The Energy Markets Podcast S3E23: Commodities trading expert Matthew Hunter talks about the financial markets for managing – or hedging – energy price risk, and how they and consumers are impacted by extreme events such as California in 2000 and Texas in 2021
Matthew Hunter was a power trader in the Western market in 2000, when California's poorly designed and managed electricity market imploded costing consumers hundreds of millions of dollars. After that, he spent much of his career at the Federal Energy Regulatory Commission and the Commodities Futures Trading Commission. He gives us a deep dive into hedging – futures markets, derivatives and swaps – and how these complex price-risk mechanisms don't necessarily protect consumers in the end.
A leading reason that California's market failed so spectacularly was because state law prohibited the state's Big Three utilities from hedging their price risk. At the height of the resulting energy and financial crisis, California officials rebuffed FERC's recommendations to allow the utilities to hedge their spot-market risk, and instead intervened in the market to purchase long-term power at crisis-inflated costs, saddling the state's consumers with those costs for the last two decades.
Fast-forward to the extreme weather-induced collapse of the Texas market in 2021, and Hunter predicts that, as in California, consumers will be again stuck with the tab. Hedging instruments are generally pegged to a price index for the commodity, and Hunter asserts that, in Texas, unreasonably high natural gas index prices translated to the price indices for electricity, contributing to the dramatic escalation in electricity prices. Hunter objects to consumers being the backstop for financial losses incurred by speculators in the market.
"If you go from a nominally and totally reasonable . . . gas price to an unreasonable gas price that then transfers itself to an unreasonable power price through contract terms of index-to-index, then it seems perfectly reasonable to roll back the index gas price to roll back the index power price to something that is reasonable," Hunter asserts. "I am not saying that it shouldn't be a scarcity value (but) there's no reason for gas even under scarcity conditions to be twelve hundred dollars per MMBtu or a thousand dollars."