Bunker Mentality Won’t Cut Energy Bills

By Benita M. Dodd

Hindsight being 20-20, traffic jams became the impetus for transportation solutions as Georgia’s population grew. Fortunately, the state can still pre-empt an energy jam fueled by Georgia’s growing population and economy.

Georgia homeowners are hot under the collar over high energy bills: Wasn’t natural gas deregulation supposed to promote competition and cut rates? Why is it that Georgia’s 2005 average residential natural gas rates are higher than the national average and lower only than Florida’s rates among Georgia’s neighbors? Why are Georgia’s 2005 average commercial and industrial rates higher than neighbors Florida, South Carolina, North Carolina, Tennessee and Alabama?

These are reasonable questions, and consumers deserve answers about foundering expectations. Clearly, the higher cost of energy in Georgia for commerce and industry puts businesses at a competitive disadvantage with lower-priced neighbors.

Clearly, we’re shooting ourselves in the foot by excluding viable options. Challenges of meeting federal air quality standards in Georgia mean new coal-fired power plants are mission impossible, as clean, cheap and efficient as they have become. Campaigns to add the cleanest and most efficient of energy, nuclear energy, still elicit apocalyptic predictions, despite a near squeaky-clean record in countries such as France, with nearly 80 percent of electricity from nuclear power, and Japan, where nuclear energy is about one-third of the electricity supply.

Clearly, the role of natural gas in electricity generation for summer cooling will continue to expand, along with an expanding role in heating homes and businesses and myriad other competing uses for the product. Just this week, the Oil and Gas Journal quoted one expert as saying demand for natural gas “may rise as industrial users deem it more economical than oil.”

Get used to it: All the energy-efficient appliances and all the conservation mandates in the world may cut residential energy bills, but won’t cut residential rates – at least, not to where they used to be. The solution lies in increasing the energy supply, by the federal government allowing exploration of competitive sources of natural gas at home, offshore and abroad; by developing efficient energy alternatives, and by expanding competition to include infrastructure options, as Georgia legislators are attempting.

That still doesn’t explain why natural gas prices vary from state to state and from the national average. First, it’s important to understand the components of the price: transmission and distribution costs – moving the gas from where it is produced to the local gas company and to the customer – and the commodity cost, or actual cost of the gas at the wellhead.

The commodity cost has been more than 50 percent of the total residential price for the past three winters – in 2005, it was 64 percent – “and this trend is expected to continue through the next winter,” according to the Energy Information Administration (EIA) of the U.S. Department of Energy.

Regional price differences can occur because of a market’s distance from the producing areas, the number of pipelines in the state and the transportation charges associated with them, as well as state regulations and the degree of competition, according to the EIA.

In Georgia, transportation charges from the provider to the customer are a regulated, fixed cost based on consumption. The cost to transport the gas interstate is regulated by the Federal Energy Regulatory Commission and fixed. The commodity price, however, fluctuates with the market – a market anticipating and fearing supply crunches, whether from unexpected Gulf hurricanes, the demands of a summer heat wave and cold winter, or the feds fiddling while China corners the global supply.

Residential, industrial and commercial customers pay different rates, and residential service is costliest, with more, smaller pipes and lower usage among customers who are farther apart. For example, the wellhead (commodity) price of gas in December 2005 was $10.02 per thousand cubic feet of gas. By the time it arrived at the local gas company in Georgia – the city gate – the price was $13.09. By the time the industrial customer got the bill, it was $15.84; the commercial customer was billed $16.40, and the average residential customer paid $19.34.

In 2004, EIA reports, more than 1,458,395 million cubic feet of natural gas arrived in Georgia and all but 394,732 million cubic feet, or 27 percent, passed through to Florida, North Carolina, South Carolina and Tennessee. That will increase, as will imports of liquefied natural gas (LNG) from Trinidad into Elba Island, one of just five LNG terminals in the nation. The EIA estimates that U.S. energy demand could increase by about another 30 percent over the next 20 years, if current trends hold. Consumption of natural gas is expected to increase 37 percent and imports are expected to increase 140 percent, the Government Accountability Office (GAO) warned last year.

“Whatever federal policies are chosen, providing clear and consistent signals to energy markets, including consumers, suppliers, and the investment community, will help them succeed,” the GAO said.

Without a reasonable expectation that they can recoup the costs of forward-thinking investments in infrastructure to meet Georgia’s growing demand, utilities will take their business elsewhere and consumers will be deprived of choice. Without a reasonable expectation that their needs are met now and in the future, industry will take their business elsewhere. Without reasonable expectations that they will benefit, customers will push for increased mandates and competition, deregulation and market-based choices will be history.

Benita M. Dodd is vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (March 24, 2006). Permission to reprint in whole or in part is hereby granted, provided the author and her affiliations are cited.