There has been a ton of discussion about the impact rising natural gas prices will have on the economy, writes utility analyst Sandy Cohen. Nearly all this discussion does remind people that the impact of these prices have not yet been felt because the winter heating season has not yet started. An informal, and anecdotal, review indicates that home heating from natural gas could cause a rise in monthly bills for consumers and businesses of between 20% and 70% for this coming winter heating season.
We have gathered this anecdotal evidence from 2 sources: The Merrill Lynch Power and Gas Leaders Conference we attended the last week of September, and more recently, the American Gas Association (NYSEARCA:AGA) Mini-Forum in New York City last week (on 10/6/05).
At the AGA, the Chairman of the AGA (who is also the CEO of New Jersey Resources, a natural gas LDC), stated that he believes LDC's will have to raise their retail prices to the end user from 20% to 50%, on average, depending on the level of gas price hedging individual companies had put into place. Two LDC's we spoke to at the AGA Mini-Forum indicated they expected to see 20-25% monthly bill increases for their customers this winter. But both of these companies had hedged over 80% of their natural gas supply needs coming into the winter. Natural gas prices have risen so much that even putting in place hedges of over 80% of supply needs is still resulting in almost 25% increases in consumers bills. Many gas utilities were hedged only between 45%-60%, not 80%.
At the Merrill Lynch Conference, Merrill's fine utility analyst Steve Fleishman, asked every company with a gas LDC subsidiary what their expected monthly increase in bills would be this summer. We were not at every presentation, but we heard answers from 9 different utilities. Four of these companies indicated monthly bill increases this winter would be 30-35%. Two companies indicated monthly bill increases of 40-60%. Two companies stated monthly bill increase this winter would be about 25%. One company gave no estimate, but said they had just increased gas rates by 13%, and that more would come.
Obviously, the consumers (both residential and commercial) are going to feel a big bite this winter if they use natural gas. But as far as utility investors are concerned, the big risk is regulatory backlash. Regulators do not like increasing rates to consumers. Obviously, they will have to allow these rate increases, as in most cases the cost of supplying gas to customers is considered a fuel pass-through, mandated by law. But if very large rate increases are coming that are unavoidable, regulators can get clever about limiting rate increases for other reasons ... like added rate base, operating and maintenance expenses that might be considered subject to review or discretionary, and most importantly, ROE (return on equity). In other words, regulatory backlash from high natural gas prices could hurt shareholder returns.
Additionally, remember that these natural gas price hedges that the gas utilities have put in place will eventually unwind. And natural gas put into storage (a significant part of the hedge) will be used up. A lot of the hedges and the gas put into storage were put into place when gas was at $6 and $8 per mcf. Gas is now ranging between $12 and $14 per mcf. Should natural gas prices stay high, consumers could see a very large increase for NEXT winter as well ... perhaps even greater than this winter.
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