PSC takes restrictions off Georgia Power’s natural gas hedging

[private]The Public Service Commission has voted unanimously to remove most of the restrictions on Georgia Power’s ability to hedge the prices it pays for natural gas, rejecting a recommendation from their own staff to keep the restrictions in place.

“Clearly, this motion doesn’t agree with the staff’s recommendation nor does it concur with Georgia Power’s filing,” Commissioner Stan Wise said. “What it does do is give the company the ability to protect ratepayers from volatility in the natural gas market.”

The commissioners contended that Georgia Power needed the ability to hedge because of federal regulations from the EPA that require coal-fired power plants to reduce the amount of greenhouse gases they emit.

“I firmly believe that once they finish decimating the coal industry, they are coming after fracking and natural gas because it’s a fossil fuel,” Commissioner Tim Echols said. “It’s just a matter of time. A hedging policy is in the best interests of Georgia ratepayers.”

“They’re coming after it, they’re coming after fracking,” Commissioner Doug Everett said. “I just hope and pray that in 15 months we won’t have to worry about that again,” a reference to next year’s presidential election.

Georgia Power, which buys large quantities of natural gas to operate some of its power plants, has engaged for years in hedging, which are complex financial transactions like call options and swaps that allow the company to buy the gas at a fixed price at a future date.

A company that hedges is basically placing a bet with the commodities market that the price of gas will either go up or go down by a certain amount during a specified time period.

In recent years, however, as the price of natural gas has continued to fall to low levels, Georgia Power has ended up paying more than the market price for natural gas and has lost money from its hedging activities.

According to an analysis by the PSC staff, Georgia Power lost a total of $607 million from its hedging activities during the period from 2005 to 2015 — losses that were ultimately passed along to ratepayers. Some of the biggest losses from hedging occurred in 2009 ($184 million) and 2011 ($106 million).

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

Georgia Power continued to lose money from hedging after those restrictions were implemented, but the amount of the losses was reduced. From 2013-15, the utility’s hedging losses totaled $62 million, or a little less than $21 million a year.

As part of its fuel cost recovery filing this year, Georgia Power requested the PSC to remove the restrictions on hedging, while the PSC staff recommended that they be kept in place.

The commission’s Tuesday vote eliminates most of the restrictions by authorizing swaps contracts, allowing the utility to hedge up to 50 percent of its monthly natural gas burn, giving the company a 48-month window on hedging, and terminating the cost cap.

The commissioners agreed with Georgia Power’s contention that the price of natural gas was so low it is likely to start increasing again, which the utility’s lawyers said was justification for a return to hedging.

“We’re sort of at the bottom of the market,” said Georgia Power attorney Brandon Marzo. “We think there’s greater chance of prices going up than of prices going down. We’re at a floor right now.”

“Gas prices are so low, how much lower can they go?” Chairman Chuck Eaton said.

Jim Clarkson, an energy consultant who often intervenes in rate cases, said the financial loss from Georgia Power’s hedging program “has taken truly huge amounts of money from Georgia Power customers.”

In a filing with the PSC, Clarkson commented: “Well before losses exceeded $100 million per year it was time to call off the program to mitigate the damage. While ignorance is no excuse, it was certainly a major contributor to the debacle.”

In addition to their vote on the hedging policy, the PSC also approved a 14 percent decrease in the fuel cost recovery rate that Georgia Power adds to customer bills to pay for the coal and gas it purchases to run its generators.

The rate decrease, which would mean a reduction of about $5 in the monthly bill of a typical residential customer, was attributed to the falling prices of natural gas.

© 2015 by The Georgia Report

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Tags: Chuck Eaton , Doug Everett , fuel cost recovery rate , Georgia Power , hedging , natural gas prices , PSC , Stan Wise , Tim Echols