Natural Gas Retail Prices

In recent weeks we have fielded numerous questions about natural gas pricing, and generally the questions have focused on why the downturn in natural gas prices has not been immediatelty reflected in rates. To fully answer that question, we first have to look at the history of gas procurement in Rhode Island.

For many years up to and including 2000, Rhode Island gas distribution companies, including Valley Gas and Providence Gas, the predecessors to National Grid, basically purchased gas on the “spot market” for the month that the gas was to be consumed. In times of relatively stable prices, that was not an unreasonable practice. As demand began to outstrip supply, and the cost of wellfield development increased, the market price of gas began to increase sharply. Very significant rate increases had to go into effect in Rhode Island as well as throughout the United States as these costs were passed on to consumers. Another major factor in the increase in natural gas prices at this time was the fact that nearly every new electric generating facility that was built used gas as its fuel supply, as coal and oil fell out of favor due to environmental reasons, and nuclear hasn’t been an option for decades. Natural gas which used to be just a peaking resource, was now the primary baseload electric generating units’ fuel source. This is still true today.

In order to address this problem of price volatility and the expected long-term trend in market gas prices, in 2001 the PUC directed the gas utilities to engage in gas purchase practices intended to bring price stability and predictability to customers. Currently, National Grid’s gas buying program is one where the company begins to purchase gas 24 months in advance of the month of use. For example, the company began to purchase gas in March of 2007 for customers to use in March of 2009. Small increments are purchased each month for that future month of use. The company is effectively dollar-cost averaging its gas cost.

As a result, Rhode Island’s gas customers have avoided the large prices spikes over the past decade that have been experienced in many other parts of the country.

When there are favorable future contract prices, the company can purchase additional supplies, as has been the case recently.