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Price Risk Management: Electric Power vs. Natural Gas

Fortnightly Magazine - February 1 1996

senior vice president of ICF Kaiser, and manages the utility consulting practice of ICF Kaiser Consulting Group.

Power versus Gas

The going assumption is that there will be many similarities between the two markets-i.e., that the gas business approach will be applied to the power sectior. This intuitive guess is largely correct. However, there will be some noticeable differences:

. Regional Market Issues. Power markets are likely to be more regionalized than gas markets. Relying on a single Henry Hub futures markets is clearly not the answer, and even if several regionalized contracts develop, the role of futures markets overall is likely to be more limited in power.

. Price Volatility. Short-run (hourly, daily, weekly) power volatility will be higher than in the gas commodity market, but long-run volatility will be lower.

. Engineering Economic Fundamentals. Engineering economic fundamentals will play a larger role in power markets, in part because a transitional period will make it difficult to create a market in the absence of historical data on market volatility.

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