The Polar Vortexes of 2014 are a good example of why your risk is higher with natural gas. Depending on the type of gas contract you had, your January 2014 bill may have been substantially higher than normal.
Obviously the historically cold weather – a.k.a. the Polar Vortexes – had a substantial effect on spot market gas prices, but why did this affect your bill so much?
If you had a “Full Requirements” contract, you were probably protected, but this type of contract is not always available and is much more expensive than other types.
The following explains all the moving parts in a gas contract and how they can affect your risk levels. It relates only to the 3rd party supplier’s gas charges and long distance transport, NOT your utility’s charges for local delivery to your facility.
Gas pricing is more complex than electricity. The main components of a gas bill are
- “Commodity” – the gas itself
- “Basis” which includes transport from the pricing point (usually a hub in Louisiana or W. PA) to your area, the “Citygate”, and the supplier’s profit margin. “Basis” can fixed or variable, and can be bought separate from the commodity
- “Balancing” – a monthly charge for quantities used above or below your historical usage, which must be bought or sold by the supplier each month. The calculation is performed daily, but you get an average charge on your monthly bill. The only way to avoid Balancing is by going with a Full Requirements contract, as explained below.
Your Contract type determines the pricing structure. Typical contract types – from most expensive to least expensive:
- Full Requirements – everything fixed – no monthly balancing.
- 100% of the Commodity fixed, but overage or underage ‘balanced’ monthly.
- 50% of the Commodity fixed and 50% indexed (i.e. variable).
- 100% of the Commodity Indexed, with monthly balancing.
- Fully variable (Indexed) pricing is the cheapest type of contract, but carries the most risk for you.
- Fixing some bill components increases the price because it transfers market risk to the supplier. Fixing everything increases it substantially.
What does this mean for your risk level in future?
The best way to explain is to illustrate what would have happened during the ultra cold weather with various contract types:
- If your contract was Indexed, either 100% or 50%, any volume of gas used that wasn’t fixed as a block, had to be bought by the supplier at spot market prices.
- You pay the average of the “Gas Daily Index’s” 31 daily rates for the month.
- During January 2014, Gas Daily prices in Pennsylvania varied from $5-$6/Dth (i.e. about normal) to over $100/Dth on some days.
- The average charge for the month in PA and NJ during January 2014 was about $23/Dth. February was just over $8/Dth*.
Because of the extremely cold weather, almost everyone used more gas than usual, either for their processes, or for space-heating or hot water heating.
Example. If a customer’s contract had 100% fixed price for the Commodity, their exposure to these high rates would only be for their over-usage. If their contract price was $5/Dth and their historical usage for the month of January was 1000 Dth, but they used an extra 300 Dth that month, their bill would have been
1000 Dth at $5/Dth = $5,000
300 Dth at $23/Dth = $6,600
Obviously no-one wants a sudden, unexpected bill for 100% more than normal, but there are a number of ways to adjust/limit your risk levels in the gas market. For further information and recommendations for future contract types, please call 484-324-8010.
* (1 Decatherm = 1 MMBtu = 100 CCF of gas)