Here is an overview of the different types of accounts available to natural gas customers and the ins and outs of each. Most natural gas contracts include both the Commodity and the Basis components, and may have a % of “Swing” in the price. For an explanation of these key terms, see the final section.
Types of Accounts:
CHOICE ACCOUNTS a.k.a Firm Service (uninterruptible)
- Guaranteed delivery – with no service interruption unless delivery is prevented by Force Majeure.
- Typically for smaller commercial volumes/users
- Contracts for Firm Service accounts are at fixed prices that include both the basis and the commodity at 100% swing with no balancing costs.
- The total charges for Firm Service contracts are generally higher than Transport and Interruptible accounts.
- Transport accounts are typically larger volume accounts and rates are typically lower than Choice accounts.
- Contracts are structured in 1 of 3 ways for Transport accounts:
- Basis and Commodity both Fixed
- Fixed Basis with the commodity allowed to float on the Nymex
- Fixed Basis with the commodity purchased on a Block & Index method – the user can lock in % of usage and layer on additional volumes throughout the term of the basis contract
- Swing is an important variable for all Transport accounts.
- Because Transport accounts rely on specific monthly volumes and monthly balancing requirements, over-use and under-use is a risk for the customer
- If an end-user thinks their future usage might be higher/lower than previously, they can contract for 10% or 20% swing (above/below historic volumes) for the upcoming year
- Swing options – Contracts can include any % of swing, but premiums increase as the % of swing increase, e.g.
- 0% Swing- no premium
- 10% Swing- little premium
- 100% swing – i.e. Firm fixed price – carries a significant premium
- Pool/Balancing Fees
- All suppliers charge a fee for buying/selling usage above or below the monthly designated volumes. Some suppliers spread the risk, and thus lower the cost, across their entire pool of customers, so the larger the pool the better for the customers.
- Balancing can be tied to a specific Index (e.g. the Gas Daily or Gas Daily Daily indexes)
- Balancing language is usually negotiable for larger end-users
Finally, there are 2 types of Transport accounts – firm or interruptible, and the determination of how the account is structured varies by rate class and utility, and even pipeline infrastructure.
Transport Accounts – Firm
- Guaranteed delivery – with no service interruption unless prevented by Force Majeure.
Transport Accounts – Interruptible
- Interruptible transport account rates are typically cheaper than Transport Firm accounts and much cheaper than Choice (Firm) accounts.
- Interruptible accounts can be curtailed if there is not enough capacity in a specific utility to supply all customers their full requirements
- Interruptible accounts are dependent on rate class and utility. In some instances, depending on the utility, even large transport accounts maybe interruptible
NOTE: All Suppliers may not service all account types:
- Not all natural gas suppliers will service Choice Accounts
- Most, if not all suppliers, will price Transport accounts but some may not be able to price Interruptible accounts
- Some suppliers prefer Choice accounts while others prefer Transport accounts.
Clearly, natural gas markets, account types and contracts are more complex than electricity contracts, so it’s imperative that your broker understands the complexities. In addition, it is imperative that your broker has a large supplier network in order to get every viable supplier to price each type of account. This is especially important for customers that have several accounts of more-than-one type.
Questions about the natural gas procurement process? Call us for a no-obligation consultation. Call or email Tom Dufraine at 610-331-3869 or email@example.com
Explanation of key terms used:
- “Commodity” means the gas itself, typically priced according to the NYMEX index at a specific location such as the “Henry Hub” in Louisiana.
- “Basis” means the difference in price between the pricing location and the “Citygate”, i.e. where the gas is handed off to the local distribution company which supplies end-users (i.e. the last few miles)
- “Swing”. Every gas supply contract contains the customer’s commitment to buy designated monthly volumes. “Swing” means a percentage above or below the customer’s monthly volume commitment.
- “Balancing”. Gas Suppliers will adjust each customer’s monthly bill according to how much gas they need to buy or sell if the actual volume used was higher than, or lower than, the customer’s monthly commitment.