FREQUENTLY ASKED QUESTIONS

Frequently Asked Questions on Wholesale Natural Gas Procurement

Why should I buy wholesale natural gas from a gas marketer instead of my utility?

It is basically the difference between buying something retail versus wholesale.  The utilities are regulated by the Wisconsin Public Service Commission and have no incentive to provide low cost natural gas to you.  To obtain market priced gas, or to obtain the flexibility to do things like buying a full year of gas at a fixed price, one must participate in the wholesale gas market.

How is the price for wholesale natural gas determined?

It is basically the difference between buying something retail versus wholesale.  The utilities are regulated by the Wisconsin Public Service Commission and have no incentive to provide low cost natural gas to you.  To obtain market priced gas, or to obtain the flexibility to do things like buying a full year of gas at a fixed price, one must participate in the wholesale gas market.

What kind of pricing options does the wholesale market offer?

If you can dream it, then it can probably be done.  For most consumers, gas can be purchased on a daily, monthly, seasonal or annual basis.  Gas can be purchased at a fixed price or it can be purchased at an index price.  Index prices are done at a specific location and tied to one of the trade papers that report prices.  Thus, if you wanted to purchase gas for next month, you could either agree to the price being traded in the market today or you could link it to the Argus Americas Natural Gas published price for next month.  The gas will then be priced when that indexed price is published.

Why is the wholesale natural gas market considered to be transparent?

The wholesale market is considered to be transparent because of the number of people trading natural gas on any given day and the availability of the previously mentioned trade publications.  On any given day the front NYMEX contract typically trades over 100,000 times.  In addition, trading on the NYMEX is regulated at the federal level by the CFTC.

What is natural gas pricing volatility?

Volatility reflects the frequency and magnitude of a commodity to react to market conditions.  Some commodities, like new cars have very low volatility as the prices change once a year.  Natural gas, which can experience periods of high demand, due to winter weather, infrastructure failures, hurricanes, power generation demand, can experience periods of extreme volatility.  During 2013 natural gas traded around $0.35 per therm, but then during some of the polar vortex events it traded as high as $7.30 per term.

How do I control natural gas price volatility?

There are a number of ways to manage natural gas price volatility.  First and foremost, if you are most concerned about price volatility, then avoid pricing your natural gas on a daily basis.  Daily pricing is by far the riskiest form of purchasing, because it is where people that MUST have natural gas NOW come to buy it.  For example, if a WE Energies coal plant trips off line on a cold day due to a problem with their coal feed belt, then they may need to start gas-fired generation and they will pay whatever price the gas market demands to insure that the light do not go out.
Thus, buying first-of-month gas, which sets the price of the gas for the entire month, insulates you against the volatility of the daily gas market.   Alternately, you can buy fix priced gas for a month, season or annual period.  For example, if the markets are currently trading calendar 2015 for $0.38 /therm, then you can put in an order and set your price for the entire year.
There are also more sophisticated hedging strategies for larger consumers of natural gas including dollar cost averaging and the use of financial options to name a few.

What is fixed price natural gas and how can I buy it?

Purchasing fixed price gas is easily accomplished in the wholesale gas markets.  Any broker should be able to tell you where natural gas is trading.  The bigger challenge is to determine whether the current market price meets your corporate objectives in terms of budgeting and cost.  The key then is to make sure you know what the current market price is as some gas marketers may charge a significant fee to transact of your behalf.

How can I determine the basis / delivery cost for natural gas?

As with all products, there is a cost to ship natural gas to your location.  Most natural gas today is either produced in the Marcellus Region of Pennsylvania and Ohio or from gas reservoirs in Texas or Louisiana.  The cost of natural gas at various locations around the country is determined by the market every day.
For much of Wisconsin, the proxy price for shipping natural gas is tied to the price of natural gas in Chicago.  This is known as the Chicago city gate price.  This location trades on the ICE electronic trading platform and prices for this location are also reported by industry trade publications on a daily basis.  Just as you can elect to buy natural gas, you can also buy the basis and thus set the cost of getting the gas to you.

How is fixed price gas different from the balanced billing offered by my utility?

These two concepts are as different as night and day.  A fixed price purchased in the gas wholesale markets is simply that.  You and the seller of the natural gas have agreed on a fixed price for a set volume of natural over a set period of time.
Balanced billing on the other hand, as managed by the utilities, divides your estimated bill over a 12 month period into 12 equal parts and then bills that fixed amount each month.   First, the balanced billing amount is calculated at the utilities retail rate and not on the wholesale price.  Second, if the utility misses with their estimate, then at the end of the 12 month period you are responsible for paying the difference.  Thus, balanced billing offers no protection from gas price volatility.

Why would I want to set/buy the basis / delivery cost of my natural gas?

While natural gas has become abundant in the United States, there is still a limitation on how much natural gas can be shipped through the interstate gas pipelines that move natural gas from one part of the country to another.  In the event of severe weather or an infrastructure failure the cost of moving natural can become highly volatile.  For example, during the recent polar vortex, basis for delivery to Chicago went from $0.05 per therm to $1.25 per therm.

Who will actually deliver the gas to my location?

If you buy wholesale natural gas, then the supplier will provide the natural gas and put it into one of the interstate gas pipelines for delivery to your local utility.  Your local utility will receive the gas and then move it through its distribution lines directly to your location.

How many bills will I receive for my natural gas if I buy wholesale natural gas?

If you buy natural gas from the wholesale market, then you may receive two bills.  One bill will come from the local utility for the cost of bringing the gas to your location.  The gas supplier will bill you for the both the natural gas and the cost of shipping it on the interstate pipeline system.  If you opt to retain a broker such as MEP Solutions, then you may receive a third bill for brokerage service.  However, it is sometimes possible to negotiate to have the supplier or broker aggregate the invoices and bill a single consolidated invoice.

Is wholesale natural gas as reliable as gas from my utility?

Yes, it can be.  Interstate pipeline capacity also trades in the wholesale gas market, so if your risk tolerance requires the highest level of reliability, then your natural gas broker can specify the same level of reliability for any new gas supply contract.  However, depending on location, a lesser service at a significantly lower price may be 99.99% reliable.  For example, even during the polar vortex of last winter none of the firm shippers of natural gas were curtailed.  In fact we know of one case in which an interruptible customer last winter had a mechanical breakdown in their fuel back up system and was still able to get gas (just don’t ask the price).

How do I change from utility gas service to wholesale natural gas?

The ability to change services is determined based on the provisions of your utility’s specific gas tariff as approved by the Public Service Commission of Wisconsin.  Some utilities require that a customer provide written notice by March 1st for a change effective November 1st.  Some require a one year notice period.  So by the book, if you just missed the change date, it could take nearly two years to affect a change.  However, depending on circumstances, utilities may, in their sole discretion, allow a customer to make the change on shorter notice.  Each utility has its own forms for initiating a change in service.

Will changing to wholesale natural gas require any physical changes?

Customers switching to wholesale natural gas are required to change to a pulse gas meter that allows the utility to track consumption on an hourly / daily basis (most extremely large consumers of natural gas already have these type of meters).  How this change is done varies from utility to utility, so make sure you inquire with your gas broker on how it is done in your area.

If I am not happy with buying natural gas can I go back to my utility?

Yes.  However, just as the utility may delay changing to transportation service, the utility, dependent upon the provisions of its Wisconsin PSC approved gas tariff, may delay in taking you back under its firm sales service.  Nevertheless, if there is an issue with the wholesale gas supplier, depending on the contract provisions with that supplier, you may change to an alternate wholesale supplier.

We have a really good relationship with our current supplier?

The real question is: how much is that relationship costing you?  If you are not acutely familiar with energy markets, terminology and contracting practices; you may be surprised to find out how much your current relationship is costing you.  There are a number of ways to value the relationship.  First, you could measure it by asking your supplier to document their performance against the rates charged by the local utility.  In a number of audits MEP has found that the client would have been better off with the utility during the polar vortex winter.  Second, if you have access to energy market information, you can track the performance of your current supplier versus the market.  Third, you can bring in experts such as MEP to do a forensic audit and evaluate the current supplier.

We are already receiving a discounted price from our supplier?

Natural gas is a fungible commodity that trades over 100,000 contracts on the NYMEX in New York each business day.  No one sells gas at a discount to the NYMEX price and makes money unless they are making it up in another area.  If they claim to be selling at a discount to the local utility, then they may be making a valid claim.  However, as we discussed in the previous question; always trust, but verify.

What does a wholesale natural gas contract look like?

The standard purchase and sale contract in the wholesale marketplace is the North American Energy Standards Board (NAESB) wholesale gas contact.  The contract contains a master agreement that delineates the standard business terms, i.e., billing period, contacts, credit and force majeure, with a separate transaction confirmation sheet (TCS).  It is the TCS that contains the commercial terms, i.e., price, volume, location, period of delivery, of each agreed transaction.  Some gas wholesalers utilize contracts similar to the NAESB, while others utilize proprietary contracts that are heavily weighted in their favor.  The latter are fairly easy to recognize as they lack specificity as to price, delivery charges or fees.  If your contract contains language that says things like “gold pool” or “reasonable marketing fees”, then you should have cause for concern.

Who are the parties that sell wholesale natural gas?

There are many companies that participate in the wholesale gas markets.  At the upper end are companies with household names such as Exxon, Chevron and Conoco.  However, many of these larger companies do not participate in the Wisconsin retail gas markets such as Wisconsin.  Nevertheless, the companies that do participate in the Wisconsin market often have market capitalization larger than the Wisconsin utilities.  This generally makes doing business with these companies a very low risk proposition from a credit and performance perspective.