Author: Renato Nitura, Account Manager, Kinect Energy
I recall a time when I worked for a natural gas utility (Local Distribution Company – LDC) here in Colorado. Gas Transportation was somewhat of a newer service offering (some 20+ years ago) and was starting to gain some traction in the local marketplace. Marketers flooded the arena, explaining to potential customers how this service worked and how it may benefit their natural gas spend (lower and/or controlled costs). They no longer had to accept the utility’s gas sales rates but could instead have access to the open market and competition. Many potential customers assumed that such marketers had a good understanding of what they were promoting and selling. Imbalance management was a service many marketers capitalized on.
I specifically recall one gas marketer who was somehow happily and surprisingly shocked that he was receiving monthly checks from the LDC. These monthly checks were akin to getting a gift for no apparent occasion as far as he was concerned. His misconception drove him to intentionally create sizable over delivered imbalances every single month on the LDC’s system in order to receive a check. Somehow, he genuinely believed he was gaming the system and taking advantage of the LDC. What he did not seemingly understand was that the LDC was actually buying his excess gas supply at a heavily discounted rate.
I suspect this marketer simply had no idea that this “gift” was actually costing his company greatly. The marketer did not last long operating under this gross misunderstanding. This is a clear example of not appreciating imbalance management as a real cost component and not grasping the consequences for mismanagement.
Let’s start with the foundational basics. So what exactly is an imbalance? It is the variance between what a Shipper has available for its use (Confirmed Receipt) and its actual demand (metered/transported volume).
|Confirmed Receipt||Metered Volume||Imbalance||Position|
|100 dth||132 dth||(32) dth||Under delivery|
|100 dth||85 dth||+ 15 dth||Over delivery|
An imbalance is often calculated on a daily basis and may accumulate over the course of the month with the sum of the daily imbalances resulting in a Monthly Imbalance. Think of the above scenario like a checking account. A Confirmed Receipt is similar to a deposit to the account and the metered volume is similar to a withdrawal on the account. The Shipper’s (the checking account holder in this illustration) goal should be to keep its deposits and withdrawals fairly close to one another so that the net effect (imbalance) is as close to zero as reasonably possible at the end of some designated time period.
Let’s focus on monthly balancing on a LDC’s system. A Shipper is said to be over delivered when at the end of the month, the Shipper has delivered more gas supply to the LDC than it required. Conversely, if the Shipper has used more gas than it delivered to the LDC, then the Shipper is said to be under delivered.
So what happens to this imbalance and why does it matter?
The LDC’s tariff will likely outline how the Shipper’s imbalance position shall be cured. A LDC may allow the Shipper to carry the imbalance forward into the next month with certain gas scheduling procedures available for curing the imbalance. A Shipper may also have the option to trade their imbalance with another Shipper on the LDC’s system so long as the imbalance trade improves both parties imbalance position meaning the imbalances must be in opposite directions. The LDC may even implement a Cashout policy as the imbalance cure. For instance, a LDC may purchase an over delivered volume from the Shipper or sell gas supply to an under delivered Shipper.
Cashouts are generally structured to be punitive to Shippers in order to encourage responsible imbalance management practices. The LDC cashout rate for the purchase of gas supply may be at prices less than market price (discounted price), meaning the Shipper will pay a higher rate for its gas supply than what the Shipper will receive in return (as was the case noted above). In the case of an under delivery, the LDC may sell gas to a Shipper at an above market price (inflated price). The Shipper is subjected to an additional cost for the imbalance in either case.
Some LDCs have Imbalance Tiers which are dependent on end of period imbalance percentages (formula for an imbalance percentage = Dth Imbalance/Dth Usage). As the imbalance percent increases, so does the related costs. A higher tiered over delivered imbalance may be cashed out at a more heavily discounted price, whereas a higher tiered under delivered imbalance may be cashed out at a higher premium.
LDCs also desire to keep their sales customers insulated from any cost causing behavior of Shippers. Imbalance policies and procedures can be an effective tool used to influence a Shipper’s management of imbalances. The lack of imbalance provisions may result in a Shipper taking advantage of a LDC’s rate payers by using or not using its own gas supply depending on actual market price conditions. Imbalance policies and provisions give the LDC some level of assurance that Shippers will conduct business in a responsible manner and also provide a means of recovery for the mismanagement of imbalances.
Balancing service is not always available to Shippers. A LDC may, from time to time, call a restriction (sometimes known as an Operational Flow Order or OFO) when its ability to meet its firm obligations (sales customers and firm Shippers) is jeopardized. Balancing on the LDC is either not available or available under limits during an OFO. If an OFO has been called for over delivery restrictions, this means the Shipper should at a minimum use the gas supply it delivers to the LDC. Such events may happen during warmer periods or when storage capacity is limited. An OFO for under delivery means the Shipper should avoid using more gas than it has delivered to the LDC. This may happen during periods of extreme cold and when the LDC’s ability to meet the demand of its sales customers and Firm Shippers (priority of service) is compromised. Non-compliance with an OFO typically results in OFO related penalties and in rare cases even curtailment.
Shippers should have a good understanding of tariff policies and procedures related to imbalance management. Imbalance positions should be monitored regularly and corresponding adjustments made to Confirmed Receipts. Effective imbalance management can be a vital piece of managing the overall delivered gas costs for a Shipper through penalty avoidance and the mitigation of cashout costs. Imbalances are certainly not intended to be a gift that keeps on giving.