Gas Price Prudence: From Hedge-and-Hope to Best Practice

Deck: 
Utilities and regulators should follow the same ideas that govern risk management at the largest of commodity trading houses.
Fortnightly Magazine - October 1 2001
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Gas Price Prudence: From Hedge-and-Hope to Best Practice



Utilities and regulators should follow the same ideas that govern risk management at the largest of commodity trading houses.

The July 5, 2001 issue of offered an update on what utilities and regulators are doing in the area of commodity price hedging for natural gas.

The headline read, "Dominion East Ohio Sales Customers Will Pay 29% Less in Gas Costs under PUCO-Led Encouragement of Hedging Plan...."

One wonders: Since when has regulatory "encouragement" helped anyone save money? But now here's the question that really makes you think: "Less compared to ?"

Theory and Practice at the State PUCs

All across North America, public utility commissions (PUCs) and their charges, the local gas distribution companies (LDCs), are revisiting past assumptions following a recent unpleasant experience-the gas price spikes that occurred this past winter. As the summer of 2000 lapsed into autumn, with spot and forward prices escalating, LDCs that manage storage inventories (and, where permitted, futures and forwards portfolios) were caught in a bind: Commit now and hope the market doesn't crash, or wait and hope it does. The net result was record low storage inventories going into November. The National Weather Service (NWS) then proceeded to report the second-coldest November and seventh-coldest December in NWS history. That was all the traders needed to send prices skyrocketing for the balance of the heating season.

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