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This is a short primer on how natural gas is actually priced and delivered on the utility:

LDC Delivery - You've purchased natural gas at a NYMEX price delivered to the Henry Hub and you've purchased basis delivery to get the gas to the city gate of the local utility. How do you get the gas the last few miles from the city gate to your facility? By using the distribution system of your local gas utility. The cost to move your gas is a separately billed item. Local distribution is typically part of the regulated tariff and billing structure for the local utility. There is very seldom any opportunity for price negotiation with several transportation "rates" available. The biggest question is whether to contract for firm or interruptible capacity. Unless you have easy access to backup fuel or can stop gas flow at a moment's notice, most customers will require firm supply from the local utility. Another key component of local delivery is access to a periodic balancing "bank."  Many customers are comfortable contracting for a 5% to 10% balancing account.

Natural Gas Delivery to Your facility can be quoted several ways, depending on how the gas is actually delivered.  Henry Hub:  A pipeline interchange near Erath, LA.   The Henry Hub is where a number of interstate and intrastate pipelines interconnect.  This is the standard delivery point for all NYMEX futures contracts.

City Gate:   A physical location where gas is delivered by a pipeline to a local utility for delivery to the customer.  Gas priced at the city gate includes the NYMEX futures price at the Henry Hub plus the transportation delivery fee (basis).  Sometimes these prices are separately detailed and other times they are bundled.

Burnertip:   This the point where gas is used by the customer.  Burnertip delivery includes the NYMEX futures price at the Henry Hub, the basis delivery charges on the pipeline and the distribution cost on the local utility system.   All burnertip deals include these 3 elements?they may be bundled or identified separately.

A short primer on management of natural gas accounts:

Balancing - Equalization of gas shipments into the system with withdrawals from the system.  Balancing may be accomplished daily or monthly with penalties assessed for excessive imbalance.

Balancing Tolerance - The amount of imbalance allowed which is not subject to a penalty charge.   This amount is usually stated in a range expressed in percentage terms.   Balancing tolerance is sometimes also referred to as system swing or bank.  Example: on a system that requires daily balancing plus/minus 10%, any usage or non-usage more than 10% above or below the daily nominated level would be subject to a penalty charge. Also, if a negative bank situation exists, new gas brought into the system is typically applied first to the negative bank.  Similarly, if a positive bank exists,   the bank gas is first applied to user needs before any new gas brought into the system.   On critical supply days, many utilities freeze access to a positive bank.

A short primer on the components of financial natural gas:

Basis - So, you've purchased natural gas at a NYMEX price delivered to the Henry Hub.  How do you get the gas from the Henry Hub to the LDC?  By using one of the 100+ interstate pipeline companies and moving the gas over the 1,000,000+ miles of pipeline.  The cost to move your gas is a separate line item and is typically called "basis."  Basis capacity can be bought, sold, traded and hedged just like NYMEX gas.  Typically, basis prices are a little less volatile than NYMEX gas prices and depend more on capacity on a specific pipeline.  It is critical that you understand the type of basis that your are purchasing.  Pipelines generally offer several levels of delivery including both firm and interruptible.

Recently, firm basis on many pipelines has been a decent value.  Many customers have opted to hedge pipeline capacity further out than the hedge of the actual gas commodity.  Low price volatility coupled with an active trading market makes this a low risk opportunity to fix costs.

Basis (Delivery):   The financial cost to move natural gas from the Henry Hub to the final delivery point on the pipeline.  Basis is defined at the price difference between the cost of a futures contract at Henry Hub and the cash price at the delivery point.

Basis Quote:   Offer or sale of a cash commodity in terms of the differential above or below the futures price. Booking the Basis:  A forward pricing sale arrangement in which the cash price is determined by the buyer or seller within a specified time.

Henry Hub:  A pipeline interchange near Erath, LA, where several pipelines interconnect through a header system operated by Sabine Pipeline.  Henry Hub is the standard delivery point for the New York Mercantile Exchange natural gas futures contracts.

Reservation Fee:  A charge paid to reserve firm transportation capacity on a pipeline.

NYMEX/Henry Hub - Gas is traded daily on the NYMEX and the resulting price is fairly volatile, often changing by the minute.   Normally, the gas is traded, and priced, in lots of 10,000 dekatherms.  Marketing companies purchase these blocks of gas and parcel it out in smaller amounts to retail customers.

Fixed Pricing - Many times customers ask for a fixed price quote for future gas supply that would remain valid during a predetermined evaluation period.   This is nearly impossible to provide since the price volatility renders any given price out of date nearly as soon as it is given.  In order to lock in a future price, the commodity future must be purchased at the same time.    Customers should be wary of any fixed price gas offer, especially if there is no expiration date on the price.

Placing a Buy Order - When you get ready to buy natural gas, you have several options.  Two of the more common order types are a "limit order" or a "market if touched order."

Market Order - A buyer places an order to purchase gas at the current "market" price that gas is trading for at that time.

Market If Touched Order - A buyer places an order to purchase gas if prices "touch" a specified price level.  Once the market touches that point, the gas is purchased "at the market."  This is a more relaxed type of order and allows for the volatility that exists in price movement. The actual "fill" price may be higher or lower than the specified price level.  Volatility in the trading arena can quickly move the price before an order can be executed. Usually, the fill price will be within a couple of cents of the specified price level and significant price movements will warrant a call from the traders confirming the desire to proceed with the trade.

Limit Order - A buyer places an order to purchase gas at "no higher than" a specific price.  For example, a limit order placed at $4 will be filled at a price no higher than $4 provided that the market trades at or below $4 for sufficient time and quantities to allow execution of the order.

Also, remember, all specified price orders are always best efforts.