While the details of the transactions with natural gas suppliers are confidential, our purchases are audited by the Public Service Commission of Wisconsin to make sure that our natural gas purchases are prudent.
Widespread cold snaps led to unusually high demand for natural gas nationwide which, in turn, led to higher natural gas prices on the spot market. Although we purchase and store natural gas when the cost typically is lower, we depleted much of that supply due to the historically cold winter. We needed to purchase more natural gas on the spot market than in normal winters to meet customer demand.
PGA reflects what we actually pay for natural gas from our suppliers and is the only market adjustment for what we pay versus what we expected to pay at the time the base rate was set. If we can buy gas for less than our forecast, customers see a credit on their bill. If gas costs are higher than we expected, customers see a charge.
Keeping prices as low as possible
Our goal is to reliably supply natural gas at the lowest possible price. We employ several purchasing methods and use financial instruments to obtain the lowest price possible. Two ways to manage natural gas prices are storage and hedging:
Breakdown of natural gas therm cost
Natural gas is measured in therms. A therm’s cost has three main components, which are indicated on customer bills:
Supply vs. capacity — Supply is the term used to describe the natural gas commodity. We use competitive bidding to get the lowest possible cost. Because we have contracts with a number of suppliers, we spread our supply risk. Supply contracts can be seasonal or annual to ensure the best natural gas cost and availability on the coldest days. We purchase capacity from a number of interstate pipelines and underground storage owners, primarily under long-term contracts, to obtain capacity at lower costs for extended periods.
Natural gas costs on your bill — Three main elements make up a natural gas bill: supply, capacity and distribution. Supply cost, or the commodity itself, is passed on directly to customers. We do not profit from the supply cost. Capacity is the physical space in the pipe. Supply cost and capacity make up about 63 percent of the rate customers pay. Distribution cost covers the cost for us to provide natural gas service, including the underground distribution network, meters, billing and customer systems as well as operating expenses. This portion makes up about 37 percent of customer rates and is regulated and approved by the PSCW.
PGA (and prices) vary by location
Our parent corporation -- Wisconsin Energy -- has several businesses, including some doing business as We Energies. Wisconsin Electric is one of those businesses, and Wisconsin Gas, which was acquired by Wisconsin Energy in 2000, is another. While every effort is made to take advantage of economies of scale, the tariffs (prices) for the two natural gas utilities remain independent. The two natural gas utilities are Wisconsin Electric Gas Operations and Wisconsin Gas LLC, each serving different geographical areas, each requiring their own pipeline contracts and each having its own natural gas receipt points and, consequently, different costs that distinguish their pricing. These differences extend to separate natural gas purchase portfolios that are reflected in the PGA. The PGA also is blended for the different months covered between a customer’s meter reading (referred to as meter reading cycle). This is why some We Energies customers have a different PGA than others – depending on their meter reading cycle and whether they are in the geographical area served by Wisconsin Electric Gas Operations or the one for Wisconsin Gas LLC.
- Storage typically takes place during the summer months when natural gas cost typically is lower. The gas is stored in underground facilities with geological formations that can support redelivery throughout the year but particularly during winter months. We lease storage in Michigan, Iowa and Illinois because Wisconsin does not have natural gas storage formations.
- Hedging is the use of financial contracts to reduce the risk of large swings in natural gas commodity prices on the New York Mercantile Exchange (NYMEX). Hedging is a financial strategy that uses gas option purchases and futures contracts to cap and lock prices to reduce market swing risks. We currently hedge up to 60 percent of our natural gas supply requirements.
Breakdown of natural gas therm cost
Natural gas is measured in therms. A therm’s cost has three main components, which are indicated on customer bills:
- Distribution — This charge covers natural gas delivery system operations, including improvements and maintenance of pipes and meters. This charge is set when a new rate order is approved by the PSCW and does not change until a new order is issued.
- Base — This charge is what we pay to suppliers and pipelines for natural gas as well as its transportation and storage. We do not keep any of the money collected to cover these costs. This amount does not change until a new rate order is issued.
- PGA — This charge reflects the difference between the base amount and the actual natural gas cost. This could be a charge or a credit, depending on actual costs. We pass along these costs to customers without any benefit to our company whether a charge or a credit. Our PGA factor is set on the second to last work day each month for the next month’s bills. PGA amounts for customers vary somewhat based on number of billing days and amount of gas consumed.
Background on natural gas supply
Most natural gas in the United States comes from the Gulf of Mexico and Canada. Natural gas is almost 100 percent methane and comes from deep underground. Once out of the ground, natural gas is transported in high-pressure pipelines by pipeline companies. When it arrives at its destination, we distribute it to our customers through underground facilities connected to pipelines.
Most natural gas in the United States comes from the Gulf of Mexico and Canada. Natural gas is almost 100 percent methane and comes from deep underground. Once out of the ground, natural gas is transported in high-pressure pipelines by pipeline companies. When it arrives at its destination, we distribute it to our customers through underground facilities connected to pipelines.
Supply vs. capacity — Supply is the term used to describe the natural gas commodity. We use competitive bidding to get the lowest possible cost. Because we have contracts with a number of suppliers, we spread our supply risk. Supply contracts can be seasonal or annual to ensure the best natural gas cost and availability on the coldest days. We purchase capacity from a number of interstate pipelines and underground storage owners, primarily under long-term contracts, to obtain capacity at lower costs for extended periods.
Natural gas costs on your bill — Three main elements make up a natural gas bill: supply, capacity and distribution. Supply cost, or the commodity itself, is passed on directly to customers. We do not profit from the supply cost. Capacity is the physical space in the pipe. Supply cost and capacity make up about 63 percent of the rate customers pay. Distribution cost covers the cost for us to provide natural gas service, including the underground distribution network, meters, billing and customer systems as well as operating expenses. This portion makes up about 37 percent of customer rates and is regulated and approved by the PSCW.
PGA (and prices) vary by location
Our parent corporation -- Wisconsin Energy -- has several businesses, including some doing business as We Energies. Wisconsin Electric is one of those businesses, and Wisconsin Gas, which was acquired by Wisconsin Energy in 2000, is another. While every effort is made to take advantage of economies of scale, the tariffs (prices) for the two natural gas utilities remain independent. The two natural gas utilities are Wisconsin Electric Gas Operations and Wisconsin Gas LLC, each serving different geographical areas, each requiring their own pipeline contracts and each having its own natural gas receipt points and, consequently, different costs that distinguish their pricing. These differences extend to separate natural gas purchase portfolios that are reflected in the PGA. The PGA also is blended for the different months covered between a customer’s meter reading (referred to as meter reading cycle). This is why some We Energies customers have a different PGA than others – depending on their meter reading cycle and whether they are in the geographical area served by Wisconsin Electric Gas Operations or the one for Wisconsin Gas LLC.
