States have passed laws to bypass FERC Order 1000 and its reforms favoring private grid developers. Could those laws themselves fall under attack?
Hedging Under Scrutiny
Planning ahead in a low-cost gas market.
that we cannot predict the future with certainty. In the future, changing supply-demand factors might turn market prices in the other direction.
Utilities will want to be prepared before a market shift occurs. On the supply front, there might be environmental regulation that slows shale gas production, additional compliance requirements that increase shale gas production costs, or technical factors that reduce the projected size of economical reserves. Natural gas demand might increase due to stymied nuclear plant development, rising coal plant operating costs, or closures of coal plants as a result of environmental compliance. New demand could result from economic recovery, LNG exports, or new natural gas and electric vehicle use. A combination of these factors could cause the North American gas supply-demand balance to materially shift, bringing about increases in market prices and volatility.
As market prices have dropped, many stakeholders are encouraging utilities to adapt their hedging practices to the current market supply and pricing paradigm. Some have suggested utility hedging be reduced until such time as gas market prices show some sign of rallying. Others are taking a more proactive stance, encouraging longer-dated hedging and new hedging program design.
Two commissions that recently have suspended hedging activities are the Public Utilities Commission of Nevada (December 2010), with respect to Nevada Power, and the British Columbia Utilities Commission (July 2011), in regard to FortisBC. The commissions didn’t disallow previously executed hedge transactions, and they left existing hedges in place; the decisions applied to future hedging activity.
In its Dec. 16, 2010 order (Docket No. 10-09003), the Nevada PUC approved a stipulation that included the requirement that Nevada Power not proceed with any additional financial gas hedges. However, the utility was told it should continue reviewing natural gas hedging in light of prevailing market fundamentals and conditions. 4 More recently, on July 22, 2011, the British Columbia Utilities Commission rejected FortisBC’s “Price Risk Management Plan.” In the order, the Commission Panel wrote: “in light of the recent exploitation of shale gas, the likelihood for more stable natural gas prices is significantly greater and the risk of dramatically higher natural gas prices, excepting short periods of price disconnects, is significantly lower than it has been in many years.” 5 Further, the panel suggested that hedging was not the best way to deal with the potential for price increases, but commented that if there were a change in market conditions, they would be willing to consider proposals to mitigate price risks for customers. They concluded by saying that the performance of the utility’s “Price Risk Management Plan” over the last 10 years did not convince them that continuation of the program was in the ratepayers’ interest.
Hedging programs are undergoing a greater degree of regulatory scrutiny. In some instances, hedging programs have been scrutinized and continued without modification, while in other cases, hedging programs have been targeted for additional review.
In spring 2009, the Colorado Public Utilities Commission commented on testimony filed by commission staff, which criticized gas hedging by Xcel’s subsidiary, Public Service Company of Colorado. The staff had conducted a