In Docket Nos. PL-20-3 and RM20-7, FERC proposed revisions to its policy statement for natural gas index developers and change reporting requirements for those who report prices to those index developers. The changes proposed are intended to support the formation of physical natural gas price indices.
A natural gas price index is a weighted average price derived from a set of fixed-price natural gas transactions within distinct geographical boundaries that market participants voluntarily report to a price index developer. Natural gas price indices play a vital role in the energy industry as they are used to price billions of dollars of natural gas and electricity transactions annually in both the physical and financial markets. Natural gas markets depend on robust and accurate indices in order to ensure just and reasonable prices. Natural gas price indices serve as a proxy for the locational cost of natural gas in the daily and monthly trading markets, as many market participants reference natural gas index prices in their physical and financial transactions. Interstate natural gas pipelines, public utilities, Independent System Operators (ISOs), and Regional Transmission Organizations (RTOs) reference natural gas price indices in their tariffs for various terms and conditions of service. State commissions also use natural gas price indices as benchmarks when reviewing the prudence of natural gas or electricity purchases. Finally, many natural gas financial derivative contracts that are used in hedging and speculation settle against natural gas price indices.
To address the relative low number of fixed price volumes reported to index developers and the potential effects on market liquidity, FERC proposed several revisions to the Commission’s price index policy set forth in its prior Policy Statement. The revisions would reduce perceived reporting burdens, encourage more reporting, and provide greater transparency into the natural gas price formation process. As a result, the revisions would increase confidence in the accuracy and reliability of wholesale natural gas prices.
First, FERC proposed to allow data providers to report either their non-index based next- day natural gas transactions, their non-index based next-month natural gas transactions, or both types of transactions, to price index developers. Second, FERC proposed to allow data providers to self-audit the transactions they provide to price index developers on a biennial basis. Currently, data providers are required to perform a self-audit on an annual basis. The revisions are aimed at reducing the burden associated with price reporting in the hope that it may lead to additional market participants reporting their transactions to index developers. In addition, FERC proposed to encourage data providers to report to all available Commission-approved price index developers.
FERC also proposed two revisions to increase transparency in the natural gas price formation process. It proposed to modify the Commission’s standards to remain an approved natural gas price index developer such that price index developers should: (1) indicate whether a published index price is assessed in their published indices and (2) obtain re-approval in order for their indices to continue to be included in FERC-jurisdictional tariffs. Finally, FERC proposed to clarify the review period for assessing the liquidity of price indices submitted for reference in FERC-jurisdictional tariffs.
Dr. Paul Dumais
CEO of Dumais Consulting with expertise in FERC regulatory matters, including transmission formula rates, reactive power and more.