NIPSCO adjusts power hedging program based on recent experience

Northern Indiana Public Service Co. is proposing some changes in its electric cost hedging program due to experience so far in running that program, which was first approved in 2011.

Daniel Williamson, Executive Director of Energy Supply and Trading for NIPSCO, said in May 31 testimony filed at the Indiana Utility Regulatory Commission that the initial hedging plan approved last year assumed that all of the coal-fired generation facilities within the NIPSCO asset portfolio were fixed in price. Since a majority of NIPSCO’s coal contracts are between three and five years in length, and since coal pricing has historically been less volatile than natural gas pricing and the Midwest Independent Transmission System Operator (MISO) market price of power, it was determined that any coal generation used to meet the power supply needs of NIPSCO customers could be classified as a fixed price resource. Any remaining resources that would likely be needed to meet the power supply needs of NIPSCO customers, however, would be classified as floating in price and thus would be considered when developing the hedge plan.

He said the 2012 version of the hedging plan also addresses NIPSCO’s exposure to both natural gas and electricity price volatility associated with supplying electricity to native load customers.

NIPSCO determines the monthly volume of MWhs to be hedged by starting with the total number of on-peak MWhs that would be needed to serve NIPSCO’s internal load. The expected number of on-peak MWhs for each month is determined through NIPSCO’s demand forecasting process. This demand forecast is determined based upon historical usage, estimated economic growth rates and normalized weather. Once the expected number of on-peak MWhs for each calendar month is determined, the PROMOD computer model is run to determine what resources would be used to meet this expected demand. Due to the lower variable cost and cycling limitations associated with NIPSCO’s coal-fired generation supply, the PROMOD model ordinarily applies these resources first before dispatching other NIPSCO generation, and in conjunction with spot energy purchases from the MISO energy markets when economic, to meet the supply needs of NIPSCO’s customers.

If any additional resources would be required, the model would determine how many MWhs should be provided by NIPSCO’s natural gas-fired Sugar Creek Generating Station and how many MWhs should be purchased from the MISO spot energy market. The model would determine this allocation between producing power at Sugar Creek and purchasing power from the MISO spot energy market based on the estimated price for each resource at each point in the future.

“Since approval of the Initial Hedging Plan, NIPSCO has gained further experience operating in the [locational marginal pricing] swap futures market,” Williamson wrote. “First, on January 1, 2012, MISO Indiana Hub became one of the new hub definitions developed by MISO’s Trading Hub Task Force which was approved by MISO members to replace MISO Cinergy Hub in late 2011. Second, NIPSCO has found that the MISO Indiana Hub Peak Calendar Month/Day Ahead LMP Swap Futures contracts are much more liquid and readily available. Therefore, NIPSCO is not planning to utilize the Midwest ISO Indiana Hub Peak Calendar Month/Real Time LMP Swap Futures contracts as an intermediate step; rather, NIPSCO will simply execute the number of proposed contracts directly using the Day Ahead type of contracts. This will provide a direct and more efficient mechanism to hedge the amount of desired contracts and eliminates having to pay additional broker and clearing fees.”

He added: “Because of the notable change (decline) in natural gas prices since last year, there is an increase in the amount of natural gas futures contracts. However, on the electricity price side of the plan, there are three instances by which the updates suggest a decrease in the amount of contracts, specifically, for July, September and November 2012. Based upon discussions with the [Office of Utility Consumer Counselor] and NIPSCO Industrial Group, NIPSCO proposes to decrease the amount of natural gas futures contract purchases in these same months on a one-to-one basis to account for the corresponding negative amounts noted for electricity price contracts. Utilizing a 1:1 ratio of natural gas futures contracts to electricity futures contracts best accomplishes the objective of accounting for the negative amounts in those months.”

The hedges under the 2012 hedging plan are being solely made to address native load fuel cost price exposure, he added. Also, the hedges will not change the economic dispatch of NIPSCO’s generation facilities or NIPSCO’s wholesale electricity sales and purchases. Therefore, NIPSCO continues to propose to pass all hedging gains and seek recovery of prudently incurred hedging losses through its fuel adjustment clause (FAC) filings.

An exhibit in the testimony has an analysis that shows an example of what additional power supply costs could be incurred if market prices move up by 20% from where market pricing was as of close of business on April 23. In this example, there could be an additional $20,670,158 of power supply costs (inclusive of CCGT generation and MISO power purchases) if market prices rose by 20% for each month of the planned period. The plan period covers July 2012 to June 2014. The analysis also includes the effect the 2012 hedging plan could have on these additional power supply costs. If these hedges were in place and the market was stressed upward by 20% for each month in the plan period, the additional power supply costs would be roughly 50% ($10,365,000) of what they would be without the hedge plan in place, Williamson pointed out.

“However, if prices were to move downward by 20%, power supply costs could have been reduced by $20,670,158 through the plan period if no hedge plan had been implemented,” he added. “With the hedge plan in place, power supply costs would have been reduced by only 50% ($10,365,000) of what they would have been without the hedge plan in place. The analysis demonstrates how a hedge plan can reduce volatility in power supply costs. While possible savings may be forgone when prices fall, the hedge plan reduces additional costs that may have been incurred when prices rise.”

NIPSCO is also proposing to file its next revised electric hedging plan by March 31 of each year instead of May 31.

NIPSCO is a unit of NiSource Inc. (NYSE: NI).

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.