Natural gas is injected into pipelines every day and transported to millions of consumers all over the country. Virtually all the gas comes from either domestic gas well production, imports, or withdrawals from storage facilities. During the summer, domestic gas well production and imported gas can more than satisfy customer demand, and excess supplies are placed into storage facilities. In the winter, demand for gas generally exceeds production and import capabilities, so withdrawals from storage are used to provide the extra gas needed to meet customer requirements.

Customer Groups

Natural gas is consumed by residential, commercial, industrial and electric utility customers. Residential and small commercial customers use gas in relatively small quantities (primarily for space heating and cooking). They tend to pay the highest prices per unit of gas but generally enjoy uninterrupted service. Industrial and electric utility users generally use gas in larger volumes (for uses such as process heating, crop drying, and as fuel for powerplants). Although larger users usually pay lower prices per unit of gas, their purchase contracts tend to be shorter-term and interruptible, and many switch to other fuels if natural gas becomes scarce or too expensive.

Components of Natural Gas Prices

The price of natural gas paid by consumers is based primarily on the volume of gas delivered and is made up of three parts:

• transmission costs - for moving the gas by pipeline from its source to the customer's local area

• distribution costs - for bringing the gas from within the local area to the user's facility

• the cost of the gas itself.

On average, the cost of the gas itself (the commodity price) is less than half the total cost for low-volume users, such as residential and some commercial customers. Seasonal changes in the cost components can lead to unusual outcomes, such as lower prices per unit in the winter than in the summer. The price of gas includes fixed cost components in transmission and distribution that are charged regardless of the level of consumption. As a result, the per unit cost of gas may increase as the amount of gas consumed declines. Lower wellhead prices of gas, generally seen in non-peak summer months, are often insufficient to offset an increase in per unit prices resulting from fixed costs being allocated over a smaller number of units consumed. Therefore, even though overall costs are lower for residential users during the summer months, their per unit costs are often higher.

Prices might go up temporarily because:

• Prolonged or severe winter weather increases demand in the high- consumption winter months.

• Diminished volumes of natural gas in storage reduce volumes that can be withdrawn and, especially in the early months of the heating season, make operators cautious about removing gas from their diminishing inventory.

• Constraints may occur along the pipeline delivery system.

• Operational difficulties restrict supplies to customers (e.g., production valves freeze, equipment breaks down).
  

The impact of price volatility varies among consumers based on their overall service needs. Prices to residential customers tend to be much more stable than for commercial and industrial users. Residential customers see less variation because their bills reflect monthly average prices, which do not fluctuate as much as daily prices. Also, many residential customers stabilize their monthly bills by participating in yearly budget plans provided by their local gas distribution companies. Residential prices are within the jurisdiction of State agencies, and regulatory provisions generally tend to inhibit the impact of market conditions. As regulatory reform proceeds at the State level, residential customers may experience more price variations. On the other hand, electric utilities and other large consumers, who often rely on short-term market purchases or arrangements without fixed price terms, have been dealing with fluctuating natural gas prices for years. These consumers often contract in this way because it offers the possibility of cost savings and they can switch to other fuels if necessary.