Gas price hike comes down to accounting

Warm winter and spring caused Enstar to overestimate gas demand, leaving a deficit in utility’s gas purchase, sale balance

Alan Bailey

Petroleum News

Customers of Enstar Natural Gas Co., the main Southcentral Alaska gas utility, may be shocked to see an increase from $4.45 to $7.67 per thousand cubic feet in the cost of the gas that they use, starting on July 1. But this apparent price hike results essentially from unexpectedly warm winter weather and the accounting mechanism whereby Enstar passes the cost of gas that it purchases from gas producers through to gas consumers, John Sims, Enstar’s director of business development, explained to Petroleum News on July 2. The actual prices that Enstar, and hence its customers, pay for gas supplies are set in a series of contracts, none of which are currently changing.

To ensure the availability of gas from producers, Enstar has to make quarterly gas demand forecasts, committing payments to the producers based on those forecasts and using the estimated volume required from each gas supply contract to compute a gas price to charge gas consumers. But the payments that Enstar receives from its customers during each quarter are based on actual gas usage, not on forecasts. And, since the actual demand never equals the forecast demand, there is always a quarterly discrepancy between what Enstar commits to pay for gas and what the utility receives in payments from its customers. The utility rolls this discrepancy forward from one quarter to the next, as a positive balance if, cumulatively, payments for gas exceed receipts from customers, or a negative balance if the utility has received more than it has paid.

Each quarter Enstar tries to move this balance towards zero by adjusting the price that it charges its customers for gas, moving the price up in the event of a positive balance, and down for a negative balance. Over multiple quarters, everything will balance out, with customers ultimately paying what the producers charged for the actual gas that was used.

Essentially, Enstar passes the cost of the gas through to its customers, with the utility making its profits from its gas transportation and delivery services, and not from the sale of gas.

With the winter weather of the first quarter of 2014 being unusually warm, Enstar overestimated the gas demand for that quarter and then compensated with an extremely low gas price in the second quarter, Sims explained. Then, with continuing warm weather and resulting low customer gas bills, Enstar ended up with a cumulative deficit of about $7 million in that rolling quarterly balance.

Recovering that large deficit in the balance requires the substantial price rise that customers are now seeing. However, as the balance normalizes, customers may see a slight decrease in the gas price in the fourth quarter, Sims explained.