Natural Gas Market Conditions and Unisource Natural Gas Bills

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Natural Gas Market Conditions and Unisource
Natural Gas Bills

• Bob Gray, Arizona Corporation Commission Staff

February 24, 2004
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Arizonas Natural Gas Supplies

• No instate production or storage
• Arizonas natural gas comes from the San Juan
  supply basin in northwest New Mexico and the
  Permian supply basin in west Texas
• Unisource and other Arizona entities contract
  with natural gas producers in these supply basins
  to buy volumes of natural gas
• Arizona entities, including Unisource, hold
  pipeline capacity rights on interstate pipeline
  systems to deliver natural gas to the local
  distribution systems in Arizona
• The price and availability of natural gas to
  Unisource is impacted by regional and national
  natural gas market conditions

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United States Natural Gas Market
Source United States Energy Information
Administration
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The National Market for Natural Gas

• Wellhead prices for natural gas were deregulated
  by the federal government in the 1980s
• For many years there was a gas bubble. This
  means there was more natural gas supply than
  demand, so natural gas prices were typically
  quite low
• In recent years the balance between supply and
  demand has changed significantly, resulting in
  higher and more volatile natural gas prices

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Recent Headlines

• USA Today, February 14, 2004 Heating bills,
  pump prices shock consumers, Virginia and
  Cincinnati customers are quoted regarding their
  much higher natural gas bills
• Reuters News, February 20, 2004 Energy Spike
  Hikes Inflation in January
• Alan Greenspan, June 2003 Today's tight
  natural gas markets have been a long time in
  coming, and futures prices suggest that we are
  not apt to return to earlier periods of relative
  abundance and low prices anytime soon.

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Current Market Conditions

• U.S. production in the traditional lower 48
  supply basins has weakened in recent years
• Canadian imports, which have typically made up
  approximately 15 of U.S. supplies, declined in
  2002 for the first time in 14 years and appear
  likely to continue to decline
• Natural gas exports to Mexico continue to grow
• Increased reliance on natural gas-fired
  electricity generation has driven increased
  natural gas demand
• Natural gas intensive industries such as
  fertilizer and chemicals have been particularly
  hard hit by large natural gas price increases,
  resulting in job losses and some relocations to
  overseas areas
• Natural gas storage inventories have fluctuated
  significantly and low storage levels have
  contributed to several recent price spikes

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Current Market Conditions (continued)

• The growth areas for natural gas supply are the
  central Rockies, liquid natural gas imports, and
  Arctic natural gas, but each of these options
  faces environmental and other concerns
• Drilling for natural gas has increased as natural
  gas prices have increased recently, but despite
  higher rig counts, producers have struggled to
  maintain production at current levels
• Weather is always an important factor. Recent
  cold weather conditions in the large consuming
  regions of the Midwest and Northeast have
  contributed to price volatility and higher prices
• In summary, natural gas market prices appear
  likely to remain high and display significant
  volatility for the foreseeable future

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Arizonas Situation

• Arizona consumers served by all Arizona gas
  companies have experienced significantly higher
  natural gas prices in recent years
• Most of Arizonas natural gas is currently
  delivered through El Paso Natural Gas Companys
  interstate pipeline system, with small amounts
  delivered over the Transwestern and Questar
  systems
• A number of companies are considering
  constructing new pipeline and/or storage
  infrastructure in Arizona
• Arizona natural gas demand continues to grow,
  driven primarily by increased production of
  electricity by natural gas fired generators

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Components in Natural Gas Rates

• Cost of natural gas - includes the cost of
  purchasing the natural gas commodity in the
  supply basins in New Mexico and western Texas as
  well as the cost of transporting the natural gas
  to Unisources distribution system in Arizona.
  Adjusts monthly based upon the Commission
  approved purchased gas adjustor mechanism.
• Other costs - includes the cost of facilities,
  metering, billing, customer service, etc. Also
  includes the companys allowed profit margin.
  These costs dont change outside a rate
  proceeding and subsequent order from the
  Commission.

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Rate Components

• Customer Charge A fixed charge which is applied
  each month. Doesnt change outside of a rate
  proceeding.
• Basic Cost of Service - Rate per therm of usage.
  Fixed rate of 0.7004 per therm. Doesnt change
  outside of a rate proceeding.
• The charges collected through the Customer Charge
  and Basic Cost of Service rate are for recovery
  of costs other than the gas commodity costs, with
  the exception of a built in base cost of gas of
  0.40 per therm. This base cost of gas doesnt
  change outside a rate proceeding.
• The base cost of gas is an estimated average cost
  for Unisource to acquire the natural gas
  commodity and the ability to transport it over
  the interstate pipeline system

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Rate Components

• PGA Cost This monthly PGA rate is set for each
  month by taking the difference between
  Unisources average cost per therm of purchasing
  natural gas supplies for the previous 12 months
  and the base cost of gas.
• PGA Surcharge This is a temporary per therm
  surcharge on customers bills. Such a surcharge
  is only implemented when Unisource has spent a
  lot more money to buy natural gas than what it
  has received from ratepayers to pay for the
  natural gas commodity.
• Circuit-Breaker Mechanism Under this mechanism
  residential usage above 140 of average
  residential usage each month from December
  through March is not subject to the PGA surcharge

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Other Issues

• Unisources PGA mechanism is a straight pass
  through, meaning the company makes no profit on
  the cost of the natural gas commodity.
• Unisource files monthly reports with the
  Commission, documenting its natural gas commodity
  costs and recovery of such costs from its
  customers.
• The Commission has formally recognized price
  stability as one of the goals of the gas
  purchasing process and has directed Unisource and
  other gas utilities to buy a portion of their gas
  supplies on fixed price, longer term contracts.
• In April 2003 the Commission initiated a Notice
  of Inquiry on Natural Gas Infrastructure to work
  with utilities and others to look at issues
  regarding additional natural gas pipeline and
  storage infrastructure in Arizona. Such
  additional infrastructure can assist Arizona in
  addressing the cost, flexibility, and reliability
  of natural gas service in Arizona.