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A Utility Executives' Guide to 2007: A Cloudy Forecast

Experts predict the top issues that utilities will have to weather this year, and beyond.

Fortnightly Magazine - January 2007

utilities understandably wary about natural gas.

“Volatility in the forecast, if not the daily cash market, can be tremendous,” says George Hopley, commodities strategist with Barclays Capital in New York. “The spread has been anywhere from $2 to $15, so people are a little guarded. How do you approach that type of volatility?”

Futures markets have provided limited help, as they have proven to be poor predictors of price trends. Futures prices several months after Katrina were $12 and higher, yet warm-weather conditions pushed spot prices down to $4.

“We have a lot of gas in storage—3.5 trillion cubic feet—but everyone is sensitive now about the weather,” Hopley says. Even average temperatures this winter and summer would result in major storage draw-downs, and extreme temperatures could quickly drive gas prices back into double-digit territory.

In the longer term, the industry’s fortunes will depend on how supply-side constraints are resolved. Permitting processes for liquefied natural gas (LNG) terminals have moved forward, and counterparties are negotiating to resolve disputes over gas quality and interchangeability. But whether gas supplies—from imports or new domestic sources—will keep pace with rising gas demand remains uncertain.

In many respects, 2007 will be a pivotal year. Just as major swings in weather patterns and infrastructure development will determine whether gas remains cheap or returns to levels seen shortly after Katrina, the utility business climate is subject to whipsaw changes in regulation, investment, and technology.

Whether these changes lead toward the best of times or the worst of times might be a matter of perspective. But at least one thing seems certain: 2007 will be an exciting year for almost everyone in the industry.