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Energy Risk Management and Prudence Review

We are an industry leader in energy risk management and the prudence of natural gas and power procurement, including the use of risk management tools. Our experts have in-depth knowledge of commodity market dynamics and modeling techniques for electricity and natural gas in the U.S. and abroad. We have undertaken risk management engagements for electric and gas utilities worldwide as well as trade and industry associations, such as the Edison Electric Institute (EEI) and the Electric Power Research Institute (EPRI).

In connection with prudence reviews, we have provided expert testimony for electric and natural gas utilities regarding the typical and best practices for fuel and power supply procurement strategies, as well as methods for measuring the risk reduction impacts and prudence of the selected versus alternative hedging strategies. These studies typically include consideration of the merits of alternative hedging horizons, use of different risk metrics, and advantages of joint versus separate hedging of natural gas and power. We have also worked with stakeholders to determine appropriate procurement and performance evaluation processes going forward, including leading workshops for multiple stakeholders to understand and debate the risk management tradeoffs between possible procurement strategies.


Below is a list of representative engagements for our Energy Risk Management and Prudence Review practice.

Prudence of hedging
On several occasions, in response to prudence challenges of utilities natural gas procurement costs, a Brattle principal has provided testimony regarding the appropriate horizon of the hedges, the hedging instruments relied upon, and the interaction of natural gas and power hedging. The testimony explained why after-the-fact outcomes of hedges being “out of the money” is not a useful measure of the benefit or prudence of hedging and why alternative procurement practices proposed by intervenors would not produce reliably better hedging in the future. The testimony was presented in connection with a regulatory proceeding regarding the recovery of natural gas costs.
Risk management workshops for West Virginia PSC
Brattle experts conducted a series of workshop at the Public Service Commission (PSC) of West Virginia for stakeholders in natural gas procurement costs. We developed a series of presentations providing a framework for discussing hedging strategies and aimed at ensuring all stakeholders were aware of the pros and cons of specific approaches to enable reaching a consensus about the trade-off between risk management and ex post regret. A new mode of hedging was agreed upon and has been used without controversy for several hedging seasons.
Suite of models for fuel and power supply risk management
Beginning with work conducted for the Electric Power Research Institute (EPRI), Brattle has developed a suite of software tools for valuation and risk management of electric and gas commodities and physical supply. These tools provide a system for participants in the energy industry to apply risk-neutral valuation methods widely used in financial services to structured and standard wholesale energy contracts; to energy portfolio risk measurement and modifications (including extensive capabilities for simulation of hedging costs and policies); and to valuation and management of physical generation resources with common but complex features such as start costs, non-linear heat rate curves, and embedded retirement options.
Western Energy Crisis of 2000-01
The U.S. Western Energy Crisis of 2000-01, though long passed, has raised persisting questions about the relationship between spot and forward electric prices, which are clearly (but only partially) related. A Brattle expert provided expert testimony on this topic in several recurring federal regulatory proceedings concerning the economic damages caused by the Western markets energy crisis. As part of these analyses, Brattle compared the statistical relationship between spot and forward prices during typical markets to what occurred during the alleged market manipulations in Western markets. The analysis was part of the evidence used to obtain very large and favorable outcomes for damages to the California power procurers.
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