A $7 Million Shortfall: Behind The Changes In The Natural Gas Rate


As you may have read in the press, the Los Alamos County Council recently adopted a new ordinance regarding natural gas rates. This ordinance adopts a Board of Public Utilities (BPU) recommendation to change the formula for computing these rates. Given the background and complexity of this issue, we wanted to give customers some insight into the reasoning behind our votes in favor of the ultimate recommendation. We’d like to emphasize that, although we are both members of the BPU, we are writing this as private citizens, not on behalf of the BPU.

As you may know, the natural gas charge on your monthly bill (and on ours, too!) has two principal components: a fixed charge and a variable charge. The variable charge per unit of energy used (which, for natural gas, is expressed by the technical term “therm”) changes with the market price of natural gas. When gas is more expensive, you have to pay more for each therm you use; when it is cheaper, you pay less. As a safety valve, however, the previous ordinance set a maximum price (at $0.99 per therm) that you would have to pay on your bill. If this price happened to be exceeded in the natural gas market, then the County would pay for the excess out of pocket and arrange to recoup the excess costs later. In historical terms, this event essentially never occurred.

Unfortunately, this winter, due to a variety of factors, including the war in Ukraine, natural gas market prices skyrocketed and the $0.99 per therm cap was shattered. If you look at your bills through March, just as we have looked at ours, you’ll see that you were only charged $0.99 per therm throughout the winter. However, the County paid $1.03 per therm in December of 2022, $3.30 per therm in January of this year, and $1.15 per therm in February. As a result, the County expended more than $7 million from January to March to cover this unprecedented increase in market costs for natural gas. The County, in other words, covered us temporarily—it insulated all of us from the shock. But by charter, this money now must be recovered from our customers.

The new formula proposed by the BPU and adopted by the Council has three terms in it to recoup those costs over a two-year period and to account for the increased level and volatility of natural gas prices. First, the fixed-price cost per therm remains at $0.25. Second, there is now a $0.44 charge per therm to recover the expenses the Department of Public Utilities (DPU) paid out this winter when natural gas prices surged past the $0.99 per therm cap. Third, we made two adjustments to the variable price charged per therm. We still compute the price based on the San Juan price index, but we added two caveats. We raised the cap to $4.00 per therm. This cap functions just as the previous cap at $0.99 per therm did: if the San Juan index comes in at less than $4 per therm, then you are charged the full amount. If it exceeds the cap, then you will be charged $4.00 per therm while the DPU picks up the excess costs, which it will have to recoup in the future. The variable charge also has a compensatory floor price of $0.11 per therm, which means that you will always be charged at least $0.11 per therm. This price sets a non-zero floor for the compensatory charge, which is required by charter. You might ask where the value of $0.11 per therm comes from. It turns out that $0.11 per therm is the lowest value of the variable rate cost in DPU’s history. Finally, there is a service charge that is added irrespective of usage. For a single-family home, that charge is $10.26 per month. 

 As an example, suppose that your monthly usage of gas is 100 therms and that the San Juan index is $3.00 per therm; then you will be charged $(0.25+0.44+3.00)×100 + $10.26 = $379.26. This is a hefty bill that is driven mostly, as you can see, by the high market price of natural gas.  

Why raise the cap? The single biggest reason is the simplest: natural gas is getting more expensive. It is both necessary and fair that the increase in price be passed on to the consumer in such a way that heavy consumers of gas pay amounts that accurately reflect the cost of that usage. Having an unnaturally low cap effectively amounts to having consumers who use less natural gas subsidize those who use more because the recovery mechanism applies equally to all customers for the next two years, not just those who happened to use a lot of gas this winter.

Following that logic, you might ask, why not remove the cap altogether? This, in fact, was one of the proposals that the DPU brought to the BPU initially, and for good reasons. However, during the debate on this proposal, we came to the provisional conclusion that this was too large a change and that we could go most of the way towards meeting the DPU’s objectives by quadrupling the cap from $0.99 to $4.00 per therm, while still preserving some safety valve on the price. A second benefit of raising the rate cap is that accurately reflecting the increased costs of natural gas in charges to customers should incentivize both the conservation of natural gas and the search for alternatives to gas heating. This is in line with the BPU’s objectives of becoming natural-gas free by 2070.

Time will tell if our compromise will work. If it doesn’t, we will likely have to revisit this issue in a year or two.