 cubic feet. They should have locked in 100 percent for the next year or two. When natural gas goes below $5.00 wholesale, the drillers shut down their rigs because that is the breakeven point for them. It also allows the market to put a floor on the price of natural gas.
Posted by: Stephen Heinermann | March 20, 2009 6:06 PM
When natural gas prices continue to fall all the politicians and PSC will say it's CEG's fault. They should have waited
What does a lawyer know about the energy market? About as much as our elected officials; which is zero. They couldn't run a business if their life depended on it. Who created the whole rate mess in199? The idiots in Annaplois
Posted by: Dennis Blimline | March 20, 2009 9:02 PM
People should be satisfied that their energy bills should be much lower next winter and stop complaining about "a chance prices will drop furthur". Prices could also go UP.
Posted by: jwb | March 21, 2009 1:33 PM