Fuels Competition and Gas Pricing in New England and the Pacific Northwest
Authors: Mitchell G.M. 
Published: December 2007

Editor's Note: The following is the second in a series of four articles concerning inter-industry competition in the domestic fuel market. Published in consecutive issues of JOURNAL OF PETROLEUM TECHNOLOGY, each of the papers approaches the widely (and often heatedly) debated subject from the viewpoint of a different segment of the energy producing-marketing field. Obviously, the ideas and opinions expressed do not necessarily reflect the views of the majority of SPE members but, rather, are presented solely for the purpose of providing the reader with further insight into this controversial problem.

This study is based on the premise that the major growth in natural-gas sales, in areas at the extremities of transmission systems, must come from new residential customers. A comparison of industrial fuel prices supports this premise. New-residence loads in the Pacific Northwest and New England areas of the United States are illustrated, and comparisons are presented for serving these loads with current gas rates and competitive energy sources. These comparisons indicate the sharp competition between energy suppliers that already exists in these areas. Costs of production, transmission and distribution for each energy source are segregated and compared. Magnification of field price increases to residential consumers through the loss of summer consumers who normally help to share annual service costs is illustrated. A multiplying effect appears as gas rates for marginal sales become noncompetitive and fixed costs on existing systems must be supported by higher rates for the remaining sales. This multiplying effect is computed to show the effect of a 10 cent/Mcf field increase in the Pacific Northwest and New England. Potential cost changes in the gas industry beyond the wellhead arising from peak shaving and gas storage, tankering and importation, and customer load-factor changes are evaluated. Potential changes affecting the other energy sources also are summarized. The conclusion is then developed that the existence of price competition has already become very real and prices of fuels competitive with gas cannot soon be expected to increase materially. There is an admitted need for increasing gas field prices to find ever in ore elusive reserves which hopefully can be offset by the cost reductions provided by new techniques, declining rate bases and intensified promotion.

Introduction

Recent years have seen steadily mounting pressure for continuing increases in the field cost of natural gas in order to maintain reserves commensurate with expanding gas markets. Strong counter-pressures have developed among consumer interests as this spiral became apparent. Many distributing utilities today can no longer sell on the simple appeal of a wide dollar saving to the customer. Charges and counter-charges within and without the industry have been exchanged privately-and all too often, publicly. Valuation of the competitive position of natural gas and the effect of increasing field prices, when defined in specific quantitative terms, produces different answers, of course, in every utility's service area. The major price problems developing for the industry are well illustrated, however, by the situations developing at the terminals of the major transmission systems, i.e., New England and the Pacific Northwest. Quantitative examination of these sharply competitive markets at least provides some definitive context for further consideration of the industry's future. The industrial market for gas at many locations distant from the source areas is already too competitive for further high-volume development other than for low-margin, off-peak sales. This competition is illustrated later. Home-heating, then, is the really big-volume, profitable market that the industry in these areas must shoot for. The two cases in this study typify the current competitive positions of natural gas, fuel oil and electricity in the New England and Pacific Northwest new-residence markets. Although the cases directly represent only a minor percentage of U.S. gas sales, they illustrate the situation that is developing for the industry as it becomes more heavily dependent on low-load-factor heating sales. Also, it should be remembered that failure of the industry to compete at the distant locations can only result in lesser ability of these areas to carry fixed costs of transmission. In turn, this would result in heavier burdens and lesser ability to compete at locations back down the lines.

JPT

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