Natural gas prices don't reflect Pennsylvania boom

Consumer still wait for lower costs

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It's very likely that by the end of this year, Pennsylvania will move into the No. 2 spot behind Texas for producing the most natural gas in the country.

So why does the Keystone State still rank in the top half of states with the highest natural gas prices for consumers?

Natural gas prices for residential and commercial consumers have been falling steadily for the past five years, according to the federal Energy Information Administration. That's true for Pennsylvania and the nation as a whole.

In fact, prices at the city gate -- the term for the point at which utilities take control of the gas before distributing it to customers -- have decreased by 46 percent in the Keystone state between 2008 and 2012. New York city gate prices fell by the same amount, even though that state has a moratorium on fracking and is nowhere near being one of the top producing states.

While Pennsylvania is very much in line with the national trend, its prices aren't falling nearly as fast as its production is rising -- highlighting the fact that locally produced gas is still a national and, soon-to-be, international commodity with a market that veers outside of state borders.

PG graphic: Gas prices
(Click image for larger version)

Last year, for example, Pennsylvania residents who bought their gas directly from utilities paid an average of $11.99 per thousand cubic feet of natural gas. Nationwide, residential consumers paid $10.71 on average.

New Jersey residents enjoyed lower average natural gas prices in 2012 than did Pennsylvanians, despite the fact that New Jersey has no shale development producing the fuel.

The explanation lies partly with how utility rates are set.

"There's a laundry list of expenses before (gas) gets to the burner tip," said David Marks, manager of natural gas supply and trading at Guttman Energy in Belle Vernon.

The average price of gas at Pennsylvania city gates in 2012 was $5.52, nearly half of the price that residents paid for the fuel.

It takes money to bring the gas out of the ground, collect it, compress it, treat it, and deliver it to the city gate. All those processes have some fixed costs that don't waiver just because the price of the commodity happens to dip on a given day. All of those costs are reflected in the city gate price.

At that point, the Pennsylvania Public Utility Commission has a role in determining how much a utility can charge consumers. Those prices are determined by rate cases, drawn-out, multi-year legal reviews by the PUC.

Utilities in Pennsylvania aren't permitted to make a profit on the cost of the commodity itself. So they pass along to the customer the price the utility paid for the gas at the city gate plus enough to cover the utility's overhead and distribution costs.

"Utilities don't have the luxury of being out there in the market and timing their purchases perfectly," Mr. Marks said. "They have storage to fill. They have customers to serve. They have to buy their gas according to a program. They are price takers."

Peoples Natural Gas used to hedge up to 25 percent of its gas supply in long-term, fixed price contracts that would offer some protection against big swings. Last year, the Pittsburgh company decided to eliminate its hedging program and move entirely to the spot market.

Hedging is a way to control for the natural volatility of commodity prices, but the growing supply from the Marcellus shale has made the gas market much less volatile, said Joe Gregorini, vice president of rates and regulatory affairs at Peoples.

So the company decided it didn't need fixed price contracts.

Most of Peoples' gas is locally produced and transported through intrastate pipelines. The utility has a somewhat unique legacy system of gathering and transmission lines left over from the time when it had its own well production.

That saves Peoples the cost of paying for capacity on federally-regulated interstate pipelines that it may or may not be using.

The Corbett administration would like to see more of that, said Patrick Henderson, Gov. Tom Corbett's energy executive.

"That's one of the reasons we've been pushing for intrastate lines. If you could have the benefit of running a pipeline from gas fields to the utility -- all negotiated between producers and the gas utility -- you're not constrained by those interstate regulations and we can see even greater benefit from Pennsylvania," Mr. Henderson said.

EIA estimates Pennsylvania will end up being the country's No. 2 gas producing state this year. That's up from No. 3 in 2012, when wells in the state produced nearly 2.3 trillion cubic feet of gas, and No. 7 in 2011, when Pennsylvania production topped 1.3 trillion cubic feet.

Mr. Henderson said the leaders of the state's economic development arm have been mulling ways to incentivize industrial clients to locate in areas where they could marshall enough natural gas demand to warrant new intrastate pipelines.

"From an economic development standpoint, this only has impact if we can say we have a unique advantage," he said.

That is, if Pennsylvania can show that because it produces so much gas, its energy prices are cheaper than its neighbors, that could be a tool to recruit new businesses and jobs to the state, Mr. Henderson said.

Anya Litvak: alitvak@post-gazette.com or 412-263-1455


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