By Shawn Davis
Deregulation in the natural gas industry has been an easy target for the media and public policy leaders since legislation introduced competition in the Atlanta Gas Light Company territory in 1997. This sentiment is understandable. Gas marketers have had difficulty getting billing under control, and high gas bills are giving consumers sticker shock, prompting them to complain to the Public Service Commission (PSC), the General Assembly and anyone who will listen. Many consumers have blamed deregulation for the high bills. But the culprit is not deregulation, the PSC or lawmakers. Everyone in the country is feeling the impact of higher prices. If something is to blame, it is the weather’s influence on the guiding principle upon which our economy is based — supply and demand. Lawmakers should exercise caution in this volatile marketplace and leave the tinkering to the PSC.
Gas Consumption Is Up 30 Percent
Two factors are causing this sticker shock. First, according to Georgia’s climatologist, David Stooksbury, Georgia is experiencing the sixth coldest heating season on record going back to 1895. The colder temperatures have prompted Georgians to use 30 percent more gas this season than in a typical winter heating season. The average consumer uses 132 therms of gas during most December months to heat and cook in 2,000 square feet of living space. During December 2000, which was 40 percent colder than past Decembers, these consumers used an average 171 therms of gas.
Wholesale Gas Prices
The second cause of sticker shock is that wholesale gas prices at the wellhead are at an all-time high – over 67 percent higher than this time last year. As a result, the average consumer paid $50 more last December than they paid for the same quantity of gas in December 1999. When you account for the increase in consumption, that same consumer is paying over $80 more than in December 1999. When January bills arrive, it is expected the average consumer will pay $92 more for their total bill than in January 2000.
So what is happening in the marketplace? As demand for natural gas exceeds production, wholesale natural gas prices — not controlled by the state or gas marketers — are at their highest level in decades. Since September 1998, wholesale gas rates have climbed 259 percent. Contributing to the production shortage were the mild summers and winters leading up to the fall of 1998. As supplies increased, commodity rates declined to the point that it was not an attractive time to increase production. When the hot summers and cold winters returned, demand increased and a lag in production reduced supply.
Supplies were further depleted when natural gas-powered utility plants came on-line to meet demands for more power capacity. These plants are selling power all over the country during summer air-conditioning months when gas reserves are normally replenished for the winter. In many areas of the country, peak summer demand now rivals that of winter. The market has responded to the shortage by increasing production efforts. However, experts do not expect any market relief this winter.
Pay Me Now or Pay Me Later
In a competitive marketplace, consumers pay for natural gas just as they do gasoline at the pump — as it is consumed. Some have suggested that price protections in the old system better insulated consumers from fluctuations in the marketplace. Consumers still paid the market rate for gas in the old system, but the gas costs were based on forecasts and leveled out through rolling purchased gas adjustments (PGA). These adjustments worked to offset spikes that occurred in the market. However, we are not experiencing spikes in gas rates; we are in the midst of a 27-month upward trend. Therefore, even in the old system the PGA-based rate would be high. Moreover, some regulated states that use the PGA mechanism are padding the rate for anticipated increases in the commodity, which means those consumers are paying even more than the market rate during already high cost months. In many ways, the pay me now or pay me later concept bears credence when billing for the commodity as the consumer still pays what the market demanded in the end.
Price Controls Could Have an Adverse Impact
A few have suggested some type of price control. While it is easy to appreciate how thousands of consumer complaints can make any lawmaker or regulator nervous, a lesson can be learned from California’s electric deregulation experience. With rates escalating in California, regulators tried to manipulate prices to keep rates stable and ended up creating a bigger problem — energy suppliers would not sell to the state’s utilities. Power companies could not pay the going rates or enter into long-term contracts. Debt followed, bond ratings were reduced and service interruptions resulted as energy suppliers took their business elsewhere. Gas marketers offer competitive rates by purchasing gas in long-term contracts with hedging strategies. If some type of price cap were in place and prices spiked, debt could accumulate for the marketer; in the worst scenario, bankruptcy or a consumer bailout would follow. Likewise, a price cap would not be in the consumer’s interest as marketers would be slow to adjust to the market and lower rates from an established cap.
The PSC Is Doing Its Job
Rather than intervening in an already sensitive marketplace, lawmakers should let the PSC continue to implement consumer protections. The Commissioners and their professional staff have been extremely effective in responding to and protecting consumers while nurturing this competitive environment. Since the last General Assembly session, state regulators:
• Returned to consumers over $40 million from the Universal Service Fund (used for line extensions and uncollectibles)
• Simplified billing by requiring that base charges be collected predominantly during months when higher volumes of gas are typically used — more similar to the billing structure used before deregulation
• Implemented natural gas slamming (unauthorized switch of service) rules which penalize up to $15,000 for every incident and $10,000 each day the violation continues
• Adopted new rules requiring natural gas marketers to provide consumers with timely, fair and accurate bills
• Implemented a Customer Resolution Task Force that helped reduce billing complaints by 68 percent over the last five months
The transition to market competition has been an imperfect process and, in hindsight, the timing could have been better. Setting aside the inexcusable billing problems, most consumers have benefited from competition and will continue to benefit as the market matures. In fact, competition has enabled many consumers to lock into fixed rates that are below market — something that would not be possible in a regulated environment. When comparing rates with other southeastern states, consumers in Georgia’s deregulated market still pay less than any of the southeastern states and these deregulated rates are not out of line with those charged by other gas utilities operating in the state. To illustrate this point, this writer did an analysis comparing his own municipal gas provider’s December bill with the rates charged for the same period by one of the leading natural gas marketers. The total charges by the municipal provider are $19.60 more than what would have been charged in the deregulated market.
Lawmakers should resist the urge to implement a quick fix for a problem that will be corrected by the market. The PSC already has the authority to step in and impose regulations when market forces fail to contain rates. The question is, can some creative relief be worked out that does not call for shifting costs on other customer classes or government handouts on the backs of state taxpayers who are also paying high heating bills in other gas systems?
Shawn Davis, a former public information officer of the PSC, is the Vice-President of Public Affairs for Williams Group International and serves on the Board of Advisors of the Georgia Public Policy Foundation. Editor’s note: Companies of Williams Group International provide various industrial services to the utilities industry. Following his service at the PSC, the author provided public affairs consulting to the natural gas industry.
The Georgia Public Policy Foundation is a nonpartisan, member-supported research and education organization based in Atlanta, Georgia, that promotes free markets, limited government and individual responsibility. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (January 23, 2001). Permission is hereby given to reprint this article, with appropriate credit given.
By Shawn Davis
Deregulation in the natural gas industry has been an easy target for the media and public policy leaders since legislation introduced competition in the Atlanta Gas Light Company territory in 1997. This sentiment is understandable. Gas marketers have had difficulty getting billing under control, and high gas bills are giving consumers sticker shock, prompting them to complain to the Public Service Commission (PSC), the General Assembly and anyone who will listen. Many consumers have blamed deregulation for the high bills. But the culprit is not deregulation, the PSC or lawmakers. Everyone in the country is feeling the impact of higher prices. If something is to blame, it is the weather’s influence on the guiding principle upon which our economy is based — supply and demand. Lawmakers should exercise caution in this volatile marketplace and leave the tinkering to the PSC.
Gas Consumption Is Up 30 Percent
Two factors are causing this sticker shock. First, according to Georgia’s climatologist, David Stooksbury, Georgia is experiencing the sixth coldest heating season on record going back to 1895. The colder temperatures have prompted Georgians to use 30 percent more gas this season than in a typical winter heating season. The average consumer uses 132 therms of gas during most December months to heat and cook in 2,000 square feet of living space. During December 2000, which was 40 percent colder than past Decembers, these consumers used an average 171 therms of gas.
Wholesale Gas Prices
The second cause of sticker shock is that wholesale gas prices at the wellhead are at an all-time high – over 67 percent higher than this time last year. As a result, the average consumer paid $50 more last December than they paid for the same quantity of gas in December 1999. When you account for the increase in consumption, that same consumer is paying over $80 more than in December 1999. When January bills arrive, it is expected the average consumer will pay $92 more for their total bill than in January 2000.
So what is happening in the marketplace? As demand for natural gas exceeds production, wholesale natural gas prices — not controlled by the state or gas marketers — are at their highest level in decades. Since September 1998, wholesale gas rates have climbed 259 percent. Contributing to the production shortage were the mild summers and winters leading up to the fall of 1998. As supplies increased, commodity rates declined to the point that it was not an attractive time to increase production. When the hot summers and cold winters returned, demand increased and a lag in production reduced supply.
Supplies were further depleted when natural gas-powered utility plants came on-line to meet demands for more power capacity. These plants are selling power all over the country during summer air-conditioning months when gas reserves are normally replenished for the winter. In many areas of the country, peak summer demand now rivals that of winter. The market has responded to the shortage by increasing production efforts. However, experts do not expect any market relief this winter.
Pay Me Now or Pay Me Later
In a competitive marketplace, consumers pay for natural gas just as they do gasoline at the pump — as it is consumed. Some have suggested that price protections in the old system better insulated consumers from fluctuations in the marketplace. Consumers still paid the market rate for gas in the old system, but the gas costs were based on forecasts and leveled out through rolling purchased gas adjustments (PGA). These adjustments worked to offset spikes that occurred in the market. However, we are not experiencing spikes in gas rates; we are in the midst of a 27-month upward trend. Therefore, even in the old system the PGA-based rate would be high. Moreover, some regulated states that use the PGA mechanism are padding the rate for anticipated increases in the commodity, which means those consumers are paying even more than the market rate during already high cost months. In many ways, the pay me now or pay me later concept bears credence when billing for the commodity as the consumer still pays what the market demanded in the end.
Price Controls Could Have an Adverse Impact
A few have suggested some type of price control. While it is easy to appreciate how thousands of consumer complaints can make any lawmaker or regulator nervous, a lesson can be learned from California’s electric deregulation experience. With rates escalating in California, regulators tried to manipulate prices to keep rates stable and ended up creating a bigger problem — energy suppliers would not sell to the state’s utilities. Power companies could not pay the going rates or enter into long-term contracts. Debt followed, bond ratings were reduced and service interruptions resulted as energy suppliers took their business elsewhere. Gas marketers offer competitive rates by purchasing gas in long-term contracts with hedging strategies. If some type of price cap were in place and prices spiked, debt could accumulate for the marketer; in the worst scenario, bankruptcy or a consumer bailout would follow. Likewise, a price cap would not be in the consumer’s interest as marketers would be slow to adjust to the market and lower rates from an established cap.
The PSC Is Doing Its Job
Rather than intervening in an already sensitive marketplace, lawmakers should let the PSC continue to implement consumer protections. The Commissioners and their professional staff have been extremely effective in responding to and protecting consumers while nurturing this competitive environment. Since the last General Assembly session, state regulators:
• Returned to consumers over $40 million from the Universal Service Fund (used for line extensions and uncollectibles)
• Simplified billing by requiring that base charges be collected predominantly during months when higher volumes of gas are typically used — more similar to the billing structure used before deregulation
• Implemented natural gas slamming (unauthorized switch of service) rules which penalize up to $15,000 for every incident and $10,000 each day the violation continues
• Adopted new rules requiring natural gas marketers to provide consumers with timely, fair and accurate bills
• Implemented a Customer Resolution Task Force that helped reduce billing complaints by 68 percent over the last five months
The transition to market competition has been an imperfect process and, in hindsight, the timing could have been better. Setting aside the inexcusable billing problems, most consumers have benefited from competition and will continue to benefit as the market matures. In fact, competition has enabled many consumers to lock into fixed rates that are below market — something that would not be possible in a regulated environment. When comparing rates with other southeastern states, consumers in Georgia’s deregulated market still pay less than any of the southeastern states and these deregulated rates are not out of line with those charged by other gas utilities operating in the state. To illustrate this point, this writer did an analysis comparing his own municipal gas provider’s December bill with the rates charged for the same period by one of the leading natural gas marketers. The total charges by the municipal provider are $19.60 more than what would have been charged in the deregulated market.
Lawmakers should resist the urge to implement a quick fix for a problem that will be corrected by the market. The PSC already has the authority to step in and impose regulations when market forces fail to contain rates. The question is, can some creative relief be worked out that does not call for shifting costs on other customer classes or government handouts on the backs of state taxpayers who are also paying high heating bills in other gas systems?
Shawn Davis, a former public information officer of the PSC, is the Vice-President of Public Affairs for Williams Group International and serves on the Board of Advisors of the Georgia Public Policy Foundation. Editor’s note: Companies of Williams Group International provide various industrial services to the utilities industry. Following his service at the PSC, the author provided public affairs consulting to the natural gas industry.
The Georgia Public Policy Foundation is a nonpartisan, member-supported research and education organization based in Atlanta, Georgia, that promotes free markets, limited government and individual responsibility. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.
© Georgia Public Policy Foundation (January 23, 2001). Permission is hereby given to reprint this article, with appropriate credit given.