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

“It is foreseeable for power producers and marketers to besupervised like the banking industry,” say Ruben Moreno and DouglasM. McDonald of Pace Global Energy Services, of Fairfax, VA, writingin a recently compiled book, Natural Gas Industry Analysis.Imposing capital and reporting requirements similar to those on thebanking industry on gas and power hedging should provide somemargin of safety against the number and size of contract defaultsand even bankruptcies that tend to occur when prices skyrocket, theauthors reason.

The movement towards increased regulation has already begun inthe accounting rules that govern the industry, which are set by theFinancial Accounting Standards Board. Currently seen as one of thechallenges facing the industry, Financial Accounting Standard 133and its progeny “will make the accounting of hedging morestrenuous, and may actually encompass a large number of operationsunder the ‘derivative’ concept,” the Pace analysts said.

Companies that might otherwise enter the hedging operation willsee the increasingly time-consuming, confusing, and complex natureof risk management and be discouraged from it.

If this happens, it will put the brakes on an industry that theauthors point out has substantial potential for rapid growth. Theforces for growth include new kinds of transactions that can bederived from convergence of fuels; the internationalization of theindustry, creating international price transparency and thusfurther risk management; and the fact that with 10 years experiencenow available, the application of more state-of-the art techniquesis now possible.

The future of risk management in the industry is just one of thetopics in the wide-ranging Natural Gas Industry Analysis, whichincludes chapters by 34 industry contributors. For more informationcall the Financial Communications Co. at (877) 520-NGIA or go

Ellen Beswick

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