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IEU-Ohio
21 East State Street, 17th Floor
Columbus, Ohio, 43215
phone 614.469.8000
fax 614.469.4653

SELECTING SUPPLIERS AND SOLICITING BIDS

Suppliers are commonly referred to as marketers or brokers. Suppliers who take title to the commodity or transmission capacity for resale are called marketers, while suppliers who do not take title are called brokers. However, this distinction may be irrelevant for most consumers who tend to use the terms interchangeably. Most of the commodity purchased is interstate supply; for example, natural gas wells located off the Gulf of Mexico. In addition, in some areas, especially in the natural-gas rich Ohio and Pennsylvania Appalachian region, end-users also have access to "local production" gas, which is natural gas that is locally produced and piped directly into the local distribution company ("LDC"), without intermediate delivery through an interstate transmission pipeline.

End-users may wish to select a supplier based on the quality of service, experience, the financial strength of the organization, and the ability and willingness to structure the transaction to best satisfy end-user needs. Bids for natural gas supply are obtainable based on a fixed price for a term, an index price, or a variable price. As discussed herein, the bids apply to the delivered price of gas to the LDC city-gate, and do not include the distribution charges of the LDC. This is because LDCs commonly charge a standard tariff regulated price for the distribution of gas, and these charges are independent of the supplier's price for the commodity and transmission delivery to the LDC's city-gate.

Fixed Price:
This is a relatively simple pricing mechanism that allows for the straightforward comparison of bids from competing suppliers. The bid price is affected by various factors, such as the transmission delivery route, delivery point, nature of capacity, and market timing. To ensure fairly comparable bids, all suppliers must base their bids on equalized factors. Accordingly, ask for all bids to be priced based on the following specifications:

  1. Equalize the measuring unit: Request bids based on one dekatherm (1,000,000 Btu) of gas.
  2. Equalize the delivery point: Request bids priced to the LDC's city-gate and at the LDC defined local market area in the end-user's consuming facility is located. For example, for a facility located in Akron, Ohio, and served by Columbia Gas of Ohio ("COH"), delivery would be to the COH city-gate at the Akron local market area. As an aside, although the transmission delivery route impacts the price, it need not be specified for this pricing mechanism, since by fixing the delivery point, the interstate delivery route transmission costs will inherently be reflected in the final bid price.
  3. Equalize the quality of service: The quality of service reflects the choice of delivery options and interstate transmission pipeline capacity options selected. The difference lies in the supplier's ability to offer delivery commitments and the end-user's risk appetite and operational flexibility. For example, gas suppliers may sell gas as a firm service without hedging firm supplies and simply provide a mechanism to keep the customer economically whole in the event of supply disruptions, or an end-user with alternative fuel switching capability in case of supply disruptions may choose interruptible service. Capacity options include firm, interruptible, or released capacity. End-users can also choose to vary the capacity type based on seasonal reliability and availability. For example, end-users often select firm capacity during the five winter months and released capacity during the remaining months. To satisfy reliability concerns while controlling costs, it may be possible to arrange for firm capacity during the winter months and released capacity otherwise, and since released capacity is released firm capacity this is the practical equivalent of twelve-month firm transmission capacity. However, firm capacity to the local market area will generally assure arrival of the gas to the LDC's city-gate for redelivery by the LDC to the end-user.
  4. Equalize the temporal range for the commodity and capacity futures market: Contact terms are commonly one year, but longer or shorter terms are available, including purchasing on a month-by-month basis. The end-user's selection of the contract length may depend on factors such as the end-user's facility's needs and price movement in the futures market for the commodity, transmission capacity, and related ancillary services.
    1. Specify the quote preparation date: for example, market close June ##, 20##.
    2. Specify the flow-start date: for example, August ##, 20##.
    3. Specify the flow-end date: for example, July ##, 20##.

 

Index Price:
This pricing mechanism is a combination of fixed and variable components. The commodity price is based on a selected index, and the index price is not hedged or locked in over a term, but instead is allowed to float based on market movement. The fixed component consisting of the supplier's markup and the basis charges associated with the transmission and related ancillary services. The fixed component is locked in over a particular contract term. Index price bids typically appear in the format of the selected index plus the amount of the fixed component. For example, the supplier's bid may state that the price is based on an Appalachian Index plus 0.08 cents delivered to the city-gate for a one-year term. To ensure fairly comparable bids, ask for all bids to be based on the four specifications discussed in the section on the Fixed Price option and the following additional factors:

  1. Equalize the index: Request bids based on the same index. Indexes are pricing mechanisms reflecting the bundled price of commodity and capacity at particular geographic locations along a transmission pipeline's delivery route, and typically rely on transaction prices available in trade publications. Consumers commonly select an index that terminates at or close to their LDC and facility's local market area.
  2. Request the amount of the fixed component on a per dekatherm basis for delivery to the city-gate and local market area. The fixed component should include the charges for transmission and any ancillary services not already reflected in the index price, the shrinkage percent and related costs associated with interstate transmission, and the supplier's markup for services to be rendered.

 

Variable Price:
This pricing mechanism allows the prices of most or all of the unbundled components implicated in delivering the natural gas to the city-gate to float based on market movement. As discussed above, these unbundled components consist of the commodity, the transmission, and various ancillary services associated with delivery. However, the supplier's markup for services to be rendered is generally fixed over a contract term. Comparing competing bids based on a variable price is somewhat more involved than the Fixed or Index Price options. To ensure fairly comparable bids, ask for all bids to be based on the four specifications discussed in the section on the Fixed Price option and the following additional factors:

  1. Equalize the index: Request bids based on the same index. Indexes are pricing mechanisms reflecting the bundled price of commodity and capacity at particular geographic locations along a transmission pipeline's delivery route, and typically rely on transaction prices available in trade publications. Consumers commonly select an index that terminates at or close to their LDC and facility's local market area.
  2. Request the charges for transmission and any ancillary services that are not already reflected in the index price as separately identifiable line items.
  3. Request the shrinkage percent and related costs associated with interstate transmission as separately identifiable line items.
  4. Request the marketer's markup for profit and costs for services to be rendered as a separately identifiable line item.
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