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Sarah R. Bratko, Esq.
Vice President of Advocacy and General Counsel
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By ALEX KUFFNERProvidence Journal
PROVIDENCE, R.I. — National Grid has applied to state regulators to raise natural gas rates in Rhode Island by 16 percent, an increase that would see the typical heating customer pay $10 more a month than expected for the period from April 1 to Oct. 31.
The proposal comes in the midst of a colder-than-usual winter in which Rhode Islanders have cranked up their thermostats and National Grid has been forced to buy more gas on the spot market than projected. With demand spiking across New England, the region’s limited gas supplies have become even more constrained and utilities have had to pay a premium to match customer usage.
To cover the added cost of supply, National Grid is taking the unusual step of asking for a rate adjustment in the middle of the year-long pricing period that started Nov. 1. It has filed for a smaller rate change in Massachusetts.
National Grid buys much of its gas months before it is needed, taking delivery of some of it and storing it, locking in contracts for some and making up the difference on the spot market.
The rates charged by the utility are set prospectively based on estimates of customer usage, weather predictions and market forces for the year ahead. If National Grid’s costs exceed its estimates by 5 percent, it is allowed to go back to the Rhode Island Public Utilities Commission for a rate change to make up for the shortfall.
Based on the increased use this winter, costs are expected to be 6 percent higher over the course of the current 12-month rate period, or $34.5 million. National Grid filed the rate increase with the PUC earlier this month and was scheduled to announce it to the public on Thursday. The change will go into effect only with PUC approval.
The over-run only applies to the cost of gas itself, not any increases in distribution costs. It also does not equate to any profits for National Grid. Under state law, the utility is not allowed to mark up the price of the commodity. The increase amounts to a 16.3 percent mark-up in the rate for gas, which is just one part of a customer’s bill.
National Grid is not seeking to recover the full amount of the cost over-run immediately. The proposed rate increase will raise only $16 million for the company over the seven months starting in April. It will seek to make up the balance in the next rate period, however.
“We’re trying to spread this out,” said David Graves, spokesman for National Grid in Rhode Island. “We’re making sure this isn’t onerous on our customers.”
The change was also proposed starting in April because that is when usage generally decreases as spring comes on, the company said. The typical heating customer in March uses 138 therms of gas, the general measurement for usage, but only 95 therms in April.
So heating bills gradually fall throughout the spring. Even with the proposed rate increase, bills should continue to fall, but the savings will be $10 less per month for that typical customer, equating to $70 in total until rates are reconsidered in the fall.
This is the second consecutive winter in which New England has suffered through restricted gas supplies. The constraints are driven by a surge in the use of natural gas for power generation. In the mid-2000s, coal- and oil-fired power plants in the region were driven off-line by a glut of cheap gas from the Marcellus Shale in Pennsylvania and other areas where deposits were freed by advances in hydraulic fracturing, or fracking.
In New England, gas-fired power generation increased from 15 percent in 2000 to 42 percent in 2012. But as power plants demanded more gas they bumped up against utilities that use the fuel for heating. That has become a serious problem because New England’s pipeline system has restricted capacity. Prices, especially on the spot market, have skyrocketed because of the competition.
At the same time, supplies of liquefied natural gas that are brought into the region by tanker ships have dropped off markedly because European markets are willing to pay double or triple the price, said Elizabeth Arangio, director of gas supply planning for National Grid.
And finally, the unusually cold winter has pushed utilities to buy more gas on the spot market than they planned because of higher usage. Average daily consumption in New England for about the first six weeks of 2014 was up 4.7 percent over the same period in 2013, according to the U.S. Energy Information Administration. In Rhode Island, during the so-called polar vortex in January, gas use over one 24-hour period reached the second-highest level ever for the state and over another 24-hour period reached the third-highest level.
Increased use has meant that National Grid has bought 12 percent of supply so far on the spot market, twice as much as it expected before the winter.
The additional cost of the increased purchases is exacerbated by the high prices of natural gas. The price at the Citygate hub in Boston for the approximately six-week period at the start of 2014 averaged $22.53 per million British thermal units, a record high for that period since at least 2001 and 50 percent higher than the previous record set in 2013, according to the EIA. At times, the price has spiked to $55 per mmBtu.
Concerns are rising about an over-reliance on gas in New England. It is one reason that Governor Chafee and other governors in the region are trying to move forward with plans to import more hydropower from Canada. They have also joined together to solicit proposals to expand the regional gas pipeline system.
“This is an issue on everyone’s minds,” said Michael D. LaFlamme, New England vice president for regulation and pricing at National Grid.
Plans are underway to expand by about a third the capacity of the Algonquin pipeline, one of the two main supply channels to Rhode Island and the region as a whole. That project, which is expected to be completed in 2016, could help ease prices.
But, Arangio pointed out, even after the recent expansion of a supply line to New York City, spot prices there this winter hit a whopping $125 per mmBtu.
“We’re setting records,” she said.