Domestic Oil And Gas Production

On December 3, 2015, the Florida Public Service Commission (PSC) voted to approve the continuation of the state’s investor-owned utilities’ (IOUs) natural gas financial hedging activities. The decision is a setback for consumer groups, which requested that hedging be abandoned in view of prolonged periods of losses. Florida’s natural gas hedging programs have cost ratepayers more than $6 billion since 2002, with projected losses of $789 million in 2015 alone.

Hedging allows utilities to manage the risk of volatility in natural gas prices by locking in prices ahead of time. It serves to ensure price stability and prevent the impacts of high price spikes for customers. While physical hedging involves long-term fixed price contracts with suppliers in order to fix the fuel price over a period, financial hedging involves swap contracts and options to fix the price at the time the hedge instrument is executed for delivery at a future date.

While utilities support hedging strategy as a prudent risk management practice, consumer groups argue that current practices which only aim to mitigate fuel price volatility impose an unreasonable burden for customers who bear the entire cost of hedging. Consumer groups say that Florida IOUs should reconsider their hedging programs in light of declining volatility, lower projected prices, and increased production and reserve levels.

Originally published by EnerKnol.

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