Index-based Capacity Release – Parameters and

ExamplesWilliam M. Griffith

El Paso Western Pipelines

August 2007

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Index-Based Capacity Release• The release of capacity may be based on an

identified index price (a posted gas or electric value)

• The releasing shipper must specify an index-based release– Minimum rate (not less than TSP min rate)

– Maximum rate (not more than TSP max rate)

– Index Price(s) to be used (may include a formula)

• Index prices are usually the value of the commodity– Natural Gas – $/Dth or $/MMBtu

– Electricity - $/MWH

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Index-Based Capacity Release• Index Prices

– More than seven gas and electric index sources

– Three of the more common gas index price sources• Natural Gas Intelligence (NGI)• Inside FERC (IF)• Gas Daily (GD)

• Price Terms (general usage)– Natural Gas - $/Dth or $/MMBtu (Index Price)

– Electricity - $/MWH (Spark Price)

– Spark Price (less ops costs)/Heat Rate = Index Price

– Spark Spread – The difference in a Spark Price and an Index Price

– Basis (B) – the difference between an Index Price and the Henry Hub Index Price

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Index-Based Capacity Release• Index Releases – common usage

– A single Index Price or Basis Price– A percentage of an Index Price or Basis Price– The difference (or “spread”) between two (or more)

Index Prices– A percentage of the spread between two (or more)

Index Prices• Index/Basis Price references (low, high, average,

etc.)– First of the month – Bid Week Average (BW)– Mid-point averages– Daily (D , for example GDD)

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Index-Based Capacity Release – Example 1

• Index Release Parameter Examples (Limited to TSP min/max rate)

• Monthly Release Index Pricing– ((NGIBW (California Southern Border, Socal) – IFBW

(NWP Rocky Mts)) –

((TSP Fuel Percent * IFBW (NWP Rocky Mts)) + TSP commodity charge +

TSP commodity surcharge )) * 100%

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Index-Based Capacity Release – Example 1

• Parameters– NGIBW (California Southern Border, Socal) = $5.49

– IFBW (NWP Rocky Mts)= $3.71

– TSP Fuel Percent * IFBW (NWP Rocky Mts)= 1.2% * $3.71 = $0.0445

– TSP commodity charge = $0.25

– TSP commodity surcharge = $0.05

• Calculation($5.49 – $3.71) - ($0.0445 + $0.25 + $0.05) = $1.4155

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Index-Based Capacity Release – Example 2

• Monthly Release with Basis Pricing– (NGBWB (Iroquois zone 2) - (TSP Monthly Fuel Rate

* IFBWB (Henry Hub) + TSP Commodity Chg + TSP ACA) - $0.05/Dth

– Optional minimum floor will be $0.00/Dth

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Index-Based Capacity Release – Example 2

• Parameters– NGBWB (Iroquois, zone 2) = $0.692

– TSP Monthly Fuel Rate * IFBWB (Henry Hub) = 2.1% * 6.11 = $0.1283

– TSP Commodity Chg = $0.33

– TSP ACA = $0.03

• Calculation$0.692 – ($0.1283 + $0.33 + $0.03) - $0.05 = 0.1537

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Index-Based Capacity Release – Example 3

• Index Release with Daily Pricing (August 30, 2007)– (((GDD (Socal Gas - midpoint) – GDD (Kern River,

Opal Plt - midpoint)) - ((TSP Fuel Percent * GDD (Kern River, Opal Plt -midpoint)) + TSP commodity charge + TSP commodity surcharge))-0.05)*50%

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Index-Based Capacity Release– Example 3

• Parameters– GDD (Socal Gas - midpoint) = $5.49

– GDD (Kern River, Opal Plt - midpoint) = $3.37

– TSP Fuel Percent * GDD (Kern River, Opal Plt -midpoint) = 1.9% * 3.37 = $0.0640

– TSP commodity charge = $0.29

– TSP commodity surcharge = $0.0307

• Calculation for 8/30/07(($5.49 - $3.37) – ($0.0640 + $0.29 + $0.0307) - $0.05) * 50% = $0.8427

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Index-Based Capacity Release– Example 4

• Original Contract – Shipper ABC

– Capacity from Permian Basin (A) to California Border

– Entitlement – 50,000 Dth/d

– Rates: full tariff rate (daily)• Reservation – $0.3650 (Tariff Max)• Commodity

– San Juan - $0.0260

– Permian - $0.0435• Fuel

– San Juan – 3.59%

– Permian - 3.59%

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Index-Based Capacity Release– Example 4

• Release Terms

– ABC releases a portion of contract based on index prices

– Offer Minimum/Award• Quantity: 10,000 Dth• Rate: 100% max reservation (net)• Term: One Month

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Index-Based Capacity Release– Example 4

• Release Terms (continued) – Value to be trued up based on a 100% load factor

rate– The difference between NGIBW (SoCal Border)

posted in Natural Gas Intelligence and– Prices of Spot Gas delivered to Pipelines posted in

Inside FERC Gas Market Report’s first issued each month for • SJ Basin• Permian Basin

– Less variable costs (commodity) and fuel

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Index-Based Capacity Release– Example 4

• Release Terms (continued)

– Rate adjustment to include • 70% SJ Basin price• 30% Permian price

– Replacement shipper pays any positive result

– Releasing shipper reimburses any negative amount up to demand charge

– Other requirements• Total reservation rate not to exceed the monthly maximum tariff

rate• Total reservation rate not to be less than the monthly minimum

tariff rate

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Index-Based Capacity Release– Example 4 Release Terms (continued)

• Special Terms – continued– Releasing Shipper

• Perform the determination of the monthly reservation rate for the release based on the release formula

• Determination must be complete and provided to the TSP by the 5th business day of the following month

– Releasing Shipper is solely responsible for the accuracy of the calculated rate

– Replacement shipper disputes regarding rate issues should be resolved with the releasing shipper

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Index-Based Capacity Release– Example 4

• Index details (as posted for the appropriate day)– SoCal Border $2.95

– San Juan $2.69

– Permian $2.79

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Implementation of Index Prices Terms

Index(a)

Rate(b)

Fuel Cost(c)

Usage(d)

Total Var(e)

Spread(f)

Net Spread(g)

Index (b) * fuel % Tariff (c) + (d)SoCal (b) – index (b) (f) – (e)

So Cal Bdr 2.95

San Juan 2.6900 0.0967 0.0260 0.1227 0.2600 0.1373

Permian 2.7900 0.1003 0.0435 0.1438 0.1600 0.0162

Index(a)

Net Spread (g)

Tariff Reservation

(h)

Net Reservation

(i)Share

(j)

Rel Shp Reser Rt(k)

Rep Shp Reser Rt

(l)

(f) – (e) Tariff (h) – (g) Deal % (i) * (j) / 100 (h) - (k)

San Juan 0.1373 0.3650 0.2277 70 0.1594

Permian 0.0162 0.3650 0.3488 30 0.1046

Total Rate 0.3650 0.2640 0.1010

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Index-Based Capacity Release• Summary

– Index/Basis Prices• Choice of multiple sources• Index postings are proprietary (access issues for TSP)

– Nearly infinite Index/Basis Price formula requirements• Combinations (index prices, basis prices, spark spreads)• Percentages and/or formulae• Index/Basis Price reversals

– Release issues• Terms are administratively feasible• Terms are non-discriminatory

– Settlement issues• Reservation determination available prior to TSP invoicing date• Daily Index releases require a weighted average invoice price• Calculated rate disputes – responsibility for rates/billing amounts