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Fuel Management

The College developed a Fuel Management Strategy for natural gas and #2 fuel oil with the goal to minimize its risk profile for both availability and cost. The co- generation turbine and three package boilers are dual fuel capable, which fire on natural gas and #2 fuel oil. The HRSG duct burner fires on natural gas only. The College purchases tariff gas, and futures contracts for both its natural gas and oil requirements as part of its Fuel Management Strategy, which is described in detail below.

Natural Gas Nymex Futures

The College of New Jersey currently purchases the majority of its utility needs in the form of interruptible natural gas from PSE&G gas division under a Cogeneration Interruptible Gas tariff (CIG). Due to the low transportation component cost included in this rate, it has continued to provide the most advantageous cost and delivery terms.

This cost, however, is subject to a commodity cost component, which is highly subject to real time market conditions. There is no option within the CIG rate for customer owned and transported gas. This unit price volatility can cause unanticipated budget overruns when natural gas unit prices increase. Conversely, world events, such as that of September 11, 2001 , can cause a dramatic slow down of the economy, triggering a drop in both price and demand for natural gas. Once there are signs of a recovering economy, a stiffening of natural gas price usually occurs. This unexpected volatility in the market makes it difficult make accurate fuel budget projections.

A slow economy and warm winter weather causes low futures contracts prices and low physical contract prices. Under normal circumstances, seasonal prices reach their lowest point during July and August, but during volatile economic conditions, the timing to purchase futures contracts is uncertain and requires extensive research. In order to reduce its fuel price risk and increase budget certainty, The College utilities financial hedge positions using NYMEX futures. The NYMEX futures enable The College to cap its price risk for the volatile months of the fiscal year. This is described as a “Buyer’s Hedge”, or long hedge position, and is a conventional practice of large consumers or buyers of natural gas to protect themselves from rising prices.

The College will continue to purchase physical gas from its regulated public utility PSE&G under the CIG tariff. The use of NYMEX futures contracts is a form of insurance that once purchased will guarantee a not-to-exceed cost for The College’s fuel needs. There are two major benefits:

  • Given a stiffening of the natural gas market and leading indicators that the economy is stable or recovering, demand for natural gas and prices will increase.
  • With a price guarantee (Price Cap) The College does not have to estimate the future unit costs and include a contingency within that estimate.

The projected natural gas budget by conventional budget process is subject to unanticipated price increases, resulting in substantial cost savings. The hedged natural gas budget, based on NYMEX future settlement prices, would be more predictable by capping price during the critical months. Minimal funds are required to be held in reserve as a contingency.

Tariff CEG (Cogeneration Extended Gas)

The College uses Cogeneration Interruptible Gas (CIG) in its Cogeneration turbine and duct burner. CIG is currently the lowest cost interruptible tariff gas. The College annually executes a rider to its existing CIG contract with PSE&G for Cogeneration Extended Gas (CEG). Use of the CEG provision is the second component of the fuel management strategy designed to reduce our overall risk profile due to cost fluctuations and availability of natural gas and fuel oil. CEG provides an additional customer option for natural gas supply, which increases operational flexibility for fuel use. Under the Special Provision CEG our current CIG contract will revert to CEG during utility natural gas interruption of CIG during periods of high demand.

Utilizing CEG significantly reduces the threat of gas interruptions, thereby allowing us the opportunity to choose the most cost-effective fuel rather than being forced to burn fuel oil or shut down operations. Under the provisions of CEG, all CIG customers are interrupted before interruption can occur for CEG customers. Implementation of the CEG piece of the fuel management strategy will allow us the flexibility to choose the most cost effective Cogeneration Plant fuel operating scenario while other CIG customers are being interrupted.

Under the provisions of CEG, the price per thermo is based on market conditions and PSE&G’s gas purchase price. During periods of interruption, The College is notified of the cost per thermo prior to the availability of CEG. It is The College’s prerogative to either accept or refuse CEG service. This decision is based on the costs per MMBTU of CEG, pre-purchased oil, grid electric, and the open market liquidation value of our pre-purchased oil. If the liquidation value of the pre-purchased oil exceeds the cost of other fuels, The College has the option to sell it on the open market at that time.

#2 Fuel Oil

The threat of high fuel oil prices in the winter coupled with natural gas interruptions is significant. During the cold winter months of December through February, The College’s Cogeneration and boiler plants are subject to natural gas interruption. During these periods of interruption, The College is required to burn #2 fuel oil in the boiler and Cogeneration plants to sustain operations, resulting in unanticipated oil quantity and unit prices potentially above the projected fuel oil budget. Typically, fuel oil prices increase significantly during these periods of increased consumption, which places The College at risk financially. All large industrial and institutional non-firm natural gas users are interrupted during this period and they, too, are faced with the reality of burning fuel oil exclusively to support their boiler and Cogeneration plants. This causes a critical fuel oil availability issue and causes an inflated unit price. In order to reduce its risk profile for both availability and cost, The College purchases fuel oil futures contracts when prudent, with a fuel oil supplier on the New Jersey State Contract. The number of contracts purchased depends on turbine oil consumption at full load, and our susceptibility to gas interruption.

The State Contract under which The College purchases oil futures contracts is a fixed bid increment above the spot market price. The spot price is determined by market conditions via commodity trading on the New York Mercantile Exchange (NYMEX).

The commodity pricing for the State oil contracts is in units of 42,000 gallons and is published as the New York Harbor Tank Car oil price. The contract price for delivery of actual physical product includes a “wet barrel” differential between the NYMEX commodity price and the New York Harbor tank car price. This is the price paid to a refiner to convert a commodity paper transaction to a physical delivery. This type of contract is commonly referred to as a “futures contract” which, simply stated, is the price charged today for a specific future (winter time) delivery date. The contracts are typically bought during the preceding summer.

This strategy also complies with legislation in the State of New Jersey , which requires interruptible gas customers to have a three-week supply of fuel other than gas for the purpose of replacing all or part of the customer’s energy needs during the period(s) of interruption of gas service.