Gearing Up For Gas Price Swings

Obtaining facility data on natural gas use now could lead to better pricing in spring months when rates typically fall

The recent price run-up in wholesale natural gas has heightened interest in options for buying retail gas competitively instead of from a regulated utility. Opportunities for price cutting right now are slim to none, but many customers are watching for large reductions — such as 20 percent or more — during the late winter or early spring, once hurricane-related pipeline and wellhead damage is fully repaired. Now is a good time to learn how to take advantage of the expected price drop.

For the last 20 years, facility executives have been buying natural gas from non-utility sources, such as marketers or brokers. The gas is physically the same: Utilities buy gas from the same sources and receive it through the same pipelines. Such deregulated purchasing is available throughout the country, though regional markets vary, especially between states having gas wells and those that do not. Nearly all gas used in the U.S. comes from North American wells, though an increasing amount is being imported from overseas in liquefied form, known as LNG.

A gas customer contracts for fuel with a marketer and has a utility deliver it through existing connections under a transportation-only tariff. Two bills are received: one from the marketer, the other from the utility. Instead of being based on the utility’s tariff, the price for the gas commodity is based on a contract with a marketer.

Without a good working knowledge of the lingo and pitfalls of gas procurement, outside expertise, such as that from a consultant or energy service company (ESCO), is essential to avoiding problems.

Tolerating Risk

Getting the best price on natural gas starts by securing information on an organization’s gas usage and its willingness to accept risk. Monthly gas use data may be obtained from past utility bills, but daily use may also be needed to assess some pricing options. Utilities may be able to supply daily-use data to large or interruptible gas customers; boiler logs may also contain such data. Usage should be broken out by account and service address, with accurate account and meter numbers.

Widely varying and unpredictable monthly energy bills is the risk involved. Many institutions operating under fixed incomes cannot tolerate cash flow problems, and some facility executives would rather not be interrogated by superiors regarding suddenly high fuel bills. A conversation with the consultant or ESCO is essential before seeking price bids.

Securing Competitive Bidders

Marketers and suppliers are licensed by state public utility commissions and are typically listed on the commission’s Web site. Unless an option for direct connection to a high-pressure gas pipeline exists, bids should be sought from those on the list. Pricing may be sought through informal contacts, requests for proposals, or an online reverse auction.

Specific gas pricing is rarely good for more than 24 hours, so the price offered by a winning bidder is unlikely to be the price paid once a contract is ready to be signed. In most cases, bidding at any point in time is done mainly to find the lowest-cost marketer willing to serve the customer, with final pricing to occur when a contract is signed.

Negotiating the Contract

Unlike regulated utility tariffs, a retail gas contract is open to a variety of negotiable configurations. While the consultant or ESCO should be versed in all options, customers should have a grasp of the basics, especially when trying to compare market pricing with that of a utility, which is always a potential choice.

As with all purchasing contracts, know what is included in the proposed price — and what is not. Be sure all the following issues are addressed:

  • Basis — pipeline transport to the utility boundary.
  • Storage — if this service is used to stockpile gas prior to use
  • Line losses, also called shrinkage — gas lost during transport to the utility boundary.
  • Balancing — to account for gas used above or below a stated monthly consumption, also called nomination.
  • Metering — data handling and invoicing.
  • Taxes — may vary, for example, based on point at which ownership of the gas is taken.

When calculating potential savings in purchasing gas from a marketer rather than a utility, several other issues merit attention:

  • The slight difference in heat content between a thousand cubic feet (MCF), a typical utility billing unit, and a decatherm, which is how most gas contracts are priced. An MCF contains about 3 percent more BTUs than a decatherm.
  • The economic impact of switching from a full-requirements gas supply tariff to a transportation-only tariff that may contain penalties, charges and line losses not seen in the supply tariff.
  • Alternative tariffs that may net savings without switching to a marketer, especially any that offer reductions or rebates for use of gas-fired equipment or that provide discounts in economic development zones.

Customers will also find themselves confronted by myriad pricing choices that entail varying levels of risk. While a fixed price for all months is the simplest (and possibly the most expensive) option, all the following are available:

  • Cap and floor — price varies within a defined range, depending on wholesale market pricing.
  • Indexed — wholesale price plus a defined charge for basis and the marketer’s overhead and profit.
  • Indexed/fixed — the price for part of the usage is fixed, such as the baseload, and the remainder floats with market pricing.
  • Interruptible/curtailable/recallable — all or part of the gas may be taken back or not delivered in exchange for a lower price for the rest. The structure is common at facilities equipped with dual-fuel boilers.
  • BTU contracting — some marketers supply both gas and fuel oil to their dual-fuel customers under a fixed price based on cost per BTU, with the proviso that the marketer tells the customer which fuel to burn at an given time.
  • Blend and extend — any of the above may be modified to extend a contract when market pricing drops, with the new pricing reflecting the average of the lowered price and that of the fuel remaining in the original contract.

Even fixed prices may be based on the allowable variance, also called “swing,” before penalties or balancing charges are incurred. Where certainty exists with regard to gas use, such as where process loads mute weather loads, tighter variance may be offered to secure a lower price.

More adventurous customers may entertain use of gas futures to hedge part of their pricing, but all should first verify if such investing is acceptable to the CFO.

Any decision to buy market-based natural gas should be made well in advance of expected market price reductions. In some areas, the lowest gas pricing is seen in late winter or early spring. Because the bidding and negotiation process may take weeks or months, it is best to prepare several months earlier to take advantage of low prices.

Lindsay Audin is president of EnergyWiz, an energy consulting firm based in Croton, N.Y. He is a contributing editor to Building Operating Management.

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  posted on 12/1/2005   Article Use Policy

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