Managing gas supply risk

Journal Article · Mon Feb 28 23:00:00 EST 1994 · Fortnightly; (United States)

OSTI ID:6984059

Walker, H III ^[1]

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1. AUS Consultants, Moorestown, NJ (United States)

The natural gas market has begun to resemble other commodities markets as a result of the industry's relentless move toward competition. And like other commodities markets, natural gas is characterized by wide price fluctuations. Hedging is essential to well-functioning commodities markets as a means of managing price fluctuations using derivatives like futures, forwards, swaps, and options that can be combined or used separately, depending on need and preference. The prevailing form of rate regulation and gas-cost recovery has not provided adequate incentives for local gas distribution companies (LDCs) to hedge their gas supply. Currently, the cost of gas is recovered at cost with no profit; however, regulatory reforms and the profit motive are changing this. With the implementation of Federal Energy Regulatory Commission (FERC) Order 636, the shift in roles of participants in the natural gas market is nearly complete. Pipelines that were once full-service merchants are now passive common carriers; LDCs are now fully responsible for all aspects of their supply portfolio and face increasing business risks as a consequence. This change requires LDCs to deviate from past business practices and will encourage hedging to address changing risk. Hedging is not foreign to LDCs. Some LDC financial managers use interest-rate swaps as a part of their financing program; others hedge their cash and long-term investment portfolios with interest-rate futures. Gas supply managers are also familiar with hedging since nonregulated marketing affiliates use gas swaps and futures (as do nonaffiliated suppliers). In addition, their suppliers offer hedging as part of a complete package of supply services.

• OSTI ID: 6984059
• Journal Information: Fortnightly; (United States), Journal Name: Fortnightly; (United States) Vol. 132:5; ISSN FRTNE8
• Country of Publication: United States
• Language: English

Related Subjects

32 ENERGY CONSERVATION, CONSUMPTION, AND UTILIZATION
320603* -- Energy Conservation
Consumption
& Utilization-- Municipalities & Community Systems-- Public Utilities-- (1980-)
ENERGY SOURCES
FLUIDS
FOSSIL FUELS
FUEL GAS
FUELS
GAS FUELS
GAS UTILITIES
GASES
MANAGEMENT
NATURAL GAS
PUBLIC UTILITIES
SUPPLY AND DEMAND