Waterloo plays natural gas futures game

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The City of Waterloo participates in a natural gas futures program as a way to protect its residents from unexpected price fluctuations.

One alderman is critical of this practice at a time when U.S. President Donald Trump’s pro-fossil fuel policies are driving the price of natural gas down.

“I’m against it, given the current administration,” Ward III Alderman Stan Darter said.

Waterloo is charged for natural gas in two ways: gas purchased through futures bought or sold and gas purchased at first-of-the-month pricing. 

When a municipality purchases futures, it’s buying a contract that gives it the right to buy natural gas for a specific price on a future date. If the market price is higher than the price specified in this contract, the city profits.

“In theory, we are purchasing gas for our customers at a higher price for those units than we would if we would have purchased everything at first-of-the-month pricing,” Waterloo finance director Shawn Kennedy said.

A spreadsheet provided by the city shows the total amount in the red since February 2015 as part of the city’s participation in the gas futures program with CenterPoint Energy Company as $211,007.90.

Darter, who serves on the city’s five-member Natural Gas Futures Committee, has consistently been the lone dissenting vote on these purchases.

“As long as gas prices are up, you win,” he said. “If prices steer down, you lose.”

The chairman of this committee, Ward I Alderman Steve Notheisen, announced during a January city council meeting that instead of having the entire committee voting on these futures purchases every quarter, Mayor Tom Smith requested the ordinance be followed more strictly so that only the mayor, utility director and gas chairman meet to make them.

Notheisen said he had previously opened up this process to allow the entire committee to be involved.

“The mayor thought that since we always approved the purchase that it was a waste of money to pay the aldermen to be at a meeting that would last 15 minutes just to buy the gas futures,” Notheisen explained. “I did not disagree with him, but I had thought that involving the other committee members was worthy of the time and expense.”

Notheisen remains a vocal proponent of the futures program.

“I don’t know what the price of natural gas will be next December, but I know that if I can buy natural gas futures at a price similar to our current price, I am protecting our customers from extraordinary price fluctuations that can not be predicted,” he said. “Our average price for natural gas in 2019 was lower than the five-year average. However, we are not going to get it right every time, but on average we have been successful.”

Darter said the city could participate in alternative natural gas purchasing programs that would still protect residents from possible peaks and valleys in their bills while not having the city be on the negative side of its investment.

Kennedy said the practice can be an arduous gamble.

“The difficult thing with purchasing futures is in order for us to ‘win’ (purchase futures at a lower price than sold), then the first-of-the-month pricing has to be higher (which is not good),” she explained. “If we ‘lose’ (purchase futures at a higher price than sold), then the first-of-the month pricing is lower (which is good).”

On Jan. 21, the committee authorized CenterPoint to purchase 1,400 futures this April at a sale price of $1.92, followed by 1,400 futures in May at $1.98, 2,100 in June at $2.05, 2,500 in July at $2.125, 2,500 in August at $2.150, 2,500 in September at $2.144, 2,700 in October at $2.18, 3,300 in November at $2.29 and 4,100 in December at $2.49. 

Notheisen stressed to the Republic-Times that buying these futures, or “hedging,” was never intended to strive for the lowest price on natural gas.

“Natural gas prices can swing 20 percent in a month and sometimes 100 percent if weather or other unforeseen circumstances occur,” Notheisen said. 

The amount of money in the red for the city on this program ($211,007.90) over the past five years amounts to about 4 percent of the cost of gas, he said. 

“With the fall of gas prices, in the last five years our customers have saved over 30 percent over the previous five-year period,” Notheisen said. “Could we have saved 34 percent?  Maybe, but we could not see into the future and being proactive with futures was our way of insuring our customers that the prices would be somewhat consistent.” 

Six years ago, the average price of natural gas was about $4 per unit, he said. These days, it ranges anywhere from $1.80 to $2.60. 

In January 2019, however, it was again around $4.

“Have we always paid the lowest price? No, but that is not the same as losing money,” Notheisen said.

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