Manitoba's Centra Gas Hung Up on Hedging

Centra Gas Manitoba, an LDC serving 240,000 customers, is on the hook for $27.5 million due to a price management program the Manitoba Public Utilities Board said was run ".with inexperienced traders, and with inadequate supervision."

The board found Westcoast Energy subsidiary Centra's 1997-1998 price management caused gas costs to be $45.5 million more than they would have been had price management not been used. Of that amount, $18.25 million is to be picked up by ratepayers with the remaining burden falling on shareholders. During the period, Centra hedged gas volumes and basis differentials. "By late August 1997, in a series of transactions, it became apparent to the person executing the trades that unwinding the transactions as required by September 1., 1997 would result in losses of $6 million on system supply gas plus an additional $3 million on broker supplied volumes," The board wrote. "Centra postponed unwinding the basis differential hedges to allow for a market turnaround. Unfortunately, the market did not respond, but losses increased to a total of $18 million. Notwithstanding that these transactions were reported, management did not take immediate remedial action."

The board found Centra allowed multiple positions to be open for the same underlying gas volumes by keeping positions open beyond Sept. 1, 1997. Centra is said to have engaged in speculative trading that resulted in a $9 million loss. "The board concluded that Centra's management was imprudent and unreasonable in its actions, oversight, and monitoring." At the heart of the board's fault-finding is Centra's strategy shift from passive hedging - where Centra took delivery of volumes - to dynamic hedging, where positions were often reversed following risk assessment, and physical delivery was not taken. "The board found that Centra had entered into dynamic trading without the appropriate plan, with inexperienced traders, and with inadequate supervision. The rigorous controls, checks, and balances were lacking, as was the attention paid by the Hedge Committee of senior management which only met quarterly."

Centra has 30 days from the board's June 19 ruling to appeal. In its defense, Westcoast said Centra's trading program had good results following its 1995 inception. "In 1996, the program, the trading team, the management team, and the checks and balances in place delivered lower gas costs to consumers," Westcoast said in a statement. "In 1997, the same program, the same trading team, and the same processes were subject to an unprecedented volatile natural gas pricing market which lead to a significant increase in Centra's gas costs."

Centra has returned to passive hedging and is reviewing its price management program. Regulators told the company to put on hold future plans to contract with Engage Energy for price management services and ordered it to put the contract up for competitive bid. "Engage was not involved in the program, so what the board has said is that the board in principle does not disagree with the outsourcing of the functions for the price management program," said Westcoast spokesman Paul Clark. "It is their suggestion that Centra needs to give the matter more consideration and should examine all potential providers of such services."

Joe Fisher, Houston

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