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Pennsylvania Utility Provides Further Details On Proposed Use of Financial Hedges For Default Service, Meant To Increase Price Stability

July 12, 2018

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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Pike County Light & Power Company, Electric Division has provided further details at the Pennsylvania PUC concerning its petition to begin using a financial hedging strategy for a portion of its electricity default service requirements, beginning May 31, 2019.

Pike's proposal to begin using a financial hedging strategy for default service had been first reported by EnergyChoiceMatters.com (see prior story for background).

Pike said that the goal of Pike’s energy price hedge strategy is to increase price stability for its default service customers. This will be achieved, initially, through executing financial hedges with counterparties to convert portions of the energy purchased from spot market rates to fixed rates, Pike said. The hedges will cover up to two (2) calendar years beyond the current calendar year.

Pike’s strategy is to build price stability by reducing the amount of energy purchased on the spot market and avoiding single point market exposure, i.e., making a fixed price commitment for 100% of the overall target hedge percent at a single point in time. This will be accomplished by layering hedges, each executed every October and April for one and/or two calendar year time-periods.

The level of fixed price commitments will increase for each time-period as it draws closer to the full commitment date (two (2) months prior to fiscal year). Pike will retain the flexibility to accelerate fixed price hedge transactions when market opportunities arise, and defer those transactions when market prices are deemed unattractive or inflated.

The targeted hedged (fixed price) positions for the energy exposure of the default supply service two (2) months prior to the upcoming calendar year (year 1) will be:

           Minimum        Maximum
            Hedge          Hedge
Year 1       50%           75%
Year 2       25%           50%

Further, under Pike's planned hedge position timeline, it will hedge 25% at 14-15 months prior to the calendar year. It will hedge another 25% at 8-9 months prior to the calendar year (accumulated hedge equaling 50%). It will hedge another 0-25% at 2-3 months prior to the calendar year (accumulated hedge equaling 50%-75%).

If forward prices covering the period to be hedged are trading in the 25th percentile or lower over the most recent 36 month trading period, Pike will consider purchasing additional hedges not to exceed the maximum percent hedge target.

Pike will retain a consultant to manage the procurement of the hedges. Pike said that among other things, the consultant will present recommendations for the, "financial product to transact (generally fixed rate energy swaps)."

The consultant will issue sealed bid pricing requests

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