City auditor: Utilities’ hedging policy cost millions

136391599A program designed to protect ratepayers from volatility in the natural gas market provided less savings than originally thought, due largely to the economic downturn and discovery of new reservoirs of the fuel.

A city audit of the natural gas hedging program by Colorado Springs Utilities found that the municipal utility could have saved $208.3 million if it hadn’t engaged in the process.

But Utilities spokesman Dave Grossman said when the program started, it made sense. Natural gas was highly volatile – climbing to $12 a unit then dropping to $2 and then climbing again.

“So we locked in prices for one-third of our natural gas budget for three years, and the next year, we locked in an additional one-third,” he said. “We know ratepayers don’t want rates changing during the winter months, so this was a way to protect them.”

And then the Great Recession hit, and demand dropped. Combined with the economic downturn, hydraulic fracturing found untold reserves of natural gas in the United States.

“We realized in 2011 that the market had changed dramatically,” Grossman said. “And the price was going to stay low for a long period. We discontinued the operation.”

Grossman emphasizes that the hedging didn’t cost ratepayers any money at all. The $208.3 million figure is simply money that could have been saved.

And the city auditor, Denny Nestor, said CSU wasn’t alone in locking in natural gas prices.

“The commodity market for natural gas has historically been one of the most volatile,” he said in a report to City Council. “To help smooth out pricing to customers and insulate them from the dramatic swings in the market, most utilities engaged in similar financial hedging arrangements.”

Grossman said that most other utilities saw about the same results – paying about 8.6 percent more because of hedging than the average price of the market from 1997 when the program started to 2011, when it was suspended.

Nestor said that the program did maintain stability for ratepayers, “but at a significant cost.”