LDCs Examine Hedging to Stabilize Gas Costs

Fortnightly Magazine - November 1 1997
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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.

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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.

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