- Restructuring of the industry and the deregulation of the natural gas "commodity" has resulted in lower prices to all consumers but accompanying this is much greater variation in the price of natural gas.
- Energy prices are among the most volatile of all commodities. This is clearly illustrated by looking at price movements on the futures market. Until the recent development of the electricity futures market, natural gas was the most volatile commodity traded on the NYMEX.
- The principal drivers behind this volatility are supply and demand fundamentals, which include the weather, storage activities, and the perception of market conditions.
- Storage or inventory levels are often the best readily-available early indicator of the supply/demand fundamentals. They are watched closely and constantly evaluated by market players as to their adequacy in view of expected weather conditions. Events that cause sharp stock draws and bring stocks down below normal levels often result in price surges.
- Exposure to price volatility in the commodity market varies widely by type of consumer. The electric generators and large industrial consumers who often contract directly with marketers to obtain their gas supplies are subject to significant price variation and price risk. Any consumer that relies on short-term market purchases, or arrangements without fixed price terms, faces price risk. Certain endusers such as residential customers have an additional benefit in that the LDC aggregates purchases, which Ďaverages' the outcome of the set of deals.
- For the residential consumer, the commodity price often is a relatively small proportion of the total unit cost of their gas service, thus these consumers seldom see the full impact of commodity market volatility in their prices. In addition, the contracting procedures by the local distribution companies can reduce the volatility of the commodity price. The exposure of the residential consumer to this price variation will increase if they participate in the retail unbundling programs without some program to mitigate or manage these price variations.
- This exposure to price volatility and price risk can be managed - the financial tools are available to ensure that consumers and suppliers can reduce the market variation if it is necessary and important for them to do so.
- Information programs play an important role in the market. Timely, reliable information with respect to supply and demand conditions and consumer purchase options supports better decision-making and promotes better understanding of market developments.
Slide 1 of 17