A big push begun six to eight years ago among public-sector utilities in California to hedge their bets on natural gas to address growing concerns about wholesale price volatility has come under fire as some municipalities struggle with a recessionary economy and continuing low gas prices.

The industrial Los Angeles suburb of Vernon, CA, is the focus of several state and federal investigations regarding alleged mismanagement putting it in a large fiscal hole, and part of the problem has been traced to a 15-year, fixed-price gas hedge that its municipal utility entered five years ago, backed by $431 million of municipal bonds.

Vernon’s escalating problems, including the gas buys, were the subject of a front page report in Sunday’s Los Angeles Times, asserting that three-quarters of 88 Bcf in gas purchases in the 15-year deal are priced at $7.50, a price that wholesale gas supplies haven’t seen in several years.

The report included quotes from the head of the Southern California Public Power Authority (SCPPA), a financing arm for about a dozen major city-run utilities spread around Southern California and a major gas purchaser for its members, including the Los Angeles Department of Water and Power (LADWP). Vernon is one of SCPPA’s 12 member munis. SCPPA Executive Director Bill Carnahan was quoted as being critical of Vernon “doing its own thing” and now reaping what he called “unintended consequences.”

Separately, Fitch Ratings Service last Thursday announced it was withdrawing its “A” rating on SCPPA’s gas project revenue bond series 2007 C because the bond was never sold.

Meanwhile, a major municipal gas distribution utility operation in the port city of Long Beach has launched a request for proposals to get a three-year deal covering up to 80% of its 12 Bcf annual load, according to Chris Garner, director of the Long Beach Gas and Oil Department.

The city utility will be interviewing eight to nine potential suppliers during the next two weeks, Garner told NGI on Monday. Long Beach has been hedging against wide swings in wholesale gas prices since 2002, and “it has worked pretty well for us,” he said. “There are certainly times when we pay a little bit above market, but to me it is worth it for the peace of mind that our customers are protected [against severe price swings].

“We were killed back in 2000. I think we had an upswing in our gas bills of $70 million in a six-month period. We wanted to make sure we never had anything like that again. It was a way to plan for the things you can’t see coming.”

Long Beach has nothing like Vernon’s prepaid gas deal at a fixed price, which Garner called “unusual.” He remembers the other local munis doing long-term deals based on market prices. “Our prepaid price was tied to the California border price, for example,” he said. “We go up and down with the market, but we have a fixed savings off of that, and on top of that we lay the price hedging so we’re protected both ways.”

Long Beach supposedly locks in the savings in the prepay and customers are protected against upswings with the hedges, Garner said.

LADWP, the nation’s largest muni, remains “tied at the hip” to natural gas and the industry’s current shale boom, General Manager Ron Nichols told NGI earlier this year (see Daily GPI, June 7).

LADWP last year briefly considered selling its share of long-term natural gas reserves in Wyoming’s Pinedale Basin in response to city budget woes, but Nichols said current plans are to hang on to them. LADWP holds roughly 74% of a $300 million reserves purchase made five years ago by a coalition of SCPPA members.

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