CONTENTS Section 1 Introduction 1 1.1 Why Manage Fuel Price Risk? 1 1.2 Types of Energy Price Risk 3 1.3 Classification of Fuel Purchasing Strategies 5 Section 2 The Basics of Commodity Price Risk Management 7 2.1 Goals of Hedging7 2.2 Components of Hedging Strategy 7 2.3 Hedging Instruments 8 Section 3 Hedging with Forward-Price Instruments 10 3.1 Futures Contracts 11 3.2 Over-the-Counter Swap Contracts 18 3.3 Firm, Fixed-Price Supply Contracts 20 Section 4 Hedging with Cap-Price Instruments 23 4.1 Options Contracts 23 4.2 Web-Based Fuel Price Protection Programs 30 Section 5 Summary and Evaluation of Hedging Instruments 35 5.1 List of Hedging Instruments 35 5.2 Objective Criteria 36 5.3 Matrix of Hedging Instruments by Criteria37 5.4 Appropriateness of Hedging Instruments 38 Section 6 Hedging Level, Duration, and Timing 39 6.1 Hedge Level 39 6.2 Hedge Duration 40 6.3 Hedge Timing 42 Section 7 Delivery Price Risk Management 47 7.1 Long-Term, Fixed-Margin Contracting 47 7.2 Competition Strategies 48 7.3 Market Power Strategies 51 7.4 Effectiveness of Delivery Price Risk Management Strategies 52 Section 8 Program Implementation 54 8.1 Evaluate Impact of Fuel Price Volatility on Budget Variance 54 8.2 Educate Staff About Hedging 54 8.3 Obtain Authorization to Hedge 55 8.4 Develop Hedging Policy 56 8.5 Identify Qualified Derivative Brokers or Counterparties 56 8.6 Negotiate Counterparty Agreements 57 8.7 Begin Hedging 58 Glossary 59 Acronyms and Abbreviations 65 Appendix A Case Studies 66