Figuring out whether you'll be better off to lock in your natural gas costs for the winter or riding the ups and downs of the market is about as easy as predicting the weather for the next five months.
In other words, it isn't easy. But that's the tough choice facing Western New Yorkers who heat their homes with natural gas from National Fuel Gas Co.
You can pay for your natural gas the way you always have, by riding out the monthly fluctuations in gas prices. Or you can sign up for National Fuel's new fixed-rate pricing option that will freeze natural gas costs from December to April at a level that is 20 percent less than the average from last year, but 30 percent higher than prices were two winters ago.
For many customers, it will come down to a choice between price stability and taking a chance that natural gas prices, which currently are running even higher than they were a year ago, will come down as winter approaches.
"Are you the kind of person who would rather have some predictability, or are you comfortable riding out the month-to-month fluctuations?" asks Donna L. DeCarolis, a National Fuel spokeswoman.
And natural gas prices, which make up about half of your total gas bill and are passed on to customers at National Fuel's cost, sure can fluctuate.
Remember last winter and the surge in natural gas prices that pushed gas costs to their highest level in a decade last December? That spike in gas prices, which came during what traditionally is the time of year when residents use the most gas to heat their homes and apartments, meant December prices were 25 percent higher than the year before and put a big squeeze on many budgets.
Prices stayed high through January, running 16 percent higher than they were in January 1996. By February, gas prices were only slightly higher than the year before and, when March rolled around, they were sharply lower.
So let's pretend that this coming winter is a carbon copy of last year's heating season. If you'd signed up for National Fuel's fixed-price plan, at the same rate being offered this year, you would have saved $32 in gas costs during January, Ms. DeCarolis says. But because gas prices fell sharply as the winter came to a close, you would have paid $22 more than the market price during March.
"The bottom line is they're going to win some months and lose some months," says William J. Daley, regional sales manager for Plum Street Energy Marketing, which markets natural gas to larger customers, such as businesses and apartment complexes.
In all, an average National Fuel residential customer, who uses about 119,000 cubic feet of gas and spent $1,055 last winter, would have saved about $31 if the fixed-price plan had been in force.
But last winter was far from normal. Prices were highly volatile and rose to levels well above the averages for the previous three years, when gas costs were held down by a persistent oversupply of gas.
Up to 100,000 National Fuel residential and commercial customers, or about 20 percent of its customer base, can sign up for the program on a first-come, first-served basis. About 2,400 customers had signed up by late last week. The deadline is Nov. 23.
So how can you decide which option is best for you? Experts say you'll need to consider a handful of issues concerning your own budget and the natural gas market.
On the most basic level, the decision to go with the fixed-price option could come down to whether you prefer to know in advance how much you'll be paying for your natural gas this winter. While the total amount of your bills still will fluctuate based on how much gas you actually use, the fixed-price option will smooth out the volatility you otherwise would face from rising or falling gas prices.
"The good thing about a fixed-price option is that you know what your costs will be and you know it's going to be less than last year," says Robert J. Kreppel, the president of National Fuel Resources Inc., National Fuel's energy marketing subsidiary.
That's bound to be appealing to many residents, because natural gas prices historically are the most volatile during the winter months, when the flow of gas can be limited during severe weather. That way, you'll know your gas costs will be 20 percent less than last winter.
What's more, the fixed-price option, which centers around the variable gas adjustment charge on your monthly bill, would allow you to lock in a gas adjustment charge of $1.3832 per 1,000 cubic feet, which is below the average of $2.17 per 1,000 cubic feet in October.
The natural gas component of your monthly bill is made up of two elements: A base gas charge of $3.1498 per 1,000 cubic feet, plus the gas adjustment charge, which is either added to, or subtracted from, the base cost, depending on fluctuations in natural gas prices.
The risk, however, is that natural gas prices could drop sharply. That would mean customers choosing the fixed-price option would end up paying more for their gas this winter than their neighbor who decided to pay the market rate from month to month.
After all, Plum Street's Daley says, National Fuel's fixed-price option is 30 percent higher than the average gas price of two winters ago and almost 43 percent higher than the average from the last four winters.
"We're creating a benchmark that is very high," Daley says. "You're taking 20 percent off of a very high number."
"I think the primary thing they should consider is stability and price shocks, but they shouldn't neglect the fact that prices now are at a relatively high level," says Michael German, a New York State Electric & Gas Corp. executive vice president who runs the firm's natural gas business.
That brings us to the even stickier problem of trying to predict where natural gas prices are headed.
The current gas market
For the moment, natural gas prices are high, running well above where they were at this time last year. "You have everyone trying to avoid the very high prices we had last year and everyone's a buyer," Kreppel says.
But there's no guarantee that today's high gas prices will stay at their lofty levels, which currently see gas trading at $3.47 per 1,000 cubic feet at the Henry Hub in Louisiana, a key natural gas distribution point, compared with $2.63 a year ago. The Henry Hub prices do not include the cost of shipping the gas to Western New York and storing it until it's needed.
Because prices are so high today, German says NYSEG's commercial and industrial customers, who had been scurrying to lock up their gas supplies at fixed prices earlier in the year when prices were lower, now are shying away from making any commitments.
"Right now, most of our customers have opted not to go with the fixed price option because prices are high right now," German says.
Experts say natural gas prices are driven by two main factors: How cold the weather gets and how much gas is stored away to be drawn upon when temperatures drop and the demand for gas soars.
The weather factor
If you think we're heading into a brutally cold winter, then this is the time to lock up your gas prices at a fixed rate.
But if you think this is going to be a warm winter, then there's a good chance that market prices will come down, which would make the fixed-rate option less attractive.
"Weather is going to be an overwhelming factor," German says. "You're really making a guess on which way the weather is going to go."
Of course, predicting the weather two days from now is hard enough, let alone coming up with a forecast for the entire winter.
Complicating matters even more is El Nino, a phenomenon that warms the waters of the Pacific Ocean and disrupts the normal flow of the strong upper air jet stream winds that steer weather patterns around the world. It tends to lead to cool and wet weather in the South and warmer-than-normal temperatures in the North.
If El Nino, which experts predict will be unusually strong this year, does indeed lead to warm weather in the North, natural gas consumption could drop sharply. And that would put downward pressure on prices as demand ebbs.
"If we get a couple of warm months, we could see prices drop like a rock," Daley says. "That's your greatest risk. If the market drops like a rock, you may find yourself locked into something that isn't that attractive."
The other big factor influencing natural gas prices is how much is tucked away in the nation's storage facilities. Low gas inventories were a driving force behind last year's price spike, when the the record cold weather during the 1995-96 winter drained supplies to all-time low levels and supplies were slow to recover.
This year, storage levels don't appear to be a problem. Gas inventories are up 4.5 percent from last year and the amount in storage already exceeds the 2.73 billion cubic feet on hand last Nov. 1, which is considered to be the start of the heating season. With two more weeks of injections still to go, U.S. storage is at 87 percent of capacity, compared with 84 percent a year ago, according to the American Gas Association.
"Storage levels are about where they should be at this time, so they shouldn't be overly positive or negative," German says.
Put the outlook for a warm winter and adequate gas supplies in storage and it's quite possible that prices could be heading for a fall. The U.S. Energy Department, for one, is predicting that natural gas prices will run at least 30 cents per 1,000 cubic feet below last year.
But if one of those factors doesn't come through, prices could stay high. "It's really going to come down to your philosophy on budgeting and how cold of a winter you think it's going to be," Daley says.