As part of the ongoing integrated resource plan (IRP) state regulatory proceeding, Nevada’s two major private sector electric utilities agreed in a stipulation earlier in September to modify their approach to natural gas price hedging. The state attorney general’s consumer protection bureau, Nevada Resort Association and Nevada Public Utilities Commission (PUC) staff engineered the agreement with the utilities, which still must be approved by the three-member PUC.

This agreement covers the utilities’ energy supply plans for the next three years (2007-2009), including an updated version for next year. The purchase of the hedges will begin by November, according to the agreement. During the transition period of November 2006 and May 2008, the utilities hedges will be composed of 50% fixed, 25% indexed, and 25% collar in the portfolio for each season.

Quarterly workshops with parties will be required to review the implementation of the gas hedging program. For each utility, separate power procurement, coal procurement, gas procurement and risk management plans will be approved by the PUC before the new hedging starts.

Under the agreement, the utilities will leave open 25% of their projected financial gas exposure for each season; hedge 50% of their projected financial exposure with fixed-price products for each season; and hedge the rest with “collars, consisting of a $1.50 OTM put and a $1.32 OTM call.” (The expected option premium cost associated with the collars is limited to no more than 1.5% of the expected total gas expenditures/season, based on prices last Aug. 14.)

“The companies will procure the hedges for each delivery month over a period of time beginning 18 months prior to the settlement date for that delivery month and ending no less than 60 days prior to the settlement date,” the agreement states.

The high-profile negative news reports on Amaranth Advisors massive multi-billion-dollar bad bet on future natural gas wholesale prices spurred state’s consumer protection head Eric Witkoski to push now for the changes that will allow Nevada Power Co. and Sierra Pacific Power Co. to prevent relying too heavily on hedges.

Instead of the current 100% hedging of natural gas prices, the Sierra Pacific Resources’ utilities will hedge no more than half of their natural gas needs on a fixed-price basis, and they will do it for longer periods — at least 18 months to cover more than one season, instead of the current season-to-season approach..

Consumer groups were worried about the 100% hedging being too costly to the retail utility ratepayers. The agreement will cover the energy supply part of the IRPs for both Nevada Power and Sierra Pacific Power.

©Copyright 2006Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.