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Enstar proposes annual gas accounting Tells RCA it wants to reduce volatility of gas cost adjustment following recent controversy over ‘price hike’ in consumer gas bills Alan Bailey Petroleum News
During an Aug. 13 public meeting of the Regulatory Commission of Alaska, Enstar Natural Gas Co. executives told the commissioners that the utility proposes reverting to an annual process for determining the gas cost adjustment, or GCA, that it charges its customers. The utility has been adjusting the gas cost on a quarterly basis but this has resulted in high levels of gas price volatility, leading recently to anguish among consumers at an increase in the price of gas from $4.45 to $7.67 per thousand cubic feet.
Annual adjustment Daniel Dieckgraeff, Enstar’s manager of rates and regulatory affairs, told the commissioners that Enstar is going to request approval for a GCA change each July. Enstar has in the past used annual adjustment that applied in January but the pricing change in the middle of winter had never been popular, Dieckgraeff said. And an adjustment on July 1 would enable the actual gas usage and cost for the entire winter to be taken into account in the adjustment calculations, he explained.
Apparently Enstar had changed from an annual to a quarterly process for the adjustment, to accommodate the fact that in some supply contracts with gas producers the gas prices were revised quarterly.
The prices that Enstar pays its suppliers for its gas depend on the terms of a series of commission-approved contracts that use a variety of pricing formulae, indexed to oil prices or North American gas prices. John Sims, Enstar’s director of business development, explained to Petroleum News that Enstar pays its gas suppliers monthly, based on the actual amount of gas that the utility has had to purchase during the previous month. Enstar passes the cost of the gas directly to its customers. The utility does not make money out of gas sales - it makes money from the services it provides in delivering gas from the producers to the customers.
Uses estimated demand But, to bill its customers, Enstar must set a gas price that it can use in its customer invoices. And, because that price is dependent on some combination of total gas usage and the gas supply contract pricing, the utility has to use estimated future gas demand to calculate a gas price for future billings. But, with gas demand depending primarily on the weather and the state of the economy, factors that are both notoriously difficult to predict, the estimated gas demand used to set the price never matches the actual gas usage that determines what Enstar has to pay its gas suppliers. Consequently the utility must periodically true up the payments it has received from its customers for the gas they have used with the amount Enstar has had to pay to the gas producers for the gas supplied. This true up is achieved by making an adjustment to the future price, with a price increase applied if customers have underpaid for the gas previously used, or a price decrease if the customers have paid too much.
Price volatility This truing up of actual gas costs against actual customer payments leads to volatility in the GCA. And a short truing up period tends to lead to higher volatility than a longer period.
This year’s July GCA increase was especially high because abnormally warm spells of weather in the first two quarters of this year resulted in a major under collection of gas payments from customers - the recovery of this underpayment through the GCA started in July, at a time at which consumers use relatively little gas, thus resulting in a relatively large adjustment in the price per unit volume of gas.
Dieckgraeff said that following the recent price controversy Enstar had assessed several different potential ways to reduce GCA volatility, including the possibility of spreading cost adjustments across multiple truing-up periods. However, reverting to an annual rather than a quarterly truing up period appeared the most satisfactory approach, he said.
Better communications needed Some commissioners, expressing sympathy with consumer concerns about gas prices, criticized Enstar for not communicating effectively with its customers, to explain that the truing-up mechanism can lead to price decreases as well as price increases. Commissioner Paul Lisankie commented that he did not understand why no one talks about the around $3 decrease in the gas price that occurred in the quarter prior to the July 1 increase. Looking at the change in pricing between January and July, the gas price appeared to have increased by 1.32 percent, Commissioner Norman Rokeberg commented.
Dieckgraeff said that Enstar estimates that the GCA will drop to $7.15 in the fourth quarter of this year.
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