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New Book Points to Market Controls on Hedging

New Book Points to Market Controls on Hedging

Regulators can be expected to add more controls on natural gas and power risk management, which will add a layer of complexity and discourage new hedging operations, according to two close observers of the industry.

"It is foreseeable for power producers and marketers to be supervised like the banking industry," say Ruben Moreno and Douglas M. McDonald of Pace Global Energy Services, of Fairfax, VA, writing in a recently compiled book, Natural Gas Industry Analysis. Imposing capital and reporting requirements similar to those on the banking industry on gas and power hedging should provide some margin of safety against the number and size of contract defaults and even bankruptcies that tend to occur when prices skyrocket, the authors reason.

The movement towards increased regulation has already begun in the accounting rules that govern the industry, which are set by the Financial Accounting Standards Board. Currently seen as one of the challenges facing the industry, Financial Accounting Standard 133 and its progeny "will make the accounting of hedging more strenuous, and may actually encompass a large number of operations under the 'derivative' concept," the Pace analysts said.

Companies that might otherwise enter the hedging operation will see the increasingly time-consuming, confusing, and complex nature of risk management and be discouraged from it.

If this happens, it will put the brakes on an industry that the authors point out has substantial potential for rapid growth. The forces for growth include new kinds of transactions that can be derived from convergence of fuels; the internationalization of the industry, creating international price transparency and thus further risk management; and the fact that with 10 years experience now available, the application of more state-of-the art techniques is now possible.

The future of risk management in the industry is just one of the topics in the wide-ranging Natural Gas Industry Analysis, which includes chapters by 34 industry contributors. For more information call the Financial Communications Co. at (877) 520-NGIA or go to www.atlasbooks.com/marktplc/00497.htm.

Ellen Beswick

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