PG&E Financial Hedging Calls for Ratepayer Collateral

By Published On: April 17, 2009

An “early warning system” for regulators regarding utilities’ financial health was triggered by Pacific Gas & Electric late last month. The utility’s first quarter trades required the use of a broker or brokers to assume “margin calls.” PG&E noted that over $300 million in financial instruments was backed by $890.6 million in PG&E ratepayer assets as collateral to cover any potential financial gap. “Posting collateral on margin calls, by itself, has no significant impact on the customer,” noted PG&E in its March 27 California Public Utilities Commission filing. The financial instruments that PG&E is using to hedge its risks are both natural gas and electricity derivatives, according to David Eisenhauer, utility spokesperson. Commissioners originally gave utilities that privilege when natural gas prices were skyrocketing. Last year’s high price of natural gas, for instance, was $13.31/MMBtu, according to the Federal Energy Regulatory Commission. Federal regulators now peg it at $3.60/MMBtu on average nationwide. Financial hedging was expected to allow utilities to save ratepayers money in the event of rising fuel costs and volatile energy prices. “When you hedge something, your derivatives may go upside down, though,” explained Bill Marcus, JBS Energy principal. He added that the financial filing with the commission was a warning system because making margin calls could affect a utility’s creditworthiness, particularly the utility’s future ability to borrow capital at relatively low rates. Margin calls can be risky. They are placed with brokers and if a call goes bad, then the broker has the option of calling in the collateral used to make the call. The collateral used by the utility doesn’t involve its “hard assets,” like its power plants or transmission lines. The assets are “cash and letters of credit,” according to Eisenhauer. The costs to use those through a broker is about $3,200/day. “A lot for us, but walking around money for utilities,” Marcus replied. No collateral has yet to be turned over to brokers for calling in the margins for PG&E trading--at least not since the utility declared bankruptcy in 2001--according to Eisenhauer. “We have not defaulted under any of our contracts,” he added. PG&E, according to the utility, is required to notify regulators when it makes margin calls that are “not offset by other hedges” in every quarter for increments of $300 million.

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