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Ouch! Energy Buyers Being Bitten By Hedge Hogs

Ouch!  Energy Buyers Being Bitten By Hedge Hogs
Energy consumers getting bit when hedging natural gas or electricity prices.

Natural Gas and Electricity Brokers Marking Up Energy Price Hedges

For purposes of this blog, the “hedge hog” is an energy broker that secretly embeds hidden upcharges into energy consumer supply-related commodity prices. This is the next part of series of blog posts designed to educate energy consumers about the multiple tactics used by energy brokers to embed hidden upcharges into energy prices.
 

 
Here’s how it works, using natural gas as the example fuel type.
 
The consumer is working an energy broker. A 36-month natural gas agreement has been implemented with a supplier, and the deal structure is variable, by month. The variable component of the total price is the natural gas commodity price, as referenced by the New York Mercantile Exchange (NYMEX). The commodity price is finalized when the futures contract for the delivery month expires and rolls off the NYMEX trading board. The natural gas agreement allows the energy consumer to switch from a variable-priced structure to fixed-price, by “hedging” the natural gas commodity price, at any point during the term of the agreement, with the NYMEX natural gas commodity price as the benchmark for setting the fixed price. The contract volume is 10,000 million British thermal units (MMBtu) per month.
 

Energy Brokers Markup Natural Gas Futures Prices – An Example

At month 4 of the 36 month contract term, NYMEX natural gas prices drop, and the energy consumer wants to fix the price for the remaining term. The energy consumer contacts the energy broker, requesting that the energy broker interface with the energy supplier to hedge the commodity prices.
 
Now, the hedge hog gets set to strike. The energy broker asks the energy supplier what the commodity lock-in price would be, and the energy supplier indicates its $3.00/MMBtu. The energy broker calls the energy consumer and tells them that the lock-in price is $3.25/MMBtu, or $0.25/MMBtu higher than the value quoted by the energy supplier. Unaware of the $0.25/MMBtu disparity, the energy consumer agrees to the lock-in value of $3.25/MMBtu.
 
The hedge hog strikes. The hedge hog calls back the energy supplier and tells them that the energy consumer has accepted a lock-in price of $3.25/MMBtu, and instructs the energy supplier to hedge the commodity prices. The energy supplier locks in the price at $3.00/MMBtu. What about the $0.25/MMBtu disparity? Well, according to the hedge hog, that $0.25/MMBtu value is theirs. They hog it. The hedge hog instructs the energy supplier send them a monthly check for $2,500 (the contract volume of 10,000 MMBtu/month x the $0.25/MMBtu hidden upcharge). The total amount of the hidden upcharges equals $77,500 ($2,500/month x the final 31 months of the energy supply agreement).
 
Since the hidden upcharge is embedded in the energy supply price, the energy consumer’s energy spend is now $2,500/month higher (than it should have been otherwise), thanks to the hedge hog. The hedge hog wins, and the energy consumer loses. Worse, the energy consumer has no idea they have been bitten by a hedge hog. The bite is invisible. They don’t see the bleeding. As a side, these same tactics can be applied to electricity commodity price hedging, and with even greater cost impact.
 
Question: Have your energy commodity prices been invisibly manipulated by an energy broker to embed hidden upcharges?

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