# ESTIMATING INDUSTRIAL NATURAL GAS PRICES

Ruey-Pyng Lu, Michael A. Taylor

Energy Information Administration

The Energy Information Administration (EIA) collects and publishes data
on prices and volumes of natural gas delivered to customers in four
sectors (residential, commercial, industrial, and electric power). **EIA
publishes the average price for a state computed as revenue averaged by
volume**. Natural gas industry restructuring has resulted in industrial
customers consuming less than 20 percent of the gas purchased from
companies that physically deliver it to the facilities. EIA's
respondents to natural gas Form EIA-857 cannot report a revenue stream
associated with the 80 percent for which they are transporting "for the
account of others". To estimate the price of the natural gas consumed by
the industrial sector, EIA has been exploring the use of another new
survey (starting January 2002), Form EIA-423 \[Monthly Cost and Quality
of Fuels for Electric Plants\] that surveys all nonutility electricity
generating facilities with a nameplate capacity of 50 megawatts or
greater. A subset of the EIA-423 respondents are in the industrial
sector; we call them the "Not-22's," referring to their North American
Industry Classification System code. At the April 2003 meeting we showed
the committee some plots of the relationship between price and volume
from the EIA-423 survey data. There was not a discernible relationship.

Meanwhile we have been receiving and reviewing additional EIA-423 data,
which we believe represent off-system prices (the deliveries for the
account of others) for industrial facilities that generate electricity
(combined heat and power plants) and meet the threshold for the EIA-423
survey. Since the EIA-857 survey data represents the on-system prices,
the question is how best to estimate the off-system prices for the
industrial facilities that either don't generate electricity or generate
electricity, but are not required file for Form EIA-423. Our most recent
2002 data show that natural gas volume in the on-system sale counted for
20% of total industrial sales, and the EIA-423 Not-22 respondents gave
12% of the total industrial sales that is part of off-system sales. This
is a national level percentage, and varies from region to region.

To estimate the unaccounted for 68% of industrial sales, we have several
options:

1.  Use the average of available on-system and off-system sale prices.

2.  Use the off-system sales price.

3.  Use the most recent Manufacturing Energy Consumption Survey (MECS)
    data which is from 1998 and assume the relationship between the
    price of natural gas reported by manufacturers who generate
    electricity and those who don't generate electricity is appropriate
    to estimate off-system sales for the unaccounted for group.

4.  Develop a model to estimate the price for the remaining off-system
    sales part.

[MECS Data]{.underline}. The 1998 MECS data shown below indicate that
the price that the manufacturers that generate electricity paid for
natural gas was lower than the price paid by the non-generators. This
may be because the non-generators are more likely to buy on-system (from
their local utility) than the generators. To test this hypothesis we
have requested from the Bureau of the Census a tabulation that separates
the data by whether the respondent purchased natural gas on-system or
off-system.

  ----------- -------------- ------------ --------------- ---------------- --------
  Region      Generate       No. of       NG consumed     Cost (\$)        Price
              electricity    facilities   (Mcf)                            (\$)
              (Yes/No)                                                     

  Northeast   No             1876         424,868,627     1,634,621,841    3.85

              Yes            86           99,976,874      343,297,107      3.43

              Subtotal       1962         524,845,502     1,977,918,948    3.77

                                                                            

  Midwest     No             3590         1,268,321,436   3,892,250,328    3.07

              Yes            211          441,129,092     1,221,579,743    2.77

              Subtotal       3801         1,709,450,528   5,113,830,071    2.99

                                                                            

  South       No             3600         2,177,349,241   5,964,486,853    2.74

              Yes            265          1,594,038,474   3,786,434,753    2.38

              Subtotal       3865         3,771,387,715   9,750,921,606    2.59

                                                                            

  West        No             1640         528,321,610     1,632,499,690    3.09

              Yes            110          283,463,892     760,646,139      2.68

              Subtotal       1750         811,785,502     2,393,145,829    2.95

                                                                            

  US          No             10706        4,398,860,914   13,123,858,711   2.98

              Yes            672          2,418,608,332   6,111,957,742    2.53

              Total          11378        6,817,469,246   19,235,816,454   2.82
  ----------- -------------- ------------ --------------- ---------------- --------

## Developing a Model to Estimate the Price of Unaccounted for Off-system Sales

Another approach is to model the difference between natural gas prices
paid by EIA-423 Not-22 respondents in 2002 (the first year of the
survey's existence) and a day-weighted average of monthly Henry Hub (a
large natural gas distribution hub in Southern Louisiana) prices. Six
models were to be made, corresponding to the following areas: the
Northeast Census Region, the Midwest Census Region, the South Census
region excluding Louisiana, Texas and Oklahoma (which were found to be
significantly different from the remainder of the region), Louisiana,
Texas and Oklahoma as a block, the West Census Region excluding
California, and California by itself following the same rationale used
above. The state-level purchased price reported by EIA would be a
weighted average of prices reported on surveys EIA-857, EIA-423 and the
predicted price difference from the model added to the day-weighted
monthly average of spot gas prices. An enhanced model is adopted to use
a day-weighted average of monthly regional Henry Hub (Chicago, New York,
California, Oregon and Louisiana) prices. There are some promising
results in this modeling approach. (the attached write-up presents more
information on this approach. Note: We're in the process of updating the
runs and will have results shortly).

### Other Investigations

In addition, we checked the correlation between these regional Henry Hub
monthly prices and the natural gas prices for the Not-22 respondents;
Northeast, South and Midwest regions showed strong correlation At the
national level, there is a strong correlation between Henry Hub monthly
price and those EIA-423 Not-22 respondents' prices. This confirms that
the natural gas price in the manufacturing sector from Form EIA-423
follows the trend of the spot market price.

The subsequent task to improve the estimation of industrial natural gas
price is to use the Manufacturing Energy Consumption Survey (MECS) 2002
data (available in Fall 2004) to validate the natural gas industrial
price estimated by the difference of regional Henry Hub prices and
EIA-423 respondents.

### Questions for the Committee

We will be asking the committee for guidance in determining the
tabulations we should request from MECS to validate our estimate of the
industrial price and also for guidance on presenting our estimates. For
example, we currently publish a table in the Natural Gas Monthly showing
prices for end-users as well as other prices.
<http://www.eia.doe.gov/pub/oil_gas/natural_gas/data_publications/natural_gas_monthly/current/pdf/table_04.pdf>

Does the Committee think we should add a column showing the price paid
by industrial combined heat and power plants from the EIA-423 survey
along with the percent of total industrial sales that it represents?
Using data from another electric power survey, Form EIA-906, we can also
present information on the proportion of natural gas consumed by
industrial combined heat and power plants that the EIA-423 data
represent.

What does the committee think of presenting a separate table that shows
several estimates that attempt to represent a price for the entire
industrial sector based on the 4 options we presented above?