Take a Closer Look at Your Gas Delivery Contract

November 2013

• Just because we don’t have a choice of gas utility for having our supply delivered doesn’t mean we don’t have choices about the services we take from them.
• Most large-volume gas delivery contracts include at least some parameters that can be adjusted to suit the gas user’s requirements.  Important examples include contract demand in Enbridge and Union contracts, injection and withdrawal capacity for Union’s T1/T2 customers, and the mix of firm and interruptible delivery service for firm transportation customers in Union’s northern and eastern regions. 
• Gas users who take their utility delivery services as a “given” are missing out on significant opportunities for gas cost reductions.  Every link in the gas supply chain should be analysed and optimized.

As gas consumers, we generally don’t have a choice who delivers our gas supply to us. Local distribution services are provided by gas utilities who have a monopoly on their service territories. But just because we don’t have a choice of service provider doesn’t mean we don’t have choices about the services we take from them.

In Aegent’s experience, too many large-volume gas users simply take the contract their utility offers, without examination or analysis. And that often means they are spending more than they need to.

Most large-volume gas delivery contracts include at least some parameters that can be adjusted to suit the gas user’s requirements. The most obvious one is the “Contract Demand”, which is the amount of firm delivery capacity reserved for the customer. Rates charged for Contract Demand are usually fixed monthly charges per unit of Contract Demand. Notionally, the customer needs enough Contract Demand to meet the requirements of their largest consumption day of the year. Since Contract Demand is a fixed charge, the consumer wants as little of it as necessary. There are consequences for “overrunning” the Contract Demand – taking more gas on a day than provided in the Contract Demand. But the consequences differ from one utility to the next. There is an economic trade-off to assess between paying for Contract Demand that is not needed versus having a lower Contract Demand and paying occasional overrun charges. Setting the Contract Demand based on historical peak day usage – or worse, peak day plus a margin for “comfort” – may very well result in too high a Contract Demand, and unnecessary costs.

Customers of Union Gas who use the T1/T2 rates also have the opportunity to specify how much injection and withdrawal capacity they need. This capacity is relatively expensive. Union will routinely allocate the customer as much capacity as they are entitled to. However, in many cases, this much capacity is not needed.

An industrial end-user will most likely operate at a high load factor (average daily use close to peak daily use), except during periodic plant upsets or shutdowns.  Such a customer does not have much need for large storage withdrawal capacity (needed when usage significantly exceeds supply) but will need a larger amount of injection capacity (needed when consumption drops unexpectedly). When we take on a new T1/T2 client, we often see that they have more injection/withdrawal capacity than they need.

Does it make sense to have enough capacity to inject all of the daily supply into storage? Not really, especially if plant consumption goes to zero only once a year during a planned shutdown. Better to manage the supply by selling off excess gas during the shutdown, than to pay for storage injection rights for 12 months of the year when they are needed for only 5 days. After all, the shutdown is planned for, why not plan for the gas supply implications? For larger consumers, this simple strategy saves tens of thousands of dollars a year.

For firm transportation customers in Union’s northern and eastern regions, there is an optimization to be made between firm and interruptible delivery service. The firm service comes with a fixed monthly demand charge and a modest variable cost. The interruptible delivery service is entirely a variable or “pay as you play” cost. The optimum mix of the two is something that must be analysed. Customers who meet their peak entirely with firm are likely paying much more than they need to. Every link in the gas supply chain involves costs, risks, and complexities.

Every link requires analysis and optimization to ensure the consumer has access to supply with the desired level of reliability at the lowest feasible cost. Gas users who take their utility delivery services as a “given” are missing out on significant opportunities for gas cost reductions.

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