SEATTLE – The Public Counsel Unit of the Washington State Attorney General’s Office will recommend Friday that the Washington Utilities and Transportation Commission (WUTC) continue investigating the so-called “hedging” strategies used by utility companies in their natural gas purchasing strategies. Public Counsel will also further recommend that the WUTC order that certain hedging costs not be passed to customers.
In October 2012, the Commission ordered an initial investigation into the natural gas purchasing and hedging practices used by the four companies providing natural gas service in Washington after concerns developed over the size of the hedging costs state wide. The Commission called for an initial report from its staff on the investigation by March 1, 2013, and will decide this week whether to continue the investigation. The four companies involved are Puget Sound Energy, Avista Utilities, Cascade Natural Gas, and Northwest Natural Gas.
The market price for natural gas fluctuates daily. Utilities use “hedging” to lock in prices for future purchases to avoid some of that fluctuation. If those prices are higher than the market price at the time the gas is delivered, the difference is considered a “loss.” If the locked in price is lower than the market price of gas at the time gas is delivered, the difference is considered a “gain.”
“When the hedging practices of the four companies are examined over a 10-year period, the losses have eclipsed the gains by a very large margin,” said Assistant Attorney General, Lisa W. Gafken. “Public Counsel is concerned that customers have been harmed by the companies’ hedging practices. Even recognizing that hedging can be an appropriate natural gas purchasing tool, the dramatic size of these losses highlights the need for more rigorous regulatory review.”
Based on non-confidential data submitted by the four companies, the net losses incurred between November 2002 and October 2012, total at least $860 million, with $800 million of those losses occurring in the last five years. Because natural gas costs, including hedging costs, are passed directly to ratepayers on their bills through the companies’ Purchase Gas Adjustment (PGA) mechanisms, ratepayers have borne the full burden of these losses.
“Ratepayers are not out of the woods yet in terms of these losses. Data provided by the companies indicate that they are also exposed to substantial future losses as a result of current hedging contracts,” said Ms. Gafken. “Hedging can function as a form of insurance, and just as any insurance has a cost, hedging also has a cost associated with it. However, these costs should be reasonable, and Public Counsel questions whether close to a billion dollars is a reasonable price for ratepayers to pay for price stability.”
Public Counsel has participated in the initial investigation and conducted an analysis of each company’s hedging practices, using an expert consultant to assist. In advance of Friday’s meeting, Public Counsel has filed its consultant’s preliminary analysis with the UTC, along with the recommendations that the Commission continue the investigation and determine if there is a basis to order that some of the hedging costs not be passed to customers.
Because the losses have been so large, Public Counsel is also recommending that the Commission place a moratorium on companies from entering into new hedging arrangements until further analysis can occur and each company’s practices can be improved to minimize hedging costs.
Public Counsel sees a number of issues that merit further investigation, including what percentage of the gas supply should be hedged, how long in advance should the companies hedge, and how best to address market fluctuations. This information is important in evaluating whether the companies acted improperly in their hedging decisions and in evaluating improvements to the regulatory review.
The WUTC will consider whether to continue the investigations at its open meeting scheduled for:
- 1:30 p.m. on Friday, March 22, 2013
- WUTC’s main hearing room, 1300 S. Evergreen Park Dr. SW, Olympia, WA 98504
- Open Meetings are open to the public.
Puget Sound Energy, Inc., serves approximately 761,000 customers in Western Washington; Avista Utilities serves approximately 149,000 customers in Eastern Washington; Cascade Natural Gas Company serves approximately 197,000 customers in Western and south central Washington; and Northwest Natural Gas Company serves approximately 68,000 customers in southwest Washington.
For more information, customers may contact either the WUTC or Public Counsel:
- WUTC – (800) 562-6150, e-mail at firstname.lastname@example.org. Information is available online at www.wutc.wa.gov. Enter docket no. UG-121569 (Puget Sound Energy, Inc.); UG-121501 (Avista Utilities); UG-121592 and UG-121623 (Cascade Natural Gas Company); UG-121434 (Northwest Natural Gas).
- Attorney General’s Office Public Counsel Section -- Public Counsel, Attorney General’s Office, 800 Fifth Avenue, Suite 2000, Seattle, WA 98104-3188, or e-mail email@example.com.
The Public Counsel Unit advocates for the interests of consumers on major rate cases, mergers, rulemakings, and other proceedings before the WUTC. More information about Public Counsel’s work is available online at http://www.atg.wa.gov/Utilities/AboutPublicCounsel.aspx.
Contacts: Janelle Guthrie, Director of Communications, (360) 586-0725
Lisa W. Gafken, Public Counsel Assistant Attorney General, (206) 464-6595