Hedging Pitfalls
A timely article related to my recent blog on hedging came out two days ago in regards to Ft. Lauderdale evaluating hedging their fuel exposure. There are some positive and alarming statements from the article. Clearly the city can better plan and manage their finances with a steady price of energy. Below are the postitive statements:
City Manager Lee Feldman correctly noted “What I’m looking at is budget certainty,” Feldman said. “When we start budgeting, we don’t want to artificially inflate our budget to make sure we have enough money in our fuel budget to protect against price increases.” Mayor Jack Seiler makes a correct statement about hedging “We’re not in the business of playing the market,” Seiler said. “The problem we have is you have such a fluctuation in gas prices.”
So far everything above is reasonable and perfect for a hedging program. The alarming parts are below:
“Palm Bay accumulated almost $600,000 in savings during the three years the program was in place, said John Cady, the city’s fleet services division manager.”
The word of savings is not correct in the context of the hedge program. It is true the hedge saved you, but I think the important stress needs to be budget and planning certainty. Because it could have been easily $600,000 in extra cost.
Another concerning statement “”That’s why you want to have somebody on your team, basically an adviser in the fuel market, telling you now’s the time to place your hedge and now’s the time not to,” Feldman said.”
Once again this leads you off the track of the prime reason, which is budget certainty and planning. If you believe someone can advise you of better timing – which I don’t doubt – then you now want to have your cake and eat it to. You want to speculate and make sure your budget certainty also makes you good money. The best method for a pure hedge program is not timing the markets via the advice of a person, but to develop a systematic method of building the hedge. I do believe in good trading, but I don’t think you want to be an active player in the trading markets as a city, when you prime goal is budget certainty for better planning. A trader’s goal is to make money. The risk reward profiles are much different. I would advise someone in the energy business of that route, but not an entity, not staffed or experienced in the energy world.
A systematic method allows all stakeholders to remove any concerns of manipulation and/or risk taking. As I pointed out in the previous blog, I have many years in the trading environment along with the corporate planning environment. My group at AEP was instrumental in designing the first approved hedging program by the public utility commission for our supply chains consumption of on-road diesel and gasoline. At All Energy Consulting we understand the energy markets and can effectively navigate you in deciding and designing a hedging program for the various energy commodities.
Your Energy Consultant,
614-356-0484
