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Utilities' natural gas hedging program cost $208 million since 1997, audit finds

August 14, 2013 Updated: August 14, 2013 at 9:00 pm
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Colorado Springs Utilities tried to stabilize natural gas prices for its customers by locking in prices for three-years at a time.

But the price of natural gas dropped dramatically and utilities, locked in on its rates, has spent $208 million more for natural gas over the market rates since 1997, a city auditor's report reveals.

"We concluded that the hedging program created some price stability for customers, but it came at a significant price," the audit says.

City Auditor Denny Nester said the utilities natural gas hedging program stabilized natural gas prices at a time when prices were volatile, sharply going up and down month-to-month. At first the program was saving millions. In 2008, when the economy tanked, industry experts predicted a rise in natural gas prices and utilities locked in prices.

Under the natural gas hedging program, utilities would buy gas at a fixed rate and lock it in for three years. The hedging program was not about chasing the lowest prices but stabilizing the prices, said Dave Grossman, utilities spokesman. Utilities officials maintain that the $208 million should not be thought of as losses but the cost of risk management.

Without hedging, customers would have paid market rates, Grossman said. For example, in January 2000 the price was $2 per 1,000 per cubic feet; in January 2001 the price was $9, which would have shown up in customers' bills.

In the past 14 years, utilities purchased about $2.4 billion in natural gas through its hedging program. In that time, Colorado Springs ratepayers had consistent rates, Grossman said. A typical customer using about 60 cubic feet paid about $34.50 a month in 2002; about $47.55 in 2007; and about $46.63 in 2013.

In 2011, utilities halted its natural gas hedging program when it saw that predicting the gas market was not going its way.

Nester said the hedging program was due to be audited.

"I thought it was important for the public to understand the hedging program now in case it does come back," Nester said.

There are no immediate plans to resume the hedging program, Grossman said.

In his audit, Nester said if the hedging program ever is resumed, utilities officials must be more clear with the utilities board on the results and risks of the program. Utilities officials agree with the recommendations, including providing more details on the impact and risk of the program.

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