Why gas prices are high

March 23, 2001|By Frank Heintz

THE QUESTION most asked of gas utility companies this year is: "Why is my gas bill so much higher than last year?" The answer isn't simple.

This winter, Baltimore Gas and Electric Co. and other utilities nationwide faced an unusual set of challenges that directly affected what we all pay for natural gas. But in the final analysis, it all comes down to limited supply and increasing demand.

The early part of the winter was much colder than a year ago, a reality that has made a bad situation worse.

As reported by the National Weather Service, December was 27 percent colder than normal in the Baltimore area. As a result, households, schools, hospitals and businesses used more natural gas this year than last year at this time. Multiply this by all of the other urban areas in the United States that experienced colder-than-normal weather, and the demand for natural gas soars.

Demand for natural gas can rise quickly, but bringing new gas wells into production takes time. It may take a year or longer before gas from a new well affects the market. This winter's quick increase in demand wasn't matched by new supply.

With the price of natural gas at near-record highs, producers now have a financial incentive to get more gas to market. As a result, the number of rigs drilling for new gas supply is now at an all-time high. This will eventually expand the gas supply and lead to lower prices.

The two factors that affect what you pay for natural gas -- the market price and the amount you use -- are up substantially this winter. High demand in a tight market equals rising prices, and the price will likely remain higher than we like until the supply-demand equation is brought back into balance.

BGE earns its living by operating the distribution system that delivers natural gas to our customers' homes and businesses, not by selling gas. For those customers who buy their gas supply through the utility, BGE sells the commodity at the going market price.

Even so, at BGE we do what we can to keep prices down. For example, we buy about 40 percent of our winter gas requirement during the summer when prices are historically lower. That means we buy less of the higher-priced winter gas.

Finally, some good news is at hand for consumers. With warming weather, the wholesale price of natural gas has begun to fall. This reduction will flow through to BGE's customers, with gas prices in March being one-third less than in February. Also, the warmer weather will reduce the quantity of gas needed by households.

Frank Heintz is president and chief executive officer of Baltimore Gas and Electric Co.

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