Balmy temperatures have thrown a wrench into the plans of gas utilities that base their business on expectations of normal weather patterns: They have pools of natural gas ready to go for a cold winter, then re-fill their inventories during the hot summer.
By one utility’s calculations, the average Pittsburgh-area customer this December has used 32 percent less gas than normal for home heating.
The good news is that these regulated companies, which are required by the state Public Utility Commission to take a years-long view of revenues and expenses, are largely immune to the short-term whims of weather events. The setup means that although customers pay monthly utility bills based largely on how much fuel they consume, utilities’ base rates won’t change in the short term.
“While winters may be colder or warmer relative to normal, over time they balance themselves out,” said Joe Gregorini, vice president of rates and regulatory affairs for Peoples Natural Gas, a utility serving 700,000 customers across 18 counties in Western Pennsylvania.
This year is a great example of the leveling effect, Mr. Gregorini said.
Earlier this year, Pittsburgh experienced its second-coldest February on record dating back to 1871, with an average temperature of 18.5 degrees Fahrenheit, according to the National Weather Service.
“Now we’re at the back end of the year, it kind of balances out with this warm stretch,” he said, adding that the utility’s weather expectations are based on 20-year rolling averages.
Utilities make money on the delivery service, not on the price of natural gas. Most of their money comes from delivery rates based on how much gas customers use. Any time they want to raise the base rates, they must provide evidence to justify their reasoning before the utility commission in a proceeding that typically lasts nine months.
The commission has the final say. In many instances, it has approved a base rate increase much lower than originally requested.
For Peoples, the terms of its 2012 takeover of Equitable Gas prevent the company from asking for another rate increase until at least 2018, Mr. Gregorini pointed out.
Meanwhile, Columbia Gas of Pennsylvania has negotiated with regulators a billing mechanism that allows it to slightly adjust monthly heating bills for abnormally hot or cold weather.
Through a so-called “weather normalization adjustment,” the company credits or debits a certain amount depending on how much temperatures deviated from normal during the months of October to May, said Jennifer DuBois, director of communications and community relations for Columbia, which has 421,000 customers across 26 counties.
For example, if weather is colder than normal and utilities are collecting more revenue than expected on average, customers receive a credit. If demand drops because of warm temperatures, the company is allowed to shift some of the cost to customers.
In each of the previous two winters, both of which were colder than normal, the average Columbia residential customer received roughly $33 in credits throughout the seven-month period, Ms. DuBois said.
So far this winter, Columbia customers have been billed at a slightly higher level. The average customer paid 23 cents more in October and $3.48 more in November. December’s adjustment has not yet been calculated.
“It protects consumers, and it protects the company,” Ms. DuBois said. The company is in its eighth year of a nearly $1 billion effort to expand and replace distribution pipelines in Pennsylvania.
“It costs $1 million for every mile of installed pipeline, and we rely on cold weather to help us recover that investment,” she said. If it were too warm for years on end, “then that model is unsustainable” for financing those projects.
Peoples does not have such a mechanism built into its rates, Mr. Gregorini said.
Overall, customers are seeing significant home heating savings this year due to not only warm weather but also low commodity prices.
For years, producers have used the hydraulic fracturing technique to drill natural gas — especially from Pennsylvania’s Marcellus Shale formation — to the point where supply far exceeds overall demand. The technique of hydraulic fracturing allowed oil and gas producers to tap previously unreachable reserves locked in shale rock formations across the United States.
Regional gas storage facilities are either full or approaching capacity, utility officials said. Columbia has told pipeline operators it cannot accept any more gas at its facilities for six days starting Wednesday and continuing through next Monday.
In October, the U.S. Department of Energy predicted natural gas customers would spend 10 to 17 percent less than in the previous two winters, thanks to low gas prices and the El Nino Southern Oscillation weather formation, which is responsible for highs in the 60s around Pittsburgh.
At the end of the day, the low natural gas prices coupled with the low usage rates end up as a double-whammy for competitive natural gas drillers trying to sell their commodity on the daily market.
But regulated utilities can afford to take the heat.
“Our folks have a plan,” Mr. Gregorini said. “For the most part, we expect to withdraw all the gas by the end of the winter.”
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This article was written by Daniel Moore from Pittsburgh Post-Gazette and was legally licensed through the NewsCred publisher network.