Best Practices for Negotiating Commercial Natural Gas Contracts in Illinois

Natural gas represents a significant operating expense for many Illinois commercial and industrial operations. From space heating and water heating to process applications in manufacturing, food processing, and other industries, gas consumption can range from thousands to millions of dollars annually. Yet many businesses treat natural gas procurement as an afterthought, accepting renewal terms without negotiation or failing to explore competitive options.

Illinois's deregulated gas market provides commercial customers with choices—multiple suppliers compete for your business, offering different pricing structures, contract terms, and service levels. But this competitive market only benefits those who understand how to navigate it effectively.

Negotiating natural gas contracts successfully requires understanding market dynamics, knowing what terms matter most, timing your procurement appropriately, and leveraging competition to secure favorable pricing. This guide provides the framework Illinois businesses need to approach gas procurement strategically.

Understanding the Illinois Natural Gas Market: Structure, Players, and Pricing

Market Structure

Illinois operates a deregulated natural gas market where commercial customers can choose their supplier:

Utility Role Local distribution companies (LDCs) maintain the infrastructure:

• Nicor Gas—largest Illinois LDC, serving northern Illinois
• Peoples Gas—serving Chicago
• North Shore Gas—serving North Shore suburbs
• Ameren Illinois—serving central and southern Illinois

These utilities continue to:

• Own and maintain pipelines and meters
• Deliver gas to your facility
• Provide emergency services
• Bill for delivery charges
• Serve as supplier of last resort

Competitive Suppliers Alternative gas suppliers (also called retail energy marketers) compete to supply the commodity:

• Purchase gas at wholesale
• Arrange transportation to LDC system
• Bill you for supply (or through utility consolidated billing)
• Offer various pricing and contract options

How It Works Together

• Supplier provides the gas commodity
• Utility delivers gas and provides billing platform
• Customer pays delivery charges to utility
• Customer pays supply charges to supplier (or through utility bill)

Pricing Components

Understanding what you're paying for enables better negotiation:

Commodity/Supply Charges The cost of the natural gas itself:

• Measured in $/therm or $/Ccf (hundred cubic feet)
• Reflects wholesale gas market plus supplier margin
• Variable (index) or fixed depending on contract
• The negotiable portion of your bill

Delivery/Distribution Charges Utility charges for pipeline infrastructure and delivery:

• Rate schedule determined by usage characteristics
• Regulated by Illinois Commerce Commission
• Not negotiable with suppliers
• May include demand charges for larger customers

Taxes and Fees Various governmental charges:

• State utility taxes
• Municipal franchise fees
• Regulatory assessments
• Not typically negotiable

Market Price Drivers

Natural gas prices fluctuate based on:

Supply Factors

• Domestic production levels (shale production dominant)
• Storage levels vs. historical norms
• Import/export flows (LNG exports growing)
• Pipeline infrastructure and constraints

Demand Factors

• Weather (heating degree days, cooling degree days)
• Electric power generation (gas-fired plants)
• Industrial activity and economic conditions
• Export demand

Regional Factors

• Chicago Citygate pricing reflects local supply/demand
• Pipeline constraints can cause regional price spikes
• Storage availability in Midwest markets
• Competition for supply during peak demand

Pricing Structures: Choosing the Right Approach for Your Business

Fixed-Price Contracts

How They Work

• Locked rate per therm for contract duration
• Supplier assumes commodity price risk
• Typically 12-36 month terms
• May have volume commitment requirements

Advantages

• Budget certainty—know exact costs
• No market monitoring required
• Protection from price spikes
• Simplified accounting and forecasting

Disadvantages

• No benefit if market prices decline
• Typically include risk premium
• Less flexibility for consumption changes
• May have stricter terms

Best For

• Budget-sensitive organizations
• Risk-averse management
• Operations without resources to monitor markets
• Facilities with predictable consumption

Index/Variable Pricing

How They Work

• Price tied to published index (NYMEX, Chicago Citygate, etc.)
• Adjusted monthly or daily based on index
• Formula typically: Index + Basis + Margin
• Full exposure to market movements

Advantages

• Benefit from market price declines
• Typically lower average cost over time (historically)
• Maximum flexibility
• Transparent pricing

Disadvantages

• Budget uncertainty
• Exposure to price spikes
• Requires market awareness
• More complex accounting

Best For

• Cost-optimizing organizations
• Operations with ability to respond to prices
• Sophisticated energy management
• Budget flexibility tolerance

Block-and-Index (Blended) Pricing

How They Work

• Fixed price for base/block volume
• Index price for volumes above block
• Provides partial protection and partial participation
• Block sized based on minimum expected consumption

Advantages

• Hedge base consumption, participate in upside
• Accommodates consumption variability
• Moderate budget certainty
• Balanced risk/opportunity

Disadvantages

• More complex to manage
• May pay premium for block
• Requires understanding consumption patterns
• Block size selection critical

Best For

• Seasonal operations
• Growing or contracting businesses
• Operations seeking balance
• Variable production environments

Cap and Collar Structures

Cap Pricing

• Index pricing with maximum ceiling
• Pay premium for cap protection
• Full downside participation, limited upside exposure
• Insurance against extreme prices

Collar Pricing

• Index with both floor and ceiling
• Share upside and downside with supplier
• Lower premium than cap alone
• Defined price range

Best For

• Larger consumers
• Operations with budget constraints but desire market participation
• Sophisticated buyers
• Usually for volumes exceeding 50,000 therms annually

Contract Terms: What to Negotiate Beyond Price

Term Length

Short-Term (12 months)

• Lower commitment
• More frequent negotiation opportunities
• May miss locking in favorable long-term rates
• Higher administrative burden

Medium-Term (24-36 months)

• Balance of commitment and flexibility
• Reduces procurement frequency
• May capture favorable multi-year pricing
• Standard for many commercial customers

Long-Term (36+ months)

• Maximum budget certainty
• Potentially better rates
• Market timing risk
• Less flexibility for operational changes

Negotiation Tips

• Don't accept supplier's initial term proposal automatically
• Consider market conditions when selecting term
• Negotiate options (extension rights, early termination)
• Align with business planning horizons

Volume Provisions

Minimum Volume Commitments Many contracts require minimum consumption:

• Typically 80-90% of estimated annual volume
• Shortfall may incur charges
• Negotiate realistic minimums based on historical consumption
• Consider business changes that might affect volume

Tolerance Bands Allow variation without penalty:

• Standard: ±10% of monthly nominations
• Negotiate wider bands if consumption is variable
• Understand balancing charges outside bands
• Consider seasonal patterns

Take-or-Pay Clauses Obligation to pay for committed volume regardless of consumption:

• Common in industrial contracts
• Negotiate reasonable volumes
• Include force majeure provisions
• Consider market conditions

Auto-Renewal Provisions

One of the most important terms to address:

Standard Provision

• Contract auto-renews at market rate
• Requires cancellation notice 30-90 days before expiration
• Easy to miss notice window
• Renewal rate may be unfavorable

Negotiated Improvements

• Remove auto-renewal entirely
• Extend notice period to 120-180 days
• Require supplier notification of pending renewal
• Cap renewal rate increase
• Require written acceptance for renewal

Early Termination

Understand the Calculation

• Liquidated damages typically based on remaining volume × (contract price - market price)
• Can be substantial in falling markets
• May include administrative fees

Negotiation Approaches

• Cap maximum termination liability
• Include termination rights for business changes (sale, closure, relocation)
• Negotiate grace period for changed circumstances
• Clarify calculation methodology

Credit and Deposits

Supplier Requirements

• May require security deposit
• Letter of credit common for larger volumes
• Based on estimated monthly billing × coverage period
• Credit review determines requirements

Negotiation Approaches

• Negotiate deposit amount and conditions for return
• Reduce deposit over time with payment history
• Alternative credit support (parent guarantee)
• Interest on deposits

For comprehensive electricity contract guidance that applies similar principles, see our resource on how to read a retail power contract.

The Negotiation Process: Steps to Secure Favorable Terms

Preparation Phase

Gather Historical Data

• 24-36 months of billing history
• Monthly consumption volumes
• Seasonal patterns
• Peak demand levels (if applicable)

Understand Current Contract

• Expiration date
• Notice requirements
• Existing terms to improve
• Current effective rate (all-in)

Set Objectives

• Target pricing (research market levels)
• Required contract terms
• Deal-breakers
• Timeline for decision

Solicitation Phase

Identify Qualified Suppliers Illinois commercial gas suppliers include:

• Direct Energy Business
• Constellation
• Interstate Gas Supply
• Ambit Energy
• Nicor Gas Solutions
• Multiple other licensed suppliers

Issue Request for Proposals (RFP) Standardized format improves comparison:

• Same volume estimates for all bidders
• Same contract terms requested
• Clear timeline for response
• Apples-to-apples comparison enabled

Consider Using a Broker/Consultant Benefits of professional assistance:

• Market knowledge and relationships
• Bid management and analysis
• Contract negotiation support
• Ongoing supplier management

For guidance on selecting energy assistance, see our resource on ESCO vs. broker vs. consultant—who does what.

Evaluation Phase

Create Comparison Framework Standardize evaluation across offers:

• Calculate all-in cost per therm
• Include all fees and charges
• Model at expected consumption levels
• Consider scenario analysis (high/low consumption)

Evaluate Beyond Price

• Supplier financial stability
• Customer service reputation
• Billing accuracy and clarity
• Contract flexibility
• Reporting and tools provided

Check References

• Request customer references
• Verify claims about service quality
• Ask about problem resolution
• Understand actual experience

Negotiation Phase

Leverage Competition

• Share that you're evaluating multiple suppliers
• Ask for best and final offers
• Use competing offers appropriately
• Don't bluff—suppliers communicate

Negotiate Specific Terms

• Don't accept standard contract language
• Mark up contract with requested changes
• Prioritize key terms
• Be willing to trade (better price for longer term, etc.)

Document Everything

• Get all commitments in writing
• Ensure contract reflects negotiated terms
• Review final contract carefully
• Keep copies of all correspondence

Implementation Phase

Transition Management

• Confirm switch with utility
• Verify first bill accuracy
• Address any issues promptly
• Set calendar reminders for key dates

Ongoing Management

• Track actual vs. expected costs
• Monitor market conditions
• Note contract renewal timeline
• Document lessons learned

Advanced Strategies: Hedging, Layering, and Multi-Site Procurement

Layered Purchasing

Rather than locking in all volume at one time:

How It Works

• Divide annual volume into portions (e.g., quarters or thirds)
• Lock in each portion at different times
• Average prices over time
• Reduces timing risk

Example Strategy For a contract year starting October 1:

• Lock 25% in April (spring shoulder)
• Lock 25% in June (early summer)
• Lock 25% in August (pre-heating season)
• Lock 25% on final pricing (or leave index)

Benefits

• Reduces risk of poor timing
• Captures average market conditions
• More opportunities to act on favorable prices
• Smooths budget impact

Multi-Site Aggregation

For businesses with multiple Illinois locations:

Benefits of Aggregation

• Combined volume attracts better pricing
• Simplified procurement and management
• Consistent terms across locations
• Single point of contact

Considerations

• May require same expiration dates
• Might limit location-specific flexibility
• Credit based on combined exposure
• Some locations may subsidize others

Implementation

• Inventory all gas accounts
• Align contract expirations
• Issue combined RFP
• Consider phased implementation

Hedging Programs

For larger consumers (typically 100,000+ therms annually):

Physical Hedges

• Forward contracts for physical delivery
• Lock price for specific future months
• Commitment to take delivery
• Basis risk if delivery point differs

Financial Hedges

• Futures contracts on NYMEX
• Swap agreements with counterparties
• No physical delivery—financial settlement
• Requires sophisticated management

Program Considerations

• Hedge only expected consumption (not speculate)
• Understand accounting implications
• Consider counterparty credit risk
• May require board authorization

Electricity-Gas Coordination

For facilities using significant amounts of both:

Coordinated Procurement

• Same supplier for both commodities
• Potential volume discounts
• Simplified management
• Combined analysis

Combined Risk Management

• Consider correlation between gas and electric prices
• Gas prices influence electric prices (gas-fired generation)
• Holistic hedging strategy
• Combined budget analysis

For comprehensive energy procurement guidance, see our resource on how to build a procurement calendar.

Conclusion: Turning Gas Procurement into Competitive Advantage

Natural gas procurement represents both a significant expense and an opportunity for Illinois businesses. Those who approach it strategically—understanding market dynamics, selecting appropriate pricing structures, negotiating favorable terms, and managing ongoing relationships—consistently outperform those who treat it as an afterthought.

Key takeaways for Illinois businesses:

1. Start early: Begin the procurement process 3-6 months before contract expiration. Rushed negotiations benefit suppliers.

2. Understand your consumption: Detailed knowledge of your usage patterns enables better pricing structures and realistic volume commitments.

3. Get competitive bids: The market only works when suppliers compete. Solicit multiple offers and use them strategically in negotiation.

4. Focus on total cost: Don't be distracted by headline commodity rates. Understand all fees, charges, and terms that affect total cost.

5. Negotiate terms, not just price: Auto-renewal provisions, volume flexibility, and termination rights can matter as much as the rate itself.

6. Consider professional help: For larger organizations or those without in-house expertise, brokers and consultants can add significant value.

7. Manage ongoing: Set reminders for key contract dates, monitor costs vs. expectations, and learn from each procurement cycle.

The Illinois natural gas market offers real choices. Taking advantage of those choices requires knowledge, preparation, and disciplined execution. The businesses that master gas procurement create ongoing competitive advantage through lower operating costs and reduced risk exposure.

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Sources:

• Illinois Commerce Commission Consumer Information
• U.S. Energy Information Administration Natural Gas Data
• Nicor Gas Commercial Services
• CME Group Natural Gas Futures
• American Gas Association Resources