Tips for Preparing Upcoming Budgets
As the end of summer looms, our customer’s thoughts turn to budgeting for the upcoming year. But don’t worry – we’re here to help! We hope that you find our budget insights helpful in preparing a real-world budget.
The previous 2012/13 heating Season approached normal levels, however; it was 20% colder than the 2011/12 heating Season, which caused significant increases in consumption year-over-year. Natural Gas commodity pricing for this same period was also up by approximately 5%. These two factors caused Property Managers and Owners to experience budget shortfalls. The impact was greater for those who formulated budgets by simply repeating the previous year’s actual costs. Those who formulated budgets based on “normal” weather faired a bit better.
Marcellus and Utica Shale exploration and the resulting production have caused a local “Glut” of natural gas, depressing the market. This is the first time a long term significant source of natural gas has been developed where it is actually needed in a large populated area such as the Eastern States. The biggest problem is moving it to other regions and that is extremely good for our area.
Although there are numerous predictions about Natural Gas powered vehicles, Natural Gas fueled Electric Generation and exporting Liquefied Natural Gas (LNG), these items should not affect natural gas pricing for some time. Our belief is that Natural Gas Powered vehicles will not become a significant market force due to the cost of conversion and the slowness of manufacturers to offer the option. Fleet operators are another story and conversions will continue as long as Government Subsidies are made available but, this will not impact pricing.
Natural Gas Fueled Power Plants will eventually impact the market but long lead times in design and construction make this less of a concern in the short-term. Exporting LNG will ultimately impact the market by making natural gas a World Commodity and will cause competition with Japan and China which could push pricing much higher. This future possibility impacts speculation which can cause the markets to move. Despite all of this, we do not anticipate any significant increase in natural gas pricing in the next two to three years.
Local Marcellus Production has also caused a significant decrease in “Basis” (the adder to NYMEX on variable priced contracts) and depending on when a contract renews it should decrease delivered commodity pricing.
All Public Utilities are facing the reality of replacing aging infrastructure (metal piping) with newer longer lasting polymer pipe which creates an expected 5%-8% increase in Delivery Costs over the next two years. Additionally, Peoples Natural Gas is attempting to purchase Equitable Gas and the proposed acquisition will most likely impact pricing a few years out. If approved, the acquisition, along with other actions by the PA PUC, will impact any customer receiving a competitive rate from the utility and will cause increases in Delivery rates that could approach or exceed 30% within a few years.
Considering the above factors, budgeting for the upcoming year should come close to mirroring the previous year’s actual costs. The cost of last year’s colder weather should overshadow any immediate increase in utility costs. On a positive note, an overall reduction could occur if a supply contract is renewing during the next year due to a lower negotiated “Basis”.
ESI’s stands by our recommendation to stay on a Floating Price NYMEX contract where pricing follows the Market. Last year, over 99% of our customers accepted this advice, and avoided a higher Fixed Price fueled by Market Speculation.
As an aside for anyone owning Natural gas Rights; be aware that some lawyers are replacing hourly fees with a percentage of the Drilling Options and royalties. One of our customers told us about a lawyer whose fees when calculated would be in the Millions of Dollars. Beware; you are looking for legal advice, not a Partner.
The past winter was colder than the previous which caused the cost for electric heating to increase. However summertime air-conditioning costs should not be significantly different.
Electric generation will be the basis of our next “Energy Crisis” as there is no rush to build any new significant generating facilities. Wind Power as well as Solar Power, while sustainable, will never provide a significant portion of our requirements, especially on dark days with no wind. The problem is exaggerated by the current Administration and the EPA on a “mission” to shut down coal fired plants, which will significantly impact available Capacity. Increases in Capacity costs of up to 300% are being predicted over the next three years.
Since 2008, economic factors have caused a “glut” of available electric generation, and prices have been severely depressed. Now a combination of Governmental Rulings, along with plants being shut down due to poor profitability, will cause electric pricing to skyrocket. Should the economy ever fully recover, it is doubtful there will be sufficient Generation Assets or Capacity to ensure things will “return to normal”.
Actual costs for electricity will depend on your supply contract’s anniversary date and this should become a major portion of your annual Budget Forecast.
ESI recommends anyone coming off of an old supply contract allow for an increase of 15%. And now would be the time to think longer term with supply contract renewals if the new price offered fits within that 15% tolerance. ESI’s position on variable rate or market based electricity agreements has not changed. These contracts are misleading and often deceptive as they typically do not include items such as Capacity, Ancillary costs, RMR, and estimated PA Gross Receipts Taxes. ESI feels that these products are so detrimental to budgets that we do not offer them to customers.
If you have any questions or comments please do not hesitate to contact us a 412.364.6468.