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Report Finds Large Variation in Missouri Utility Hedging Strategies

A new report to the Missouri Public Service Commission (PSC) recommends changes to a state natural gas price volatility rule in light of higher gas prices and a wide variation in the hedging practices used by the state's utilities. The PSC staff report found that while 95% of the state gas consumers were served by a utility that hedged at least 50% of its winter gas supply against price fluctuations there was a significant variation in the use of gas price hedging strategies among the utilities.

"The report notes that there are three general categories with respect to hedging performance by natural gas utilities this winter," said Warren Wood, the PSC's utility operations division director. According to the report, on or before Nov. 1, 2005, AmerenUE and Aquila had hedged a high percentage, 80% or more, of their expected heating season needs. Laclede, Atmos and Missouri Gas Energy hedged in the 50% to 60% range. But Southern Missouri Gas, Missouri Gas Utility and Fidelity Natural Gas did little or no hedging by Nov. 1, 2005.

"A central question is what is an appropriate hedging strategy?" Wood said. "Joint recommendations in the report are designed to improve the hedging practices of Missouri's local natural gas companies and help to mitigate the impact of changing and potentially higher natural gas prices for consumers in the future."

Hedging is described as any method of minimizing the risk of price change through the use of storage and financial instruments such as futures contracts or options to avoid a total reliance on spot market purchases or a market based index.

The study's recommendations include the following: establishing minimum future time frames over which planned hedging must occur; establishing minimum boundaries for hedging programs unless good cause is shown for any deviations from these minimums; establishing a process whereby natural gas companies provide detailed information to the commission regarding planned natural gas hedging positions each spring with updates for the coming winter each fall; recognition of appropriate hedging mechanisms that mitigate upward price volatility; and further development of consumer education materials on efficient energy usage.

A copy of the report can be found here: http://www.psc.mo.gov/publications/GW_Report_022406.pdf.

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