Index based pricing allows customers to purchase their natural gas supply needs at market rates. Buyers who think that the market prices are going to fall should consider this pricing strategy.

Advantage of Index Price:

• Full-market participation for customers
• Provides end-users an opportunity to maximize savings if market prices fall during the contract period

Risks of Index Price:
The customer will always receive market pricing. Therefore, if prices increase, customers are at risk to pay more for their gas supplies. In order to hedge against unfavorable price movements, a fixed price or costless collar could be used for price risk protection.

Example:
Current prices for natural gas are $4.00. A utility customer believes natural gas prices are going to remain constant or decrease due to high storage inventory levels and a forecasted mild winter. To take advantage of the potential for lower prices, the utility could select an index price from NFM. Using this strategy, the customer was able to take advantage of $3.20 gas prices in May when the Index fell.