With municipal finances under continued strain, local government managers are seeking innovative ways to maximize revenues and stabilize budgets. Several municipalities are discovering significant benefits through municipal consortiums that allow them to achieve competitive terms for a variety of supplies and services. One area that still offers advantage is the opportunity to negotiate lower natural gas prices by group purchasing as part of a consortium.
Current Practice in Natural Gas Procurement
Traditionally, most municipalities in Illinois have received their natural gas via a franchise agreement with a regulated utility that delivers natural gas such as Ameren, Nicor, or North Shore Gas. These franchises typically offer compensation for use of a municipality’s rights-of-way in the form of “free” therms or an equivalent cash sum. However, this “free” gas service is not “free” and is charged back to the municipality’s residents on their bills. At the same time, with the deregulation of natural gas that began in Illinois in the late 1980s, many businesses and residents have benefited from negotiating better rates for their natural gas supply on the open market.
Municipalities, on the other hand, because of the tradition of receiving “free” therms from a franchisee, have not been able to readily take advantage of the opportunity to save money by purchasing all of their natural gas as a group, thus leveraging greater volume for more favorable pricing. As natural gas franchises come up for renegotiation, a municipality may be tempted to renew old agreements for fear of jeopardizing an apparently beneficial arrangement that offers “free” gas as compensation for the utility company’s use of municipal rights-of-way – even though their community may or may not use all of this allowance (sometimes by a wide margin) and without consideration of whether or not the “free” therms program is fair and equal compensation to the community for the fair market value of the franchise.
What Are the Benefits of Buying Natural Gas On The Open Market?
Just as many communities have discovered that they can create cost savings by working together in regional schemes to negotiate better contractor rates for capital projects, so too they are finding that they can go beyond taking advantage of a buyer’s market for natural gas through the creation of a municipal partnership purchasing program for natural gas, benefiting from economies of scale to further drive down supplier margins and increase municipal funds.
