Users of natural gas are rarely able to forecast exactly how much gas they will need on a given day. Production rates go up and down, weather affects cooling and heating loads, and power plants may be ramped up or down depending on electric loads. Thus it is rare that actual gas through the meter on any given day matches the amount nominated. Similarly, producers and interconnected pipelines may experience variations in day-to-day delivery volumes from amounts forecast or contracted for.
Balancing is a technique used throughout the industry to allow parties to manage day-to-day fluctuations in deliveries and/or receipts. In the case of an end user, balancing allows the customer to take gas each day matched to her actual demand (rather than her anticipated demand, which may be quite different) and either owe gas back to the LDC/pipeline or have gas owed to her. In the case of a producer with variable flow, balancing applies to the pipeline’s receipt of supplies. Even interconnected pipelines will use balancing to handle day-to-day differences between actual physical flows and contractual flow quantities. To manage these differences, pipelines often put in place operational balancing agreements (OBA) that allow them to balance their systems on an ongoing basis.
A decade ago, pipelines asked their customers to balance on a monthly basis. That is, customers would add up the total amount of gas delivered into the pipeline on their behalf along with the total amount of gas they actually used for the same period. Any imbalance could be either traded with another customer on the pipeline or cashed out by buying or selling the gas from or to the pipeline. When the gas business was simpler, monthly balancing worked just fine. However, with the proliferation of marketers and other third parties owning contracts on a pipeline system, misuse of this system became widespread. It was not long before these parties saw a way to increase their margins at the expense of the pipeline companies or other ratepayers. As a result, many pipelines now ask their customers to balance on a daily basis. These pipelines offer various services to help customers deal with the inevitability of imbalances. They also retain the right to impose hefty penalties for those who are not able to keep imbalances within a pre-determined tolerance band.
Local distribution companies (LDCs) still tend to utilize monthly balancing since daily balancing is viewed as overly burdensome on end-use customers. But they may also need to utilize flow orders that require daily balancing during times of system stress.
A balancing example
- Joe’s Manufacturing nominates 100 MMBtu each day for a month.
- All nominated quantities are scheduled and received as planned from the upstream pipeline.
- But instead of the 100 MMBtu they had anticipated, Joe’s uses only 80 MMBtu each day.
- By the end of the month Joe’s is 600 MMBtu (20 MMBtu x 30 days) out of balance.
Since Joe’s total gas usage for the month was 2,400 MMBtu (80 MMBtu x 30 days) they are more than 10% out-of-balance, the maximum typically allowed by the LDC. Thus the LDC notifies Joe’s they have one month to correct the imbalance. Joe’s corrects their imbalance the next month as follows:
- They underdeliver by 10 MMBtu each day (i.e., 70 MMBtu/d) thereby reducing their imbalance to 300 MMBtu.
- Joe’s is still out of balance so they find a marketer, Jill’s Trading Company, which has a negative imbalance (Jill’s has consumed more gas than they nominated) and they trade 300 MMBtu of imbalance between them. Now Joe’s is back in balance.
Note that this example assumes monthly balancing. Some systems have moved to daily balancing (the above example should explain why), where any imbalances greater than 10% must be corrected within days rather than at the end of the month. Gas prices vary significantly, even from day to day. Loose balancing rules allow customers to use gas they didn’t purchase on days when gas is expensive and then pay it back on days when it’s not.