Winter’s coming: Time to lock in your gas rate?

John Heinzl
Globe and Mail
October 9, 2004

Like a lot of homeowners, Bill Harang cringes when he opens his natural gas bill.

“It just shocks me when I look at the bottom line,” says the Bowmanville, Ont., resident, who has watched his heating costs soar since he bought his three-bedroom townhouse in the late eighties.

So this year, he signed a contract with Canadian RiteRate Energy Corp., one of several natural gas marketers that allow consumers to lock in their price for three to five years.

To homeowners such as Mr. Harang, a 46-year-old customer support manager in the software industry, locking in seems like a no-brainer. With cold weather looming and analysts warning of tight supplies and growing demand for natural gas, consumers want the security of knowing their heating costs won’t go through the roof.

“I’m a person who’s really cautious with my money. I don’t take any risks,” he says.

But locking in may not be such a prudent move — especially now, some energy experts warn. After leaping about 50 per cent in the past two years, natural gas prices will probably stabilize or fall in the years ahead, making this precisely the wrong time to lock in, they say.

“I think there’s better than a 50-per-cent chance that prices over the next three to five years are going to be in the range or lower than the current utility price,” says Tom Adams, executive director of Energy Probe. He has two words for anyone thinking about signing a contract: “Skip it.”

While the conventional view is that demand will grow and supplies will remain tight, Mr. Adams sees the opposite scenario unfolding.

Some of the biggest consumers of natural gas, such as the fertilizer industry, have either moved offshore or retooled to reduce their exposure to gas prices, removing a key source of demand, he says. And households are consuming less gas, thanks to more energy-efficient appliances and better-insulated homes.

At the same time, the supply outlook is hardly dire. New sources such as coal-bed methane – which accounts for about 9 per cent of natural gas production in the United States but a much smaller amount in Canada – and gas from conventional reserves that have yet to be tapped should help prevent shortages, he says.

That may be cold comfort to consumers who have been watching natural gas prices surge in the futures market as the heating season approaches. But some energy analysts say the current price spike is an aberration.

Gas prices have been driven higher by a combination of factors, including hurricane damage to gas rigs in the Gulf of Mexico, an influx of speculators and – perhaps most important – record high oil prices. Oil and gas tend to trade in tandem, because businesses often switch to whichever fuel is cheaper, thereby driving up the price.

But natural gas storage levels are at historically high levels and fall weather has been mild, suggesting gas prices may be poised for a correction. And if the price of oil falls from its record levels, it will almost certainly drag gas down with it.

The upshot for homeowners? “It’s a bad time to do a knee-jerk” by signing a gas contract, says Wilf Gobert, vice-chairman of Calgary-based brokerage Peters & Co.

To be sure, there are times when locking in would have been wise.

A typical Ontario homeowner who signed a three-year contract in October, 1999 – when the utility price of natural gas was just 10.6 cents for a cubic metre – would have saved $685.71, compared with the cost of buying gas at the floating rate, according to Energyshop.com, an independent source of information on natural gas rates.

But homeowners who signed contracts in April, 2001 – after the utility price had more than tripled to 36.2 cents – are kicking themselves now that the price has settled back down to 28.57 cents. They spent $366.92 more than if they hadn’t locked in.

For those who are still convinced prices are heading higher, Energyshop.com simplifies the process of finding the best deal on a contract. The website lists current offers from gas marketers in Ontario, Manitoba and Alberta, and enables on-line registration with certain companies, avoiding the high-pressure sales pitches that have given the industry a bad name.

Ian MacLellan, co-owner of Energyshop.com, says locking in remains popular with consumers and businesses. “I’m certainly doing that myself,” he says.

So are plenty of others.

Across Ontario, roughly 40 per cent of households with natural gas furnaces buy their fuel through a marketer, according to Enbridge Gas Distribution Inc., a regulated utility. That’s down from a peak of about 50 per cent in 2002.

In a bid to woo more customers, gas marketers are offering a range of contract options. Direct Energy Marketing Ltd., for example, offers a five-year fixed rate of 32.4 cents a cubic metre, or a five-year contract that starts at 33.9 cents and declines by a penny each year.

Canadian RiteRate Energy, a newcomer in the gas marketing field, offers a five-year fixed contract at 28.4 cents. For consumers who aren’t sure whether they should lock in or not, it also offers a “blended rate” in which roughly half the cost floats with the utility price while the other half is fixed – the option Mr. Harang chose.

If you’re serious about cutting your fuel bill, however, Mr. Adams says there are better ways to use your time than shopping for gas contracts.

“For the ordinary household it’s much, much better to invest in a little better attic insulation,” he says.

 

This entry was posted in Natural Gas Utility Regulation and Commodity Deregulation. Bookmark the permalink.

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