While most utilities, regulators, marketing companies and consumers agree that hedging is an effective tool that utility companies should use in managing commodity price risk, most also say the current regulatory process is inadequate to enable utilities to effectively deal with the price problems that exist today, according to a survey by Calgary-based consulting firm RiskAdvisory, a unit of SAS.

Of the 30 respondents in the survey, which included 20 North American utilities, some regulators, financial institutions, marketers and consumer groups, 67% said that regulators are categorically unqualified to set policies for utility hedging programs. About 60% also characterized public rate hearings on managing gas and fuel cost volatility as “ineffective and too costly.” The survey was conducted during RiskAdvisory’s two-day conference Oct. 21-22 on the topic of commodity price management.

A total of 96% of the respondents said that utilities should employ hedging, and 59% said hedging was very effective. About 85% agreed that regulators could authorize cost recovery related to hedging programs. However 73% said the industry was not doing a good job of communicating the benefits of hedging as a way to mitigate consumer misgivings about electricity rates. Only 42% thought consumers, marketers, regulators and utilities could work together in the current rate setting process to come up with hedging programs.

“Despite the consistent exposure of North American utilities and their customers to severe energy price volatility, it is clear that there is still no standardization around the design and implementation of utility hedging programs from region to region,” said Tim Simard, principal consultant at RiskAdvisory. “These results are consistent with our supposition that the industry won’t be able to escape a continuing cycle of disappointment and frustration without some sort of process that is more forward looking and prescriptive than the current hindsight review process.”

RiskAdvisory noted that over the past two decades there have been numerous hearings across North America on the merits of utility hedging programs and the methods that can be used to shield ratepayers from undesirable commodity price volatility. Yet there is still no agreed upon method. Participants in the regulatory process are still struggling to develop an equitable approach that meets the needs of all stakeholders.

©Copyright 2004 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.