Low Wholesale Natural Gas Prices Don’t Immediately Result in Lower Retail Prices
While natural gas wholesale spot prices have dropped to relatively low levels since the end of 2014, these low prices have not translated directly into lower retail prices for consumers who use natural gas to heat their homes and businesses, according to the Energy Information Administration. This short-term lag is largely due to the nature of utility regulation. Over longer periods, changes in natural gas spot and residential prices are much more closely correlated.
Local distribution companies (LDCs, or the utility companies that serve residential and commercial consumers) have several different ways to ensure adequate supplies of natural gas for the winter. Several of these approaches occur months before the heating season begins, meaning that residential and commercial prices often reflect the cost of gas purchased many months ago. Additionally, residential and commercial prices are regulated by the state regulator, and rate changes may significantly (by a year or more) lag changes in the LDC’s costs of purchasing natural gas, according to EIA.
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