Natural Gas – Marginal Cost Analysis - June 2014

Report January 14, 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 typical commercial and residential rate is comprised of two components, the fixed (or customer) charge and the costs that vary by consumption. An example of a fixed charges are employee salaries, while the commodity cost (or purchased gas cost) is a variable, or marginal cost. The fixed costs are recovered in a bill regardless of the amount of gas consumed, as this fee represents a “readiness to serve” obligation of the utility. So only the marginal costs should be considered when calculating the impact of conservation efforts, which tend to happen, of course, at the margin of user consumption.

The documents below provide the methodology, rationale and results of the analysis the American Gas Association performs to calculate natural gas marginal costs.

Contact: Bruce McDowell, Managing Director – Policy Analysis | 202-824-7131 |

fois_2014_-_6_marginal_cost_v2.pdf362.67 KB
aga_billcomp_3-14_v2.pdf391.23 KB