After evaluating the purchasing trends of local distribution companies (LDCs) during the 2001-2002 heating season, the American Gas Association (AGA) said it believes longer term supply contracting may assume more importance in the future.

While LDCs have tended to focus on shorter term and spot contracts to pursue the “least cost options” for their peak requirements, “recent developments in market volatility, particularly as they apply to natural gas acquisition prices, may result in a re-examination by consumers and regulators of supply acquisition contracting, with less emphasis on absolute least cost and more emphasis on price stability,” the AGA said. As a result, “longer term supply contracting may become a larger part of the gas supply mix once again.”

A survey conducted by the AGA Gas Transportation and Supply Operations Task Force, which quizzed 32 LDCs in 25 states about their purchasing activities during the 2001-2002 heating season, revealed that the majority of companies relied on long-term contracts (one year or longer) and mid-term agreements (more than one month, less than one year) to acquire peak-day gas supplies last winter.

Long-term agreements were used by 24 of 29 respondent-companies and accounted for more than 50% of the purchased gas for 11 companies on a peak-day basis, while mid-term agreements were used by 22 LDCs and met more than half of the peak-day gas needs of 10 LDCs last winter, according to the task force’s “Winter Heating Season Performance Survey” released last week. Sixteen of the surveyed LDCs used the daily market, it said, but only one purchased more than half of its peak-day requirements on a spot basis.

Many LDCs cited producers, producer marketing affiliates, pipeline marketing affiliates and independent gas markets as their principal gas suppliers. In fact, six companies reported that independent marketers provided 76-100% of their peak-day requirements during the 2001-2002 heating season, the survey noted.

Purchases via pipeline transportation, pipeline storage, citygate supplies for transportation customers and citygate purchases for sales customers accounted for the bulk of the gas delivered to LDCs on peak days last winter, according to the AGA task force. Sixteen of 31 companies reported that 26-50% of their peak-day deliveries originated as firm transportation supplies; 11 LDCs said a like percentage was sourced from pipeline storage; and 11 companies said between 2-20% of peak-day supplies originated from liquefied natural gas (LNG) and propane-air peaking facilities.

The surveyed LDCs reported that they had planned for an aggregate peak demand of 33,334,141 Dth for the 2001-2002 winter. But due to the warmer-than-normal temperatures, their aggregate peak-day sendout was only 23,368,957 Dth for the entire period, the AGA task force said.

Three-fourths or 24 of 32 companies contracting for long-term supplies used a first-of-the-month index (FOM) to price their gas, with 14 of the companies accounting for 76-100% of purchased gas as FOM, according to the survey. For mid-term contracting, 20 LDCs used a FOM pricing mechanism as well, but 15 LDCs also used monthly agreements while the daily price market guided eight companies.

More than half of the surveyed LDCs (55%) reported that they used financial instruments to hedge at least a portion of their gas supply purchases. Eight of the companies said they hedged more than half of their gas purchases, the survey noted. In addition, 16 of 30 LDCs used fixed-price contracts to hedge a portion of gas volumes delivered on a peak day.

“The use of financial tools may be understated in this report inasmuch as some volumes delivered to LDCs from marketers and other suppliers are hedged by the third-party rather than the LDC or customer and may have been excluded from the LDC hedging calculation,” the AGA task force noted.

On the physical side, companies reported they viewed gas delivered to storage during the summer refill season as a price hedge against potential winter run-ups, and 63% (19 of 30 LDCs) indicated storage was a primary hedging tool.

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