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Staff for Florida utility regulators say hedging works despite $6 billion loss

Published Nov. 28, 2015

A group representing Florida residential electric customers opposes it. So does one that represents retail businesses. And the organization that is the voice of industrial and commercial firms doesn't like the policy either.

But the state's investor-owned utilities think hedging the price of natural gas is beneficial even if it has cost Floridians $6 billion since 2002.

Staff for the Florida Public Service Commission is siding with utilities by recommending commissioners meeting Dec. 3 continue the practice allowing utilities to hedge much of the natural gas they buy to fuel power plants. This comes even as utilities estimate hedging losses in 2015 alone will be $789 million.

The Nov. 20 recommendation by PSC staff probably ensures commissioners will reject a call to end the controversial practice, say officials at the Office of Public Counsel. OPC, which represents consumer interests before the PSC, had asked the PSC to discontinue hedging.

In a hedge, a utility agrees to buy fuel in the future at a fixed price. A decision to hedge looks great if fuel prices then climb beyond that fixed price, resulting in savings. But when prices fall, hedging losses can mount.

And that is what has been happening with natural gas prices in recent years.

The staff recommendation said hedging is in consumers' "best interests" because it protects them from price volatility, or wide swings in the price of fuel utilities purchase. Utilities pass the cost of fuel to consumers in their monthly electric bill.

"Staff believes, while natural gas prices have trended down, price volatility is uncertain and cannot be reliably forecasted," the staff report said. "What is known is that, without hedging, customers have very significant exposure to natural gas price volatility."

Hedging, staff and utilities argue, was never intended as a "bet" to outguess the market. The PSC has previously argued that hedging profits and losses would tend to even out over the long haul. But despite gains in the early years of the natural gas hedging program, recent history shows enormous losses.

Duke Energy Florida has lost $1.48 billion from 2002 to 2015. Tampa Electric: $421 million. Florida Power & Light: $4 billion. Gulf Power: $171 million.

"I was certainly disappointed in the staff recommendation because it basically regurgitated the utility argument," said Public Counsel J.R. Kelly. "And they just absolutely disregarded the customers."

Commissioners do not comment on issues pending before them.

"Staff believes … savings and costs — hedging gains and losses — should not be a chief consideration in deciding whether to continue fuel price hedging," the staff report said. "When gas prices are falling, losses will occur. Conversely, when gas prices are rising, gains will occur. The main objective of … hedging programs is to reduce the customer's exposure to fuel price volatility, not to reduce fuel costs."

Sarah Gatewood, a spokeswoman for FPL, the state's largest electric utility, said in an interview, "What hedging does is protect customers from future price hikes … It has done what it set out to do."

Besides OPC, hedging also is opposed by the Florida Retail Federation and the Florida Industrial Power Users Group (FIPUG). Among utilities, only Duke has no official position on whether hedging should continue, calling it a policy decision for the PSC. The utility, however, says it believes hedging is a prudent way to manage price volatility.

John Butler, representing FPL, told commissioners at a Nov. 2 hearing that hedging resulted in the utility having only to make one mid-year correction in utility rates in the last 13 years to compensate for big swings in the price of fuel.

"Hedging has and will continue to serve customers well by increasing the stability of their bills, which provides them with greater … certainty in budgeting and planning," Butler said.

Jon Moyle, representing FIPUG, told commissioners his clients would rather "pay at the pump."

"I think you'll hear from the witnesses who will say hedging is for the customers, we're doing it for the customers' benefit, but you will not hear any customer witness take the stand and say, "Yeah, this is great, let's continue this.' Because they won't," Moyle said. "The customers are unified in their position, which is it should be discontinued."

At the hearing, Moyle asked an FPL witness, "Have you ever heard of the phrase, 'Stop the bleeding?' "

"I have heard of that phrase," said Gerard Yupp, FPL's director of wholesale operations.

"What does that mean to you?"

"When something is going wrong, to put an end to it," Yupp said.

"Okay," Moyle said. "And do you understand that consumers are … asking you and the commission to stop the bleeding?"

"I understand that there are concerns from customers," Yupp replied. "But we are on different ground on this. We believe that hedging is beneficial."

Contact William R. Levesque at Follow @Times_Levesque.