Expressing concern about price volatility in the natural gas market, New Jersey, Virginia and Michigan regulators have directed local gas distribution companies to try fixed-price contracts and other hedging instruments. This would allay risk in wholesale gas supply portfolios and protect residential ratepayers from price swings common in the winter heating season, regulators said.
The growing popularity of fixed-price and other financial instruments to hedge against price spikes follows two winters of volatility noticed by regulators nationwide.
New Jersey. The New Jersey Board of Public Utilities has approved a plan authorizing Public Service Electric and Gas Co. to "lock in" the cost of its residential gas supply portfolio for 12 months using fixed-price transactions with gas suppliers and financial hedging instruments.
The company agreed to limit its use of the instruments to not more than one-eighth of the total supplies necessary to serve the residential class. It also agreed to limit the instruments it would purchase to a defined list of products including, floors, swaps, caps, collars, puts and calls.
In an earlier ruling, the board had rejected a proposal by the LDC to change its levelized gas adjustment clause charge for residential, cogeneration, street lighting and uncompressed vehicular gas customers from an annually adjusted rate to a monthly adjusted rate. The board directed the LDC to maintain the annual adjustment convention and instead to investigate possible alternatives to its adjustment clause rate structure that might still fit the "continuing movement of the gas marketplace toward customer choice and competition."
The board found that while the hedging/lock-in plan proposed by the company would risk the opportunity to save ratepayers money if market prices drop, it would adequately protect customers against price run-ups, such as the ones experienced during the past two heating seasons. Re Public Service Electric & Gas Co., Docket No. gr96070554, July 30, 1997 (N.J.B.P.U.).
Virginia. The Virginia State Corporation Commission has authorized Roanoke Gas Co. to implement a pilot program using financial hedging instruments.
It said the company could use financial hedges for up to 25 percent of its normal wintertime demand, excluding volumes supplied from storage. The commission also allowed the LDC to modify the terms of its supply adjustment clause mechanism to permit the recovery of hedging contract costs as a "gas cost."
Under the pilot, the company will negotiate no more than two contracts with a financial institution for either a fixed-price or a "no-cost" collar contract under which the bank would guarantee a cap and floor for gas prices. The LDC will file all documents with the commission. It also will compile a comprehensive report on the impact of the contracts at the end of the 1997-98 season. Re Roanoke Gas Co., Case No. pue970420, July 24, 1997 (Va.P.S.C.).
Michigan. The Michigan Public Service Commission approved an offer by Michigan Consolidated Gas Co. to increase its reliance on fixed-price contracts rather than shorter-term contracts based on spot market prices.
It rejected the LDC's proposal to "provide a buffer against unforeseen price increases" by adding 44 cents per thousand cubic feet to the projected price of gas used in setting its monthly gas cost recovery rate.
The commission found that the LDC's current strategy of relying heavily on short-term contracts with market-based prices did not justify adding a "volatility factor" to its adjustment clause price forecast. Re Michigan Consolidated Gas Co., Case No. u-11145, August 13, 1997 (Mich.P.S.C.).
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