Contracting Wisely for T1 Can Reduce Costs

September 2008

The T1 distribution service offered by Union Gas provides larger gas users an opportunity to reduce costs on distribution services, but only if they contract wisely. In Aegent's experience, T1 customers too often "over-contract" for T1 services, and end up missing a chance to achieve significant cost reductions.

Bundled distribution rates, like Union's M4 rate, combine load balancing services with distribution services, and all users in that rate class pay the same unit cost for load balancing, regardless of how much they need.

T1, on the other hand, is a "semi-unbundled" rate that allocates a certain amount of storage space and injection and withdrawal rights to users for load balancing purposes. The rate allows users to contract separately for storage capacity and for transportation capacity. Within limits, gas users on the T1 rate can tailor the amount of load balancing capability and the amount of transportation service they take. By contracting only for the level of service they need, customers can reduce costs.

After lengthy proceedings, the Ontario Energy Board earlier this year established new rules for the maximum storage resources that customers would be entitled to obtain from Union under the T1 rate. The maximum storage space allocation for process loads is 15 times the customer's Daily Contract Quantity (the DCQ is the volume of gas to be delivered to Union each day under the direct purchase contract). The maximum injection and withdrawal rate is equal to the greater of the customer's DCQ or the DCQ minus the transportation Contract Demand.

In our experience, Union Gas tends to offer customers a T1 contract with the maximum values in it. As one Union rep expressed it, "all of my customers just want the max." That's unfortunate.

Under the T1 rate, the difference between the Daily Contract Quantity and the gas usage at the customer's plant automatically is injected into or withdrawn from storage to balance the load. Most industrial gas users are "high load factor". This means that their peak daily usage is not that much higher than their average daily usage, so the amount likely to be withdrawn from storage on a normal day is relatively small... certainly much less than the Daily Contract Quantity. Someone who contracts for the maximum withdrawal rights will have far more withdrawal rights than they would need, most of the time. And withdrawal rights are an expensive fixed cost in the T1 rate.

What about injection rights? Customers will inject into storage if plant consumption drops below the average daily usage, which will happen from time-to-time. Sometimes this drop is related to normal production schedules (weekend consumption may be less than weekday, for example), or it could be related to plant operations (a chemical plant with three trains may operate at 1/3 load, 2/3 load, or full load). Each customer can examine their load history in light of what they know about their operation, and determine what the maximum injection requirements are likely to be.

Again, the customer can save money by contracting for only the amount of injection capacity that they need.

In fact, the T1 contract allows customers to contract for unequal amounts of withdrawal and injection capacity. And since the needs for injection and withdrawal are unequal for many industrial users, it makes sense to explore this option.

What about plant shut downs? Many industrial facilities must shut down completely once or twice a year for maintenance. During this period, consumption goes to zero, and the full Daily Contract Quantity has to be injected into storage. What then?

Gas users have some options. Depending on the time of year, Union may permit overrun injection. This could allow the customer to inject the full Daily Contract Quantity at a small incremental cost during the shut down period. Or, again depending on the time of year, Union may grant permission to suspend deliveries of gas to them, and the gas user can sell the gas back to suppliers during the shut down. While both of these require permission from Union, usually one or the other option will be available.

It's true that reducing costs in the T1 contract might require a higher degree of involvement by the gas user, but the cost savings can be worth it. Consider the example of an industrial user with a Daily Contract Quantity of 3000 GJ/d and a load factor of 80%. Operational characteristics mean the plant usage can go as high as 3,750 GJ/d and as low as 50% of peak day, or 1,875 GJ/d. Once a year, the plant has a shutdown for a week.

The customer would pay approximately $70,000 a year to Union Gas for the default injection and withdrawal rights of 3000 GJ/d (equal to the DCQ), in addition to the other charges under the T1 rate for storage space and transportation services.

However, the customer could contract for 750 GJ/d of withdrawal rights and 1,150 GJ/d of injection rights for an annual cost of just over $22,000, while still meeting normal operational requirements. This is an annual savings of about $48,000! True, the customer would have to put in place specific measures to handle the annual shutdown, but an annual savings of $48,000 likely justifies the additional work involved. And for customers who do not have the resources or expertise, the potential savings would more than offset the cost of retaining the necessary expertise.

The optimization of injection and withdrawal rights is just one example of a number of ways customers can achieve cost savings by close analysis of their transportation and distribution contracts.