Comparison of the price and volatility of current and alternative models for the acquisition of direct supply natural gas for the Department of Defense

Abstract

The Department of Defense (DoD) is the largest user of energy in the nation. DoD utilizes the Defense Energy Support Center (DESC) to procure a large portion of its natural gas. In this study it will be determined if the current buying approach utilized by DESC or an alternative approach present a better method to reduce the pricing risks associated with market timing and volatility. In order to determine how market timing and volatility affect purchasing, historical data for actual monthly prices of the current program and data from market pricing indices for a statistical model were analyzed. The data for the current model and the statistical model were compared using averages prices and standard deviation to determine which model provided better overall results. The analysis proved that by entering the market to purchase natural gas more frequently and using firm fixed price contracts results in an overall lower average price with less variability than using the current method of purchasing. This study recommends that DESC consider a pilot program, beginning in the northeast region, where the current purchasing model produces the most volatility in pricing, to develop a procurement program which will support stabilized pricing for its DoD customers.