Gas prices increase after Japan quake: minimal local affect

The stability of natural gas prices is important to the Weatherford Municipal Utility board as it directly correlates to the electric rate it charges customers.

During Thursday’s utility board meeting, Electric Utilities Director Joe Farley updated the board on the recent increase in natural gas prices following the Japan earthquake and tsunami. With the failure of nuclear power plants, Japan has switched to using natural gas for fuel, a commodity they must import.

Farley said that has not increased demand much since Japan’s electric consumption is down overall due to the destruction of the earthquake, but that could change once their power comes back on line.

While not outside normal parameters, the cost per million British thermal units increased from $3.89 March 11, the day of the earthquake, to its current rate of $4.25 per Btu. The price didn’t begin to rise until March 17.

Farley said the increase will have a minimal effect on local electric rates as the U.S. doesn’t rely on importing natural gas and has an abundance of gas supplies of its own.

Board member Ken Davis said he expects to see what he calls the “Japan effect,” meaning more power plants will switch to operating with natural gas rather than the nuclear or coal power.

“That is when the demand will go up,” Davis said.

To avoid price spikes when demand and costs increase, the city implemented a gas management strategy following the electric rate spike in the summer of 2008. That plan includes hedging, locking in the rate of a certain amount of the city’s gas needs for an extended period of time.

Before hedging, the city purchased natural gas one month at a time, and when prices spiked from about $8 to $14 in 2008, that caused electric customers to see their electric rates double.

“Now we do not float on the market every month,” Assistant City Manager Sharon Hayes said. “We lock in say 25 percent for six months and maybe another 25 percent for nine months, so every month we have some of the price set.”

For instance, if the city locks in half of their gas needs at $4 per Btu and the next month the price increases to $6. The city would be paying an average of $5. The same is true if the price dropped to $2. The city would then pay $3, an average of the two.

“It helps stabilize the rate,” Hayes said. “We still float on the market [for the amount not locked in]. We are never the lowest, but it helps us predict, and we need budget certainty for our customers.”

The city uses a complicated mathematical probability model to determine what amount should be hedged and how far out to lock in a rate. Natural gas consultant R.W. Beck performs this service for the city.

Currently, the city has 25 percent of their gas needs locked in for March at a rate of $4.56 Btu — this was locked into place about six months ago. The remaining 75 percent of gas needs is being purchased at the $4.25 market value.

The city currently has no price locked in for April or further out. They have until the end of next week to lock in a new rate and hedge gas for future months or this will be the first time they will fully ride the market since 2008.

Hayes said the city is waiting to make a decision on whether to hedge or not due to the extremely low gas rates and low volatility of the market.

“The likelihood to see any spike is very low,” she said.

Farley said the city also has to be careful how far out to lock in rates.

“If you go too far out you could lock in prices higher than what you would otherwise pay,” he said. “Even though you have stability, you end up with customers paying one or two cents higher per kilowatt hour than they should be.”

(Source: http://weatherforddemocrat.com/homepage/x1332405571/Gas-prices-increase-after-Japan-quake-minimal-local-affect)