Centra Gas Manitoba, an LDC serving 240,000 customers, is on thehook for $27.5 million due to a price management program theManitoba Public Utilities Board said was run “.with inexperiencedtraders, and with inadequate supervision.”

The board found Westcoast Energy subsidiary Centra’s 1997-1998price management caused gas costs to be $45.5 million more thanthey would have been had price management not been used. Of thatamount, $18.25 million is to be picked up by ratepayers with theremaining burden falling on shareholders. During the period, Centrahedged gas volumes and basis differentials. “By late August 1997,in a series of transactions, it became apparent to the personexecuting the trades that unwinding the transactions as required bySeptember 1., 1997 would result in losses of $6 million on systemsupply gas plus an additional $3 million on broker suppliedvolumes,” The board wrote. “Centra postponed unwinding the basisdifferential hedges to allow for a market turnaround.Unfortunately, the market did not respond, but losses increased toa total of $18 million. Notwithstanding that these transactionswere reported, management did not take immediate remedial action.”

The board found Centra allowed multiple positions to be open forthe same underlying gas volumes by keeping positions open beyondSept. 1, 1997. Centra is said to have engaged in speculativetrading that resulted in a $9 million loss. “The board concludedthat Centra’s management was imprudent and unreasonable in itsactions, oversight, and monitoring.” At the heart of the board’sfault-finding is Centra’s strategy shift from passive hedging -where Centra took delivery of volumes – to dynamic hedging, wherepositions were often reversed following risk assessment, andphysical delivery was not taken. “The board found that Centra hadentered into dynamic trading without the appropriate plan, withinexperienced traders, and with inadequate supervision. Therigorous controls, checks, and balances were lacking, as was theattention paid by the Hedge Committee of senior management whichonly met quarterly.”

Centra has 30 days from the board’s June 19 ruling to appeal. Inits defense, Westcoast said Centra’s trading program had goodresults following its 1995 inception. “In 1996, the program, thetrading team, the management team, and the checks and balances inplace delivered lower gas costs to consumers,” Westcoast said in astatement. “In 1997, the same program, the same trading team, andthe same processes were subject to an unprecedented volatilenatural gas pricing market which lead to a significant increase inCentra’s gas costs.”

Centra has returned to passive hedging and is reviewing itsprice management program. Regulators told the company to put onhold future plans to contract with Engage Energy for pricemanagement services and ordered it to put the contract up forcompetitive bid. “Engage was not involved in the program, so whatthe board has said is that the board in principle does not disagreewith the outsourcing of the functions for the price managementprogram,” said Westcoast spokesman Paul Clark. “It is theirsuggestion that Centra needs to give the matter more considerationand should examine all potential providers of such services.”

Joe Fisher, Houston

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