Gas Reserves

  • Florida is heavily reliant on natural gas for the generation of electricity (2ndlargest consumer in US). Natural gas fuels two-thirds of Florida's electricity generation.
  • The natural gas market can behighly volatile and in order to protect against such volatility most large consumers[REB1]engage in some form of financial hedging, which provides certainty of price for some minimal period of time (typically one year forward at most). Producers have historically been unwilling to sell gas under long term contracts when prices are low, believing instead that the market will “recover” and they will then profit. Moreover, the credit requirements for guaranteeing large volumes of physical purchases make long-term financial hedges impossible to finance, even for large companies with strong balance sheets.[REB2]

  • Hedgingprotects against market volatility,which is driven by conditions that can’t be controlled (weather events, unexpected demand, etc.) and therefore helps stabilize customer bills.
  • Recently, FPL sought an innovative approach to physical hedging - producing and deliveringa relatively small percentage of natural gas for its own generation of electricity, rather than buying 100% from the short-term or “cash” [F3]market.[REB4]
  • Physically producing and delivering natural gas to utility powerplants,rather than buying gas at market prices locks in gas prices at production costs and removes the “middle man”. This approach also reduces the amount of financial hedging or derivatives that must be purchased[REB5] and eliminates the related fees and posting of credit that institutions require for this type of financial instrument.
  • Acquiring natural gas at production costs requires a utility to invest capital and incur some operational costs during the life of the well. Nevertheless, with proper due diligence and experience,utilities can and have[F6]secured physical production of gas that is more economically beneficial for customers than purchasing the same amount of gas in the market.
  • Removing the “middle man” also removes a layer of costs and profits from the equation.
  • In June of 2015 [F7]thePSC approved a program allowing the acquisition and use of gas reserves—with a host of protections for customers. Like other hedging costs, the PSC held that the costs of physical gas reserves could be recovered through the fuel clause.
  • Last year the Florida Supreme Court ruled that the PSC did not have the “express legislative authority” to allow cost-recovery ofa capital investment for gas reserves.
  • The proposed legislation is intended to clarify the jurisdiction of the PSC by providing the express authority for the PSC to approve cost-recovery of prudent investments and expenses in gas reserves, while protecting customers from vast price fluctuations in the market and in the long term at a lower rate.
  • It provides substantial protections for customers by including certain conditions before the PSC could allow for cost-recovery of such investments:
  • The electric utility must have at least 65% natural gas generation.
  • Each project must demonstratea projection of savings to the customer over the life of the investment to the satisfaction of the Public Service Commission.
  • Projects are capped at 15% of a utility’s daily burn.
  • And--At least 50% of the wells in each gas reserve investment must be proven wells as classified by the Securities and Exchange Commission.
  • The proposed legislation will allow customers to reap the economic and price stability benefit of a robust gas production market – utilities will be able to temper their enormous volume of gas purchases with cost effective, cost of service based gas reserve transactions which will reduce price risks for customers, provide a hedge against market prices and lower customer bills.

[REB1]Is this at odds with FIPUG wanting us to cease hedging?

[REB2]This structure is a bit awkward. You move from consumers, to producers, back to consumers.

[F3]I’d go with this as opposed to real-time.

[REB4]The insertion of “real time” makes this no longer true, right? In the context of the time period where we proposed reserves we were hedging 60%

[REB5]“Must” is a bit strong given our settlement agreement. How about “that would otherwise be purchased”

[F6]We were the first IOU I’m aware to do this. There have been a few muni groups to procure reserves and production, but I wouldn’t oversell this.

[F7]To be clear, the Woodford project was approved in December 2014. The guidelines were approved in June 2015.