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Gas buying strategy scrutinized

Attorney general’s office wants regulatory review of utilities’ price hedging

The Washington attorney general’s office is pushing for more regulatory review of natural gas purchases by Avista and other utilities, saying hedging strategies are costing ratepayers.

The Public Counsel Division of the AG’s office says Avista lost $11.9 million from November 2008 to October 2012 as a result of locking in prices for future gas purchases to avoid market fluctuation.

The loss – the difference between the fixed price Avista agrees to pay for future gas delivery and the lower market price at the time of delivery – is passed on to ratepayers.

“Public Counsel is concerned that customers have been harmed by the companies’ hedging practices,” said Assistant Attorney General Lisa Gafken. “Even recognizing that hedging can be an appropriate natural gas purchasing tool, the dramatic size of these losses highlights the need for more rigorous regulatory review.”

But Spokane-based Avista Utilities disputes the AG’s analysis and defends its hedging strategy as sound, even as wholesale prices have fallen substantially in the past five years.

No one can predict where market prices will go, and agreeing to fixed prices in advance for a portion of future supplies ensures price stability for customers, said Kelly Norwood, Avista’s vice president of state and federal regulation.

“We’re not going to put ourselves in a position where we’re … buying natural gas for our customers on a day-to-day basis and the market runs away from us,” Norwood said Thursday.

The Washington Utilities and Transportation Commission will decide today whether to carry on with an investigation of the hedging strategies of Avista, Puget Sound Energy, Cascade Natural Gas and Northwest Natural Gas. The investigation has kept recent changes in retail gas rates, including a decrease in Avista’s rates, from becoming permanent.

The Public Counsel Division recommends the investigation continue and that the commission place a moratorium on new hedging arrangements until utilities revamp their practices to limit costs. The office also wants the commission to consider ordering that some hedging costs not be passed on to utility customers.

The UTC staff, however, conducted its own analysis of utility hedging performance and recommends ending the current investigation and making the temporary rate changes permanent.

Just how much hedging has added to gas supply costs in Washington is unclear. The Public Counsel’s analysis of data provided by the four utilities concluded that at least $860 million was lost between November 2002 and October 2012, with $800 million of those losses in the past five years.

“We know that the data they were looking at to come to their conclusions for this dollar amount is just wrong,” said Steve Harper, Avista’s gas supply director.

The company, however, declined to release figures to counter those estimates, and much of the data it and other utilities provided state regulators is kept confidential.

A consultant for the UTC staff puts the net loss among the four utilities at $695 million at the most, and as low as $18 million, during the 10-year period.

“The magnitude of the losses and their apparent persistence over the years is significant and not lost on staff,” the commission staff wrote in a March 1 report. It went on to state that the issues are complex and difficult to examine and resolve within the time frame allowed for the commission to act on the current rate changes.

The UTC staff instead recommended the commission conduct public workshops on the matter and consider new rules or policies on hedging practices.

The UTC review of Avista’s hedging practices concluded that the company achieved better results than the consultant’s best-case scenario from Nov. 1, 2011, through Oct. 31, 2012. Avista also outperformed Puget Sound Energy and Cascade Natural Gas in that survey.

Avista last September proposed lowering the portion of its gas rates tied to buying gas wholesale. The utility, with more than 149,000 gas customers in Washington, sought a 4.4 percent rate decrease, cutting annual revenue by about $6.5 million.

That change is independent of the 3.7 percent rate hike at the start of this year, which will bump up revenue by $5.3 million a year. That portion of gas rates is related to operating costs, including labor and equipment.