By the OGJ Online

HOUSTON, Apr. 11, 2001—State regulators should investigate the benefits of permitting energy companies to hedge gas purchases to decrease volatility, said the Federal Energy Regulatory Commission's Linda Breathitt.

With gas prices topping $10/Mcf on the New York Mercantile Exchange this winter and skyrocketing to $50/Mcf at times in California, policies should be in place to give natural gas buyers incentives to use risk management tools, such as price hedging and efficient use of storage to decrease price uncertainty, Breathitt told the American Gas Association.

The commissioner said her concerns were prompted by the practice in California of relying on the spot electric market to buy power. In December FERC recommended California utilities put 95% of their load in forward markets to minimize exposure to price volatility on the spot market.

"I believe the same logic holds for the natural gas market, although I don't prescribe to certain percentages," Breathitt said. The California Public Utilities Commission's policy of allowing for recovery of gas costs that meet a benchmark determined by the use of monthly spot market purchases, "creates an incentive to rely on spot market purchases of natural gas," she said.

Regulators need to be careful to distinguish between hedging and speculating, Breathitt conceded. But, she added, it could be said that failing to hedge and, therefore, limiting exposure to the vagaries of the market, is actually speculating.

High gas prices continue to affect the electricity markets, she said, including the most efficient generating plants. When gas cost $2/Mmbtu, the cost of generation of a plant with a 10,000 Btu heat rate was $20/MW-hr. As gas prices climbed to $10/Mmbtu, generation costs rose to $100/MW-hr. And as gas prices surged to $50/Mmbtu for a short period in California, generation costs soared to $500/MW-hr.

At less efficient plants, the impact of rising gas costs was even greater, she said.

Breathitt said she favors acting on several gas price-related complaints before summer, which is the peak season in California. San Diego Gas & Electric Co. (SDG&E), the Los Angeles Department of Water & Power, and the National Association of Gas Consumers have asked FERC to rescind the portion of Order 637 that removed the price cap for short-term pipeline capacity releases. The gas consumer group and SDG&E also asked for a cap on commodity sales of gas.

"I will be keeping an open mind about these cases, but I must admit that I had reservations about releasing the price cap in the Order 637 rulemaking proceeding," Breathitt said. "That is why I advocated so strongly to release the price cap as an experiment, with a Sept. 30, 2002, sunset date."

Because the 1993 Natural Gas Wellhead Decontrol Act removed price controls over all sales defined as "first sales," FERC's ability to reinstate caps is limited, she said.