Southwest Gas Berated for Poor Hedging Practices

The staff of the Public Utilities Commission of Nevada has determined that Southwest Gas overpaid for natural gas last summer by about $8.13 million because of a poor hedging program and over-reliance on the spot market. As a result, the staff has recommended that amount be taken out of a rate balancing account and that the utility be ordered to improve its risk management practices.

In written testimony, Staff Economist Beverly A. Brereton told the commission that Southwest Gas's strategy of relying heavily on spot purchases "resulted in unnecessary additional gas procurement costs during the months of June to September 2000.Those months coincide with the peak period in the Western natural gas market when competition from electric generators for gas supplies is burgeoning," she noted. "Had Southwest secured adequate fixed-priced term purchases or triggered the index within the secured contracts earlier, the cost escalation could have been dampened or averted temporarily until the next purchasing season for the company had begun." She said Southwest erred by not purchasing futures or options contracts prior to April 2000 to mitigate the high price volatility associated with spot purchases.

Southwest overlooked market fundamentals that appeared as early as the fall of 1998, said Brereton, when a number of new natural gas-fired power plants were announced in the region but new gas pipelines were "stymied by inadequate subscription to the projects."

Southwest also had an opportunity to trigger an index in its term contract but chose not to do so when prices were low, she said. "Southwest chose to trigger the price mechanism for its term contracts providing gas supplies to northern Nevada in July, August, September and October 2000 on June 8, 2000. A similar experience occurred in southern Nevada where the exercise date was June 28, 2000."

Brereton said she "found problems with the prudence of the gas costs" and proposed that the Gas Cost Balancing Account be adjusted accordingly. She recommended reducing Southwest's Gas Cost Balancing Account by $1.9 million for northern Nevada and by $6,232,888 for southern Nevada to account for Southwest's failure to hedge the price risk within the gas supply portfolio.

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