Risk Management

The most dramatic change in energy procurement management over the next few years may be the impact of price risk management. Where customers were previously passive recipients of the price risk management exercised by the LDC on their behalf — in effect, no risk management — nearly all customers will have the ability to manage their individual price risks in the future. While the utility essentially pays, and charges, whatever market prices are when the gas is bought, customers can easily lock in a fixed price for future periods by simply asking a broker for a quote. If agreed to, the broker hedges the transaction in its book of futures contracts and supply portfolio. If not agreed to, the customer can call the broker back for another quote should the futures prices fall, paying market prices until prices fall sufficiently or until the customer is fearful of forward prices rising higher.

Note that while risk management is typically thought of as only something that someone with very large energy positions might engage, this is no longer true. Some small heat-sensitive businesses and even residential customers already have this ability through brokers and this is expected to be a growing trend as the market continues to mature.

Further, while this may seem like a cumbersome addition to the manager's energy procurement effort, the risk management ability will provide invaluable efficiencies. Certain technology application projects may make sense only on the condition that the future gas or electric price holds; and the project economics fall apart with other future price constellations. With risk management, one can easily lock in the forward price and initiate the project without price risk. Alternatively, if the prices do not support sufficient economic performance for the project to be viable, one can safely put the project on hold until the forward prices support the project.

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