The Ohio shale gas glut means Dominion East Ohio's SCO customers are in for a year-long bargain
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Dominion's Standard Choice customers are about to see prices tumble into the bargain basement. COLUMBUS, Ohio -- Consumers who buy natural gas through Dominion East Ohio will see monthly prices just 2 cents higher than the national commodity price, beginning in April.
Wholesalers battling in Dominion's annual auction Tuesday determining which of them will supply gas to Dominion's Standard Choice Offer customers bid down the retail price they will charge to that 2-cent margin.
The Public Utilities Commission of Ohio approved the auction results today. All of the winning bidders, who will be identified in 15 days, must charge their SCO customers the same price.
Since last April Dominion's SCO customers have been charged 43 cents over the price set at the end of every month on the New York Mercantile Exchange, or NYMEX. An SCO customer could look up the NYMEX monthly price and add 43 cents.
That's how much money -- 43 cents -- the wholesalers needed in the year-ago auction to cover their costs and make a profit. That was before shale gas production here ramped up as much as it has.
Tuesday's auction changes all of the math.
In April, that "retail adder" falls from 43 cents to just 2 cents over the NYMEX price. That's a 95 percent reduction.
The PUCO staff report to the commission released today showed eight companies fought through 15 rounds of bidding over the Internet before submitting final sealed bids in place of a 16th round. The staff recommended approval.
Getting to the bottom of the price collapse has to do with just how much shale gas is now available to Dominion East Ohio's system.
Because Dominion East Ohio's pipeline system is connected to the enormous glut of natural gas in southeast Ohio, northern West Virginia and southwest Pennsylvania, there is far more gas than needed, say analysts.
There is so much gas in the region that producers here are unable to charge the national benchmark price, which has for decades been the price at a major pipeline hub in Louisiana, which closely follows the NYMEX results.
Wholesalers fighting to sell gas in Dominion East Ohio's territory are not paying that price, either. They are currently paying about $1.12 less than the official NYMEX price. In other words, they are paying the NYMEX price minus $1.12 when they buy gas from the "pool" of gas feeding the Dominion East Ohio system.
And that is how they were able to bid down the amount they will add to the national benchmark NYMEX price, a price they are not currently paying. And at 2 cents over NYMEX, they will still be making money.
A PUCO staff member explained this to the five-member commission before they unanimously approved the auction. The 2-cent "retail adder" is the lowest since the PUCO began requiring Dominion's annual auctions in 2007, said staff energy specialist Roger Sarver.
"The bidders incorporated into their retail price adjustment their access to local production in the Marcellus and Utica ... [that] they can purchase and get into Dominion's system," he said.
In an email interview later, Jeff Murphy, a Dominion vice president, agreed.
"The tremendous increase in natural gas production from the Utica and Marcellus shale formations has caused a significant reduction in the price of the gas delivered to our system. Our market provides a great outlet for that gas, and suppliers have wisely taken advantage of its availability."
Before the PUCO vote, Chairman Thomas Johnson urged quick passage. "Let's second this before it changes," he said in response to a second vote offered by Commissioner Steven Lesser.
Here's the math to show just what the 2-cent deal means to Dominion's SCO customers.
Dominion's January-February SCO price, which ends today, has been $3.62 for every 1,000 cubic feet they have bought.
The Public Utilities Commission of Ohio approved that rate last month. Had the new auction results been in effect, the SCO would have been $3.21 per Mcf.
Dominion's February-March SCO price, which begins Thursday, will be $3.30 per Mcf
Under the new auction, in which the "retail adder" is 2 cents rather than 43 cents, the price would be $2.89 per Mcf. (That's the NYMEX February price of $2.87 plus a "retail adder" of 2 cents, or $2.89.
The Ohio Consumers' Counsel, the agency which fought for the annual wholesaler auctions -- which were opposed by the suppliers -- said the results show the advantage of competitive markets over old-fashioned regulated prices.
"At a time when Ohio's electric utilities are seeking re-regulation and subsidies from customers, Ohio's natural gas utilities continue to show the benefits of using competitive markets to lower Ohioans' natural gas bills," said Scott Gerfen, spokesman for Consumers' Counsel Bruce Weston.
Looking ahead, consumers will continue to benefit for many months.
NYMEX natural gas contract prices do not even reach $3 until November, and then hover in the $3.30 to $3.40 range over the winter. Those prices can and do change, but analysts do not see a return to scarcity and price spikes that occurred a decade ago.
Customers who are served by Columbia Gas of Ohio will not see anything like the Dominion discount. This is because wholesalers supplying Columbia do not have access to the same pool of shale gas that supplies the Dominion system.
And Columbia does not have the extensive system of pipelines that Dominion has built, called a gathering system, that move local gas from wells into Dominion's Ohio transmission pipelines.
The annual Columbia wholesaler auction occurred two weeks ago and the resulting "retail adder" was $1.29. In other words, the bidding ended after wholesalers would not bid lower than $1.29 over the NYMEX price. That's how much they figured they needed to cover costs and turn a profit.
The $1.29 closing auction result was less than last year's auction that yielded a $1.40 retail adder. Much of that money pays for long-haul transmission fees moving gas from across the continent to Columbia's Ohio pipelines.