Ga. Power’s ‘hedging’ on gas prices has cost ratepayers $607 million

[private]The Public Service Commission is expected to make a decision this month on a policy issue that has cost Georgia Power’s customers about $607 million in higher monthly bills over the past decade, according to PSC staff estimates.

The issue involves “hedging,” the complex financial transactions that Georgia Power deploys when it purchases large amounts of natural gas to operate its gas-fired power plants (the utility says it purchases about 1 percent of all natural gas sold in the U.S. each year).

Through the use of exotic instruments like “call options” and “swaps,” Georgia Power has tried to level its cost of natural gas and avoid sharp price increases during periods of volatility.

There is also a down side to hedging, however. During periods when the price of natural gas is falling, as has been the case in recent years, a utility can end up paying much more than the market price for natural gas and lose money from hedging.

“It’s a two-edged sword, all these hedging programs,” PSC Chairman Chuck Eaton noted.

From 2005 to 2015, according to an analysis by the PSC staff, Georgia Power lost a total of $607 million from its hedging activities — losses that were ultimately passed along to customers as the utility recovered its fuel costs.

“In a normal company that is subjected to market pressure, a loss of $600 million from playing around in the futures market would cause heads to roll and a workout program put in place to avoid year after year losses,” said Jim Clarkson of RSM, an energy consultant.

Georgia Power, on the other hand, is a regulated utility and has been able to continue its hedging practices, although it must do so under restrictions spelled out by the PSC.

From 2005 through 2012, Georgia Power lost a net total of $545 million in natural gas hedging, an average loss of nearly $70 million a year. While the utility realized small gains from hedging in 2005 ($48 million) and 2008 ($6 million), it suffered disastrous losses in years like 2009 ($184 million) and 2011 ($106 million).

In late 2012, PSC staffers recommended restrictions on Georgia Power’s hedging to try to reduce the losses being charged off to ratepayers. The commission subsequently adopted recommendations that put a “hard dollar cap” on the hedging and prohibited any use of swaps contracts.

Georgia Power has continued to lose money from hedging, but under the PSC restrictions those losses have been reduced. From 2013-15, the utility’s hedging losses have totaled $62 million, or a little less than $21 million a year, according to a PSC analysis.

“They had significant losses and we addressed the problems,” said Tom Newsome, the PSC’s director of utility finance.

Newsome said the current hedging program regulated by the PSC strikes a more appropriate balance “between the benefit of providing protection from increases in natural gas prices against cost that is known upfront.”

Georgia Power, however, wants to remove those restrictions and return to the former hedging program that allowed swaps and had no hard dollar cap. The utility has included that request in its latest filing to recover from customers the costs of fuel for its power plants.

The utility’s lawyers and the PSC staff have agreed on most aspects of the fuel cost recovery order, which the PSC is expected to adopt on Dec. 15. Georgia Power will reduce its projected fuel costs by an additional $156 million to reflect lower prices for natural gas, which in turn will cut the monthly bill of a typical residential customer by $4 to $5.

The hedging question prompted a lively commission hearing on Tuesday, where Georgia Power executives disagreed with PSC staffers and intervenors over the future direction of the hedging program.

“Hedging still provides the desired stability in natural gas prices,” said David Poroch, Georgia Power’s vice president and comptroller. “I’ve not come across any other utility that’s prohibited from using swaps.”

While natural gas prices have been dropping for several years due to increased fracking in several areas of the U.S., Poroch said hedging will be important to the utility if those prices should start rising again.

“We do not have a crystal ball and do not know whether prices will go down further,” Poroch contended.

Clarkson, who cross-examined some of the hearing witnesses, called attention to documents Georgia Power filed that redacted several sections from public review on the grounds that they were “trade secrets.”

“There’s been a reluctance to come across with this $600 million cost,” Clarkson said. “I believe the company is embarrassed by this (hedging losses) and is trying to hide it.”

“There’s nothing to hide here,” Georgia Power lawyer Jack Jirak retorted. “The costs are what they are.”

The commission did not take a vote Tuesday on the hedging question, although Commissioner Stan Wise appeared to be in favor of Georgia Power’s request to expand the program.

© 2015 by The Georgia Report

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Tags: call options , Chuck Eaton , David Poroch , Georgia Power , Jim Clarkson , natural gas hedging , PSC , Stan Wise , swaps , Tom Newsome