From the April 2008 issue of Treasury & Risk magazine

Avoiding Cost Shock

Energy and commodity prices have been increasing for many months, wreaking havoc on corporate budgets for fuel, raw materials, heat and power. Companies can hedge exposures with derivatives, but not every company has the expertise on staff to stay on top of fast-moving markets. When it comes to electricity, most settle to negotiate the best price available on the day they sign an annual contract.

Constellation NewEnergy says it can offer a better, less risky strategy to deal with electricity costs at least. With Constellation's i2i program--standing for information to implementation--finance departments of large-scale energy users, such as hotels or manufacturers, are offered

a way to develop a long-term energy purchasing strategy that takes into account a company's appetite for risk and long-term budgeting goals. "Electricity is an input that can be hedged and managed like other inputs," says Bruce McLeish, senior vice president of products and pricing for Constellation NewEnergy.

"In a deregulated market, the price of electricity will be moving up and down just like natural gas or oil prices," McLeish explains. "But there isn't the same kind of price transparency for electricity prices as with gas and oil. With i2i, we work with customers to develop a three- to five-year energy procurement program taking into account the best timing for negotiating prices and aligning the client's risk tolerance with our hedge strategies."

According to McLeish, Constellation's patent-pending program takes advantage of price volatility. In some states, like New Jersey and Illinois, electricity prices from utilities can vary on an hourly basis. McLeish expects more states to follow this lead, which will put more pressure on corporate consumers to get better in touch with the market. "Spot prices tend to be lower but there is a huge risk," he explains. "There is no public place to go like the exchanges for pricing. You can go to power pools to get hourly prices, but they don't show the price of future power. Suppliers like us are trying to fill the void."

Constellation has plans to expand the i2i offering to other energy-related commodities.


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