DR 98-029
EnergyNorth Natural Gas, Inc.
Petition for Approval to Modify its
Natural Gas Price Risk Management Policy
Order Nisi Approving Modifications to the
Natural Gas Price Risk Management Policy
O R D E R N O. 22,915
April 30, 1998
On March 6, 1998, EnergyNorth Natural Gas, Inc. (ENGI)
filed with the New Hampshire Public Utilities Commission
(Commission) its Petition for Approval to Modify its Natural Gas
Price Risk Management Policy (Hedging Policy) and to Adopt a
Natural Gas Price Stability Plan (PSP). On April 2, 1998, the
Commission issued an Order of Notice which bifurcated the Hedging
Policy from the PSP, scheduled a Prehearing Conference and
proposed a procedural schedule for the PSP. This Order Nisi
specifically addresses the Hedging Policy and the PSP only in
regard to its effects on the Hedging Policy.
The purpose of the Hedging Policy is to mitigate
natural gas price volatility for ENGI's firm gas sales customers
at a minimal cost. By Order No. 22,699 (September 3, 1997), the
Commission approved ENGI's Hedging Policy for effect through the
end of the 1997/1998 winter period (March 31, 1998). The Hedging
Policy allowed ENGI to use call options to hedge up to 100% of
the index-priced Gulf Coast supplies purchased for the winter
period. A call option gives the buyer the right, but not the
obligation, to purchase a commodity at a predetermined price and
before a predetermined date. Call options allow ENGI to limit
the upside cost exposure of natural gas prices. ENGI credits the
Cost of Gas Adjustment (CGA) for the entire amount of any gains
resulting from the purchase of options. Additionally, premiums
and brokerage fees are charged entirely to the CGA. The
Commission approved a $500,000 spending cap of net Hedging Policy
costs (i.e., total premiums and brokerage fees, less gains
resulting from the purchase of options). Although ENGI relies
upon the advice of a brokerage firm, the final decision as to how
much and when to purchase and sell the options rests upon four
members of ENGI's senior management.
ENGI summarized the results of the winter 1997/1998
Hedging Policy. For the entire winter, ENGI paid $364,800 in
call premiums in addition to $4,575 in brokerage fees. As a
result of the November options having value on their expiration
date, ENGI received a net gain for those options. All options
purchased for the months of December, January and February had no
value on their expiration dates due to the fact that gas prices
had fallen and, therefore, the options had become worthless. As
a result of the gain experienced in November 1997, ENGI's net
outlay for the winter was $268,800, exclusive of the brokerage
fees mentioned above.
ENGI requests the following modifications to the
Hedging Policy: 1) ENGI may hedge the cost of natural gas volumes
not only for its Gulf Coast but also for its Canadian
index-priced supplies; 2) in addition to hedging volumes
purchased in the winter months of November through March, ENGI
may also hedge its supplies for the shoulder months of October
and April; 3) the two benchmarks, against which ENGI compares the
current natural gas market price to determine the amount of
supplies that will be hedged, will be updated to reflect the
averages for the most recent 3-year data; and 4) in addition to
purchasing call options, ENGI may sell put options.
By selling a put option, ENGI agrees to purchase a
specified quantity of natural gas at a predetermined price at any
time up to the expiration date of the option if the purchaser of
the put option decides to exercise its right. In exchange for
taking on this risk, ENGI receives a premium. The purchase of
call options and sale of put options in conjunction with each
other is known as a "collar" because it essentially establishes
the maximum (the call) and the minimum (the put) price at which
ENGI will buy gas contracts on the commodities market. The
intent of a collar is to offset the premium paid when purchasing
a call option with the premium received when selling a put
option. The use of a collar allows ENGI to mitigate excessive
price increases through the use of call options, while largely
negating the cost of the premium that would normally be incurred
for the call option. In exchange, ENGI forfeits the potential
benefit of a decrease in gas prices below a certain level.
ENGI proposes that it will not hedge more than 100% of
its index-based supplies between the modified Hedging Policy and
the PSP on a combined basis. Under the PSP, ENGI requests to
make available no more than 20% of the current winter period's
weather normalized therm sales. Under the PSP, which is being
addressed through a separate procedural schedule, ENGI proposes
to use EFPs (Exchange of Futures for Physicals) to hedge the gas
supplies allocated to customers participating in the PSP.
ENGI does not propose to change the $500,000 per fiscal
year spending cap of net hedging costs. If 100% of the Gulf
Coast and Canadian index-priced supplies are hedged, ENGI
estimates that the maximum amount at risk for firm sales CGA
customers is $0.0045 per therm; at 80%, the risk is $0.0057 per
therm. The reason for the increased risk per therm is that the
EFPs, which ENGI proposes to use to hedge gas supplies for PSP
customers, essentially have no additional costs associated with
them (i.e., there are no premiums). Thus, if the PSP is
approved, the $500,000 spending cap would be allocated over fewer
therms. For the average domestic heating customer using 1,023
therms per year, the estimated maximum increase in the overall
annual bill is $4.62 or $5.78, at 100% and 80%, respectively.
ENGI believes that the 1997/1998 Hedging Policy
was very successful in achieving the intended goal of protecting
against a large increase in the cost of gas as has been
experienced in the previous two winters. ENGI established a good
working relationship with its broker and set up an efficient and
effective system for tracking all trades. ENGI believes that the
revisions will allow the program to be more cost effective while
still achieving the intended goal of upside price protection.
ENGI proposes that the modified Hedging Policy continue in effect
until it is either revised or abrogated by the Commission.
On April 20, 1998, ENGI filed with the Commission an
executed Action by Consent, signed by ENGI's Board of Directors,
approving the revised Hedging Policy as filed with the Commission
on March 6, 1998.
After careful review of the filing, we find that the
revised Hedging Policy is reasonable and in the public good. We
shall approve the Hedging Policy subject to the following
provision pending an order on the PSP: ENGI may hedge up to 80%
of its Gulf Coast and Canadian index-priced supplies. Use of
EFPs to hedge the remaining 20% of supplies will be evaluated
during the PSP proceeding.
The revised Hedging Policy represents a fairly
conservative approach to the use of the futures market. The use
of a collar will allow ENGI to limit the cost exposure of
substantial upswings in the price of natural gas while attempting
to mitigate the cost of the premiums.
Including the shoulder months of April and October is a
reasonable modification to the Hedging Policy. These two months
can be fairly cold, increasing demand and costs to customers.
The use of a collar for April and October can also reduce the
price volatility often associated with these months.
We shall not address in this order the treatment of net
costs which exceed the $500,000 spending cap. That determination
will be made in ENGI's next rate case.
Based upon the foregoing, it is hereby
ORDERED NISI, that the modified Natural Gas Price Risk
Management Policy is APPROVED; and it is
FURTHER ORDERED, that ENGI may hedge up to 80% of the
Gulf Coast and Canadian index-priced supplies until such time as
the Commission addresses the remaining 20% in the PSP proceeding;
and it is
FURTHER ORDERED, that pursuant to N.H. Admin. Rules,
Puc 1604.03 or Puc 1605.03, ENGI shall cause a copy of this Order
Nisi to be published once in a statewide newspaper of general
circulation or of circulation in those portions of the state
where operations are conducted, such publication to be no later
than May 7, 1998 and to be documented by affidavit filed with
this office on or before May 14, 1998; and it is
FURTHER ORDERED, that all persons interested in
responding to this petition be notified that they may submit
their comments or file a written request for a hearing on this
matter before the Commission no later than May 21, 1998; and it
is
FURTHER ORDERED, that any party interested in
responding to such comments or request for hearing shall do so no
later than May 28, 1998; and it is
FURTHER ORDERED, that this Order Nisi shall be
effective June 1, 1998, unless the Commission provides otherwise
in a supplemental order issued prior to the effective date.
By order of the Public Utilities Commission of New
Hampshire this thirtieth day of April, 1998.
Douglas L. Patch Bruce B. Ellsworth Susan S. Geiger
Chairman Commissioner Commissioner
Attested by:
Claire D. DiCicco
Assistant Secretary