Natural Gas Prices FAQs

The price of natural gas is determined by market influences. The biggest influence on the price continues to be supply and demand. When the gas supply gets tighter and/or demand increases, the result is higher prices. When gas supply increases and/or demand decreases, gas prices decrease.

Many other factors also influence the price of natural gas, including:

• Anticipated future supply of natural gas;
• Anticipated future demand for natural gas;
• Weather events or conditions that impact the demand for natural gas;
• Amount of natural gas available in storage;
• The cost to transport natural gas from sources of supply to end users;
• The cost of firm gas supply to ensure that gas is available during times of greatest demand; and
• The price of oil domestically and abroad.

The marketplace determines the price of natural gas. Currently, no governmental agency regulates the price of natural gas production at the wellhead. Interstate natural gas transmission is regulated by the Federal Energy Regulatory Commission (FERC). The Railroad Commission of Texas (the Commission) regulates intrastate natural gas transmission and requires gas utilities to file their rates with the Commission. If you live inside the city limits, the city in which you live sets the price a utility can charge for the cost of service (see definition below). If you live outside the city limits, the Commission sets the price a utility can charge for the Cost of Service. The cities and the Commission regulate the service a distribution utility provides to the consumer.

Cost of Service is the utility’s cost to provide natural gas to the end-user. It excludes the price for the natural gas commodity. Cost of Service includes the cost of the pipe in the ground, the personnel necessary to provide the service, and equipment and facilities required to get the gas to the consumer. The utility is allowed to earn a reasonable return on its investment through the Cost of Service.

The Cost of Gas is the amount the utility pays to acquire and transport the gas to the distribution system. The utility is not allowed to earn a return on the cost of gas or add any profit to it. The Cost of Service is reflected in the base rate on a customer's utility bill. The Cost of Gas is also a part of a customer's utility bill and is billed as a Purchased Gas Adjustment (PGA) or a Gas Cost Adjustment (GCA).

The federal government has attempted to place artificial price controls on different commodities, such as natural gas, in past years. However, in each instance the artificial price control has failed to work as intended. The Commission has no authority to control the price of natural gas.

There are several things you can do to help control the amount you pay for natural gas.

• Contact your gas company and ask if they have an energy awareness program or energy conservation program. Many utilities offer to come to your home and conduct a review of your home’s energy efficiency.
• Look around your home to see what you can do to save energy. For instance, you can lower your thermostat when not at home, set the water heater on a lower setting, or coordinate the timing of meal preparation.
• Caulk around your home’s exterior to help reduce heat escaping.
• Open the blinds to let the sun shine in on sunny days to help heat a room.

If you need help, contact your utility and ask if they have an alternate payment program or average payment program.

You can also contact your county or city governments for assistance and to identify the various social service agencies that offer assistance paying utility bills. Many agencies have assistance programs for low income residents.

Each city or municipality has regulatory authority to monitor the charges gas utilities pass on to customers. Likewise, the Commission monitors gas utility charges to customers outside city limits. The Commission monitors the utility by conducting periodic, random audits of Texas utilities. The Commission conducts these audits to assure the utilities are charging the approved rates. The rates are monitored by reviewing a random selection of customer bills. An audit of the cost of gas is also conducted. Not only is the rate tested, but the audit assures interest is calculated properly on deposits, connections and reconnection fees are charged as approved, and that the customer’s quality of service is maintained as well. If the Commission finds the utility has misapplied approved rates, it requires the utility to issue refunds to customers.

Any violation of the rules of service, or the rates, is brought to the attention of the utility. Correction of any problem found in an audit is monitored to assure the utility comes into compliance with state laws and Commission rules.

The cost of natural gas varies for the same reason the price of gasoline is different from one city to the next. The price depends on regional supply and demand, as well as the cost of moving or transporting natural gas to a particular area, such as through a pipeline. The price also depends on whether natural gas production is abundant in the area, whether the natural gas needs processing to be of sufficient quality, and the number of suppliers in the area.

There is a complex system of processing plants, pipelines, compressors, meters and other pieces of equipment necessary for the safe production and movement of natural gas. The natural gas produced must be processed to remove water or other contaminants that would damage appliances or be unsafe if it were left unprocessed. Additionally, the gas is put into a complex system of pipelines, sometimes traveling many miles before it reaches the end-user. With each of these steps the expenses or costs can increase and that cost is passed on to the consumer.

For example, natural gas produced in South Texas could be sold at $4.00 per Mcf. The gas is processed and $1.00 is added to the cost for cleaning the contaminants from the raw gas. After processing, the gas is put in a pipeline. To get the gas into the pipeline it must be compressed. Just like putting air into an automotive tire, the gas must be compressed at a higher pressure to get it in to the pipeline. That compression adds $0.50 to the price. The pipeline charges a transportation fee to move the gas from South Texas to the local distribution utility who serves your location. The pipeline charges $1.00. Since the distribution utility serving you must be assured that the pipeline has the capacity when the temperature drops, the distribution utility pays a reservation fee or capacity fee to the pipeline company. That could be an additional $0.50. Now an additional $3.00 has been added to the original $4.00 per Mcf, resulting in a $7.00 Cost of Gas charge on a customer’s bill. Sometimes there are even more parties involved in getting the natural gas from the field of production to the end-user.

The local distribution utility serving you must make sure it has a reliable, adequate supply to meet customers’ needs, plan for many types of contingencies, and maintain constant communication with the suppliers of gas to ensure a safe and reliable supply of gas to its customers. 

A City has original Jurisdiction over gas rates and services of a gas utility distributing natural gas in an incorporated area.

The Railroad Commission has original jurisdiction over:

1. Gas rates and services of a gas utility distributing natural gas in an unincorporated area; and 
2. Sales for resale at the city gate.
   (See flowchart below)