Progress Energy 2010 Annual Report Download - page 56

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MARKET RISK DISCLOSURES
sensitivity analyses to estimate our exposure to the market
risk of the CVOs. The sensitivity analyses performed on
the CVOs uses quoted prices obtained from brokers or
quote services to measure the potential loss in earnings
from a hypothetical 10 percent adverse change in market
prices over the next 12 months. A hypothetical 10 percent
increase in the December 31, 2010 market price would
result in a $2 million increase in the fair value of the CVOs
and a corresponding increase in the CVO liability.
Commodity Price Risk
We are exposed to the effects of market fluctuations
in the price of natural gas, coal, fuel oil, electricity and
other energy-related products marketed and purchased
as a result of our ownership of energy-related assets.
Our exposure to these fluctuations is significantly limited
by the cost-based regulation of the Utilities. Each state
commission allows electric utilities to recover certain of
these costs through various cost-recovery clauses to the
extent the respective commission determines that such
costs are prudent. Therefore, while there may be a delay
in the timing between when these costs are incurred and
when these costs are recovered from the ratepayers,
changes from year to year have no material impact on
operating results. In addition, most of our long-term
power sales contracts shift substantially all fuel price
risk to the purchaser.
Most of our physical commodity contracts are not
derivatives or qualify as normal purchases or sales.
Therefore, such contracts are not recorded at fair
value. At December 31, 2010, substantially all derivative
commodity instrument positions were subject to retail
regulatory treatment.
See Note 17 for additional information with regard to our
commodity contracts and use of economic and cash flow
derivative financial instruments.