Curious if anyone here has any insight into this issue:
Years after realizing that gas utilities operating in Washington state had incurred more than $1 billion in hedging losses over a decade, the state regulator urged the companies to develop balanced hedging strategies that keep ratepayers in mind.
The gas utilities in the state have been "blindly" following outdated hedging strategies, the Washington Utilities and Transportation Commission, or UTC, said in a March 13 policy statement. Failing to respond to the changing marketplace, Northwest Natural Gas Co., Avista Corp., Puget Sound Energy Inc. and Cascade Natural Gas Corp. collectively lost about $1.1 billion from November 2002 through October 2012, according to the commission.
After extensive comment collection and a commission-requested white paper on hedging practices, the UTC found that the utilities' hedging strategies appeared focused on mitigating volatility in gas supply prices, often at the expense of minimizing gas prices for customers.
Different tactics are appropriate for avoiding cost increases versus avoiding uncompetitive prices. For instance, a high hedge ratio, the relationship between the amount of hedged and unhedged supplies, is better suited to cost mitigation, while a low ratio would be appropriate for preventing hedging losses, according to the white paper the UTC commissioned.
Having a pre-set hedging ratio leaves little room for risk-based and market-aware judgment calls in the hedging process, the white paper noted. The utilities in Washington state had generally been using "programmatic" hedging, or accumulating hedges on a set schedule to reach a particular ratio.
"A programmatic hedging strategy necessarily is disconnected from a critical assessment of market risk conditions; there is no need for a company to measure risk if it has no intention of responding to changing risk," the UTC's policy statement said. "Companies regard the primary hedging objective to be 'price stability.' Thus, most companies established large hedge ratios and maintained those ratios in a declining and stabilizing natural gas market."
The commission directed the companies to develop a framework for data-driven risk mitigation, to monitor market conditions and to make hedging decisions based on those factors. The utilities also will have to document their decision-making processes when it comes to hedging.
The UTC recognized that it will take some time for companies to switch tactics and told the utilities to submit in 2017 a plan for how to move to a risk-based hedging strategy and a path to build all the necessary expertise and systems. In 2018, the companies will have to have comprehensive hedging plans that should be implemented over no more than 30 months. By 2020, the risk-based hedging programs should be fully underway.
"While no 'right' mix of methods may be applied unilaterally due to utility specific operations, the companies must reasonably plan for market volatility and appropriately react to balance ratepayer exposure to hedging losses with ratepayer exposure to price spikes," the UTC said. "The commission adopts these policies supporting dual protection of upside price risk and downside hedging loss, along with annual validation of acceptable hedging outcomes."
Years after realizing that gas utilities operating in Washington state had incurred more than $1 billion in hedging losses over a decade, the state regulator urged the companies to develop balanced hedging strategies that keep ratepayers in mind.
The gas utilities in the state have been "blindly" following outdated hedging strategies, the Washington Utilities and Transportation Commission, or UTC, said in a March 13 policy statement. Failing to respond to the changing marketplace, Northwest Natural Gas Co., Avista Corp., Puget Sound Energy Inc. and Cascade Natural Gas Corp. collectively lost about $1.1 billion from November 2002 through October 2012, according to the commission.
After extensive comment collection and a commission-requested white paper on hedging practices, the UTC found that the utilities' hedging strategies appeared focused on mitigating volatility in gas supply prices, often at the expense of minimizing gas prices for customers.
Different tactics are appropriate for avoiding cost increases versus avoiding uncompetitive prices. For instance, a high hedge ratio, the relationship between the amount of hedged and unhedged supplies, is better suited to cost mitigation, while a low ratio would be appropriate for preventing hedging losses, according to the white paper the UTC commissioned.
Having a pre-set hedging ratio leaves little room for risk-based and market-aware judgment calls in the hedging process, the white paper noted. The utilities in Washington state had generally been using "programmatic" hedging, or accumulating hedges on a set schedule to reach a particular ratio.
"A programmatic hedging strategy necessarily is disconnected from a critical assessment of market risk conditions; there is no need for a company to measure risk if it has no intention of responding to changing risk," the UTC's policy statement said. "Companies regard the primary hedging objective to be 'price stability.' Thus, most companies established large hedge ratios and maintained those ratios in a declining and stabilizing natural gas market."
The commission directed the companies to develop a framework for data-driven risk mitigation, to monitor market conditions and to make hedging decisions based on those factors. The utilities also will have to document their decision-making processes when it comes to hedging.
The UTC recognized that it will take some time for companies to switch tactics and told the utilities to submit in 2017 a plan for how to move to a risk-based hedging strategy and a path to build all the necessary expertise and systems. In 2018, the companies will have to have comprehensive hedging plans that should be implemented over no more than 30 months. By 2020, the risk-based hedging programs should be fully underway.
"While no 'right' mix of methods may be applied unilaterally due to utility specific operations, the companies must reasonably plan for market volatility and appropriately react to balance ratepayer exposure to hedging losses with ratepayer exposure to price spikes," the UTC said. "The commission adopts these policies supporting dual protection of upside price risk and downside hedging loss, along with annual validation of acceptable hedging outcomes."
Been there, and WOW done that -- the last one to the tune of ~$3B stolen from ratepayers, felony warrants of collusion and fraud that stopped right at the governor's door, and certain LinkedIn gaps that mysteriously persist to this day.