Lacking regulatory oversight, financial hedges turn into risky speculation.
John A. Neri is a principal with energy consulting firm Benjamin Schlesinger and Associates, and is a lecturer in economics at the University of Maryland.
Natural gas distribution utilities have used financial derivative instruments such as futures, options and swaps to hedge gas commodity cost since the 1990s. The primary motivation on the part of utilities and their regulators is price stability to protect consumers against spikes in gas prices. Surveys conducted by the Natural Regulatory Research Institute (NRRI) and the American Gas Association (AGA) in 2008 and 2009 show most state regulatory commissions in the U.S. support or are neutral to local distribution companies (LDC) using financial instruments to hedge gas price movement. However, regulators now are questioning LDC hedging programs in light of large losses some utilities have experienced with them. Also, low price volatility and declining and stable gas prices since 2009 are causing regulators to question the need for hedging programs. Regulatory Commissions in Nevada and British Columbia have suspended hedging activities using financial instruments, and other jurisdictions are targeting financial hedging programs for additional review.