Edition 1

F E D E R AL E N E R G Y R E G U LAT O R Y C OMMI S S I O N

1 2 •0 8•2005

“Effective conservation must start with early 

consumer awareness of the high level of gas

prices. Under most circumstances, the consumer

receives a price signal after consumption, when

the consumer receives a bill from the gas utility. 

If the consumer understands ahead of time that

gas prices will be high this winter, they are more

likely to conserve.”

Chairman Joseph T. Kelliher

High Natural Gas Prices:

The Basics
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Before the hurricanes, prices rose

because supply fell compared to demand.

Natural gas production in the United States has fallen

slightly in the past few years, and imports have grown only

slightly. Meanwhile, demand continues to grow, both from

the natural growth of the economy and from rapid growth

in the gas-fired sector of electric generation. These basic

forces of supply and demand have led to price increases

every year since 2002, although never as much as in 2005.

Natural gas prices have risen significantly in 2005, trading

for as much as $16.00 per MMBtu in national productionarea spot markets during the early fall. Gas prices were rising even before Hurricanes Rita and Katrina, but without

question these two natural disasters greatly affected those

prices. Before the hurricanes, prices rose about 50 percent

(from around $6.00 at the beginning of the year to about

$9.00/MMbtu). After the hurricanes, they rose by as much

as another 65 percent. Futures markets suggest that prices

are likely to remain high during the winter.

Natural gas prices have reached

historically high levels.

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

May Jun Jul Aug Sep Oct Nov Dec

Natural Gas Price

The hurricanes worsened the underlying

tightness of supply and demand.

By shutting in a significant part of the Nation’s production

for the year, supply tightened. So far, the hurricanes have

shut in about 500 billion cubic feet (Bcf) of gas, almost three

percent of the Nation’s annual production. Recovery efforts

have succeeded in getting more than 70 percent of Gulf of

Mexico production on line. Nonetheless, about 2.65 Bcf per

day of gas production remains shut in today. The 2005 

hurricanes were substantially more destructive than

Hurricane Ivan in 2004.

Even with supply disruptions, companies continued to fill

gas storage against the possibility of a cold winter. That will

help protect the Nation against problems this winter,

although it put continuing upward pressure on prices in the

weeks after the hurricanes. Storage is now at relatively high

levels historically. However, with significant levels of 

productive capacity still shut in, supplies through the winter

are likely to remain tight. As a result, forward prices for the

winter remain higher than before the hurricanes.

Henry Hub Prompt Month Prices

Derived from Platts GasDat.

F E D E R AL E N E R G Y R E G U LAT O R Y C OMMI S S I O N

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2,000

4,000

6,000

8,000

10,00

Wilma landfall

10/24/05

Ivan landfall 9/15/04

Rita landfall

9/24/05

Katrina landfall

8/29/05

MMcf/day

MMS Report Day

1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101

Daily Shut-In Natural Gas, Outer

Continental Shelf

Derived from Mineral Management Service (MMS).
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What is the Commission doing to respond

to high gas prices?

The Commission is acting to make sure that natural gas prices

reflect the true balance between supply and demand, and not 

artificial constraints in the system or the exercise of market power.

It has:

• Issued orders immediately after the hurricanes that let 

market participants move gas in new ways that avoided 

bottlenecks caused by the hurricane damage.

• Approved applications for a substantial expansion of the

Nation’s LNG terminals for overseas gas.

• Shown a strong record of approving applications for new

pipelines both quickly and in an environmentally 

responsible way.

• Established a strong monitoring system for the market to

make sure that it detects any market manipulation that

might arise during this time of high prices. 

• Strengthened its enforcement policy, proposing new market

manipulation rules and implementing its new civil penalty

authority in a manner to encourage a strong compliance program.

• Improved its ability to detect new market manipulation by

implementing a Memorandum of Understanding with the

Commodity Futures Trading Commission. 

• Approved changes to pipeline tariffs to help pipelines force

compliance with operational flow orders to maintain system

reliability.

It is important to remember that the Commission does not directly

regulate most wholesale natural gas prices, which were decontrolled in 1989 to prevent the severe inefficiencies and shortages of

the 1970s from recurring. 

The best guess from the market is that prices will probably

be much higher this winter than last winter. Weather will

be the most important factor. With a normal winter, prices

are likely to remain high, but may not rise much further.

With an abnormally cold winter, prices could be considerably higher. Other factors will be the level of continuing

supply outages from the hurricanes (longer, larger outages

will tend to raise prices) and the amount of conservation

people practice (more conservation will put downward

pressure on prices).

In any case, natural gas prices have been among the most

volatile or “spiky” in the economy for years. They will 

continue to be volatile through the winter - in tight markets, small fluctuations in demand can strongly affect

prices.

What are gas prices likely to be this winter?

Areas that depend heavily on production

from the Gulf of Mexico are the most

affected.

These areas include the Northeast, the Southeast and even

Gulf coast areas in Louisiana, all of which have seen higher

prices than the rest of the continent since the hurricanes.

These areas are likely to remain the most vulnerable to

higher prices through the winter, especially if recovery of

Gulf of Mexico production is delayed. During a cold winter,

the Northeast (especially New York and New England) is

likely to see the highest prices, as the weather strains

pipeline delivery capacity to that region.

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What can you as a customer do about high

natural gas prices?

What will happen to retail bills this winter? You can cut your own natural gas bill through conservation –

see (for example) the Department of Energy’s website

http://energysavers.gov for practical suggestions on conservation. When you conserve, you also help everyone else,

since reduced consumption lowers stress on the whole gas

industry and tends to lower prices. 

Higher gas prices normally mean 

higher electric prices. 

In many electric markets, prevailing prices depend on the

cost of running the most expensive plant needed to meet

demand – most often a generating plant that burns natural

gas. In these situations, higher natural gas prices translate

directly into higher power prices. 

In any case, most of the new generating capacity built in the

last ten years burns natural gas. Rising gas prices increase the

cost of these units whenever they run. In most cases, such

cost increases are passed on to consumers.

Some current estimates (such as Energy Information

Administration’s) suggest that winter gas heating bills could

rise by 35-50 percent this year.

The Commission regulates only wholesale natural gas markets. State public utility commissions decide how retail rates

will be set. In practice, most retail bills are almost certain to

rise, although probably less than the spot price of gas. At least

two factors would lessen the effect of spot wholesale prices on

customers this year: 

• First, changes in the price of gas do not directly affect

transportation or distribution charges that make up

part of the customer’s bill. 

• Second, many gas utilities and suppliers have bought

part of their gas throughout the year, either by putting

some gas into storage or by entering into forward 

contracts. Customers would pay an average of what the

company paid through the year for such supplies. 

Federal Energy Regulatory Commission

888 First Street NE • Washington DC

20426

If you have any questions please contact:

Office of External Affairs

202-502-6088

1-866-208-3372 (toll free)

202-502-8371 (TTY)

customer@ferc.gov

Can imports make up the difference 

in supply?

The United States imports natural gas from Canada and from

overseas as liquefied natural gas (LNG). Canada is part of the

same basic market with the United States and sees the same

tightness between demand and supply that we do. For overseas shipments, the United States must compete with other

consuming countries in Europe and Asia. In many cases, foreign gas customers are state-owned and have long-term contracts. Such customers are often unwilling to sell gas on the

spot market even at very high prices. Even where spot markets are active (for example, the United Kingdom), prices are

sometimes higher than in North America. So it is impossible

to be sure how much LNG the United States will receive this

winter.

Disclaimer: This document reflects the views of the Commission

staff and not necessarily the views of the Commission itself or any

individual Commissioner.

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