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Editorial: Utility hedging needs to be reviewed

Wed., March 27, 2013

West Coast utilities learned a hard lesson during the 2000-2001 energy crisis, when many failed to lock in electricity costs during a bad year for hydropower. That lack of foresight forced them to buy power at more than 100 times normal prices on some days, or go without. Conservation, windmills and new generating plants fired by natural gas have since restored the balance between supply and demand, but the episode cost Northwest ratepayers hundreds of millions of dollars.

Now, the Public Counsel in the state attorney general’s office, representing the public in utility rate cases, says Washington natural gas customers may have been overcharged more than $800 million because utility managers rashly locked in wholesale prices despite an emerging glut that has pushed the market sharply lower in recent years.

To hedge, or not to hedge. Apparently, there’s no winning whether utilities lock in prices, or not. But that seems not to be the case so much for Avista gas customers, who have paid a relatively small premium for the certainty they will have gas when they turn up the thermostat.

The expert hired by the Public Counsel estimates Avista has forced its customers to eat about $11.9 million in financial hedging losses sustained between November 2008 and October 2012.

The expert hired by the state Utilities and Transportation Commission staff estimated the losses going back to 2005 at $18 million, one-half that in the 2011-2012 year. The one-year results tacked 13 percent onto the price of natural gas supply purchased with contracts covered by financial hedges. The utility also uses hedges indexed to prices as they move up or down, and hedges related to its capacity to store gas.

Overall, Avista hedges about one-half its supplies one way or another.

If the 13 percent sounds like a high premium for the certainty of supply, consider the 38 percent the staff expert found for Puget Sound Energy, and the 30 percent for Northwest Natural Gas. Customers of Cascade Natural Gas, with one-year hedging losses of less than $1 million, paid a 1 percent premium. Going back 10 years, however, Cascade financial hedges cost the company $141 million.

Bottom line, Avista natural gas is the cheapest sold in Washington today, in part because its cost of piping gas into its system from Canada is low. The utility estimates it has passed $60 million in gas price savings along to its customers in the last five years. Rates have declined 30 percent over that period.

Given the magnitude of the hedging conducted by the utilities, a look under the hood of how well they do it is overdue. Prior to the release of the Public Counsel findings last week, too little attention had been paid to the commission review of the issue.

The Public Counsel recommends formation of a collaborative to review Avista hedging practices, and recommend changes. The staff recommends rulemaking that examines many of the same questions. Out of either should come information that gives utility customers a better understanding of hedging, and confidence they are not paying for the mistakes of imprudent managers.