AGA Marginal Pricing Methodology: Furnace Efficiency Rule

Report July 09, 2015

When calculating savings in energy cost from using natural gas appliances and considering conservation and efficiency efforts, some analysts simply multiply the average cost per unit of energy times the energy savings. This method of determination is inappropriate because only a part of the natural gas energy cost should be considered in this calculation. The marginal costs should be considered when calculating the impact of conservation efforts, which tend to happen, at the margin of user consumption. The American Gas Association developed a method to develop natural gas utility marginal prices by deducting the fixed charge portion of the bill from the total bill, which is outlined below.

AGA Method

The full 12 month residential gas bill was calculated from the reported total monthly residential sales data collected by EIA. AGA conducted an internet search of utility tariffs to obtain the customer charges for about 200 of the largest utilities (representing roughly 90 percent of the total market). A month’s worth of customer charges for all 200 companies was deducted from each total monthly bill or total residential sales. The resulting net monthly bill was divided by the monthly usage to get the marginal cost per Mcf or therm. Dividing the net bill by the total bill yielded the marginal cost factor. The remainder of the calculations followed DOE’s methodology – seasonal rates, use of shipment data to develop weighting of the state rates. AGA’s methodology uses a conservative approach to calculate marginal prices since just subtracting the customer charge from the customer bill does not account for other non-volumetric rate components in some utility rate structures/designs. For example, at least 20 large utilities use declining block rates, which if incorporated into the analysis could reduce the marginal cost factor even more.

When comparing the results of AGA’s marginal pricing methodology with the results of DOE’s methodology, DOE’s marginal gas price factors were on average 6 percent higher in the winter and 11 percent higher in the summer.

The links below provide the methodology and results of the analysis the American Gas Association performed to calculate natural gas marginal costs.

Contact: Bruce McDowell, Managing Director – Policy Analysis | 202-824-7131 | bmcdowell@aga.org

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aga_energy_analysis_-_natural_gas_utility_rate_structure.pdf624.97 KB
copy_of_aga_marginal_cost_factor_analysis_-_eia_data_7_7_2015.xls455.5 KB