THE SOURCE - Winter 2017 - 18

LARS HAILSTROM/SHUTTERSTOCK.COM

feature

Whistling In The Dark:

Shortcomings of Natural Gas Indices Persist

K

By John P. Gregg

udos to the Federal Energy Regulatory Commission
(FERC) for holding a conference on natural gas price
indices this summer (Docket AD17-12.). This shed light
on how most of the natural gas purchased for residential
consumers in the U.S. is priced on a flawed basis. APGA
member Donnie Sharp from Huntsville Utilities told the

FERC staff that many price index locations are no longer reliable and fewer and fewer
trades are observable. FERC data revealed that 78 percent of the total physical gas
market in 2016 settled off next day or month indices. Yet the number of transactions
on which indices are based is absurdly low. In short, wholesale gas transactions have
never been so reliant on index pricing at the same time that there has never been fewer
quantities that go into creating a price index.

The reaction of many is to throw up
their hands hopelessly. APGA, though,
told FERC that it must address this
market dissonance; that is somewhat like
whistling in the dark: we courageously
accept indices even though we are
quite fearful that they are wrong. APGA
therefore does not agree with those
who choose to believe that widespread
dependence on indices equates with
complete confidence in the price-setting
system. The industry must do better for its
consumers, and FERC should lead the way.
Evidence for Alarm: APGA is Concerned
about Index Illiquidity
Nearly all APGA members purchase
most or all of their natural gas for resale at
a price based on a price index. An index is

published by a vendor that surveys fixedprice purchases and sales at a particular
location-a price reporting agency
(PRA). The average at such valid points
is published as an index price, stated on
a daily or monthly basis, which is used
in most wholesale natural gas contracts.
Interstate natural gas pipelines also use
indices as proxies for the market when
penalizing shippers under their tariffs.
Participation in price reporting means
liquidity. By any measure, liquidity is lower
than it should be for consumers to have
confidence in the index prices that they
pay. Staff reported at the conference
that of the 1,234 entities that have ever
submitted a Form 552, only 134 have
indicated that they report to PRAs. Of
the 711 Form 552 respondents this past

18 THE SOURCE | THE VOICE AND CHOICE OF PUBLIC GAS

year, only 15 percent reported transaction
information to the PRAs. Natural Gas
Intelligence concluded that 12 of the top
20 companies ranked for total volumes
of natural gas sold and purchased do
not report to PRAs. Similarly, Platts North
America, S&P Global, reported that of
the 10 traders experiencing the largest
volume increase from 2015 to 2016, only
one was a price reporter.
At FERC's conference, BP Energy
bluntly provided a startling example for
bidweek December 2016 and January
2017. The TETCO M3 monthly index
was settled on an average gas volume
of 53,500 MMBtu/d - the equivalent
amount of gas required to run a small
gas-fired power plant. But Northeast gas
demand averages between 10-12 Bcf/d,
and Northeast production stands at over
23 Bcf/d today. This TETCO M3 market is
most of the region's demand (about 5-6
Bcf/d), yet a paltry 53 Mcf/d of volumes
were reported into the index to set prices
on that huge amount of consumption.
Thus a single price reporter almost
certainly is a very high percentage of
reported trades in this huge market-a
recipe for price manipulation.
In fact, concentration among the
price reporters overall has increased.
Among the top 20 market participants (by
volume), 10 are price reporters. Those 10
price reporters' daily fixed price volumes
represented 74 percent of total daily
reported volumes in 2016, up from 69
percent the previous year. The same 10
market participants made up 72 percent
of monthly reported volumes, up from 68
percent the previous year.
APGA's members are far flung and
use a large number of index locations.
Platt's Inside FERC last winter was 24
percent illiquid, i.e., 20 of 85 monthly



Table of Contents for the Digital Edition of THE SOURCE - Winter 2017

A Vision from Our Industry: Listen, Define, Allocate, Execute
First Person
APGA Events
Q&A: Chairman Chatterjee
Furnace Rule Update
Delivering the Needs of Customers Through Legislative Action
Reaching Your Future Customers
Whistling In The Dark: Shortcomings of Natural Gas Indices Persist
Growth in Renewable Natural Gas
Legislative Outlook
The Pipeline
Marketing Matters
At Last
THE SOURCE - Winter 2017 - intro
THE SOURCE - Winter 2017 - ebelly1
THE SOURCE - Winter 2017 - ebelly2
THE SOURCE - Winter 2017 - A Vision from Our Industry: Listen, Define, Allocate, Execute
THE SOURCE - Winter 2017 - cover2
THE SOURCE - Winter 2017 - 3
THE SOURCE - Winter 2017 - 4
THE SOURCE - Winter 2017 - 5
THE SOURCE - Winter 2017 - 6
THE SOURCE - Winter 2017 - 7
THE SOURCE - Winter 2017 - First Person
THE SOURCE - Winter 2017 - 9
THE SOURCE - Winter 2017 - APGA Events
THE SOURCE - Winter 2017 - Q&A: Chairman Chatterjee
THE SOURCE - Winter 2017 - Furnace Rule Update
THE SOURCE - Winter 2017 - 13
THE SOURCE - Winter 2017 - Delivering the Needs of Customers Through Legislative Action
THE SOURCE - Winter 2017 - 15
THE SOURCE - Winter 2017 - Reaching Your Future Customers
THE SOURCE - Winter 2017 - 17
THE SOURCE - Winter 2017 - Whistling In The Dark: Shortcomings of Natural Gas Indices Persist
THE SOURCE - Winter 2017 - 19
THE SOURCE - Winter 2017 - 20
THE SOURCE - Winter 2017 - Growth in Renewable Natural Gas
THE SOURCE - Winter 2017 - 22
THE SOURCE - Winter 2017 - Legislative Outlook
THE SOURCE - Winter 2017 - 24
THE SOURCE - Winter 2017 - The Pipeline
THE SOURCE - Winter 2017 - Marketing Matters
THE SOURCE - Winter 2017 - 27
THE SOURCE - Winter 2017 - At Last
THE SOURCE - Winter 2017 - 29
THE SOURCE - Winter 2017 - 30
THE SOURCE - Winter 2017 - cover3
THE SOURCE - Winter 2017 - cover4
THE SOURCE - Winter 2017 - outsert1
THE SOURCE - Winter 2017 - outsert2
THE SOURCE - Winter 2017 - outsert3
THE SOURCE - Winter 2017 - outsert4
THE SOURCE - Winter 2017 - outsert5
THE SOURCE - Winter 2017 - outsert6
https://www.nxtbook.com/naylor/PGAQ/PGAQ0218
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https://www.nxtbook.com/naylor/PGAQ/PGAQ0417
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https://www.nxtbook.com/naylor/PGAQ/PGAQ0217
https://www.nxtbook.com/naylor/PGAQ/PGAQ0117
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https://www.nxtbook.com/naylor/PGAQ/PGAQ0116
https://www.nxtbook.com/naylor/PGAQ/PGAQ0415
https://www.nxtbook.com/naylor/PGAQ/PGAQ0315
https://www.nxtbook.com/naylor/PGAQ/PGAQ0215
https://www.nxtbook.com/naylor/PGAQ/PGAQ0115
https://www.nxtbookmedia.com