Natural Gas Hedge Program
Kansas Gas Service designed the Gas Hedge Program to help protect customers from extreme price increases or spikes in the natural gas market. Every year for the past several years, the Kansas Corporation Commission approved the Gas Hedge Program and its success has ranged from being savings neutral to saving customers millions of dollars. Although the level of success may vary, indicators suggest the program has responded favorably to changing conditions in the natural gas market.
How the program works
In early spring, Kansas Gas Service develops its Gas Hedge Program for the coming winter. Hedging instruments are obtained during the summer to avoid exposing all the costs in the market at a single point in time.
Beginning in April and continuing through October, Kansas Gas Service customers pay a natural gas hedge charge to recover natural gas hedging costs to protect next winter's natural gas prices. Natural gas billing statements will display "Gas Hedge" as a separate line item. Hedge "settlements," which return any hedge benefits during the months of November through March, will be included in the cost of gas factor (and not separately displayed).
A "hedge" protects against adverse movement in market prices. Generally, natural gas companies use hedging instruments to dampen fluctuations or spikes in natural gas prices. This protection can be obtained from contracts traded on the New York Mercantile Exchange (NYMEX) or over-the-counter derivatives of those contracts. An over-the-counter derivative usually refers to a contract agreed to outside of trading on the exchange. Kansas Gas Service uses the following financial instruments:
- Call Option: An over-the-counter instrument that gives a buyer the right, but not the obligation, to purchase a given quantity of a commodity at a specified price, prior to the expiration of the option contracts.
- Put Option: An over-the-counter instrument that obligates a seller to sell, if ordered to do so by the buyer, a given quantity of a commodity at a specified price, prior to the expiration of the option contract.
- Swap: An exchange of payments at a pre-established time, during which one party pays a fixed price and the other party pays a floating price for a given quantity of a commodity at a specified price.
- Strike Price: A specific price at which a trading position will be established or a cash settlement made if the buyer exercises the option.