Natural Gas Prices
Natural gas prices are set in an open and competitive market and are influenced by many variables throughout North America. These variables include supply and demand, production and exploration levels, storage injections and withdrawals, weather patterns, pricing and availability of competing energy sources and market participants’ views of future trends in any of these or other variables.
The NYMEX natural gas futures contract is widely used as an international benchmark price, including here in Alberta. The futures contract trades in units of 10,000 million British thermal units (MMBtu). The price is based on delivery at the Henry Hub in Louisiana, the centre of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s prolific gas deposits. The pipelines serve markets throughout the US East Coast, Gulf Coast and Midwestern US.
It is important to realise that the NYMEX does not set the prices of the traded commodities. Market forces determine the prices through an open and continuous auction on the exchange floor.
The AECO “C” spot price, which is the Alberta gas trading price, has become one of North America’s leading price-setting benchmarks. (The above link will take you to the Natural Gas Exchange Inc (NGX) website for AECO-C and other market prices)
The Alberta Natural Gas Reference Price is a monthly weighted average field price of all Alberta gas sales, as determined by the Alberta Department of Energy through a survey of actual sales transactions. This price is used for royalty purposes.
In Alberta, there are two major companies responsible for providing regulated natural gas service: Direct Energy Regulated Services (providing gas for customers of ATCO Gas North and South) and AltaGas Utilities. Their natural gas rates are set at the beginning of each month, subject to verification by the Alberta Utilities Commission. These rates reflect the forecast market price for the upcoming month, correcting for any amount that is over- or under- collected from previous months. Natural gas rates are “passed through” (i.e. the gas rate reflects the costs to purchase natural gas and the costs involved with managing that gas supply). There is no profit or mark-up on regulated natural gas rates.
How are natural gas rates determined in Alberta?
The price of natural gas is based on supply and demand. A number of factors influence natural gas prices, such as weather and storage levels. The government, the utility companies and the regulators do not have any control over natural gas prices, which have tended to follow the North American wholesale market since 1985.
Regulated monthly natural gas rates are based on expected natural gas prices for the month and any balances or credits carried forward from prior months. It is a flow-through cost that is passed on directly to consumers. The rate is called the Gas Cost Recovery Rate (GCRR) or the Gas Cost Flow Through Rate (GCFR).
As Alberta’s natural gas rates are set on a monthly basis they are responsive to changes in market prices. While rates can rise when natural gas prices are high, they also respond to quickly falling market prices. Natural gas prices tend to be higher in the fall and winter months when colder weather increases demand and prices tend to fall in the summer months when demand decreases.
How are natural gas rates set in other Canadian provinces?
Utilities across Canada use a variety of short- and long-term purchasing options to obtain their natural gas at market prices. In Alberta, rates fluctuate monthly and adjustments for differences between rates and actual costs are made within two months. Other provinces typically review and approve rates less frequently, evening out market price changes over longer time periods.
The cost of transporting natural gas is also factored into natural gas rates. For example, transportation adds about a dollar per GJ to the delivered price of natural gas in Ontario.
Do consumers in other Canadian provinces pay less than Albertans?
According to Statistics Canada, Alberta residential consumers paid approximately 30 per cent less before rebates for their natural gas than the average Canadian in other provinces in 2007. Even without rebates, Albertans have typically paid less over the past two years than consumers in other jurisdictions.
What happens if natural gas prices rise? What can consumers do?
Natural gas prices are set in an integrated North American marketplace where the price of natural gas is determined based on supply and demand.
Monthly natural gas rates fluctuate due to changes in wholesale natural gas prices. Consumers concerned about price volatility have the option of entering into an equalized billing program through their gas supplier, which averages natural gas bills over the year. Consumers also have the option of stabilizing their bills by purchasing natural gas at fixed prices from competitive retailers.
In addition, Albertans that improve their energy efficiency could benefit from long-term savings on their natural gas utility bills.