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Gas Price Volatility: Of Winters Past and Futures Market

Fortnightly Magazine - March 15 1998

that is what has stalled the opening of the NYMEX contract."

Steven L. Brash, a spokesman for Cinergy, attributes the NYMEX decision to fix a contract at the Cinergy interconnection to his company's "very active and longer-time support for open transmission access" (hinting at the efforts of former PSI CEO James Rogers), and to the fact that the company maintains its own trading floor, 24 hours a day, seven days a week, operated through Cinergy's energy commodities business unit (not a separate subsidiary).

The Entergy contract, on the other hand, located near the Henry Hub, site of a premier gas spot market and a highly successful NYMEX futures contract for gas, offers the tantalizing prospect of cross-hedging between electricity and gas.

Entergy claims that its control area is well-equipped and positioned to handle physical delivery over its backbone of 500-kilovolt transmission lines and interconnections with 12 surrounding utilities. Shahid Malik, senior vice president and COO of Entergy Power Marketing Corp. (the utility's marketing and trading subsidiary), anticipates "a very good arbitrage opportunity" with the Henry Hub.

"A fairly large proportion of gas-fired generation is located in the South Central states," notes Malik. "This fact will allow us to hedge our trading of electricity with gas. You don't necessarily need to have a lot of nearby gas generation, but it does help."

When asked about the proposed NYMEX coal futures contract, and whether its location at a coal loading facility in Kentucky, close to the new electricity contract at the Cinergy control area, could possibly allow for power/coal cross-hedging, an EIA source declined comment, and Malik questioned whether the power contract would feature enough liquidity. He did volunteer, however, that the Cinergy contract could act as a proxy for New York and northeastern power markets in the event of a delay in starting up the PJM futures contract.

"They [NYMEX] have some real problems at PJM," Malik added.

Ben Schlesinger and John Herbert both remain cautious. "NYMEX is forging ahead," says Schlesinger, "but volumes will have to pick up through spark spread trading and arbitrage, before we get any real change."

Herbert acknowledges that Cinergy and Entergy are "very active wholesale markets for power, in terms of volume," but questions the market links between electricity and gas.

"Right now there's not much of a connection because of institutional constraints. That's why utilities are looking for assets.

"It's hard to cut deals, because nominations and contracts are not in synch. But if a company has both types of assets it can cut that knot." F

Bruce W. Radford is editor of Public Utilities Fortnightly.

Low Price vs. Fixed Price

Which Do Customers Want? Which Will Regulators Allow?

CONCERNED over gas price spikes during the winter of 1996-97, state regulators have called for more fixed-price

arrangements (em both in setting regulated retail gas rates and for portfolio supply contracting by gas utilities:

INDIANA. After hearing complaints about gas price volatility, state commission allows Indiana Gas Co. to back away from practice of buying all baseload gas supply at market-index prices, and instead buy a portion