Mississippi manufacturers who use natural gas to fuel production processes are getting hit twice from the impact of high natural gas prices. With natural gas prices up an average of 20% to 30% over a year ago, manufacturers are not only paying more for natural gas used for manufacturing, their electricity bills may also be higher due to fuel adjustment costs.
“What happens is that when natural gas prices go up, it affects not only your natural gas prices but your electricity price, too, because electric utilities have fuel cost adjustments so they can pass through higher costs to the end user,” said Richard Smith, chairman of the Mississippi Manufacturers Association (MMA) energy committee. “A negative for manufacturers is that utilities don`t always have appropriate hedging programs in place which would help mitigate the high costs of natural gas.”
Smith said the problem isn`t unique to Mississippi, but found across the country. In some cases public service commissions have mandated hedging programs to help contain the high costs of natural gas. Smith said those programs work best when there is a review and/or an oversight committee to make sure the utilities have hedged in the best interest of consumers.
“If I have no accountability or no incentive to do an appropriate hedge, then I can hedge at any price,” Smith said. “I don`t want witch hunts at the Public Service Commission due to perceptions that inappropriate hedges were done in a hedging program. I just think you need to make sure you have a hedge program that has the proper mechanisms and methodologies in place to work the process.”
The high natural gas prices are having a negative impact on industries across the country. Smith said the problem is that manufacturers often have no way to immediately pass on cost increases to their customers.
“The competitive facilities that are the most efficient in their process are the ones that will stay in business in the long run,” Smith said.
Checky Herrington, manager of communications for Entergy Mississippi, said the company introduced a hedging plan approved by the Mississippi Public Service Commission just a few weeks ago.
“We are continuing at Entergy to do everything we can to lessen the burden on our customers,” Herrington said. “We have a very diverse fuel mix in which we use nuclear, coal and natural gas. Also, because of the natural gas situation, we have switched over to fuel oil in some of the plants where we can burn oil.”
Herrington said the situation this winter is similar to what was seen in 2000 when natural gas prices skyrocketed. The utility switched over to fuel oil then, a strategy that helped contain fuel costs.
Entergy`s fuel adjustment costs for 2004 are expected to increase rates by about 3%. One thousand kilowatts would cost residential customers an extra $2.27 per month, or a total of $87.56 compared to $85.29 last year.
Prices for natural gas normally climb in the winter and decline during the summer. Manufacturers and utilities can usually get purchasing contracts in the summer at lower rates than waiting until winter. But this past summer, natural gas prices didn`t go down as usual.
Roland Woodard, senior refining engineer, Ergon Inc., Jackson, said there was only a narrow window in the last part of summer in August and September when prices dipped.
“But they still never did fall below $3.50 for any time,” Woodard said. “The majority of prices didn`t get down where most manufacturers could afford to lock in the prices. For the winter, most manufacturers are paying 20% to 30% more on average than we were in 2002.”
Woodard said the end of the year slowdown combined with high natural gas prices created narrow profit margins, if not negative operating margins, for some manufacturers.
“They will attempt this first quarter to recover, if not get ahead,” Woodard said. “A lot of businesses we talk to say it sounds good that the economy is in recovery, but their forecasts aren`t showing that much of a recovery. Most of our salesmen at Ergon are seeing a year where we may be able to sustain some nominal growth, but nothing that is exceptional. I would see that for most manufacturers, too. For most manufacturers, there may be some sustained growth depending on what sector they are in. They’re just trying to hold on and see there is a recovery on its way.”
Natural gas prices are identified as one factor that makes it difficult for manufacturers in the U.S. to compete in the global economy.
“Natural gas prices are part of the external costs that manufacturer can`t control,” said Mark Leggett, director of government affairs for MMA. “All these add up to hurt us in competing with other countries. It all comes down to the bottom line costs. What can you sell a product for in the market? A lot of times you can`t raise the price of your product. We want to be as competitive within Mississippi as we can be so these companies can be competitive around the world.”
Leggett said one way manufacturers are coping is by consolidations of manufacturing operations.
Alicia Dixon, spokesperson for CenterPoint Energy, which distributes natural gas to a large numbers of cities across the state, said the volatility of natural gas prices continues to be a concern.
“Since we are a distribution company, we purchase from suppliers and charge the customer basically what we are paying for it,” Dixon said. “We sent out billing inserts in September and October letting customers know gas prices were predicted to rise and recommending things they could do to adapt. Prices are definitely higher and more volatile.”
Joseph Sims, president of the U.S. Oil & Gas Association, Mississippi-Alabama, said the volatility of natural gas prices is bad for everyone.
“It is in no one`s interest to have these wild swings up and down,” Sims said. “Producers and consumers agree – we need to take the volatility out of the trading. The point is we need to have a stable price not only to encourage exploration, but for residential and industrial consumers.”
According to Sims, three main actions are needed to help stabilize prices:
• Establish more LNG (liquid natural gas) terminals around the country.
• Get serious about encouraging natural gas development in some areas that have been off limits such as the Rocky Mountains and the Gulf of Mexico.
• Reform the way that natural gas is traded on the Mercantile Exchange.
While 60% of the oil consumed in the U.S. is imported from other counties, 90% of the natural gas consumed is produced domestically. The remaining 10% comes from LNG imports and Canadian imported natural gas.
Contact MBJ contributing writer Becky Gillette at email@example.com.