Please explain gas company jargon before I explode

May 12, 2008 12:33 PM

I'm helping out a small not-for-profit with their financials and cost-containment. I've received a letter from our local natural gas provider which is confusing and (of course) it has been impossible to find anyone at the company who can give me a straight answer. So, it is up to me to decide, should we take their offer or not when it comes to signing a contract for gas rates?

Here is the letter sent to us from Integrys:

VARIABLE PRICE--The variable price is *Index + $.06 per therm for 12 months beginning with your July meter read. The variable price allows you to float with the market while retaining the flexibility of locking in at a fixed price at any time during this agreement. The variable price can change monthly based on current market conditions.

Your contract will automatically renew for a one-year period under the variable price if you do not respond to this letter. If you do not respond by May 15th, your effective price starting July 2008 will be the variable price of Index* + $.06 therm for 12 months. As always, you acknowledge that you are responsible for "pass through charges".

The Variable price is the 'avg' price published by Natural Gas Intelligence, in its Biweekly Survey, for the applicable month, under 'Midwest', for 'Chicago citygate' any successor index ("Index"), converted to a price per therm or +$.06 per therm of gas you use.

Um, okay. What the hell does that mean? And what are my other options? This is one of the worst letters written to a customer that I have ever read (and I used to administer VERY complicated benefit plans for a living).

Help!

posted by jeanmari to grab bag (3 comments total)

Natural Gas Intelligence.

Get out your gas bills for the last couple of years, or request a use history for the address(es) your client organization heats. Figure out how many therms a year you use, and if there are electives in that use (heating of meeting hall spaces, time of day use factors, capital improvements like new heating system or components, etc.) that impact the historical use factors. Come up with an average use, or maybe a moving average use, in therms, for the heating season. See if this is a significant expense to your organization, and if trying to actively manage it is worth your time. ($500 worth of your time, to manage a $100 a month heating expense to small office space, with no elective factors - nope. $200 worth of your time to manage $1000 a month expense for heating large after school care facility, with lots of elective changes possible over previous heating seasons - yes!)

If you decide not to manage it, decide if you'd rather lock in your gas price, and forget about it, or take some market and weather risk for possibly lower pricing. If your usage is small, lock in at the lowest rate you can get, and forget about this until next year. You'll have to respond to this letter, with what you want to do, to exercise that option.

If your usage is greater, and you have reason to think it will be a warmer winter than usual, ride the market, until prices go down. Lock in then. Or, guess wrong, and watch prices go up, and panic, and lock in then, kicking yourself as you do. Or do nothing about price variation, and just keep paying your bill and believing in the power of the market. Any way you go on the variable option, you'll need a subscription to NGI, some time each month to track their price averages, some time each month to check that against your billed price and usage, and the inclination to do this.

If you don't respond to the letter, you'll be on variable pricing. That's the real thrust of the letter.

Frankly, off the top of my head, looking at this chart (which shows Chicago's Henry Hub spot price in May, 2008 at about $1.13 per therm, if I did the math correctly), the trend for gas pricing is not in favor of continuing on variable pricing. And they are locking in $0.06 per therm you use, for themselves, even on variable pricing, and you are still on the hook for "pass through costs" if extraordinary situations throw the usual markets into turmoil, whatever you do.

What other suppliers are available to you? What are their pricing schemes?
posted by paulsc at 2:14 PM on May 12

Wow, thank you. Lots of detail and VERY helpful.
posted by jeanmari at 8:27 AM on May 14

This is normal in the industry. I would try to fix a price. Gas prices tend to go up and not down.
posted by charlesv at 10:43 AM on May 16