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Florida PSC staff recommend utilities continue gas hedging programs

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Florida PSC staff recommend utilities continue gas hedging programs

The staff of the Florida Public Service Commission recommended March 27 that investor-owned utilities in the Sunshine State be allowed to continue natural gas financial hedging activities, finding them to be in customers' best interest.

The PSC staff memorandum was issued nearly a year after the state's four major IOUs — Duke Energy Corp. subsidiary Duke Energy Florida LLC, NextEra Energy Inc. subsidiary Florida Power & Light Co., Southern Co. subsidiary Gulf Power Co. and TECO Energy Inc. subsidiary Tampa Electric Co. — volunteered to reduce their hedging practices. Key stakeholders including the Florida Office of Public Counsel and Florida Industrial Power Users Group have argued in previous years that the utilities' hedging practices have cost customers billions compared to purchasing natural gas on the spot market, due to low gas prices.

In its memo, the PSC staff agreed with utilities that fuel hedging protects customers from large price increases and minimizes mark-to-market losses that occur when prices settle below projected levels.

This contrasts with the view of Florida's OPC, which advocates on behalf of consumers and believes utility fuel hedging practices should be suspended.

Utilities and the OPC met with the PSC in February to discuss hedging's future. The IOUs were willing to take one of two paths based on what the commission preferred.

If the PSC concluded hedging helps mitigate price spikes and limit exposure, utilities would be content with continued hedging, according to the staff memo. However, if the PSC saw hedges as a mirror to the market, then utilities would pull the plug on the practice.

"There is no free lunch," the memo quoted an FPL representative as saying on the importance of the decision.

PSC staff wrote in the memo that there is a distinction between customers' tolerance for upside cost exposure in rising-price markets and for hedge losses in declining-price markets.

"Cost increases occur in rising cost markets where unfavorable outcomes, if unmitigated, can be severe," the memo reads. "Hedge losses occur in declining price markets, so outcomes are still beneficial, even if less so due to hedging."

PSC staff added, "when executed in an economically efficient manner, staff believes that fuel price hedging activities are in customers' best interest."

The memo also discussed what changes, if any should be made to how utilities hedge. Staffers weighed whether to prioritize market price over option price, or vice versa. The PSC is scheduled to take up the issue at its April 4 meeting. (Florida Docket No. 170057-EI)