Planning ahead in a low-cost gas market.
Julie Ryan is a vice president and Julie Lieberman is a project manager with Concentric Energy Advisors. The authors acknowledge the editorial contributions of Steve Caldwell and Carrie O’Neill.
The new world of gas supply, brought about by shale development, the economic downturn, and expanded gas infrastructure, has caused regulatory stakeholders to challenge utility gas supply hedging programs.
Hedging, a common feature of utility risk management practices, serves as a tool to stabilize prices, protect customers from market volatility, and insure against unexpected price spikes. However, regulatory commissions and intervenors are challenging the merits of their utilities’ hedging programs with increasing frequency, questioning whether the risk mitigation benefits of hedging have justified the associated costs, and whether customers are paying for insurance to manage a risk that might no longer exist.
Concerns raised by commission staff or other stakeholders relating to the cost of utility hedging programs has led to an emerging trend of greater commission and stakeholder involvement in assessing such programs’ efficacy. Regulatory commissions are asking utilities to provide written justification of their hedging practices, applying pressure on utilities to work with stakeholders to resolve hedging differences through collaborative processes and to find common ground on the risk-reward spectrum. In some cases, risk management hedging programs have been suspended until there are visible increases in volatility and market prices.