Department Policy on Hedging
Paul G. Afonso, Chairman
Massachusetts Department of
Telecommunications & Energy
March 31, 2004
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Hedging
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•
On October 9, 2002, the Department
issued an Order regarding the
implementation of a risk-management
protocol for Massachusetts local
distribution companies (“LDCs”) (Docket
No. D.T.E. 01-100-A). The Order states
that the D.T.E. will allow, but not
require, Massachusetts LDCs to use
financial risk-management instruments
to mitigate natural gas price volatility.
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Hedging (cont.)
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•
LDC hedging proposals shall maintain the
objective of volatility mitigation and price
stability rather than the objective of
procuring prices below indices.
•
Hedging programs submitted for
Department approval shall demonstrate
the effect that the plan would have on
the reliability and transparency of
commodity price. In addition, such
programs shall ensure fair competition in
the gas supply market.
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Hedging (cont.)
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•
Customer participation in LDC hedging
programs shall be voluntary, and not
mandatory.
•
LDCs shall allocate all costs associated
with their hedging programs to program
participants only.
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Hedging (cont.)
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•
The use of incentive mechanisms in
conjunction with LDCs’ financial riskmanagement programs shall not be
allowed because the use of incentive
mechanisms in conjunction with LDCs’
hedging programs
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Hedging (cont.)
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(1)
would not be consistent with
the Department’s goal of
promoting market-based
regulation and enhanced
competition in that it would not
“serve as a vehicle to a more
competitive environment?”
(2)
could negatively affect the
development of retail competition
and customer choice in
Massachusetts?
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Hedging (cont.)
____________________________________________________________________________________________________________________________________
• Approval of LDC risk-management
proposals will be on a case-specific
basis to ensure that any hedging
proposal does not negatively affect gas
unbundling and customer choice in
Massachusetts.
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Bay State Gas Company’s Gas Cost
Incentive Mechanism
• The Department approved a gas cost
incentive mechanism (“GCIM”) for Bay State
Gas Company (“Bay State”) in an Order
issued on December 5, 2002 (Docket No. D.
T. E. 01-81).
• The GCIM will allow Bay State to utilize
various financial instruments and trading
strategies to lower the overall commodity
cost associated with procuring natural gas
for its residential customers for an initial
three-year period.
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Bay State Gas Company’s Gas Cost
Incentive Mechanism (cont.)
• The Department notes that Bay State’s
GCIM proposal represents the use of
innovative portfolio management strategies
to achieve lower gas supply costs for
customers than is likely to occur under the
currently used cost-based CGAC
mechanism.
• The implementation of the GCIM shall be
limited to residential customers only so as
to minimize any negative effect that it
might have on the development of a fully
competitive retail market in Massachusetts.
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Bay State Gas Company’s Gas Cost
Incentive Mechanism (cont.)
• Bay State shall not hedge more than 25
percent of its residential portfolio.
• There shall be a 25 percent to 75 percent
(“25/75") margin sharing between
ratepayers shareholders if Bay State
makes any “gains” from the GCIM. In case
of a “loss”, Bay State shall absorb 100
percent of the loss without passing any of
the losses to ratepayers.
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Bay State Gas Company’s Gas Cost
Incentive Mechanism (cont.)
• Bay State shall limit the financial
instruments that it uses in its hedging
program to futures and options products,
and not over-the-counter (“OTC”) products.
• To recover any administrative costs
associated with the GCIM program, Bay
State shall submit a proposal in its next
base rate filing to that effect, and
demonstrate that customer savings from
the GCIM exceed the level of administrative
costs to be recovered.
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NOTE: BAY STATE DID NOT GO
FORWARD WITH THE
DEPARTMENT-APPROVED GCIM,
STATING THAT THE VOLUMES
(RESIDENTIAL ONLY) WERE NOT
LARGE ENOUGH TO BRING ABOUT
ANY SIGNIFICANT MARGINS
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KeySpan Energy Delivery’s Proposed Gas
Procurement Practices
• The Department approved KeySpan Energy
Delivery’s (“KeySpan”) proposal to change
its gas procurement practices to mitigate
price volatility for its customers in an Order
issued on November 13, 2003 (Docket No.
D. T. E. 03-85).
• For the winter of 2004-2005, the Company
shall lock-in the price (equally over the
twelve-month period) for all of its domestic
non-storage gas supplies, equaling onethird of its projected normal winter
requirements.
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KeySpan Energy Delivery’s Proposed Gas
Procurement Practices (cont.)
• KeySpan was authorized to use the
NYMEX futures market but not financial
derivatives.
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