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****PRELIMINARY AND TENTATIVE FINDINGS**** by the FMPA have an impact on the amounts charged to FMPA members. \Ve have disclosed several FMPA activities or practices in this report that may have contributed to higher costs billed to FMPA members. Hedging Activities Given the volatility in fuel prices, hedging using derivatives, such as commodities futures contracts, is a common industry practice. The usage of interest rate swaps to hedge interest rate volatility on variable rate debt is also a common industry practice. However, as indicated in finding Nos. 1 through 3, the FMPA's risk tolerance for usage of derivative hedging instruments was higher than the industry norm. Finding No. 1: Fuel Hedging Governmental Accounting Standards Board (GASB) Statement No. 53, Acenrmting and Financial Reporting for Derivative Instruments, addresses the goal of effective hedging, saying, "effectiveness is determined by considering whether the changes in cash flows or fair values of the potential hedging derivative instrument substantially offset the changes in cash flows or fair values of the hedgeable item." The goal of effective hedging, therefore, should be to offset changes in the cost of fuel, not to reduce fuel costs. The simplest effective fuel price hedge vehicle would be to have a payout that increases dollar -for -dollar with the increase in spot fuel prices (i.e., fuel prices purchased at market price rather than a contracted futures price), thereby offsetting variability in a utility's fuel costs. Forwards, futures, and swaps are examples of hedging vehicles with characteristics similar to the simplest effective fuel hedge in that their payout approximately increases dollar -for -dollar with the increase in spot gas prices. The FMPA has implemented its Natural Gas Fuel Oil Risk Management Po14 to authorize hedging of fuel prices. Section 3.2 of the FMPA policy states, "FMPA shall implement the FST (FMPA Short-term) Program to mitigate the impact of upward trending natural gas price movements while concurrently allowing participation, to the extent possible, in downward price movements." This statement is inconsistent with the simplest effective fuel hedge in that it contemplates offsetting upward fuel price movement while capturing the cost savings of downward price movement. The FMPA's policy allows for exchange -based futures, over-the-counter transactions, such as forwards, swaps, and options; forward physical purchases; fixed price physical natural gas purchases of longer than one month; natural gas storage; and fuel oil storage. Given this hedging flexibility and variety of hedging instruments allowed, the FMPA provided for training of applicable staff regarding various hedging practices and mechanisms. From September 2008 through April 2013, the FMPA engaged in complex trading practices utilizing matched combinations of options positions (i.e. spreads) and futures positions that were not consistent with a simple fuel hedge and were inconsistent with industry practices utilized by eight comparable JAAs1 that employ gas fuel hedging derivatives. Further, FMPA source documents for derivative trades from July 2008 to June 2013 did not demonstrate that the FMPA's trading program was calculated to offset changes in the spot price of fuel as would a simple effective fuel hedge. As shown in Table 7, the FMPA incurred net total losses of $247.6 million related to fuel hedging activities over the past 12 fiscal years. Comparability to the FMPA was based on reported peak ;\I\V load, wholesale electric revenues, the number of member municipalities, total number of retail customers served, and the generation fuel types employed. 8 10