Q1. As per the provided information the Gas Utility companies pays a base commodity charge of $. 3359 plus a peak usage demand of charge that is $4. 63 per Mcf multiplied by the total demand during the maximum take day in the last 12 months which is 240 in this case. The cost per MCF can be derived by the below formula (Commodity Base Charge * Total Demand) + (Peak Usage Demand Charge* High Peak in 1 day* months in year) This will translate into ($ 0. 3359*30,700,000 Mcf)+ ($ 4. 63*240*12) = $ 23,646,530
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By substituting the appropriate values in the formula we arrive at a cost of $ 23,646,530. This cost is then divided by the total demand over 12 months of 30. 7 Bcf or 30,700,000 Mcf to arrive at an average cost per Mcf of $ 0. 7702 which is a 125% increase over the base charge $ 0. 3359. Similarly in a scenario where the peak demand is equal to the average demand of 84109. 59 Mcf we arrive at an average cost per Mcf of $ 0. 4881 which is a 45% increase over the base charge of $ 0. 3359. Q2.
In order to determine the excess amount of gas that had to be bought from Distrigas we made an assumption that the demand was not normally distributed and in order to normalize it we removed the deviation of 18. 66 from the average of the independent demands over the three months to arrive at a normalized value of 178 (rounded off). The assumption is that the gas Utility companies will buy gas from Distrigas only if the demand goes aboce 178. Following this methodology the gas utility company will need to purchase 1801 MMcf from Distrigas to fulfill the peak demand.
Filtering days that had excess demand we arrived at 74 days that required the Utility gas company to purchase gas from distrigas. The first phase of that purchase has to be from December 7th to 25th January and the second phase of the purchase should be from 5th February to 28th of February. The annual cost of the policy is attained by the total excess demand ( 1801 MMcf) multiplied by the cost per MMcf of $ 1660 to arrive at a cost of $ 2,989,660. By taking the average of the two cost per Mcf from question 1 we know that the cost per Mcf for regular gas supply is $ 0. 63.
The amount of regular gas supply is derived by reducing the Distrigas excess demand gas supply from the total annual demand. These numbers are then used to arrive at a total cost of $ 25,248,978. 26 which results in a savings of $ 252,140 over using pipeline gas. Q. 3 Utility gains from the competitive price rate offered by Distrigas Corporation of $1. 66 per MCF when compared with the pipeline emergency gas rate of $1. 80 per MCG, which makes Distrigas price rate substantially cheaper than the pipeline gas rates. Utility is charged an excessive penalty for going above their planned gas volume by the gas providers.
We can evidence this by simply comparing the prices during the peak demand, which is actually more than the average demand with the peak demand being the average demand. Calculating the Cost of Gas: Cost of Gas = (Base Commodity Charge)*(Total demand) + (12)*(4. 63)*(Peak 1 day demand) (Shown in table 1 Annual Cost Analysis) It should be an easy decision for utility to use Distrigas as its emergency gas provider when daily volume of the gas exceeds 178 MMCF (derived after taking the average of the demands for the three months and then normalized the demand variation by taking the Standard Deviation).
With the given demand forecast numbers; utility will end up buying 1801MMCF of gas from Distrigas. We thought that using the concept of location pooling from risk pooling strategy would best suit this case study. We backed on this strategy because the objective of the risk pooling strategy is to redesign the supply chain and to either reduce the uncertainty the firm or to hedge uncertainty so that the firm is in a better position to lessen the consequence of uncertainty. This will convert into cheaper end consumer pricing.
Location pooling is best suited for single product as it can be used to decrease the inventory while holding service constant, or increase service while holding inventory cost, or a combination of inventory reduction and service increase. However, the proposal A for Distrigas would cost only $29,376,000, or savings of $252,140. The annual cost of Distrigas policy is $21,172,397. 19. Distrigas strategy should be to maximize on its competitive rate and endeavor itself as a cost leader, promising speed delivery, reliability and meeting the right quantity when needed the most, all at most cost efficient rate possible.
To be cost efficient it needs to operate economically such as storing the right amount of gas needed. It has to improve on its storage and deliver the gas in the best cost efficient using the right mode of transportation possible. The biggest threat could be when consumers like Boston Gas decide to build their own storage facilities and therefore start sourcing directly from the pipeline-gas providers, to be stored for usage during peak season. Q4. Proposal A: Slow Build up Strategy – In this proposal infrastructure will be built and machinery and trucks purchased to allow Distrigas to slowly build up inventories at the customer location.
This strategy includes building a satellite tank which will serve as a reserve for the gas that is brought in by Alozean. It takes 250 days to build up inventories to satisfy peak demand. This model requires 6 trucks to carry the gas over the 250 day period. Field tanks will need to be built at the customer location in order to hold the gas that will service the peak demand and this will cost $ 25. 1 Million. This is one of the disadvantages of this strategy. The upside is that only 6 trucks are needed to operate on this strategy.
Implementation of this strategy requires a total capital investment of $ 29. 376 Million and yields positive cash flows of . 325 (because of annual depreciation charges and tax rate of 50%) which shows that the project at a cost of capital of 9% has a Net Present Cost of $ – 26. 33 Million. Proposal B: Quick Build up Strategy – In this proposal peak demand for the Utility companies will be built by quickly sending gas to the companies based on peak season demand forecasts. This strategy will require 128 trucks to fulfill demand within a 10 day period.