Updated: May 3, 2013 12:14PM
Originally published: October 28, 2004
It’s going to be a long, cold -- and expensive -- winter. The soaring prices for oil and gasoline that you see in the headlines are about to transform themselves into much higher bills for homes heated by natural gas or oil.
Hedging saves money
Based on the globally traded markets for oil and natural gas, your monthly bill could easily soar 50 percent or more from last year’s tally. Cold weather is coming. Plan ahead.
In fact, that’s just what major utility companies are doing. Despite a common misperception, gas-distribution companies such as Peoples Energy in Chicago do not make more money on the price of gas they transport. But they do get all the complaints.
Peoples’ earnings come only from a fixed, monthly per-customer charge, along with an additional regulatory distribution fee (fixed and unchanged since 1995), which is applied to volume usage. Thus, in colder winters, as more gas is used, the more customers pay in fees.
But the main portion of your heating bill is just a “pass-through” of the actual cost the utility itself pays to gas producers. That’s where the big increases come from. Oh, and one more thing: substantial state and local taxes -- roughly 10 percent -- are added to your gas bill.
In the winter of 2000-2001, Peoples Energy took a lot of -- pardon the expression -- heat for the high cost of natural gas. That winter, natural-gas prices rose from around 40 cents per therm to a peak of more than $1 per therm in January, nearly triple the previous all-time high after a decade of very low natural-gas prices.
The gas company had no choice but to pass along those higher prices.
People screamed. Even the city, which realized a windfall of far higher tax revenues on those larger bills, demanded that Peoples Energy do something to protect consumers from unexpected price increases. And Peoples realized it had a growing mountain of unpaid bills from consumers. Thus the price-hedging program was born.
Using futures and options markets, the energy company tried to smooth the prices paid by customers by locking in lower prices in advance. The savings are apparent as prices move higher.
So far, Peoples estimates that its hedging program saved consumers $136 million in the winter of 2002-2003, and another $8 million last winter. This year, Peoples predicts that the hedging program will save consumers another $84 million.
But that doesn’t mean that bills won’t rise. In recent months, natural-gas prices have risen from about 60 cents per therm to a current 73 cents per therm, and the futures markets are forecasting that prices will rise to at least 93 cents per therm during the winter.
That number could go far higher when the cold weather actually hits, and demand intensifies.
Peoples Energy Chairman Tom Patrick predicts that even with the hedging program in place, Chicago area consumer-heating bills could rise by 20 percent or more in coming months. After all, even Peoples’ hedging was done amidst a scenario of rising prices in the last year. And since the company never knows how warm the winter might be and how much gas might be used, not all of the gas is hedged.
How to reduce your bill
That’s why all of us need to create our own hedging program against higher bills by taking steps now to winterize our homes. People’s has created a “Share the Warmth” program that will match contributions from wealthier customers to help those who will be overwhelmed by this winter’s heating bills. Here’s what you can do:
*Lower the temperature on your thermostat. Each degree lowered can save between 3 percent to 5 percent on your bill.
*Install weatherstripping around door frames.
*Caulk window frames and seal other openings. Install insulation under outlet covers.
*Get information on Share the Warmth at (773) 725-1100.
*Go to www.PeoplesEnergy.com to enroll in a budget payment plan that spreads the higher winter costs over the year.
Here’s an energy forecast that’s a sure bet: Higher home heating bills will make headlines within 90 days.
You can’t hedge away rising energy costs, but you can avoid some of the shock by planning ahead, and by passing this information on to at least one family that may not regularly read the business section of the paper. You’ll feel a lot warmer if you do. And that’s The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.