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Natural Gas Primer
Natural Gas Primer Glossary of
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Under traditional cost-based regulation, customers received a single bundled price for natural gas delivered to the burner tip, which is the final price at the point of consumption. On the other hand, by choosing a competitive supplier, the burner tip price reflects the sum of the unbundled components. Normally, consumers can commonly purchase their natural gas either as tariff customers (the non-competitive alternative) or as gas transportation customers (the competitive shopping alternative). The competitive shopping alternative for residential customers is frequently referred to as choice instead of gas transportation. Consumers can continue to purchase their natural gas from the local distribution company ("LDC"), generally referred to as purchasing "tariff" gas. Alternatively, consumers can choose to shop for the natural gas commodity and transmission along with related services in the competitive market. Under either alternative, only the charges associated with the commodity and the transmission and associated charges are subject to competition. The charges for distribution and associated ancillary services components are regulated and are not subject to competitive procurement. Only the commodity and transmission and related ancillary services components can be competitively procured on the open market. However, whether the end-user purchases gas from the LDC or another supplier, the LDC will continue to perform the standard LDC functions, such as read meters, respond to emergencies, and maintain the LDC owned distribution pipeline systems.

Non-Competitive Shopping:
Natural gas customers that choose not to select a competitive supplier for the natural gas commodity are supplied the commodity by the LDC, based on the LDC's "tariff" rate. The tariff rate is a rate on file with the state regulatory commission for both the distribution and commodity components. In Ohio, the commodity component is called the Gas Cost Recovery ("GCR") rate, which is a bundled price comprised of the commodity and transmission components. LDCs are presently required to purchase the commodity from the marketplace and to supply end-users that do not select an alternate supplier. LDCs merely pass on the costs associated with procuring the commodity based on a cost recovery mechanism administered by the state regulatory commission. This cost recovery mechanism is called the GCR mechanism; an automatic mechanism established in the 1970's. The GCR mechanism operates to reimburse the LDC for actual costs incurred for procureing the commodity, without an added profit margin. Ohio LDCs make no profit on the commodity procurement component; however, the LDC does make a profit on its distribution delivery service. The GCR mechanism adjusts the GCR rate quarterly to reflect changes in the LDC's cost of procuring natural gas and having it delivered to its city-gate.

Competitive Shopping:
In a competitive market, customers are free to self-supply or choose an energy supplier based on criteria such as service, price, variety of offerings, and value. As described above, the state regulatory body, in Ohio the PUCO, sets each LDCs tariff rate for distribution services and the GCR, the bundled price comprised of the commodity and transmission components. End-users not shopping competitively pay the tariff rate. On the other hand, the competitive alternative suppliers charge market-based rates, and are also able to offer shopping choices and options that LDCs are not permitted to offer. For example, by shopping competitively, consumers have the option to fix the commodity and transmission delivery price to the city-gate for a term, for example one year, or buy the service based on the fluctuating market price for the commodity and transmission delivery. Additionally, by participating in competitive gas transportation, consumers can structure their commodity delivery to the city-gate by selecting from a menu of unbundled services, such as selecting the transmission capacity type, delivery point, transmission delivery route, or ancillary services such as storage and banking. While there are no guarantees, end-users generally select the competitive alternative because of the potential for savings over the tariff purchase option's GCR rate.

End-users that select the competitive shopping alternative would do so under the gas transportation or Choice options, as offered by the LDC pursuant to a program approved by the oversight state regulatory commission. For example, beginning in the 1970's with Ohio's self-help program and through other regulatory programs in other states, most industrial end-users have been able to make direct arrangements for their natural gas supplies with alternative suppliers. Most competitive shoppers, especially residential and small-commercial consumers, make arrangements with a supplier for the procurement of the commodity and its transmission delivery to the LDCs city-gate. However, some competitive shoppers, generally end-users with very large consumptions, choose to self-supply, instead of selecting a competitive supplier. Self-supplying involves arranging for the procurement and transmission delivery services without involving a competitive supplier. Self-supplying involves strategic decisions concerning both the physical and financial portfolios necessary to procure and manage commodity and transmission delivery prices and risks. A discussion of this topic exceeds the scope of this writing. In either case, instead of the GCR rate for the commodity under non-competitive shopping, the competitive shopper's price of the commodity is based on the market price of the commodity and the end-user's contractual arrangements with the supplier, if any. In addition to the cost for the commodity, the competitively shopping end-user must also pay for the transmission costs associated with moving the gas from the source, for example the wellhead or storage, to the LDC's city-gate at the point of consumption. However, even the competitively shopping end-user pays the LDC the standard applicable tariff rate for the distribution service to deliver the gas commodity from the city-gate to the end-user's facility.

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