After the deregulation of utility service in 1984, uncertain market prices replaced known, set prices for gas and electricity, creating significant budgeting problems for public agencies. Since most of these agencies have fixed budgets for utilities, if natural gas expenses exceed budgets, administrators are forced to reallocate funds from critical mission needs.
Natural gas is the second most volatile commodity traded in American futures markets, fluctuating between 21 and 30 cents per therm in the year 1999, with huge monthly fluctuations and daily spreads occasionally reaching 5% or greater. Compounding the difficulty of maintaining consistent levels of service is the fact that local gas utilities are not necessarily bound to deliver the full quantities needed by institutional customers, as they were before deregulation.
In California, 1996 was a particularly volatile year for natural gas, with prices doubling over one winter, causing budget overruns for many customers. In response, officials at the California Department of General Services' Real Estate Services Division (RESD) began to investigate risk management strategies that could help institutional customers insulate themselves from some of the dangers of the market.
In doing so, the RESD created the Natural Gas Services program (NGS), an initiative designed to connect public sector needs to market opportunities. Many regulations designed to protect public funds put constraints on public agencies' bidding power, especially in a market like natural gas where short-term price volatility means that bids may only be good for a few hours. At NGS, the program staff members use their expert knowledge of trade in natural gas and quick turnaround times to ensure steady and fair prices for public agencies.
NGS features a tiered portfolio with ceiling prices to mitigate high market values and protect critical mission functions, but allows participants to reap the benefits of a falling market in gas, unlike fixed-price schemes. Through a three-tiered procurement, 75% of the total volume needed is protected by a ceiling from market price spikes, as well as 75% of the total volume having no floor, allowing price decreases to benefit pool members. Program participants can also buy into a storage pool to protect against limited supply, when capacity constraints limit interstate deliveries; by pooling storage needs, members pay less than they would individually for comparable service.
The program's results speak for themselves; in 1999, 115 separate NGS customers saved over $2 million based on what they would have paid local utilities at base rates over the year. In Southern California, the cost per therm for pool members varied by only 10%, versus the 23% resulting from a straight index-based delivered price. The number of accounts served doubled between 1996 and 2000, as did the total gas volume handled by the program, with a customer-retention rate of nearly 100%.