# Presentation: 291606

## Proposed Natural Gas Prices for the SSG-WI 2008 Base Case

## Introduction

- The Council used the linear regression methodology in their final *Fifth Northwest Electric Power and Conservation Plan*
- The Council’s earlier methodology calculated and then fixed the differentials between Henry Hub and regional hub prices, and between regional hub and burner tip area prices.  These differentials were then applied to the Henry Hub price (e.g., $4, 5, or 6) to get forecasts of burner tip area prices.1

- 1More details on the Council’s earlier methodology are found in the Appendix

- _Introduction_

## The new linear regression method does not calculate or make use of differentials.  Rather, price relationships between hubs and burner tip areas are established using historical price data.  Linear regression is used to define these price relationships and to get forecasted burner tip area prices.2
Historical gas prices are the only data used; basic supply and demand issues that underlie energy prices are not addressed in the modeling
There is no simulation of supply and demand, but rather historical price relationships are estimated and assumed to continue in the future
In some Rocky Mountain states (UT, WY, MT, and ID) where no strong relationship was apparent from the data, simple markups are used for market hub and transportation differentials as in the Council’s earlier methodology
The sources of the price data is Natural Gas Week for hubs (Henry Hub, AECO, Rockies, San Juan, Permian, and Sumas) and some burner tip areas (northern and southern CA)
The source of the price data is the EIA’s “State Energy Price and Expenditure Report” and “State Energy Data Report” for other burner tip areas
From both sources, monthly data were used from January 1989 to September 2003.  Some data series had missing months

- Historical gas prices are the only data used; basic supply and demand issues that underlie energy prices are not addressed in the modeling
- There is no simulation of supply and demand, but rather historical price relationships are estimated and assumed to continue in the future
- In some Rocky Mountain states (UT, WY, MT, and ID) where no strong relationship was apparent from the data, simple markups are used for market hub and transportation differentials as in the Council’s earlier methodology
- The sources of the price data is *Natural Gas Week* for hubs (Henry Hub, AECO, Rockies, San Juan, Permian, and Sumas) and some burner tip areas (northern and southern CA)
- The source of the price data is the EIA’s “State Energy Price and Expenditure Report” and “State Energy Data Report” for other burner tip areas
- From both sources, monthly data were used from January 1989 to September 2003.  Some data series had missing months

- 2 Complete methodology description is found in the NWPCC staff paper “Developing Basis Relationships Among Western Natural Gas Pricing Points”

## The Council used simple linear regression to model the historical Henry Hub and regional hub price relationship

- The Council assumed this linear relationship would be the same in the future

- _FOR DEMONSTRATION ONLY_

- _Description of the NWPCC methodology for getting 2008 burner tip area prices_

## The Council used their 2008 Henry Hub price to get the 2008 regional hub price

- 1.  Start at the 2008 Henry Hub price on the x axis

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

- 3.  The corresponding 2008 regional hub price is on the y axis

- _FOR DEMONSTRATION ONLY_

## The Council also used linear regression to define the historical relationship between regional hub price and burner tip area price and to get the 2008 burner tip area price

- a.  They fit a linear regression model to the historical data for each burner tip area

- b.  They assumed this linear relationship would be the same in the future

- c.  They used their 2008 regional hub price to get the 2008 burner tip price

- _FOR DEMONSTRATION ONLY_

## The direction of the solid arrows on the next slide show two
things:

Which historical prices were used for modeling which gas price relationships.  

	For example:
Historical Henry Hub and AECO prices were used to linearly model AECO prices
Historical AECO, Rockies, and N CA prices were used to linearly model N CA prices
Historical Rockies and UT prices were used to estimate the historical price differential between the Rockies hub and UT (recall that UT, WY, MT, and ID do not use the linear regression methodology)  

Which forecasted prices drive the forecasts of other prices.  

	For example:
The 2008 Henry Hub price is used in the AECO model to get the 2008 AECO price
The 2008 AECO price and the 2008 Rockies price are both used in the N CA model to get the 2008 N CA price  
The 2008 Rockies price is added to the Rockies/UT differential to get the 2008 UT price

The dashed arrows show which 2008 burner tip area price is
used for each SSG-WI bubble

E.g., the PNW East 2008 price is used for both the NW East and the Alberta SSG-WI bubbles

- things:
- Which historical prices were used for modeling which gas price relationships.
- 	For example:
- Historical Henry Hub and AECO prices were used to linearly model AECO prices
- Historical AECO, Rockies, and N CA prices were used to linearly model N CA prices
- Historical Rockies and UT prices were used to estimate the historical price differential between the Rockies hub and UT (recall that UT, WY, MT, and ID do not use the linear regression methodology)
- Which forecasted prices drive the forecasts of other prices.
- 	For example:
- The 2008 Henry Hub price is used in the AECO model to get the 2008 AECO price
- The 2008 AECO price and the 2008 Rockies price are both used in the N CA model to get the 2008 N CA price
- The 2008 Rockies price is added to the Rockies/UT differential to get the 2008 UT price
- The dashed arrows show which 2008 burner tip area price is
- used for each SSG-WI bubble
- E.g., the PNW East 2008 price is used for both the NW East and the Alberta SSG-WI bubbles

## Gas Price Drivers

- AECO

- Rockies

- Permian

- San Juan

- Henry Hub

- PNW East

- N CA

- Sumas

- PNW West

- UT

- WY

- MT

- ID

- S NV and N NV

- S CA

- AZ

- NM

- CO

- S CA, San Diego, Imperial CA, LADWP, Mexico-C

- Bay Area, Sierra, PG&E

- 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

- NW East, Alberta

- _SSG-WI Topology Bubbles_

- _Burner Tip Areas_

- _Regional Hubs_

- _Gas Price Drivers_

## Considerations

- By using a linear model, as opposed to a constant markup, this method uses more of the information in the historical data and gives a more precise forecast of gas prices, assuming the linear model is a good one
- This method assumes that linear pricing relationships used to describe historical data endure into the future
- The method also assumes that prices at burner tip areas are:
- Driven by regional hubs as shown
- Modeled appropriately using linear relationships
- The method does not take account of the time dimension of the historical data

- _Considerations_

## Slide 10

|   | Market Hub and Tranportation Differential (Burner Tip Area - $5 Henry Hub) (in 2005$/MMBtu) |  |   | Market Hub and Tranportation Differential (Burner Tip Area - $5 Henry Hub) (in 2005$/MMBtu) |  |
| --- | --- | --- | --- | --- | --- |
| Burner Tip Area (reformatted as SSG-WI Topology Bubble) | Used in preliminary 2008 Base Case | Proposed for use in final 2008 Base Case | Burner Tip Area (reformatted as SSG-WI Topology Bubble) | Used in preliminary 2008 Base Case | Proposed for use in final 2008 Base Case |
| SAN DIEGO                         | $0.43  | $0.03  | BONZ | ($0.06)  | ($0.27) |
| SO CALIF                          | $0.49 | $0.03  | BHILLS | $0.00  | ($0.21) |
| IMPERIAL CA                       | $0.18  | $0.03  | LRS | $0.00  | ($0.21) |
| PG AND E                         | $0.43  | $0.07  | WYO | $0.00  | ($0.21) |
| BAY AREA | $0.43  | $0.07  | SW WYO | $0.00  | ($0.21) |
| LADWP                            | $0.55  | $0.03  | BHB | $0.00  | ($0.21) |
| SIERRA                           | $0.33  | $0.07  | YWTL | $0.00  | ($0.21) |
| MEXICO-C                       | $0.49  | $0.03  | MONTANA                          | ($0.08)  | ($0.30) |
| WAPA L.C.                        | $0.17  | ($0.26) | JB | ($0.06)  | ($0.27) |
| NEVADA                           | $0.18  | ($0.26) | KGB | ($0.06)  | ($0.27) |
| ARIZONA                          | $0.17  | $0.27  | OXBOW/HELLS CANYON | ($0.06)  | ($0.27) |
| IPP | $0.17  | $0.27  | MDPT BOISE & SNAKE | ($0.06)  | ($0.27) |
| NEW MEXICO | $0.08  | ($0.22) | NW WEST | $0.52  | $0.13  |
| COL E | $0.11  | ($0.53) | NW EAST | ($0.06)  | ($0.10) |
| COL W | $0.11  | ($0.53) | B.C.HYDRO                        | ($0.26)  | $0.13  |
| UT N | ($0.06)  | ($0.27) | ALBERTA                          | ($0.51)  | ($0.10) |
| UT S | ($0.06)  | ($0.27) |   |   |   |