MADISON, Wis., Oct. 27, 2016 /PRNewswire/ -- This article, originally published in the Wisconsin Association of School Business Officials magazine, discusses some common features in wholesale gas purchasing programs that often cause those seeking savings to actually lose money. This article provides some guidance on key areas to focus on in order to turn these programs around and begin saving money.
Areas covered include
Gas Contracts – Many retail gas contracts have vague or unverifiable proprietary pricing provisions. With these types of contracts the pricing provision can best be summed up as saying "you will pay me whatever I bill you." The gas pricing provision should be built around published and verifiable industry pricing at a location in proximity to where the gas will be consumed. It is also important to understand the risk profile of daily, monthly and strip pricing. In any case, gas pricing should be auditable by your accountants. If the pricing cannot be audited, then you have a potentially serious problem.
Gas Transportation – It is not unusual for a gas purchasing program to be started without fully understanding the natural gas supply chain. Many would-be buyers get entranced by the daily trading of the NYMEX and fail to realize that there is a delivery cost for natural gas that is not addressed by the NYMEX. This transportation component, or basis as it is also known, can actually be the most costly part of the gas supply chain. One Wisconsin manufacturer paid $2.70 per Therm for part of his natural gas during the Polar Vortex of 2014 when he thought he was fully hedged at $0.40 per Therm. Such a mistake can cost tens of thousands of dollars.
Metrics – A good gas purchasing program is metrics driven. Most gas consumers that leave a gas utility to pursue wholesale natural gas fail to do any metrics to validate their programs. No one leaves the local gas utility so that they can spend more money with a retail marketer, but this frequently happens. All of the rates and charges for the gas utility are publically available through the utility or the state public service commission. Therefore, performance metrics should be a key part of any gas purchasing program.
Given the number of these programs that lose money, there should either be someone in-house that can properly evaluate the metrics or there should be consideration given to bringing in outside expertise.
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SOURCE MEP Solutions, LLC