Buying natural gas: What you need to know


CLEVELAND, Ohio — The same natural gas suppliers who are trying to persuade consumers to sign long-term contracts have again proved they are willing to sell gas for a lot less than the advertised price.

In fact, they are willing to sell at deeply discounted rates that look more like wholesale than retail prices.

Constellation Energy, Direct Energy Services, Interstate Gas Supply, or IGS, and Volunteer Energy Services currently offer Ohio consumers fixed-rate and monthly variable-rate contracts — all at higher prices than what they have agreed to charge in state-monitored auctions.

These four companies and four others battled it out recently in auctions to supply a portion of the gas that Dominion East Ohio and Columbia Gas of Ohio will need to supply customers who buy their gas through each utility’s Standard Choice Offer, or SCO.

The SCO is a rate that varies monthly because it is linked to the national commodity price of gas set on the New York Mercantile Exchange, or NYMEX.

The auctioneer began each contest by offering competitors a relatively high profit margin over the national commodity price of natural gas. Then, in a series of bidding rounds, he reduced that margin until he reached the point where the surviving bidders were still willing to supply enough gas — but at the lowest profit margin.

The names of the winning companies in the Dominion bidding were released this week in a filing that appeared in a case docket at the Public Utilities Commission of Ohio.

Columbia’s auction occurred two weeks earlier and most of the same companies emerged as the suppliers to Columbia’s SCO customers, as well. (More on that below.)

A fifth winner in both SCO supplier auctions was DTE Energy Trading. It’s a subsidiary of Michigan-based DTE Energy, which also owns DTE Energy Supply, a company that offers consumers retail contracts.

The auction battle for Dominion’s SCO customers ran through 16 rounds, eliminating three of the eight competitors before it was over — an indication of how much the gas suppliers wanted to win SCO customers — if only to have the contact information.

Typically, the companies supplying SCO customers try to sell them a retail contract, especially a long-term, fixed-price contract. But the SCO is designed for consumers who don’t want to choose a gas supplier — in other words, for consumers who choose not to choose.

Dominion and Columbia automatically enrolled these diehards as SCO customers when the utilities stopped actually selling gas and became delivery-only companies. By law, utilities are not permitted to make money on the sale of gas, only on its delivery.

Consumers who previously chose a gas supplier on their own or who let their city choose a gas supplier but who now want the SCO won’t find easy directions to do it at the PUCO. And the companies supplying their gas won’t tell them how to do it.

They must call Dominion or Columbia and request the SCO.

Many gas suppliers don’t like the SCO and want the state to eliminate it, as it already has for small commercial customers. The issue has still to be resolved by the Public Utilities Commission of Ohio.

The independents see the SCO price as unfair rather than a benchmark price because it does not reflect the expenses they incur marketing retail contracts one customer at a time.

Their argument has been that if the SCO were eliminated, retail competition alone would drive down prices. The Ohio Consumers’ Counsel rejected the “free market” argument years ago and suggested the SCO as a way to create competition. The OCC offers what amounts to a short course on the SCO and updates retail contract offers weekly on its website, available by clicking here.

Another argument from the independent retailers, which made a lot of sense before shale gas development, is that a fixed-price contract protects customers from winter price spikes. In other words, consumers are paying for an insurance policy and the supplier is taking the risk of having to buy gas at astronomical winter prices.

This year’s Dominion auction showed just how starkly different the SCO and retail contract retail prices can be.

The winners agreed to charge SCO customers just 2 cents above the monthly NYMEX price — a record low.

They could do that because they can buy shale gas from wells in this region at prices much lower than the NYMEX national price and move it into Dominion’s Ohio pipelines and enormous underground storage. In other words, they are still making money at 2 cents above NYMEX and their risk is low.

The new 2-cent “retail adder” begins in April.

The current retail adder, set a year ago when the region’s shale gas production was not as high, is 43 cents, meaning SCO customers have been charged 43 cents above the price set on NYMEX every month since last April.

That SCO price was on most months below fixed-price contract prices and in nearly every case below the monthly variable price offered by many of these same companies in month-to-month retail contracts.

The story is similar for Columbia customers, though the prices are much higher, because suppliers pushing gas into Columbia’s pipeline system are said to be unable to draw from the same regional shale gas glut that flows into Dominion’s system.

Seven bidders competed for seven rounds in the Columbia auction. The bidding ended with a “retail adder” of $1.29 — which the PUCO approved and will add to the price set monthly on the NYMEX.

In other words, the auctioneer was not able to secure enough gas for Columbia’s SCO customers at retail adder price less than $1.29. The rate is just 11 cents below the adder set a year ago.

The five winning bidders in the Columbia bidding were Constellation Energy, Direct Energy Services, DTE Energy Trading, NextEra Energy and Volunteer Energy.

Constellation and Volunteer Energy offer monthly variable rates contracts to consumers. The current Volunteer rate is actually less than the SCO.  Constellation, Direct Energy and Interstate also offer long-term, fixed-rate contracts at higher prices.

The bottom line? Consumers who can stomach a little uncertainty should seriously consider the SCO. And consumers who live in a community represented by the Northeast Ohio Public Energy Council, or NOPEC, ought to look at its offers, available by clicking here.