Written by Pat McGonagle, Vice President & CFO
The natural gas futures market is off to an unpredictable start this winter. Natural gas futures rose to their highest level in more than four years during the week of November 12th as the December 2018 delivery contract traded at $4.846 per million British thermal units (MMBtu) on the New York Mercantile Exchange (NYMEX). The final settlement price for December was $4.715 as compared to the November close of $3.185 representing a 48% increase for the month. The primary reasons for this price spike appear to be low storage inventory levels across the nation combined with short-term weather forecasts for colder than normal weather. Due to the current volatility in the pricing of natural gas and the early arrival of winter I thought it may be a good time to review how we calculate our Gas Cost Recovery (GCR).
The GCR reflects the cost incurred by the cooperative to purchase the gas used by our members. Through the GCR charge, the cooperative, in turn, charges you the member the same price it paid for the gas. Gas costs recoverable through the GCR include the following three components: the cost of purchasing the gas, the cost of transporting the gas from the producing region to the cooperative’s service territory and any over/under recovery of gas costs from previous months.
First, the cooperative purchases natural gas based on projected usage. In order to ensure a reliable supply and counteract price fluctuations, the cooperative purchases gas supplies through contracts with various suppliers and local producers. Most of these gas purchases are based off NYMEX pricing and the volatility in this market greatly affects the monthly GCR. A portion of the gas used during the winter, November through March, is purchased and injected into our underground storage fields during the summer and fall in order to meet demand during the winter and hedge against a spike in price like we are currently witnessing (see page 6).
Next, the cooperative transports purchased natural gas on one of three interstate pipelines from the Gulf of Mexico to our service territory. The cost of transporting this natural gas to our pipelines is then calculated on each pipeline and added to our gas cost. The cooperative then completes the first step of the GCR calculation adding the gas and transportation costs. This subtotal is what the natural gas industry refers to as the Expected Gas Cost (EGC).
The final component of the GCR is calculating the over/under recovery of gas costs from previous months. This over/under recovery is referred to as the Actual Adjustment (AA) in the regulated natural gas industry. The AA calculation is comprised of two main variables, which are usage and price. The most common factor effecting usage is weather. Weather can provide for large changes in projected customer usage, either up or down. The second factor can be a change from the anticipated natural gas cost as projected when the GCR is calculated to actual costs for the month.
The methodology listed above that the cooperative uses to calculate the Gas Cost Recovery is, with a few exceptions, the same methodology that is prescribed by the Public Utilities Commission of Ohio. Rest assured, the price the cooperative paid for the natural gas is the same price you pay when you consume the product.