Survey: Utility Regulatory Process Viewed as Costly and Ineffective Utility, Marketer, Regulator, Consumer and Financial Reps Agree: Hedging IS Effective
CHICAGO (October 26, 2004)
Results from a survey of attendees at the 2nd Annual RiskAdvisory Regulatory Summit establish that hedging is an accepted and effective practice for managing the severe volatility of gas and fuel prices for utilities, but there's skepticism about the overarching processes that regulators, consumers and utilities use to come to agreement on such programs.
The survey of 30 representatives from North American utility companies, regulatory bodies, financial institutions, marketers and consumer groups was conducted during the two-day conference that gathered Oct. 21-22 to discuss how responsibility for commodity price management should be assigned to all stakeholders in order to decide on the appropriate guidelines for risk management strategies. Organized and sponsored by RiskAdvisory, the conference explored issues surrounding the management of energy commodity price risk in a regulated environment.
Key findings include:
- 96 percent of respondents concluded that utilities should employ hedging.
- 59 percent thought hedging to be very effective and 41 percent thought it somewhat effective. None thought hedging to be ineffective.
- 67 percent of respondents viewed regulators as categorically unqualified to set policies for utilities' hedging programs.
- 60 percent characterized public rate hearings over actions to manage gas and fuel cost volatility as ineffective and too costly
- 21 percent thought hearings to be expensive but effective
- 17 percent thought those hearings to be cost effective
- 92 percent agreed that public utilities should seek state/provincial public utility commissions' approval for a hedging program.
- 85 percent thought jurisdictional commissions should be in a position to authorize utilities to recover costs that utilities incur while hedging its fuel costs.
- 81 percent thought regulators see hedging as a risk management activity, as opposed to 19 percent who thought regulators view hedging as a speculative activity.
- 73 percent did not think the utility industry does a good job communicating about the value of hedging as a way to mitigate consumer misgivings about electricity rates.
- 27 percent were unsure of whether utilities were doing a good job communicating.
- None thought the industry does a good job of communicating about their programs.
- 42 percent thought customer representatives, direct marketers, regulatory staff and gas and electric utilities could work together in the current rate setting process to develop hedging programs.
- 58 percent were unsure or did not think such unassisted collaboration is possible.
- 78 percent thought regulators should have less than 25 percent influence in choosing the risk profile utilities should use to control gas and fuel price volatility in order to benefit consumers.
- 73 percent thought consumers should have 50 percent or less influence in risk profile choices the utilities use
- 83 percent thought utilities should have 50 percent or more influence in the risk profile they use to control gas and fuel price volatility in order to benefit consumers.
In all fairness, these results were skewed toward the perspective of utility company representatives, 20 of whom participated in the survey, said Tim Simard, Principal Consultant, RiskAdvisory. Nonetheless, the participants came from across the United States and Canada and demonstrate widespread dissatisfaction with current hedging arrangements as negotiated between the different stakeholders. There's work to be done in developing a more progressive policy process for North American utility industry stakeholders.
Simard added that the conference was held because over the past two decades there have been numerous regulatory hearings in North America that have examined the merits of utility hedging programs and the methods that can be used to shield ratepayers from undesirable commodity volatility. Yet there is currently no agreed upon method. Participants still struggle to develop an equitable approach that meets the needs of all stakeholders.
Despite the consistent exposure of North American utilities and their customers to severe energy price volatility, it is clear that there is still no standardization around the design and implementation of utility hedging programs from region to region, said Simard. These results are consistent with our supposition that the industry won't be able to escape a continuing cycle of disappointment and frustration without some sort of process that is more forward looking and prescriptive than the current hindsight review processes.
About RiskAdvisory, a Division of SAS
RiskAdvisory Inc. is a leading provider of real-world risk solutions to energy companies operating in today's volatile energy commodity markets. Founded in 1995 by accomplished energy risk professionals, the company has provided expert consulting solutions to over 200 clients in the energy sector. Headquartered in Calgary, Alberta, RiskAdvisory also produces software solutions that are used by a growing number of well-known energy companies. RiskAdvisory was acquired by business intelligence software leader SAS in 2003.
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