Wash. regulator directs gas utilities to modify hedging practices

Discussion in 'Commodity Futures' started by deltastrike, Mar 15, 2017.

  1. Curious if anyone here has any insight into this issue:

    Years after realizing that gas utilities operating in Washington state had incurred more than $1 billion in hedging losses over a decade, the state regulator urged the companies to develop balanced hedging strategies that keep ratepayers in mind.

    The gas utilities in the state have been "blindly" following outdated hedging strategies, the Washington Utilities and Transportation Commission, or UTC, said in a March 13 policy statement. Failing to respond to the changing marketplace, Northwest Natural Gas Co., Avista Corp., Puget Sound Energy Inc. and Cascade Natural Gas Corp. collectively lost about $1.1 billion from November 2002 through October 2012, according to the commission.

    After extensive comment collection and a commission-requested white paper on hedging practices, the UTC found that the utilities' hedging strategies appeared focused on mitigating volatility in gas supply prices, often at the expense of minimizing gas prices for customers.

    Different tactics are appropriate for avoiding cost increases versus avoiding uncompetitive prices. For instance, a high hedge ratio, the relationship between the amount of hedged and unhedged supplies, is better suited to cost mitigation, while a low ratio would be appropriate for preventing hedging losses, according to the white paper the UTC commissioned.

    Having a pre-set hedging ratio leaves little room for risk-based and market-aware judgment calls in the hedging process, the white paper noted. The utilities in Washington state had generally been using "programmatic" hedging, or accumulating hedges on a set schedule to reach a particular ratio.

    "A programmatic hedging strategy necessarily is disconnected from a critical assessment of market risk conditions; there is no need for a company to measure risk if it has no intention of responding to changing risk," the UTC's policy statement said. "Companies regard the primary hedging objective to be 'price stability.' Thus, most companies established large hedge ratios and maintained those ratios in a declining and stabilizing natural gas market."

    The commission directed the companies to develop a framework for data-driven risk mitigation, to monitor market conditions and to make hedging decisions based on those factors. The utilities also will have to document their decision-making processes when it comes to hedging.

    The UTC recognized that it will take some time for companies to switch tactics and told the utilities to submit in 2017 a plan for how to move to a risk-based hedging strategy and a path to build all the necessary expertise and systems. In 2018, the companies will have to have comprehensive hedging plans that should be implemented over no more than 30 months. By 2020, the risk-based hedging programs should be fully underway.

    "While no 'right' mix of methods may be applied unilaterally due to utility specific operations, the companies must reasonably plan for market volatility and appropriately react to balance ratepayer exposure to hedging losses with ratepayer exposure to price spikes," the UTC said. "The commission adopts these policies supporting dual protection of upside price risk and downside hedging loss, along with annual validation of acceptable hedging outcomes."
     
    murray t turtle likes this.
  2. Those Washington State utilities are pikers with their "more than $1 billion in hedging losses".

    Florida utilities have lost over $6 billion.

    "Florida's four largest utilities have jointly proposed reducing the scope of their hedging programs by about 25%, responding to calls from state regulators last year that changes were needed after $6 billion in losses in the last decade and a half."

    http://www.utilitydive.com/news/flo...uts-to-gas-hedging-after-6b-in-losses/418166/

    It seems that their definition of hedging is to always buy natural gas futures to lock in a price. And in a market with a long term down trend doing nothing would work much better.

    The utility hedgers are like many traders here, can't see a trend and even though they lose money year after year they keep doing the same thing.

    The real question is who made all the billions by shorting natural gas consistently over the last decade plus?

    Not everyone in the market is a autopilot loser.
     
    murray t turtle likes this.
  3. tommcginnis

    tommcginnis

    State-level utility regulation is a battle between professional staff (who cry "Armageddon!") and regulatory hacks (who mutter, "What? Me worry?"). The usual outcome is pablum:
    -- the utility knows best
    -- the market will fix all
    -- life is great; life is tough; {pick one}.

    "While no 'right' mix of methods may be applied unilaterally due to utility specific operations, the companies must reasonably plan for market volatility and appropriately react to balance ratepayer exposure to hedging losses with ratepayer exposure to price spikes," the UTC said. "The commission adopts these policies supporting dual protection of upside price risk and downside hedging loss, along with annual validation of acceptable hedging outcomes."

    That is as close to a typical "cookbook" order as it gets. That last one -- "along with annual validation of acceptable hedging outcomes" -- can be translated as: We will placate our tech staff and cover our asses by insisting that you come in every 12 months and give us a dog-n-pony show, so we can say "Look at the great job we're doing!"'

    In truth, the dog-n-pony show is really for the utility to not look like fools to the other utilities, who would love to under-price them and gain favor with the Commission and with potential mobile customers. (And potential *future* customers...)

     
    Sig likes this.
  4. %%
    Thoughtful points, jeb9999;
    + the population trend of FLA is about 3 times larger, most likely much faster growth,2??. Dont know about FLA power/climate/ consumption; but maybe they remember some of the long term killer up spikes in natural gas.LOL?? NBC news [old news, but up to date] noted hedge fund Amaranth lost $6 billion, heavily in nat gas in one month; comparing that loss to FLA $6 billion in 15 years , as you noted.
     
  5. tommcginnis

    tommcginnis

    In defense of utilities {"Really?? *McGinnis*?!?"}
    Utilities are not there to "trade" -- profit involves successful risk garnering reward.
    Utilities are there to provide *guaranteed* power. They *try* to do that at the lowest reliably attainable price. For utilities, future contracts and options represent what they really are: Insurance. It is an expense which they try to minimize. (Those who have tried to 'play' the market get justifiably *fried* for their effort, regardless of outcome.) So, your assessment that "...their definition of hedging is to always buy natural gas futures to lock in price..." is precisely correct.

    The second thing "in defence" of their performance is to look at the time period, when long term contracts were still dealing with $6-$8 gas, and the market was trying to get their arms around $4-$6 gas as more than a fluke, and $2-$4 gas (as we've had) was a wet dream. Over that initial period ('00-05, when you're signing stuff going '02-'07-'12), prices were flopping, forecasts were high *and* very low, the recent past was ferociously high, and yet utilities were beginning to see NG-fired *steam* as economically viable[!!!].

    One of my favorite definitions of "analyst" is "that person that wanders onto the field of battle after it's over, and shoots the wounded." That would apply here (excuse me, *could* apply here), if the Washington commission was seeking punishment, and not just analysis/monitoring. It was tough times back then.
     
    deltastrike likes this.
  6. That seems to be the crux of all white papers I read; post-event analysis and possibly not understanding precisely how to implement in actual practice as opposed to academia. It's almost as if the regulatory body in this matter doesn't understand what hedging does and why it will "lose" money when isolated from the broader portfolio.
     
  7. " Since 2002, Duke Energy Florida lost almost $1.5 billion as a result of hedging; Tampa Electric lost $421 million; FPL lost $4 billion; and Gulf Power lost about $170 million. "

    Unsure whether the loss for individual companies could be simply cost paid for hedging charged by OTC hedging providers.

    It seems some companies did quite well if the loss/cost was only $170 million or $421 million for a 15 period of time. That would be average 11.4 million or 28 million per year, respectively.

    Unless the % of the above loss/cost is known for individual companies, it's hard to measure their hedging performance individually.

    That means the smallest loss/cost $170 million (Gulf Power) could be also produced by the company with smallest operational revenues, hence possibly the highest % among them, for worst performance.

    I think if they are public utilities companies, they should have responsibilities to provide transparent figures about their hedging loss/cost and procedures/methods.

    Therefore, they can learn from each other for improvements.

     
  8. dealmaker

    dealmaker

    [​IMG]
    Duke blames Q4 earnings drop on higher asset expenses, storm costs
    [​IMG]
    Duke Energy told analysts Thursday that its fourth-quarter earnings decline was from higher depreciation and amortization expenses on a growing asset base, as well as higher storm-related costs. The Charlotte, North Carolina-based utility holding company reported Q4 adjusted diluted earnings of 84 cents/share, down from 94 cents/share in Q4 2017. (S&P Global Platts)
     
  9. Sig

    Sig

    I agree, this order is both a. Typical mealy mouth commission stuff and b. Would be completely absurd and naive if they actually planned to enforce it. Seriously, they had some staffers with full hindsight determine that the utilities shouldn't have been hedging is what was "clearly a declining market"! How many of them are willing to put a personal dollar of theirs on what today's market "clearly" is? Do any of them have even a basic exposure to efficient market theory or any economics background at all?
     
  10. tommcginnis

    tommcginnis

    Well, as a former commission economist, I can tell you that if you don't like what you read, it means the commission staff knowledgeable on the subject were duct-taped in the corner, tapping out Morse Code with their toes. :wtf: :confused: :mad: Been there, and WOW done that -- the last one to the tune of ~$3B stolen from ratepayers, felony warrants of collusion and fraud that stopped right at the governor's door, and certain LinkedIn gaps that mysteriously persist to this day.

    I guess the point is, that the worse something reads, the further was the expert staff.:cool:
     
    #10     Feb 16, 2019