More gas utilities hedge peak purchases, AGA says

By the OGJ Online Staff

HOUSTON, July 26, 2001 – Nearly half of gas utilities’ peak-day purchases were made under mid-term contracts of 1 month to 1 year this past winter, while long-term contracts of more than 1 year accounted for 26% of peak-day purchases, the American Gas Association said.

Spot market purchases accounted for 13% of gas purchases, up from 9% in the winter of 1999-2000, largely due to increased need for natural gas on cold days, it said.

Use of financial instruments and fixed-price contracts helped local distribution companies hedge a portion of their winter gas supply purchases against fast-rising prices. These financial instruments allow gas supply managers to control prices, in part, by locking in the cost of a portion of their gas supplies.

State regulatory officials must typically review and approve the use of such financial tools prior to a utility’s use of them.

Despite extraordinary market conditions and record cold weather, local natural gas utilities succeeded in delivering what appears to be a record amount of natural gas to customers last winter, according to an analysis published by the AGA.

“Our analysis found that underground storage continues to be vital to reliability, and that utilities are growing even more sophisticated in balancing their need to minimize the cost of acquiring gas supplies with their traditional obligation to provide reliable service at the lowest possible cost,” said Chris McGill, AGA managing director for policy analysis.

During the winter of 2000-2001, working inventories of natural gas in storage were adequate to meet customer needs but lower on a national average than the 5-year average reported by AGA’s American Gas storage survey.

Two factors accounted for the reduced inventory: lower-than-average storage volumes at the start of the winter heating season, and large withdrawals in response to early onset of cold weather. November and December 2000 were the coldest such months on record, according to the National Weather Service.

Temperatures were colder than normal for the 9 weeks between Nov. 11, 2000, and Jan. 6, 2001.

The early onset of cold weather exacerbated what was already a tight supply-demand market for natural gas, the AGA said. For the first quarter of 2000, natural gas prices remained within the bounds of average pricing for the last decade, on a national average basis.

As average prices crept toward $4/Mcf and more, supply planners waited to see if higher prices would reverse themselves and fall during the summer, as is often the case. But the trend of higher prices at the wellhead was not reversed until after the first weeks of January 2001, when the combination of warmer-than-normal weather and growing domestic production capability began to take hold, the report found.


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