Friday, June 01, 2012

Utilities Continue to Cut Natural Gas Rates as the Shale Revolution Saves Consumers Billions

More evidence of the significant benefits from the Shale Revolution....

1. "Philadelphia Gas Works announced today the latest decrease in natural gas rates, which have been falling because of low commodity prices. The new rate for residential customers is $1.35 per hundred cubic feet, down 2.5% from $1.40. Rates also decreased for commercial, industrial and municipal customers. In the last year, PGW’s residential natural gas rate has fallen 13%. On an annualized basis, a typical PGW residential customer now pays $181 less than 12 months ago."

2. "Elizabethtown (N.J.) Gas residential customers could spend less to heat their homes this upcoming winter. The company has filed a petition with the New Jersey Board of Public Utilities to lower rates for supplying natural gas to residential customers by an average of 2.3%."

3. "South Jersey Gas proposed a rate reduction today that would save residential customers an average of 1.1% on their natural gas bills. SJG has filed petitions with the New Jersey Board of Public Utilities that will lead to an overall decrease of $1.44 on a 100-therm monthly natural gas bill. This filing follows a series of other reductions to customers' bill costs over the past two years, including a 10.6% rate reduction granted in 2010, a 3.4% reduction granted in September 2011, and two Basic Gas Supply Service bill credits for $23 million and $20 million issued in April 2011 and December 2011, respectively." 

4. "In a filing made today with the New Jersey Board of Public Utilities, PSE&G has proposed to lower winter natural gas bills this fall by an additional 5.2% a month for residential customers. If the request is approved, it will result in the ninth decrease in a row in natural gas supply charges, for a total savings of 39% -- or about $674 -- since January 2009, when wholesale prices started to drop."

Update:

5. Electricity customers in Oklahoma are benefiting from low natural gas prices as the two largest utilities lowered charges for fuel going into the peak summer months. Oklahoma Gas and Electric Co. will lower its fuel costs by $50 million in the next 12 months, while Public Service Co. of Oklahoma will drop its fuel costs by $70 million.

MP: Lower natural gas prices have already delivered a powerful $250 billion economic stimulus to the U.S. economy over the last three years from cost savings for natural gas customers (residential, commercial, industrial and electric utilities), according to a recent study by the American Gas Association (see CD post). And these new announcements today of further rate cuts by utilities in Pennsylvania and New Jersey indicate that the significant cost savings from the energy stimulus known as the "Shale Revolution" will continue.  Importantly, this ongoing economic stimulus from shale gas, unlike the politically-favored alternative energies, doesn't require any tax subsidies, tax credits, public expenditures, procurement preferences or grants.

14 Comments:

At 6/02/2012 8:05 AM, Blogger joshua said...

Can someone explain to me 1) why these companies have to file to lower their rates and 2) why they want to?

I'm guessing 1 is due to the general regulation that is supposed to prevent prices going UP and usually justified by a lack of competition. But if there really is a lack of competition, what is the incentive for the company to lower rates?

 
At 6/02/2012 8:10 AM, Blogger Mark J. Perry said...

At the end of the first news report:

"PGW is required to adjust its gas-cost rate quarterly to reflect market conditions, and must pass commodity costs through to customers without markup. Natural gas costs have decreased because of surplus production of shale gas from formations like Pennsylvania’s Marcellus Shale."

In exchange for being granted a "natural monopoly" status, most utilities are governed by state regulations that force them to adjust prices on a regular basis to reflect changes in costs, commodity prices, raw materials, etc.

 
At 6/02/2012 8:22 AM, Blogger Jon Murphy said...

But if there really is a lack of competition, what is the incentive for the company to lower rates?

Adding on to what Dr. Perry said, even if these companies weren't protected monopolies, there is an incentive to reduce prices: it keeps competitors out. If you are selling a widget at $X and the costs go down, you have two choices: Keep charging $X and make more profit. However, competitors could come in and charge a prices less than X, and you'd lose your business. By lowering your price along with costs (at least to the profit-maximizing level), then you can prevent competitors from competing with you, at least on price.

 
At 6/02/2012 8:27 AM, Blogger Mark J. Perry said...

Yes, the "smell of profits" has a very attractive, strong and redolent odor, and that smell attracts competitors and rivals when profits are high, just like bees to nectar. Both existing competition AND the "threat of potential competition" are very effective forms of discipline for existing firms.

 
At 6/02/2012 10:33 AM, Blogger joshua said...

Thanks! I'll click through before asking questions next time :)

 
At 6/03/2012 9:18 AM, Blogger VangelV said...

The new rate for residential customers is $1.35 per hundred cubic feet, down 2.5% from $1.40.

Why are they paying $13.50 per mcf when the wellhead price is under $2.50?

 
At 6/03/2012 9:20 AM, Blogger VangelV said...

Yes, the "smell of profits" has a very attractive, strong and redolent odor, and that smell attracts competitors and rivals when profits are high, just like bees to nectar. Both existing competition AND the "threat of potential competition" are very effective forms of discipline for existing firms.

What profits have you seen in shale gas again? I have been scouring the 10-Ks and been listening in to conference calls and have yet to see anything positive about cash flows and debt levels in the sector. The few very profitable wells in the best areas are more than offset by the majority of wells that are losing money.

 
At 6/04/2012 12:43 AM, Blogger Michael said...

In Massachusetts, the private electricity utilities just chopped 10% off the average customers monthly bill because burning natural gas to create power has became even cheaper.

 
At 6/04/2012 8:16 AM, Blogger Jet Beagle said...

vangeiv: "Why are they paying $13.50 per mcf when the wellhead price is under $2.50?"

Do you think there might be a few costs incurred between the buying gas at the wellhead and delivering it to the customer at the point of use? or perhaps some costs incurred in measuring usage, billing customers, and collecting payments?

 
At 6/04/2012 8:21 AM, Blogger Jet Beagle said...

vangeiv: "What profits have you seen in shale gas again?"

Not sure what point you are making. Your comment refers to the "smell of profits" statement by Profesdor Perry. I think the professor and Jon Murphy were referring to profits for gas utilities - not profits for gas producers.

 
At 6/04/2012 2:11 PM, Blogger VangelV said...


Do you think there might be a few costs incurred between the buying gas at the wellhead and delivering it to the customer at the point of use? or perhaps some costs incurred in measuring usage, billing customers, and collecting payments?


Of course there are other costs. My point is that the cost of the fuel is too little to provide that much of a savings in a regulated market where utilities are given monopoly status. Most of the pipes that carry the gas have already been fully depreciated. Yet consumers are paying more than three times the wholesale cost. Doesn't that ring a few alarm bells?

 
At 6/04/2012 2:15 PM, Blogger VangelV said...


Not sure what point you are making. Your comment refers to the "smell of profits" statement by Profesdor Perry. I think the professor and Jon Murphy were referring to profits for gas utilities - not profits for gas producers.


But without the profits for producers they can't keep producing. If they need $7.50 gas it will not stay below $7.50 for very long because the hedge funds will destroy the stocks and lenders will not be providing cheap loans.

Mark has been arguing both sides of the argument. You can't have abundant natural gas produced at a loss and cheap gas for very long. Either the investments made in the expectation of cheap gas will go bad or the producers will go bankrupt and the investments made in the expectation of cheap gas will follow over the cliff.

It seems to me that by arguing cherry picked data points Mark and the optimists have failed to see that the logic is not consistent.

 
At 6/04/2012 5:45 PM, Blogger Jet Beagle said...

vangeIV: "Most of the pipes that carry the gas have already been fully depreciated"

Natural gas pipelines are still investing billions of dollars in expanding the U.S. pipeline network and the plants required to process the gas. Here's the ongoing capital spending for just one pipeline company, ONEOK:

Sterling III Pipeline - 570 mile pipeline from mid-continent to teh Texas Gulf Coast, estimated to cost $610 million to 810 million

MB-2 fractionator at Mt Belvieu, TX - estimated to cost $300 million to $390 million

Bakken Pipeline - 615 mile pipeline from the Williston basin, estimated to cost $450 million to $550 million

Buston Fractionator Expansion - related to the Bakken pipeline, estimated to cost $110 million to $140 million

OneOK's capital expenditures for 2012 are expected to total $2.27 billion.

That's just one of the many companies which provide for the transport, processing, and marketing of natural gas after it leaves the wellhead.

The downstream capital requirements for natural gas are still huge. To imply that most of the fixed assets have already been depreciated is a misunderstanding of that industry.

 
At 6/04/2012 6:37 PM, Blogger VangelV said...

The downstream capital requirements for natural gas are still huge. To imply that most of the fixed assets have already been depreciated is a misunderstanding of that industry.

Most of the gas in the US has come from conventional fields that are very old. The pipelines that carry this gas were paid off a long time ago. Much of the new 'investment' is being made in the hope that shale gas is real but as I have pointed out, that is not the case. It is a fact that the shale gas producers are having trouble with cash flow and need to add large amounts of debt just to stay in business. That means that eventually they will stop drilling as much. The pipeline companies that carry them will have trouble recouping their investment.

The big problem for free market advocates has been the blending of all of these costs into an aggregate to hide the true conditions in the sector. But as I pointed out, we cannot escape the consequences of reality. If gas and oil prices remain weak for a while the shale sector will be devastated and production will fall off a cliff. New production will only begin if it makes economic sense and that will only happen if the drillers also go bankrupt and their capital is bought for pennies on the dollar. At that point the energy invested in the equipment will be a sunk cost that idiot investors have paid for and the incremental energy invested will yield positive returns for a while.

Since we are in a post peak world you can expect the boom/bust cycles to get worse for a while until the system breaks. (Hopefully later rather than sooner.) Of course, the optimists will hype up any positive trend as the beginning of another boom and politicians will keep blaming the greedy companies when they manage to make a bit in profit.

 

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