Winter-Heating Bills
Are Tough to Forecast

A substantial drop in natural-gas prices won't help some U.S. consumers with their heating bills this winter. As a result, some utilities are waiting to see whether households dial back their thermostats -- and whether that could hurt their earnings.

Some utilities that raised rates significantly last year, in the aftermath of gas-production disruptions along the Gulf Coast, will offer substantial reductions this year because of the fall in gas prices. Others will have modest increases or decreases depending on whether they locked in gas supplies when prices were high or rolled the dice on the spot market. Gas-commodity costs make up 50% to 80% of a common residential bill, and gas heats more than half of all U.S. homes.

Many utilities sock away large quantities of gas in spring and summer so it can be consumed in the winter. The companies then make spot-market purchases, as needed. More utilities are making purchases in other months and are leaning more heavily on financial-hedging tools to protect their customers against price shocks. About 70% of gas utilities enter into financial hedges to protect their customers, according to the American Gas Association, a trade group in Washington, D.C.

The different approaches account for different consumer outcomes in different places. AGL Resources Inc., of Atlanta, said it will offer reductions of 5% to 28% this winter at the five utilities it owns in six states, with the largest decrease in Virginia. That is partly because Virginia is one of the few states that discourages hedging, so it relies more on current market prices.

That has worked out well this year because prices have dropped. In recent trading, a 12-month strip of gas -- a contract for a set supply monthly for a year -- could be purchased on the New York Mercantile Exchange for $7.97 a million British thermal units, compared with $11.67 a million BTUs a year earlier, a decline of 32%. U.S. gas inventories have swelled to 3.44 billion cubic feet, their highest level ever, according to the Energy Information Administration, of Washington, D.C.

At AGL's Chattanooga Gas Co. in Tennessee, a 24% reduction in the commodity portion of each bill will translate into savings of $29.50 in November and $56.60 in December for the average household. Although that is welcome news, it leaves prices relatively high because rates jumped 39% last winter.

Even though gas-commodity costs are a pass-through expense for utilities, the companies can suffer if their customers suffer. NiSource Inc., of Merrillville, Ind., said in August that it expects to lose 1.2% of its residential customers this year, most due to shutoffs for nonpayment. That is a 10% increase in customer losses from 2005 and is twice as great as what it expected. NiSource owns 10 gas utilities in nine states with 3.8 million metered customers.

Overall, residential-gas use at NiSource companies has fallen 5% this year, on top of a 4% drop last year, Chief Executive Bob Skaggs told investors. He said in August it is "highly unlikely" the company will meet its earnings targets for 2006, as a result of this growing conservation effect.

NiSource's experience suggests there may be more pain ahead -- both for utilities and customers -- than what the federal government expects. In its annual winter-fuels outlook, the EIA said it expects less conservation this year than last year, because of reduced prices.

Some utilities with successful buying strategies are raising rates. Customers of Northwest Natural Gas Co., of Portland, Ore., will pay 3.5% more for gas this winter. What consumers won't necessarily know is that it could have been far worse. Normally, Northwestern locks in prices for 90% of the gas its customers need, but "we really backed off this year," said Randy Friedman, gas-supply manager, because prices quoted early in the year for deliveries this winter "seemed nuts to us."

It held off on purchases and later was able to buy gas more cheaply. By deviating from its normal plan "we cut the amount of our price increase in half," said Mr. Friedman. This year's increase comes on top of a relatively modest 15% increase last year, when a larger hedging program protected customers against price increases late in the year. Its earnings aren't affected by conservation because the company revised its rate structure in 2002 so it can earn its authorized rate of return even if gas usage drops.

Many utilities are reluctant to change their buying programs, afraid they will be second-guessed by regulators. Consolidated Edison Inc. takes a "disciplined approach" to procurement, says Terry Agriss, vice president of energy management. "We didn't do anything substantially different this year than what we do in any year."

ConEd, of New York, expects the average household to pay about 5% less this year than last. That means a total gas expense of nearly $2,000 from November through March, compared with an average cost of $2,090, $1,658, and $1,415 the prior three years.

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