As defined by “Investopedia”https://www.investopedia.com/terms/d/discountrate.asp: “Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal Reserve Bank through the discount window loan process, and second, the discount rate refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.”

For G2M2® purposes, the latter context – the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows – is the appropriate definition. The discount rate is only used to help GPCM make decisions about storage injections and withdrawals, but always within the constraints imposed by the Storage Plan.

For example:

(Forgetting restrictions such as minimum and maximum storage levels (i.e. Storage Plan) and injection cost and loss fraction)

If the price of gas in a storage field were $4.00 in September and $4.01 in October, then if the discount rate were 0%, there would be an incentive to inject gas into storage.

Gas flows from lower price locations or times to those with higher prices.

However, if the annual discount rate were 7%, then the monthly discount rate would be approximately (1.07)^(1/12) - 1 = 0.5654%.

(Note that 7%/12 = 0.5833% would also be a reasonable, but less exact, approximation.)

The discounted price of gas for October (relative to September) would be $4.01/(1.005654)=$3.9875 which is less than $4.00.

In this case, it would not make sense to inject gas into storage because it would be worth less in storage than in the September market.

Please contact customer support if you have any further questions - RBAC, Inc. support line (281) 506-0588 ext. 125, from 9:00 am to 5:00 pm CT