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Washington State Regulators Want NatGas Utilities to Update Hedging

Regulators in the state of Washington on Monday launched a process for revising the approach of the state's natural gas utilities toward hedging their future gas supply purchases.

The action is part of an investigation of hedging that regulators began four years ago after tracking a 10-year record of more than $1 billion in hedging losses collectively by the state's four gas utilities.

Saying it wants more risk-responsive hedging by the state's utilities, the Washington Utilities and Transportation Commission (UTC) outlined an approach calling for submittal of new hedging approaches by the utilities in their 2017 purchased gas adjustment (PGA) filings this fall and starting next year a requirement for utilities to include annual hedging plans with their PGA submittals.

"The commission prefers that natural gas companies adopt risk-responsive hedging strategies, rather than the singular, programmatic hedging approaches currently used," said a UTC spokesperson.

"In blindly adhering to programmatic hedging strategies, the companies failed to respond to changes in underlying market conditions and continued to protect against diminishing upside market risk, resulting in higher exposure to hedging losses," UTC said in its policy statement, which cited an internal conflict within the utility programs between mitigating regulatory risk for shareholders and price risks for utility ratepayers.

The three-member UTC said there is no "right mix"  of methods used in gas hedging, given the fact that each utility's operations are unique, but it expects each of the four gas utilities under its jurisdiction will "reasonably plan for market volatility and appropriately react to balance ratepayer exposure to hedging losses with ratepayer exposure to price spikes."

The policy statement outlines expectations for future hedging practices and UTC's dissatisfaction with the current approach.

Utilities be required to demonstrate that they have adopted risk-responsive approaches and should take no more than 30 months to fully implement the new hedging practices, UTC said. UTC members will review the plans each year and determine the appropriateness of hedging losses or gains for recovery through the PGA rate-setting process. "However, the commission will not formally accept or reject the companies' plans," the spokesperson said.

Washington's private-sector natural gas utilities include Avista Utilities, Puget Sound Energy, NW Natural, and MDU Resources Group's Cascade Natural Gas Corp.

"The four LDCs regulated by the commission experienced net hedging losses of more than $1.1 billion between Nov. 1, 2002, and Oct. 31, 2012," UTC said, adding that "while it is tempting to characterize the problem simply in terms of hedging losses, 'mark-to-market' losses are a likely outcome of any hedging strategy."

"The unstable, downward-trending market, coupled with a continued programmatic hedging strategy, brought about the large mark-to-market losses experienced by the companies over the 10-year period."

UTC said it specifically has avoided an "overly prescriptive" policy statement, and instead has attempted to adopt "an affirmative policy" that natural gas company hedging programs need to adapt to constantly changing market risk conditions, and "the companies must determine how best to achieve these objectives."

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