# Presentation: 291609

## Methodology for Natural Gas PricesSSG-WI 2008 Base Case

**Methodology for Natural Gas Prices****SSG-WI 2008 Base Case**

## Introduction

- Objective is to estimate the variable component of gas prices for the SSG-WI topology
- Based on Henry Hub annual average price scenarios ($4, 5, and 7 in 2005 dollars)
- Prices determine gas unit dispatch and fuel costs in each     SSG-WI bubble
- Northwest Power and Conservation Council’s data and methodology is used
- As reflected in final version of *Fifth Northwest Electric Power and Conservation Plan*
- Council employs historical hub price data from last 20+ years
- Linear regression used to forecast prices at Henry Hub, other regional hubs, and some burner tip areas
- Seasonal patterns are added to Council’s prices

- Methodology for Natural Gas Prices SSG-WI 2008 Base Case

## Two components of the cost of gas:  

- Fixed, which is primarily transportation cost
- Variable, which is primarily the cost of gas itself
- SSG-WI’s production cost modeling uses variable cost component only
- Fixed cost component will be added to the economic analysis of resource and transmission scenarios in 2015 studies
- Historical seasonality was incorporated for Henry Hub prices
- Henry Hub NYMEX futures used to calculate monthly allocation factors
- Monthly factors were averages of
- 	factors for Jan. 2007-Dec. 2009
- 	contracts
- Price history data used from
- 	Jan. 3 to June 15, 2005
- Factors applied to annual Henry Hub
- 	price to get monthly Henry Hub price

- Methodology for Natural Gas Prices SSG-WI 2008 Base Case

## Council used linear regression to model historical Henry Hub and regional hub price relationship for each regional hub

- SSG-WI uses this model for 2008

- _FOR DEMONSTRATION ONLY_

- Relies on Council’s data and regression models to get 2008 regional hub prices1
- Data:  monthly hub price data from *Natural Gas Week*,* *Jan. 1989-Sep. 2003 (some data series were missing values)
- These prices exclude fixed costs

- 1Complete data and methodology description is found in the Council’s staff paper, “Developing Basis Relationships Among Western Natural Gas Pricing Points”

- Methodology for Natural Gas Prices SSG-WI 2008 Base Case

## SSG-WI uses specified Henry Hub price (e.g., $5) to get the corresponding regional hub price

- 1.  Start at the Henry Hub price on the x axis

- 2.  Find the point of intersection with the regression line

- 3.  The corresponding regional hub price is on the y axis

- _FOR DEMONSTRATION ONLY_

- Methodology for Natural Gas Prices SSG-WI 2008 Base Case

## Treats the 2008 regional hub prices as variable costs at burner tip areas
Council’s burner tip area prices include both fixed and variable costs, and they are ignored

SSG-WI bubbles are assigned prices from their respective burner tip areas

Gas units in GridView are then assigned the prices in their respective bubbles

- Council’s burner tip area prices include both fixed and variable costs, and they are ignored
- SSG-WI bubbles are assigned prices from their respective burner tip areas
- Gas units in GridView are then assigned the prices in their respective bubbles

- Methodology for Natural Gas Prices SSG-WI 2008 Base Case

## Drivers of the variable cost of gas

- AECO

- Rockies

- Permian

- San Juan

- Henry Hub
- $4, 5, and 7 sensitivities
- Historical seasonal shapes

- S CA, San Diego, Imperial CA, LADWP,
- Mexico-C, NV, WAPA L.C.

- AZ, IPP, NM

- COL E, COL W

- UT N, UT S, Bonz, Bhills, LRS, WYO,
- SW WYO, BHB, YWTL, MT, JB, KGB,
- OXBOW, MDPT

- NW West, BC Hydro

- _SSG-WI Topology Bubbles_

- _Regional Hubs_

- N CA Border

- S CA Border

- Sumas

- NW East, Alberta

- Bay Area, Sierra, PG&E

- Indicates which regional hub price used as variable cost of gas at bubble level

- Indicates:
- 1.  Which historical prices the Council used
- 2.  Which forecasted prices drive forecasts of other prices

- Indicates:
- 1.  Which historical prices the Council used
- 2.  Which forecasted prices drive forecasts of other prices

- Methodology for Natural Gas Prices SSG-WI 2008 Base Case

## Caveats

- Extreme outliers removed from historical data for estimates at typical conditions
- Supply and demand issues not addressed in modeling
- Assumptions:
- Linear pricing relationships found in historical data endure into the future
- Regional hub prices are driven by Henry Hub and other regional hubs as shown
- Regional hub prices are modeled appropriately using linear relationships
- Linear regression analysis did not account for the time dimension of the historical data

- Methodology for Natural Gas Prices SSG-WI 2008 Base Case