Two Critical Components of a Natural Gas Offer in California

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California is one of the largest deregulated natural gas markets in the United States. Retail natural gas suppliers compete for business so that consumers get the best price available. Not all suppliers offer identical products, so it’s important to know exactly what your offer includes before selecting a supplier. There are two critical components of a natural gas offer than can vary from supplier to supplier: transportation and swing tolerance.

Only 9 percent of the natural gas consumed in California is produced in California, the rest is brought in via interstate pipelines.* Once in California, the natural gas is transported to the utility’s distribution system which carries the gas the rest of the way to the customer’s premise. The cost of this transportation service is paid for by the customer of one of two ways:

• Embedded in the commodity price. Some suppliers will include the transportation costs in their commodity price. This may be called an “all-in” price or a “delivered” price. These offers will not have any transportation pass-through fees attached.
• As a pass-through. The transportation cost may be separated from the commodity cost when an offer is presented to a customer. This is often described as a “transportation pass-through” or a “border price” and can be misleading if not fully understood. A transportation pass-through offer may appear much cheaper than an embedded transportation offer if the transportation cost is not considered.

Swing tolerance is another attribute of a natural gas offer than can result in an apples-to-oranges price comparison. Swing tolerance describes the allowable usage fluctuations for a customer described in the contract with their supplier. As natural gas usage fluctuates with weather or behavior, the customer’s supplier will provide additional natural gas or dispose of excess natural gas as needed at the contracted rate up to a defined threshold. Once the usage exceeds this threshold, an excess or deficient adder will be applied to additional units of natural gas. The three common thresholds are:

• 100% or Full Requirements: This means that the customer can use more or less gas as needed at the contracted rate. Typically a full requirements offer will have the highest per unit cost compared to a limited swing or no swing contract. This premium can be described as an insurance policy that the customer purchases to cover usage fluctuations.
• Limited Swing: This is often 10 percent or 25 percent. Under these limits, the customer can swing some at the contracted rate and may incur excess or deficient adders for swing that exceeds the limit.
• 0 percent or No Swing: Any fluctuation from the contracted volume will incur excess or deficient adders. A 0 percent swing product will typically have the lowest per unit rate; however, excess and deficient adders must be considered since no swing is covered in the contract.

Direct Energy Business has been in the California gas market since 2012 and is actively serving small to large commercial and industrial customers behind Pacific Gas and Electric, Southern California Gas Company, and San Diego Gas and Electric. Learn more about our full suite of products available to help serve your energy needs.

*Source: http://www.cpuc.ca.gov/puc/energy/gas/natgasandca.htm

Posted: April 29, 2015