What is the current outlook?
What is the present natural gas situation?
Where does Washington State’s natural-gas supply come from?
How are natural-gas rates determined?
Why is the company's approved rate increase higher than the wholesale (daily) spot market?
Why does the cost of natural gas increase?
What can be done?

What is the Current Outlook?
In the long term natural gas rates are expected to continue to rise through 2025. Regional demand for natural gas is projected to grow more than 50 percent by 2025. For more information, see Northwest Gas Association’s press release in July 2008 entitled Soaring Natural Gas Prices Drive Up Rates This Fall.

What is the present natural gas situation?
After a period of high prices, national domestic natural gas prices have plunged 42 percent since early July 2008. This is due to a combination of weaker summer demand, storage reserves recovering from last winter’s high demand combined with speculators (U.S. Senate Report) backing out of the market due to both of these events. Recovery of storage supplies and prices declines have been supported by increases in domestic natural gas production from shale deposits and conventional domestic wells, as well as the recent fall in oil prices.

Regionally, the announced closure of the Rocky Express pipeline that brings Rocky Mountain natural gas supplies eastward has driven down the price of natural gas shipped to the Northwest. Domestic production from shale deposits as well as double digit increases in production of conventional wells in the Rockies has caused some stabilization in the current prices. However, the jury is still out on how big shale is going to be on the long term outlook of natural gas prices. Shale deposits are still more expensive to drill then conventional sources. For more information read Seattle Times August 25, 2008 article: Natural gas prices fall as shale yields bounty.


Where does Washington State’s natural-gas supply come from?
About half of Washington’s natural-gas supplies come from Alberta and British Columbia provinces in Canada and the other half from Rocky Mountain production sites such as Wyoming.

How are natural-gas rates determined?
The two basic components in the cost of your natural-gas service are:
· The cost of delivering the gas to your house
· The cost of the natural gas

Cost of delivery
The cost of transportation, storage and distribution of the natural gas includes maintaining pipes and meters, billing customers and allowing an opportunity for a reasonable level of profit for the company’s investment in its network of distribution pipelines. The commission reviews each utility’s request for higher rates.

Cost of gas
Your utility purchases its gas supply through an unregulated wholesale-commodity market, using a mix of long-term and short-term contracts with independent suppliers. The price you pay for natural gas reflects what your company actually pays for the fuel. Your utility is not entitled to make a profit on the gas-supply portion of your bill.

The commission uses a process called the Purchased Gas Cost Adjustment (PGA) mechanism to keep track of how much utilities spend on acquiring natural-gas supplies. The first part of the process involves the company looking forward and establishing the best projection for the price of natural gas in the upcoming year. The second part of the process looks back and calculates the difference between the previous projection and the actual price. Customers receive a credit if the PGA collected too much from customers. If not enough money is collected, a surcharge is applied to your energy bill.

Why is the company’s approved rate increase higher than the wholesale sale (daily) spot market?
The price of natural gas in customer’s rates is set by the forward market prices for natural gas plus the difference between the actual cost of gas used during the previous year and the previous forward estimates of the price of gas set a year ago. Sometimes that difference can be positive and sometimes it can be negative.

The price the public hears for natural gas is the wholesale spot (daily) market price. For any given year, gas utilities buy a portion of its gas supply for its customers 3 years in advance. Another portion of the gas supply is purchased 1-2 years ahead and about one third to one fourth of the gas is bought during the season in which it is used.

So the actual price of the gas customers must pay is a blend of all those purchases over the previous several years.


Why does the cost of natural gas increase?
Commodity costs to Northwest customers have tripled in the past seven years. There are a number of factors that influence the cost of natural gas.
1. Supply
a. Production is declining in many older natural gas basins.
b. Storage capacity, used to hold gas purchased during less expensive times of the year, are fairly fixed due to the lack of the right geological conditions for creating underground storage facilities.
c. Severe weather in any natural gas production areas will cause prices to rise because it affects production or because of the risk that it might affect production.
2. Demand
a. Use of natural gas for space heating is increasing not only regionally but nationally and globally.
b. Use of natural gas for electric generation has and is increasing.
c. Regional demand for natural gas is projected to grow more than 50 percent by 2025.

For more information read the Northwest Gas Association’s white paper on Natural Gas Prices in the Pacific Northwest.