Copyright © American Gas Association, 2014. All rights reserved.

Financial and Operational Information Series

Volume 2014-06, June 2014

Issue:

Calculation Methodology and Rationale for Using Marginal Costs

in Determining Savings from Efficiency and Conservation

When calculating savings in energy cost from using natural gas appliances and considering 

conservation and efficiency efforts, some analysts simply multiply the average cost per unit of energy 

times the energy savings. This method of determination is inappropriate because only a part of the 

natural gas energy cost should be considered in this calculation. The typical commercial and 

residential rate is comprised of two components, the fixed (or customer) charge and the costs that vary 

by consumption. An example of a fixed charges are employee salaries, while the commodity cost (or 

purchased gas cost) is a variable, or marginal cost. The fixed costs are recovered in a bill regardless 

of the amount of gas consumed, as this fee represents a “readiness to serve” obligation of the utility. 

So only the marginal costs should be considered when calculating the impact of conservation efforts, 

which tend to happen, of course, at the margin of user consumption.

Local gas utility fixed charges are calculated and approved in jurisdictional rate cases and reported in 

the utility’s tariff. However, there are hundreds of tariffs, and collecting and then calculating the 

weighted average of this charge is cumbersome. The American Gas Association surveys its members 

on typical utility bills, including the bill sent out if the customer did not consume any gas that month. 

This “zero use” amount can be a surrogate for fixed costs – in most cases this zero use value matches 

exactly with the fixed cost in the reporting utility’s tariff.

Thus calculating the marginal cost for a customer’s bill for consuming 20 therms, for example, can 

follow the methodology: (Total bill – fixed costs) / 20 therms = marginal cost/therm.

Had the fixed costs not been deducted, the change in the operating cost for a customer upgrading an 

appliance would be overstated using the average cost methodology. The table below shows that the 

marginal cost per therm was, on average, about $0.332/therm lower than the average cost per therm 

for a residence that used 40 therms using the American Gas survey data.

Comparison of Average and Marginal Costs Assuming 40 Therms per Month

March 2013 June 2013 September 2013 December 2013

Average Cost/Therm $1.316 $1.271 $1.320 $1.448

Marginal Cost/Therm $0.969 $0.932 $0.992 $1.135

Difference/Therm $0.347 $0.339 $0.328 $0.314

AGA Survey, assumes 40 therms used in each month

AGA Contact: Bruce McDowell (202-824-7131) bmcdowell@aga.org

 Brendan O’Brien (202-844-7220) bobrien@aga.org

Representing America’s Natural Gas Utilities
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

AK $13.520 $13.530 $1.082 $0.969 $0.744 $0.631

AZ $11.160 $11.070 $11.160 $1.246 $1.228 $1.254 $0.967 $0.951 $0.975

CA $1.667 $3.333 $1.667 $0.982 $1.254 $1.092 $0.941 $1.171 $1.050

CO $10.650 $10.650 $10.370 $11.228 $0.897 $0.897 $0.878 $0.931 $0.631 $0.631 $0.618 $0.651

CT $14.333 $14.333 $14.333 $14.333 $1.654 $1.397 $1.444 $1.660 $1.296 $1.038 $1.086 $1.302

DC $8.000 $10.000 $9.900 $10.000 $1.275 $1.450 $1.303 $1.275 $1.075 $1.200 $1.055 $1.025

DE $13.000 $1.738 $1.413

FL $10.935 $12.350 $11.135 $11.135 $1.445 $1.684 $1.428 $1.429 $1.172 $1.375 $1.150 $1.150

ID $5.415 $3.415 $3.415 $5.410 $0.903 $0.870 $0.870 $0.952 $0.768 $0.785 $0.785 $0.817

IL $20.295 $17.766 $14.183 $18.477 $1.171 $1.139 $1.182 $1.333 $0.664 $0.695 $0.827 $0.871

IN $12.105 $12.105 $12.305 $12.105 $1.064 $1.176 $1.049 $1.101 $0.762 $0.874 $0.741 $0.798

IA $14.095 $14.095 $9.940 $9.940 $1.082 $1.114 $0.983 $1.012 $0.730 $0.762 $0.735 $0.764

KS $16.410 $16.543 $16.050 $16.125 $1.099 $1.193 $1.097 $1.080 $0.689 $0.779 $0.696 $0.677

KY $12.113 $12.530 $13.420 $16.988 $1.162 $1.323 $1.308 $1.316 $0.859 $1.010 $0.973 $0.891

LA $12.500 $12.500 $12.240 $16.785 $1.071 $1.100 $1.057 $1.717 $0.758 $0.788 $0.751 $1.298

MD $11.323 $11.985 $11.188 $12.000 $1.194 $1.190 $1.369 $1.265 $0.911 $0.891 $1.089 $0.965

MA $9.185 $10.188 $8.250 $8.943 $1.412 $1.167 $1.218 $1.469 $1.182 $0.913 $1.012 $1.246

MI $9.515 $8.060 $9.765 $9.187 $1.093 $0.900 $1.055 $1.103 $0.855 $0.698 $0.811 $0.873

MN $8.540 $8.750 $8.750 $9.000 $0.885 $0.979 $0.898 $0.928 $0.671 $0.760 $0.680 $0.703

MS $10.630 $10.630 $10.940 $10.850 $0.935 $0.935 $0.880 $0.980 $0.669 $0.669 $0.606 $0.709

MO $18.605 $22.277 $21.893 $20.310 $1.502 $1.330 $1.360 $1.618 $1.037 $0.773 $0.812 $1.111

NE $15.378 $14.380 $1.079 $1.193 $0.695 $0.834

NH $18.440 $17.310 $17.400 $1.748 $1.418 $1.629 $1.287 $0.985 $1.194

NJ $7.790 $7.637 $7.790 $7.790 $1.303 $1.279 $1.289 $1.183 $1.108 $1.089 $1.095 $0.988

NM $14.790 $13.720 $14.790 $12.903 $0.948 $1.053 $0.951 $1.034 $0.578 $0.710 $0.581 $0.711

NY $20.327 $20.567 $20.703 $20.719 $1.758 $1.750 $1.660 $1.725 $1.250 $1.236 $1.143 $1.207

NC $9.000 $8.000 $10.000 $9.000 $1.196 $1.073 $1.249 $1.268 $0.971 $0.873 $0.999 $1.043

ND $18.480 $18.480 $0.911 $0.935 $0.449 $0.473

OH $14.908 $15.003 $13.133 $22.905 $1.131 $1.273 $1.159 $1.138 $0.758 $0.898 $0.830 $0.565

OK $14.110 $13.210 $1.366 $1.211 $1.013 $0.881

OR $7.120 $7.120 $7.120 $8.130 $1.265 $1.265 $1.259 $1.241 $1.087 $1.087 $1.081 $1.038

PA $12.863 $13.690 $12.124 $13.106 $1.324 $1.330 $1.264 $1.286 $1.002 $0.988 $0.960 $0.959

RI $14.230 $14.230 $12.370 $1.584 $1.584 $1.516 $1.228 $1.228 $1.207

SC $8.000 $8.000 $8.000 $0.889 $1.042 $1.042 $0.689 $0.842 $0.842

TN $9.375 $6.725 $10.983 $11.250 $1.190 $1.056 $1.053 $1.231 $0.955 $0.887 $0.779 $0.949

TX $13.066 $14.910 $15.383 $14.024 $0.879 $1.026 $1.015 $0.994 $0.552 $0.653 $0.631 $0.643

UT $5.510 $0.959 $0.821

VT $19.130 $19.130 $19.130 $20.430 $1.828 $1.797 $1.778 $1.712 $1.349 $1.319 $1.300 $1.201

VA $12.477 $13.215 $11.278 $11.215 $1.253 $1.396 $1.204 $1.199 $0.941 $1.066 $0.922 $0.918

W A $8.290 $9.500 $9.495 $14.670 $0.964 $1.133 $1.133 $1.954 $0.757 $0.896 $0.895 $1.587

W V $8.990 $8.990 $8.990 $9.415 $1.061 $1.061 $1.061 $4.303 $0.836 $0.836 $0.836 $4.067

W I $9.266 $8.988 $14.048 $8.053 $1.003 $0.905 $1.028 $0.992 $0.771 $0.681 $0.677 $0.791

W Y $15.000 $15.000 $15.000 $13.275 $0.972 $1.052 $1.052 $1.082 $0.597 $0.677 $0.677 $0.750

Average $13.870 $13.560 $13.120 $12.550 $1.316 $1.271 $1.320 $1.448 $0.969 $0.932 $0.992 $1.135

Fixed Rate Total Rate Billed per Therm Marginal Rate Billed per Therm

AGA Marginal Cost Analysis Assuming 40 Therms per Month for 2013

State