Hedging by utilities cost state's ratepayers $800 million
OLYMPIA, Wash. (AP) - The hedging practices of natural gas companies in Washington state have cost ratepayers hundreds of millions of dollars in recent years, and officials said Thursday they are recommending a moratorium on new hedging arrangements.
The state attorney general's office said it wants the Washington Utilities and Transportation Commission to continue investigating the purchasing strategies used by utilities. Lisa W. Gafken, an assistant attorney general, said companies have no real incentive to improve their investment efforts - something that is evident in the losses during recent years.
"They didn't prudently manage their hedging strategies," she said.
In the last five years, the natural gas companies incurred hedging losses of about $800 million. Those costs are passed directly to ratepayers. Gafken said ratepayers face more losses in the future because the companies already are locked in other hedging contracts at high gas rates.
Utilities use hedging to avoid dramatic changes in gas prices. During the economic downturn of recent years, natural gas prices fell, perhaps contributing to the hedging losses. But Gafken said there were losses in other years, too, including $60 million in net losses between 2002 and 2007 - a period in which prices increased.
The attorney general's office is recommending that officials place a moratorium on companies from entering into new hedging arrangements. It also wants state regulators to explore whether there is a way to prevent some hedging costs from being passed to ratepayers. Officials also want to investigate how best to address market fluctuations.
The state attorney general's office said it wants the Washington Utilities and Transportation Commission to continue investigating the purchasing strategies used by utilities. Lisa W. Gafken, an assistant attorney general, said companies have no real incentive to improve their investment efforts - something that is evident in the losses during recent years.
"They didn't prudently manage their hedging strategies," she said.
In the last five years, the natural gas companies incurred hedging losses of about $800 million. Those costs are passed directly to ratepayers. Gafken said ratepayers face more losses in the future because the companies already are locked in other hedging contracts at high gas rates.
Utilities use hedging to avoid dramatic changes in gas prices. During the economic downturn of recent years, natural gas prices fell, perhaps contributing to the hedging losses. But Gafken said there were losses in other years, too, including $60 million in net losses between 2002 and 2007 - a period in which prices increased.
The attorney general's office is recommending that officials place a moratorium on companies from entering into new hedging arrangements. It also wants state regulators to explore whether there is a way to prevent some hedging costs from being passed to ratepayers. Officials also want to investigate how best to address market fluctuations.
$800 million is equivalent to 8 each 737, at retail price no discount, getting destroyed by these morons with no insurance coverage. Â If eight each new 737 get misplaced and disappear, everyone would stand up and take notice. But when $800 million in tax payer funds disappear, it gets a caviler notice. Â Not even the head line news. Â
Just the opposite, there are many awake, watching the idiot non-readers called tax payer, to figure out a scam to fund their unfunded pension and entitlements. Â In Washington State the unfunded liabilities can bankrupt the Gate's Foundation and still be $20 billion in the hole. Â Washington State has over $70 billion in unfunded liabilities and Gates Foundation only has $50 billion! Â That's $20 billion hole in non-funded government labor union crap!
I'm assuming that if they were losing money year after year that somebody would have spoken up. I have a mental picture of a room full of people sleeping next to a giant switch.
Review all the losses due to inept decisions by the government workers and elected officials.  Animal farms (liberal human hater engaging in bestiality) charging $13,000 per year for care of a $4.50 hamster and $1,250 per night stay at an animal rescue shelter.  $5 million annual payment for no-show Seattle minority business services for school district, $5 million in annual grants for a broke church unable to deliver services to the community from Seattle School district, $200 million cost over-run in ferry design by a legislators son running a design services, $200 million to $600 million cost over-run in poor engineering, design and manufacturing practice by the (nepotism of legislator relatives) in construction of new floating bridge, $100 million in screw up of tow on the bridges by (nepotism of legislators kids) etc. etc. etc. etc.
Attorneys and politicians now want to provide input on how best to hedge cost exposure? Get real.
Hedging is a cost. It isn't playing with money or gambling. It is a way to reduce risk exposure. Had natural gas prices spiked up this article would have never existed, rates would have remained stable and all would be happy. Rates dropped, you still ahve the cost of the hedge. That's fine. A properly constructed hedge is designed to limit your exposure to market volatility. I have my doubts the AG or pols are real gurus on how best to structure these to get the desired results.
....and even if the hedging had turned a major profit, rate payers would have never seen even a penny in reduced rates.
No Government agency, especially in this State, would EVER do anything to benefit the citizens in general.
Hedging by utilities cost state's ratepayers $800 million
Inept WSDOT cost us as much during the Gregoir Administration, and the project started then will continue to cost $Billions
(....so who's gonna have us bend over next)?
Â
Funny how officials get all worked up about these costs getting passed on to the consumer. But they're all for taxing the hell out of these companies, which also get passed on to the consumer.
@jimbobJimbob... funny how you conveniently forget you are taking full advantage of many of the services those taxes pay for. Thanks for playing
Forgot to list one other source of the information, OCC gov (Office Comptroller of Currency), they list the total derivative trades against the USD in a quarterly report.  That amounts to $600+trillion (International Bank of Settlement) or more than the entire value of our Earth.
Those losses constitute 2/3 of the budget deficit.  $800 million (losses) divided by $1.2 billion (budget shortfall) = 66.67% of the states budget short fall.  If a private company engaged in these activities incur those losses their share holder and workers takes the hit.  With government, those fraudulent losses get's passed on to the innocent tax payers and not the government workers who engaged in the stupid financial transactions.  In fact, if one trace back the hedging trades, the other side of the trade who won on the bet, were the government workers pension funds, from California, Washington, NY, NJ etc...  Bloomberg, Wall Street Journal, CNBC financial and many other business news networks have reported time and again that the government labor union pension funds are the largest group engaged in hedging against the tax payers for their pension funds.  So, the tax payers get screwed over twice by the liberal democratic government labor unions and their workers.  The reason gas prices are so high, because CNBC, WSJ, Bloomberg and others reported the government pension funds were the largest group hedging on gas prices, driving the price up.  Remember, pension funds cannot eat, smoke or drink oil or gas, therefore these groups never take physical delivery of the oil of gas, they are speculating on and driving the price of the oil and gas upward.  Please learn to read.  Sources for the information are, Bloomberg, WSJ, CNBC, Fox Business, SEC, and International Bank of Settlements (IBS).
@NWDemocrat Not all utilities are public and this article did not name anyone. Could be private companies....
Another reason to leave Washington. Run by a bunch of bafoons. Between the 520 bridge fiasco, the basketball stadium that we will all have to pay for in 10 years when whatever team is playing there leaves and the hedge fund manager is no where to be found and now this. Time to bite the bullet, sell my house and get the hell out. Seattle has turned into a crime ridden cesspool and the biggest bafoon of all, McSchwinn, has run our city into the ground. But since there are more bike lanes that makes everything ok.
@Phinn - don't let the door hit ya in the ass as you leave. Hope you're happy where you're going, but I doubt it.
Just more capitalism run amok. Derivatives like hedge bets shouldn't even exist , they are pure gambling and should be taxed accordingly. Its also why the commodity board should be closed. It does nothing for the regular people and only leads to inflation. So many things have gone off the track on our financial system over the last 100 years and no one seems to want to fix it.
What a bunch of crap. this kind of stuff is also tied directly to the ongoing burn bans. More people have to use gas the more money they make. I bet the top idiots that are on the Puget Sound Clean Air Agency are also on the board for the gas companies. It's all a big scam.
It's easy to say after the fact that their hedging strategy was poorly thought out. I have no idea if it was or not. I would assume that these futures contracts are bought on the open market, so the price paid for them was the same that any other normal (non-utilities) private businesses were paying. I.e. I hope/assume that the utilities weren't negotiating these hedges one on one, but instead paid a market rate for them. Are there other privately run companies that we can compare them to to see what the typical hedging strategy was in these years? Were the utilities choosing to lock in prices much further in the future than other companies were?
Good questions. THe first post from someone who has a clue.
Those costs should be borne by the company and ultimately it's stockholders and NOT the ratepayers. I'm always amazed at how companies can pass on the huge costs of their poor decisions to their customers. Especially in this case, where customers have no alternatives available for power.
Ok...if you're going down that path, let's take away the hedge and let end users also fully bear the cost of price swings.
Are you ready for that? Do you understand in a quantitative way what that means?
@Gnirk Thank you for making the argument that granting monopolies is a bad idea.
Now, who's up for a Single Payer Health Insurance System?
Don't you realize NO ONE should be gambling with other peoples money nor their home. In the last 10 years, they have bet on mortgages, fuel prices, NG prices and all of the risk goes away because its not their money. When they fail, the citizens pay the price.
Hedging is not gambling. It is just the opposite of gambling...it is an attempt to minimize risk exposure.
@NBA_Is_Useless Â
A $800,000,000 loss sounds like a big gamble to me. I am sure
that most of the tax paying public would agree .
@pete1427 @NBA_Is_Useless 800 MM was used to hedge what exposure over how many years?
The article is very non-specific but if that was over 5 years...that is $160M/year....if they are hedging $6 BILLION per year in natural gas price exposure, that isn't that bad. But the article...poorly written and researched...fails to provide that necessary detal
In the last five years Obama has been telling us we have to pay higher energy costs and his EPA is doing everything they can to raise costs of the energy industry. Our own democrat governor demands we reduce carbon output based on a complete fraud and the only way to do this is raise prices.
People, you get what you vote for. But when their policies fail, as they always do, they just blame the industry and are aided and abetted by media advocacy.   The biggest reason for hedging is the industry has no idea how the government will punish them in the future and it is undeniable that the Obama administration told them they would be punished.
@Goodwin Excellent. I totally agree.Also the more we have to pay the more they get to tax the crap out of us. I will let you know that i haven't voted for the losers that we have in the capitol. They are all out to bend us over and give it to us.
@Goodwin What are you talking about? My God...
Natural gas prices are the lowest they have been in like forever. We are paying extremely low rates. Â
Utilities "hedge" all the time. It's good business and has nothing to do with politics, let alone Obama. Â
People like you with your rambling ignorance scare me.Â
@lakeview @Goodwin Look up Obamas speech on reducing green house gasses. He says, in plain English, that the price of energy/fuel will go up because of the restrictions they will put on their exhaust fumes. Obama did not deny this, it was a move toward a more green planet.
@Xirxious @lakeview
What Obama meant by "Green" is the "Green" that goes into the pockets of his contributor cronies with their Unicorn And Fairy-dust Energy LLC's with government subordinated "loans."
See? He's not actually "lying" if you look at it that way.
"said companies have no real incentive to improve their investment efforts"
If I was responsible for such massive losses I could not expect to keep my job. Why is it not the same for them?
Oh god. This is the problem with really schlocky journalism. It leads people to see these losses as a complete and total failure and somehow a rip-off of the ratepayer.
Totally wrong. This is a risk management device. Had natural gas prices spiked you would have saved billions of dollars because of the hedge. The hedge isn't designed to generate investment returns. It is designed to minimize the risk of large price swings. If no massive upticks happen - then yes, there is a cost. But that cost is not a failure.
Sorry to sound stupido, but what are hedging practices/losses? I can only guess it's some sort of corporate guessing/manipulation/crippy-crap.
@YadayadaIt's not nefarious. It's quite normal actually. Puget Sound Energy, for example, doesn't buy natural gas day to day, they agree to purchase quantities of gas at certain prices in the future. It's a way to know exactly what you're costs are going to be. Sometimes you win and end up paying a cheaper price than the spot market, sometimes you lose and pay more. Natural gas has dropped so much in value, these companies have gotten screwed and probably paid too much, but gas prices for consumers are still rock bottom, so I don't think this matter too much.Â
@lakeview Exatamundo. If  natural gas had skyrocketed, the company would have been getting pats on the back for saving the company oodles of cash. Really, nothing to see here, I agree.
I am so shocked that the ratepayers will have to cover the utilities losses
@my2cents They aren't real losses though.Â