The Current Natural Gas Market

Natural gas is sold and/or distributed to consumers by the LDCs. LDC natural gas rates are determined through a cost-of-service regulatory process under the jurisdiction of a PUC. Increasingly, though, consumers may now also purchase gas through a variety of other means — usually a gas broker — and have it transported to the city gate of the LDC. The city gate is the delivery point at which the LDC takes control of gas delivered by pipelines and moves it through its distribution system to the customers in its franchise area. The price paid for the gas is market-based and the price paid for its transportation through the interstate pipeline system is regulated by FERC. Currently, the LDCs have exclusive franchise rights for sale of distribution services for delivering the gas from its city gate to the customer's gas service meter.

Gas flows from the wellheads scattered across the country to these gas meters through a massive distribution system that includes interstate and intrastate pipeline and local distribution networks. Most of these networks are woven with cross-connections forming a reliable patchwork of very large centralized trunk lines, with successively smaller branches.

Gas flows to and from massive hubs, or distribution centers, and is priced to consumers based on its cost at the hub plus a transportation differential from the hub to the city gate. When customers select a forward fixed price, the price is built up using the following three components:

1. The NYMEX natural gas futures contract price for the forward month(s), whose delivery location is at Henry Hub in Louisiana. [While there is an additional, smaller futures trading location at the Waha Hub in West Texas, the overwhelming reference point used to price gas from California to Maine is the NYMEX contract at Henry Hub.]

2. A basis differential from the Henry Hub to a local market hub.

3. The transportation differential from the market hub to the city gate.

Whether it is bought by the LDC for sale or by a broker arranging the sale for a customer, pricing is based on the delivery of a given volume at a given time to a given location with a given level of reliability.

Most consumers are not involved throughout the entire process. They most commonly purchase gas from the LDC, based on a price at their meter. Some, usually larger customers, may purchase gas that is delivered to the LDC's city gate by a broker. Either the broker negotiates its ultimate delivery to the facility meter with the LDC or the consumer may play a more direct role in this process. Still, only a few, usually the very largest, customers play an active role in all of the numerous transactions that occur along the way from the wellhead to the burner tip.

Mentioned above, gas, like many other commodities, is sold on the NYMEX futures exchange. It can be bought on a month-by-month basis, or in strips for a given volume at a specific monthly price for a year or several years, with specific volumes locked in for each month. A basis is added to the NYMEX price to establish a price at a given local market hub. Although the basis is traded in an over-the-counter market, the natural gas basis and NYMEX contract together are one of the most volatile and heavily traded products in U.S. energy markets.

In addition to these costs, various other transaction fees are incurred along the way as gas moves from system to system on its way to the city gate of the LDC. For most process businesses, a known, or at least fairly regular, quantity of gas is required every day with known maintenance downtimes and the occasional forced shut down. Most customers, however, have heat sensitive loads that are driven by unpredictable weather. While these customers must have gas as it is needed, it makes it very difficult, and hence expensive, to bring the right amount of gas everyday to the city gate.

Even process oriented facilities experience some variability in their gas use. This may result from the variation in their production levels that depend on market conditions and/or a portion of their load being weather sensitive. The activity surrounding this unpredictability is referred to as "balancing" and usually involves local gas storage and propane-air or LNG injections. The cost of the facilities required in balancing this load is an additional charge that is passed on to the consumer.

Customers that have on-site backup fuels (e.g., fuel oil, propane, etc.) can save money by purchasing their gas and its transportation on an interruptible, rather than firm, basis. For many facilities in distant regions, such as the far northeast, firm delivery is not an option; there simply is not enough pipeline and storage capacity to service the winter requirements of everyone. For others, though, strategically paying for only seasonal off-peak transportation and gas can produce a substantial savings bucket to pay for alternate fuels and fuel-use equipment.

Natural gas is purchased on a firm or interruptible service basis or as a combination of these services. Firm sales are assured, i.e., the broker and/or LDC takes on the obligation to provide customers with as much gas as is required on a year-round basis.

While the commodity may be available on a firm basis, it is necessary to reserve room on the pipelines and local distribution system to ensure firm delivery. Interruptible delivery service, which requires little or no contribution to pipeline demand charges, involves the sale of gas, generally at a lower rate than firm service, when gas is available.

The fixed costs that must be recovered are based on the overhead of the companies involved and include the distribution system, storage facilities, and service and corporate facilities. The variable costs that must be recovered are those associated with purchasing natural gas supplies and transporting them through the vast national pipeline transmission system, and the annual storage activity by the LDC.

Rates are reflective of the degree to which fixed and variable costs are affected by the type of load served and service provided:

• Firm sales and transportation services are the most expensive, because to fulfill the obligation of firm service, the broker and/or LDC must enter into long-term guaranteed supply-purchase contracts. In many cases, they are also responsible for storage practices to keep extra gas available in the event of an unusual winter cold spell or some type of supply interruption. Because firm-service obligations set the level of peak-distribution capacity that must be built and maintained, they have the greatest effect on capital expenditure requirements. Firm service also may include uninterrupted transportation service for third-party purchased gas or backup for facilities using alternative energy sources.

• Interruptible sales and transportation services are less costly because the broker and/or LDC is unencumbered by the obligation of firm service, and they are required to sell or transport gas only when gas or capacity is available. Availability may result from excess gas from firm supply contracts or purchased gas from the spot market. Interruptible transportation service is provided whenever the pipeline and/or LDC have capacity available on their distribution system. Customers contracting for such services have the ability to withstand supply interruptions, typically through the use of alternative energy sources. There are also various levels of interruptible service. In many cases, agreements are made that call for gas service to be interrupted (either by the pipeline or LDC) for a given number of days in the year. This may range from a few weeks to several months, depending on the location of the facility and the price paid.

One of the important industry trends is the switch toward straight cost-of-service pricing for local distribution of transported gas. In some areas, distribution tariffs are negotiated based on competitive alternatives, much like interruptible gas service. This presents certain difficulties for gas marketers and end-users because the LDC ultimately controls the final price through its ability to vary the price of distribution between the LDC's city gate and the burner tip, regardless of the price paid for gas delivered to the city gate. For example, by charging a high price for distributing independently purchased gas from the city gate to the customer's facility, an LDC can make it more attractive for the consumer to purchase gas directly from the LDC. However, the trend continues toward local distribution tariffs that are cost-of-service based for both interruptible and firm distribution services.

Renewable Energy Eco Friendly

Renewable Energy Eco Friendly

Renewable energy is energy that is generated from sunlight, rain, tides, geothermal heat and wind. These sources are naturally and constantly replenished, which is why they are deemed as renewable.

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