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Warmer weather and good natural gas storage levels have eased what was expected to be a winter energy crisis across the nation. The rush to engage in natural gas hedge contracts, however, may not be working out as hoped. Instead, hedging designed as insurance against high gas costs may be keeping prices artificially high this winter, according to observers and data. "The winter has been much warmer than average nationwide," said Mike Florio, The Utility Reform Network senior attorney. "So we paid something for insurance and our house didn't burn down." Natural gas prices are a lot lower than projected after hurricanes wreaked havoc on the short-term gas markets. "It was feared gas prices would reach $13 to $16" per MMBtu, said Richard Myers, CPUC branch supervisor for gas. Today, however, gas fetches $7.50/MMBtu at the state border in Southern California. "Right now we're going 'whew,'" said Myers. "The crisis everyone feared is not shaping up." Following last summer's hurricanes, regulators and energy industry officials predicted that home heating bills would hit record levels this winter. They moved to alleviate the economic pain through a number of policy measures. To prepare for the potential gas price crisis in California, regulators eased the qualification criteria for low-income assistance programs and authorized the state's gas utilities to minimize the risk posed by potentially high prices through gas hedge contracts (Circuit, Oct. 28, 2005). Unfortunately, the hedge contracts are unlikely to save any money this winter, though they might in future years, said Myers. When asked whether they would result in losses, Myers-who is bound by regulators' agreements for secrecy over the ratepayer-funded contracts-simply replied: "It's probably not going to turn out well." In addition to hedge contracts, utility officials pointed out that they procure gas in a number of ways to minimize price risk. That includes daily buys on the spot market and through purchase agreements of various terms. How much those hedge deals cost ratepayers depends on the terms of the agreements, including whether the agreed-upon price was fixed or set a ceiling or floor, said Stephen Smith, Stephen Smith & Associates energy consultant. "There are a variety of insurance policies," said Smith, who predicts gas will drop to $7/MMBtu by the end of March. "Nobody is sorry their house didn't burn down because they had fire insurance." Procurement cost reports filed with the CPUC show that while the price of gas at the state border is down in January, gas utilities are paying more for gas than they did in December, when cold weather gripped much of the nation. In fact, core customer gas costs for the state's utilities are back up to the levels of October when the state regulators approved hedging and other measures in an attempt to dampen prices this winter. For instance, PG&E paid $1.02/therm in October, which rose to $1.13/therm in November before dropping to 86 cents/therm in December. In January, the utility is paying $1.03/therm. Before the hurricanes in August, the utility paid 64 cents/therm. Though a bit lower, SoCal Gas core customer costs show a similar pattern. In October, when talk of a natural gas crisis had reached a fevered pitch, the utility paid $1.03/therm. That rose to $1.09/therm in November before dropping to 86 cents/therm in December. SoCal Gas's cost rose to 93 cents/therm in January. In August before the major storms, the utility paid 63 cents/therm. While it is unknown how or whether hedge contracts are contributing to the uptick in the cost of gas due to confidentiality requirements, Florio said he expects that the hedging program will be improved by next year. "Clearly the process involved was not ideal in the sense that the PUC and utilities only reacted after the hurricanes and therefore paid more for the insurance than they would have had to pay if they acted earlier," said Florio. "Nonetheless, I think what the commission did was reasonable under the circumstances we were facing in October." Last fall, the commission allowed, even prompted, utilities to hedge gas contracts. Regulators acted on an expedited basis without hearings. They promised that utilities would not face after-the-fact reasonableness reviews for their contracting. In many ways, regulators were stuck between fast action to avoid what might have been an economic crisis in natural gas this year and what they are mandated to do by the state?that is, specifically watch out for utilities' poorly examined investments on the ratepayers? dollar. At the time, the CPUC also authorized SoCal Gas to tap so-called cushion gas for its low-income customers (Circuit, Oct. 15, 2005). The utility bought cushion gas when prices were very low and stored it underground to supplement supplies in emergency situations. Tapping the gas this winter is intended to keep prices under 80 cents/therm for low-income customers. However, gas prices have sunk so much that the utility is now asking the CPUC to reserve the cushion gas it was planning to tap for future winters, said Denise King, SoCal Gas spokesperson. The CPUC is expected to decide the matter on February 16. The utility's low-income customers paid 65 cents/therm in December and will pay 57 cents/therm in January, because of the cushion gas. Overall, low-income customers saved $11 million as a result of tapping the low-priced reserve, according to the utility. Lower gas prices on the national market have prompted SoCal Gas to revise downward its earlier estimated increases in home heating bills this winter. The utility had expected a rise of between 45 and 55 percent, said King. Now the utility projects an increase of 30 to 40 percent. That means a single-family home will likely see its monthly gas bill climb from $79 a month during winter last year to $105 a month this winter-a 33 percent increase. The story is similar in San Diego Gas & Electric territory, according to King. The average single-family-home customer will see their bill increase from $57 a month last winter to $75 a month this winter-a 32 percent increase. PG&E would not discuss its hedging contracts and the impact on rates because of "the market sensitivity issue," said Christy Dennis, utility spokesperson. Last October, PG&E estimated the expansion of its hedging would cost ratepayers about $60 million (Circuit, Oct. 28, 2005). "PG&E's goal in requesting increased hedging practices was to protect against a continued rise in prices while allowing the customer to benefit from any drop in prices," Dennis added. While the details are considered confidential, the gas hedge strategy may actually be exerting upward price pressure for California residential and small business customers this winter. Prices might be lower without hedges. For instance, under expanded hedging authority that the CPUC authorized for PG&E for the next three winters, all losses and savings as a result of hedge contracts will be shifted to ratepayers. Previous hedge contracts passed only a portion of any savings on to ratepayers but required company shareholders to shoulder any losses.

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