Gas hedging

Here is a brief synopsis of my view of LDC gas hedging, which I just chewed
Harry's ear off explaining:

1. Commission needs to understand how hedging works. In a typical market
situation, the supplier of a good negotiates with the consumer, who can
explain to the supplier what his appetite for risk and term is, and then the
supplier can come up with the appropriate pricing and term (eg. all spot,
fixed price, pricing within a band). In other words, the hedge reflects the
customer's specific wants and needs.

2. When a utility tries to hedge for its amorphous group of bundled sales
customers, it lacks the specific knowledge of the appetite for risk that
group has, and in fact, the appetites will be all over the place. Therefore,
the hedging will not be perfect. If a utility locks in some pricing at term,
there is always the risk that a hindsight regulatory review will find that
the price was too high in light of later market developments, or that too
much reliance was placed on spot, which may have moved up. What utilities
need then, is the guidance to hedge, and then freedom from hindsight review.
(This gives ENA a good market for its hedged products and removes regulatory
risk involved with those products.)

3. When the utility hedges, it faces potential stranded costs, which arise
if load leaves. Thus, to mitigate the potential and size of this problem,
the hedged portfolio should only be dedicated to those customers for whom
leaving for transportation is not a real option (residential and small
commercial). If larger customers are on sales service, their rates should
reflect market index prices, as they do have the ability to leave, and spot
pricing removes the stranded cost and undercollection concerns. (It also
gives us something easy to market against). In other words, we need 2 PGA's,
one for captive customers and one for non-captive customers.

4. To make this 2-part world work, there must be in place an effective
transportation program that enables larger customers to shop for their own
supplies in the competitive market.

Sue, I will be in Houston Tues afternoon and Wed. if you want to meet to
discuss.