News

Posted On: 06/28/2004

Stock up now for potential energy savings

The sun is high in the sky, temperatures are soaring and you're worried about your building's air-conditioning unit breaking down. It may seem hard to believe, but this is the perfect time of year to be thinking about buying the oil or natural gas you'll be using to heat your business this coming winter.

 

"Generally speaking, this is the time of year when the prices for natural gas and #2 heating oil are at their lowest," says Rachel Baugher, president of Utility Analysts, a company that specializes in energy planning and utility bill review in Canton, Conn. "The demand for these types of energies drops in June and July and so does the price, but few businesses realize that they can take advantage of this time to set themselves up for better pricing come colder weather."

 

Generally, heating oil and natural gas pricing declines in the late spring and early summer months because the heating demand has gone away and the need for gas used in cooling has not reached is peak. Although this year has been a bit of an exception due to the OPEC production concerns and the Middle East struggles, the summer months still offer pricing options worth shopping for.

 

Whereas most companies that provide #2 heating oil and propane are flush with cash during the winter months, they all see a dramatic decrease in business once they have provided the final winter deliveries for their customers. This puts the pinch in their pocketbooks. Many of these companies offset the downside by offering reduced fixed pricing for customers who are willing to prepay for a determined amount of oil for the coming winter. Many of these programs are offered only in the months of June and July and have a cutoff date of July 31.

 

"The upside to these advanced purchasing plans is you get a reduced fixed price on all your winter deliveries from the oil or propane provider," Baugher says. "The downside is you have to prepay for your entire winter's worth of energy, which could be a considerable amount for most businesses. You're also locked into this rate even if the market pricing declines, but that has been pretty rare as of late. Another problem this year is oil prices haven't dropped as much as they have in the past because of the turmoil in the Middle East. The bargains are not as big, but they are still bargains."

 

You may have some success in finding a provider that will negotiate a fixed price with no prepayment requirements, but the price under these types of agreements will generally be higher than when the customer is required to prepay.

 

Baugher illustrates how the lock-in programs work. She has used pre-payment programs for her home use during the past five years and says she has saved money each year. "The most notable savings was the winter of 2002, when I locked in a rate of 62 cents per gallon for oil. By January of that winter, we had a major price spike where the gallon price here in Connecticut hit over $2.  Needless to say, I felt pretty good about my decision," she says.

 

There is another option for those businesses that do not want to tie up their finances with prepayment or feel that the energy prices may go down. You can negotiate a "cap price," which is nothing more than a ceiling on what the company will pay for its oil or gas for the winter. For example, if Acme Oil Co. offers a capped price of $1.15 per gallon, the delivery price will never be higher than this price. However, if the market eases up and crude oil prices decrease, the customer may end up paying a lower market price.  "While this sounds like a no-lose situation," Baugher says, "it is important to note that the capped price will generally be higher than a fixed price by several cents per gallon to cover the provider's 'hedge' or risk that they may have to pay the higher prices during the winter with no recovery from the customer."

 

In most states deregulation has enabled commercial customers to shop for gas in much the same way as they do for oil. Although the local distribution company (LDC), the gas company that owns the customer pipelines and meters, continues to provide the transportation of the natural gas, the gas itself can be purchased from third-party vendors who specialize in the purchase and sale of natural gas.

 

"Generally speaking, third parties offer a more competitive pricing structure and the opportunity to lock in the price," Baugher says. "This is because the LDC often charges a 'fuel surcharge' to recover any price increases it incurs in buying the gas to supply its customers. Because of this, a business may be able to lock in a $.80/ccf price for a 12-month period with a third-party vendor. While that same business may find that their local gas company is offering a tariff rate of $.75/ccf, that rate will probably skyrocket up to $1 with the addition of this fuel surcharge during the coldest winter months."

 

Once again, Baugher says the summer months generally offer the best opportunity for reduced gas pricing due to a decrease in demand. However, due to the increase in natural-gas-powered electric generating plants during the past two to three years, the decrease in the next few years may not be as dramatic as in the past.

 

"Another important thing to consider is the timing for when you choose a third-party energy provider," Baugher says. "LDCs usually require that all customers receiving natural gas from third-party vendors have telemetering devices placed on their gas meters to ensure adequate monitoring of daily gas demand. Although the gas company generally provides this service, due to high demand, the change from the old meter to the new telemeters can take up to two months. Accordingly, if you begin using gas for heat in October, you must start the purchasing process at the latest by August to ensure that your business will be able to take advantage of this lower-priced third-party energy."

 

Baugher says one other summer option that may be available to businesses looking to cut down on their gas and oil bills is the increase of buying power offered through some local Chambers of Commerce or other local business associations. Some of these groups create consortiums, pooling together the oil or gas needs of their members to obtain the best prices, much like they do for insurance purposes. If you are a member of your local Chamber, you might consider placing a call to see if they offer such programs.

 

No matter what your business decides to do, Baugher advises you to do your homework and read the fine print before committing to any program or contract. "Because most businesses have little experience in the energy and fuel industries, they may find that they are faced with a lot of confusing terminology in the contracts provided by the oil and gas vendors," she says. "Don't hesitate to question any jargon that is not understandable, and don't accept that these contracts are set in stone. Many of the third-party vendors are flexible with the removal of certain language or extending the payment periods if asked."

 

Most importantly, Baugher warns companies to make sure the fixed contract is really fixed. Make sure there is no language included in the agreement that allows the provider to increase the price of the commodity if any underlying market conditions or distribution company charges increase over the period of the contract.  If there are minimum volume commitments, make sure they are in line with your previous winter's monthly oil or gas use.

 

"There is no question that the heat of summer is the time to plan for your energy usage for the freezing days of winter," Baugher says. "Depending on usage, companies can realize thousands of dollars in savings. But if a company waits until its time to fire up the furnace to think about purchasing its winter energy, it will only find itself getting burned."

 

For more information, contact Rachel Baugher at (860) 693-8550 or e-mail utilityanalysts.com@comcast.net.