20/20 Hindsight: The Gas Forecasting Dilemma
1 May 2002
By Dr. Stuart Harshbarger
In this article, NERA Vice President Dr. Stuart Harshbarger explores supply acquisition strategies for regulated gas utilities seeking to provide consumers with a reliable gas supply at a competitive price. The article examines the experience of Michigan Consolidated Gas Company (MichCon) during the winter of 2001-2002, in which MichCon attempted to protect ratepayers from high and volatile gas prices by employing a gas acquisition strategy that made advanced fixed-price purchases based upon the natural gas futures market at the New York Mercantile Exchange (NYMEX). When future prices crossed certain predetermined price hurdles based on historical moving averages, MichCon locked in delivered prices for 2002. Unfortunately, this strategy resulted in a nearly 50 percent increase in costs for ratepayers -- from $2.95 per thousand cubic feet (Mcf) to$4.38 per Mcf. Meanwhile, spot market prices for gas hovered in the $2.00 to $2.50 per Mcf range throughout the winter of 2001-2002, and MichCon faced harsh criticism from many who questioned the dramatic rate increases.
Dr. Harshbarger argues that the outcome at MichCon illustrates a situation that could occur again and again due to increased price volatility within newly deregulated natural gas markets. Rather than seeking absolute solutions for combating price volatility, as did MichCon, he emphasizes that natural gas distributors need to pursue a gas acquisition strategy that relies on a diversified mix of resources.
This article was published in Public Utilities Fortnightly, 1 May 2002.
