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