Recommendation


DATE:	October 2, 2008
TO:	Office of Commission Clerk (Cole)
FROM:	Division of Economic Regulation (Breman, Hinton, Laux, Slemkewicz) Office of the General Counsel (Bennett, Brubaker, Young)
RE:	Docket No. 080009-EI – Nuclear cost recovery clause.
AGENDA:	10/14/08 – Regular Agenda – Posthearing Decision – Participation is Limited to Commissioners and Staff
COMMISSIONERS ASSIGNED:		All Commissioners
PREHEARING OFFICER:		McMurrian
CRITICAL DATES:		None
SPECIAL INSTRUCTIONS:		None
FILE NAME AND LOCATION:		S:\PSC\ECR\WP\080009.RCM.DOC

Case Background

On February 29, 2008, Progress Energy Florida, Inc. (PEF) filed a petition seeking prudence review and recovery of costs associated with increasing the capacity (uprate) of the existing nuclear generating plant Crystal River Unit 3 (CR3 Uprate) pursuant to Rule 25-6.0423, Florida Administrative Code (F.A.C.), and Section 366.93, Florida Statutes (F.S.). PEF obtained an affirmative need determination for the CR3 Uprate by Order No. PSC-07-0119-FOF-EI.[1] On July 18, 2008, PEF amended its petition to include additional cost recovery associated with the newly proposed nuclear power plant, Levy Units 1 & 2. PEF obtained an affirmative need determination for the Levy Units 1 & 2 project by Order No. PSC-08-0518-FOF-EI.[2] Completion of these approved projects will add 2,380 MWs of new nuclear base load generation to PEF’s system.

On March 3, 2008, Florida Power & Light Company (FPL) filed a petition seeking prudence review and recovery of costs for uprate activities at existing nuclear generating plants, Turkey Point Units 3 & 4 and St. Lucie Units 1 & 2, pursuant to Rule 25-6.0423, F.A.C., and Section 366.93, F.S. Collectively, these uprate activities are known as the extended power uprate project (EPU Project). FPL obtained an affirmative need determination for the EPU Project by Order No. PSC-08-0021-FOF-EI.[3] On May 1, 2008, FPL amended its petition to include additional cost recovery associated with the newly proposed nuclear power plant, Turkey Point Units 6 & 7. FPL obtained an affirmative need determination for the Turkey Point Units 6 & 7 project by Order No. PSC-08-0237-FOF-EI.[4] Completion of these projects will add 2,614 MWs of new nuclear base load generation to FPL’s system.

Traditionally, all eligible power plant construction projects have been afforded the same regulatory accounting and ratemaking treatment. That is, once a need for a project has been determined by the Commission, the utility books all expenditures associated with the project into account 107 Construction Work in Progress (CWIP) for that particular project. A monthly allowance-for-funds-used-during-construction (AFUDC) rate is applied to the average balance of this account and the resulting dollar amount is then credited to the account balance. Another accrued carrying cost is a deferred tax adjustment (DTA). A DTA reflects the difference in timing of recognition of certain revenues or expenses for income tax purposes compared with book purposes. This process continues until the completion of the project.

Once construction is completed and the plant is placed in commercial service, the CWIP account balance is transferred to the appropriate plant-in-service account and becomes part of the utility’s rate base. The inclusion of the total project cost in a utility’s rate base is addressed during a subsequent proceeding wherein the Commission determines whether customer base rate charges should be changed in order to provide the opportunity to recover these costs. This is usually done in the context of a comprehensive rate case where all costs and revenues are evaluated in the determination of compensatory rates.

In 2006 the Florida Legislature enacted Section 366.93, F.S., in order to encourage utility investment in nuclear electric generation by creating an alternative cost recovery mechanism. Section 366.93, F.S., authorized the Commission to allow investor-owned electric utilities to recover certain construction costs in a manner that reduces the overall financial risk associated with building a nuclear power plant. In 2007, Section 366.93, F.S., was amended to include integrated gasification combined cycle plants, and in 2008, the statute was amended to include new, expanded, or relocated transmission lines. The statute required the Commission to adopt rules that provide for, among other things, annual reviews and cost recovery for nuclear plant construction through the existing capacity cost recovery clause (CCRC). By Order No. PSC-07-0240-FOF-EI, the Commission adopted Rule 25-6.0423, F.A.C., to implement Section 366.93, F.S.[5]

Pursuant to Rule 25-6.0423(4) and (5), F.A.C., once a utility obtains an affirmative need determination for a power plant covered by Section 366.93, F.S., the affected utility may petition for cost recovery using the alternative mechanism. Three types of prudently incurred costs are described in the rule for such consideration.

• Preconstruction costs are those costs incurred after a site is selected through the date site clearing work is completed. (Rule 25-6.0423(2)(g), F.A.C.)

• Construction costs are costs that are expended to construct the nuclear or integrated gasification combined cycle power plant including, but not limited to, the costs of constructing power plant building and all associated permanent structures, equipment and systems. (Rule 25-6.0423(2)(i), F.A.C.)

• Site selection costs are costs incurred prior to the selection of a site. A site is deemed selected upon the filing for a determination of need. (Rule 25-6.0423(2)(e) and (f), F.A.C.)

Pursuant to Rule 25-0423(5)(a), F.A.C., all prudently incurred preconstruction costs will be recovered directly through the CCRC. Additionally, Rule 25-0423(5)(b), F.A.C., provides for recovery of carrying charges on prudently incurred construction costs through the CCRC. Rule 25-6.0423(4), F.A.C., allows a utility to request an alternative cost recovery mechanism for site selection costs. Rule 25-6.0423(2)(h) F.A.C., defines site selection costs to be similar to preconstruction costs.

By Order No. PSC-08-0295-DS-EI, the Commission granted FPL’s request for a declaratory statement that “advance payments made prior to the completion of site clearing work are properly characterized as preconstruction costs to be recovered pursuant to the mechanism provided in Rule 25-6.0423, F.A.C.”[6]

Rule 25-6.0423(5), F.A.C., sets forth the process by which the Commission is to conduct an annual hearing to determine the recoverable amount that will be included in the CCRC pursuant to Section 366.93, F.S. Docket 080009-EI was opened and established for purposes of addressing the petitions of PEF and FPL.

The Commission granted intervention to the following parties: the Office of Public Counsel (OPC), American Association of Retired Persons (AARP), Florida Industrial Power Users Group (FIPUG), and White Springs Agricultural Chemicals Inc. d/b/a PCS Phosphate – White Springs (PCS Phosphate). Testimony and associated exhibits where filed by FPL, PEF, OPC and Commission staff. Prehearing statements of the parties were filed on August 22, 2008.

The Commission held its first evidentiary hearing for the Nuclear Cost Recovery Clause (NCRC) docket on September 11 and 12, 2008. OPC, AARP, PCS Phosphate, FIPUG, PEF, and FPL presented two sets of stipulations. One set of stipulations recommended deferral of a prudence review related to the new power plants due to the timing of the Commission’s determination of need, which prevented PEF and FPL from filing actual costs for the previous year by March 1, pursuant to Rule 25-6.0423(5)(c), F.A.C. The parties asserted that the shortened timeframe was insufficient to perform a prudence review. Additionally, these stipulations stated that it was reasonable to allow PEF and FPL to begin collecting costs in 2009, pending prudence review, because denial could result in even higher charges to customers in 2010.

The second set of stipulations recommended that utility uprate costs for purposes of the clause be limited to costs that are separate and apart from those which would have been necessary to provide safe and reliable service had there been no uprate project. Pursuant to these stipulations the parties and staff shall collaborate to improve transparency in utility filings related to this matter. The interveners did not challenge the prudence of PEF’s and FPL’s 2007 uprate project costs with respect to the “separate and apart” issue. The Commission approved the parties’ stipulations as a preliminary matter during the September 2008 hearing.

The stipulations are attached to this recommendation. Attachment A consists of all fully stipulated issues, and Attachment B consists of all partially stipulated issues approved by the Commission at the September 2008 hearing. The remaining unresolved issues in this proceeding pertain to implementation policies, the prudence of 2007 actual uprate project costs, the reasonableness of the estimated 2008 and 2009 uprate project costs, and the reasonableness of the 2007 through 2009 costs for the new power plants.

This recommendation first addresses implementation policy matters that arise due to characteristics observed in the utilities’ filings. The company-specific issues in this recommendation are grouped by company and similar subject matter, rather than the sequence used in the prehearing order. Staff believes this structure is consistent with the Commission decision to hear the case for each company separately.

Post-hearing briefs were filed on September 15, 2008, and each party’s post-hearing position is shown in this recommendation where provided. The notation “(Pre-Hearing)” indicates the party’s position in the prehearing order when none were provided in its post-hearing brief. The Commission has jurisdiction over these matters pursuant to Section 366.93, F.S., and other provisions of Chapter 366, F.S.

Discussion of Issues

NCRC Implementation Policy Issues

Issue 1A:

Should Progress Energy Florida, Inc. and Florida Power & Light Company be allowed to recover through the Nuclear Cost Recovery Clause revenue requirements for a phase or portion of a system associated with a power plant, after such phases or portion of the project has been placed into commercial service, or should such phases or portion of the project be recovered through base rates?

Recommendation:

PEF and FPL should be allowed to recover through the NCRC associated revenue requirements for a phase or portion of a system placed into commercial service during a projected recovery period. The revenue requirement should be removed from the NCRC at the end of that period. Any difference in recoverable costs due to timing (projected versus actual placement in service) should be reconciled through the true-up provision. (Laux, Bennett, Breman)

Position of the Parties

FPL:

Yes. Rule 25-6.0423(7) specifically provide for the appropriate method to recover revenue requirements “as operation units or systems associated with the nuclear power plant and the nuclear power plant itself are placed in commercial service,” allowing for clause recovery until the time that a unit or system enters commercial service.

PEF:

PEF agrees with Staff's position, as set forth in its Prehearing Statement. Applying Staff's position to the MUR phase of PEF's CR3 Uprate project would remove $1,233,443 from PEF's request for 2009 projected costs. This results in PEF requesting a total of $15,224,693 for its 2009 projected costs for the CR3 Uprate project, and a total of $418,311,136 to be included in establishing PEF's 2009 Capacity Cost Recovery Clause factor. Pursuant to Section 366.93(4), F.S. and Rule 25-6.0423, F.A.C., PEF shall file a petition for Commission approval of a base rate increase for the remaining portion of the MUR.

AARP:

Same as OPC.

FIPUG:

(Pre-Hearing) The plants should be moved to base rates at the earliest practicable date.

PCS Phosphate:

Supports the position of OPC.

OPC:

Once the phase or portion has been placed in commercial service, the utility should recover the costs through base rates.

Staff Analysis:

This issue addresses an implementation policy matter concerning whether revenue requirements associated with a phase or portion of a covered project can be recovered through the NCRC after it has been placed into commercial service, and if so, for how long.

Section 366.93(4), F.S., states:

When the nuclear or integrated gasification combined cycle power plant is placed in commercial service, the utility shall be allowed to increase its base rate charges by the projected annual revenue requirements of the nuclear or integrated gasification combined cycle power plant based on the jurisdictional annual revenue requirements of the plant for the first 12 months of operation. The rate of return on capital investments shall be calculated using the utility's rate of return last approved by the commission prior to the commercial in-service date of the nuclear or integrated gasification combined cycle power plant.

Rule 25-6.0423, F.A.C., implementing that provision states:

(7) Commercial Service. As operating units or systems associated with the power plant and the power plant itself are placed in commercial service:

(a) The utility shall file a petition for Commission approval of the base rate increase pursuant to Section 366.93(4), F.S., separate from any cost recovery clause petitions, that includes any and all costs reflected in such increase, whether or not those costs have been previously reviewed by the Commission; provided, however, that any actual costs previously reviewed and determined to be prudent in the Capacity Cost Recovery Clause shall not be subject to disallowance or further prudence review except for fraud, perjury, or intentional withholding of key information.

Each party acknowledges in their position on this issue that once a plant, or portion thereof, is moved into commercial service, it should be moved into base rates. Deciding this issue will provide a vehicle for the movement of items from the NCRC to base rates.

It is appropriate for the Commission to consider this matter at this time because PEF completed a phase of the CR3 Uprate project known as the measurement uncertainty recapture (MUR) in January 2008. (TR 191) In February 2008, PEF began commercial operation of approximately 12 additional megawatts of nuclear generation due to the MUR. (TR 191, 774)

Although this affects only the MUR project in this year’s proceeding, in future years any particular project could have several portions going into commercial service at different times during a single year. The Commission could then be considering multiple base rate petitions in a single year.

PEF witness Cross explains that PEF prefers to recover the applicable revenue requirement for the MUR phase through the NCRC until the remaining phases of the CR3 Uprate project are completed. (TR 774, 775) PEF initially proposed this approach due to the relatively small nature of the dollars associated with this phase of the project and for purposes of administrative efficiency. (TR 783, 784) PEF now agrees that the alternative position staff proposes is reasonable and complies with Section 366.93(4), F.S., and Rule 25-6.0423(7), F.A.C. (EXH 2, Tab 5, Nos. 47, 48 )

OPC, AARP, and PCS Phosphate maintain that no amount of allowed revenue requirements for projects placed into commercial service can be recovered through the clause. FIPUG’s pre-hearing position, while similar, urges clause recovery to cease as early as practical. None of the interveners specifically addressed this issue in their post-hearing briefs.

The regulatory implementation policy is one of timing and therefore how often customers base rates could change. As demonstrated by PEF’s MUR project, the construction phasing approach used by both utilities for uprate projects can result in various dates in which commercial operation begins rather than just one. Multiple in-service dates will become more prevalent as transmission projects associated with the new plant construction are completed. For example, PEF anticipates completion of all transmission facilities by 2015 to allow a year’s worth of testing before the June 2016 in-service date of Levy Unit 1. (TR 90, 101) If utilities are prohibited from collecting the allowed revenue requirements for these projects through the clause, at least for some period, the Commission may be required to address multiple changes in base rates petitions in any one year.

Rule 25-6.0423(7), F.A.C., which implements Section 366.93(4), F.S., in part states “[a]s operating units or systems associated with the power plant and the power plant itself are placed in commercial service: The utility shall file a petition for Commission approval of the base rate increase pursuant to Section 366.93(4), F.S.” Additionally, Rule 25-6.0423(7)(c), F.A.C., states “[a]t such time as the power plant is included in base rates, recovery through the Capacity Cost Recovery Clause will cease, except for the difference between actual and projected construction costs as provided in subparagraph (5)(c)4.”

Based on the forgoing, staff recommends the Commission allow utilities to recover through the NCRC revenue requirements for a phase or portion of a system placed into commercial service during the remainder of the year in which it is placed into service. For example, PEF’s MUR phase was placed in commercial service in January 2008. Staff’s recommendation would allow PEF to recover through the NCRC carrying charges on prudently incurred construction cost for January 2008. For the remainder of 2008, PEF would be allowed to recover through the NCRC the revenue requirement associated with the MUR phase.

Staff believes this approach is consistent with the requirements of Section 366.93, F.S., and incorporates an efficient method on moving projects out of the NCRC and into the utility’s rate base as portions become commercially available. Under this recommended approach, the number of changes customers will see in their base rates during the construction period is minimized, while not affecting the level of allowable revenue requirements utilities are entitled to recover pursuant to Section 366.93, F.S.

At this time, only one project is affected by the Commission’s decision in this issue. That project is PEF’s MUR phase of the CR3 Uprate project. If the Commission agrees with staff’s recommended approach on this matter, then the Commission should approve the amounts shown in staff’s recommendation for Issues 9G, 11G, and 13. The amounts shown in Issues 11G and 13 already reflect a reduction of $1,233,443 for the 2009 MUR revenue requirements. However, if the Commission approves the position taken by OPC, AARP, FIPUG, and PCS Phosphate that no amount of allowed revenue requirements for projects placed into commercial service can be recovered through the clause, staff’s recommended recoverable amounts in Issues 9G and 13 should be reduced by $1,181,822.

Issue 1B:

If recovery of costs for a phase or portion of a system associated with a power plant that is in commercial service continues through the Nuclear Cost Recovery Clause, how should the revenue requirements for that phase or portion be determined?

Recommendation:

If cost recovery is allowed in Issue 1A, then the revenue requirements collected through the NCRC should be determined according to current rate setting standards consistent with Section 366.93(4), F.S., and Rule 25-6.0423(7), F.A.C. This issue is moot if, in Issue 1A, the Commission does not allow recovery of costs for a phase or portion of a system associated with a power plant that is in commercial service to occur through the Nuclear Cost Recovery Clause. (Laux, Bennett, Breman)

Position of the Parties

FPL:

Rule 25-6.0423(7) specifically provides for the appropriate method to recover revenue requirements “as operating units or systems associated with the nuclear power plant and the nuclear power plant itself are placed in commercial service.” allowing for clause recovery until the time that a unit or system enters commercial service. Revenue requirements should be determined consistent with Rule 25-6.0423.

PEF:

The revenue requirements for such phase or portion that is in commercial service but for which recovery will continue through the Nuclear Cost Recovery Clause will and should be calculated consistent with rule 25-6.0423(7)(b), (d), (e).

AARP:

Same as OPC.

FIPUG:

(Pre-Hearing) The administrative complexity of attempting to match revenues with costs militates in favor of moving the plants to base rates. If the carrying costs continue to be collected through a cost recovery clause, 100% of the base revenue and wholesale sales revenue collected from the nuclear plant sales should be allocated to the recovery clause plus all base rate revenue in excess of the mid point of a utility’s last authorized rate of return.

PCS Phosphate:

Supports the position of OPC.

OPC:

The revenue requirements should be determined in a manner analogous to the methodology used in a revenue requirements case.

Staff Analysis:

This issue addresses an implementation policy matter concerning how revenue requirements should be determined for a phase or portion of a project placed into commercial service but continues to be recovered through the NCRC. Section 366.93(4), F.S., and Rule 25-6.0423(7), F.A.C., are intended to apply to completed projects that begin commercial operation. Staff, FPL, and PEF believes the methodology used to determine the revenue requirement for a completed project should be used for in-service phases as well. OPC, AARP, and PCS Phosphate take a position suggesting use of a methodology analogous to a rate case. However, OPC, AARP, and PCS Phosphate did not address this issue in their post-hearing briefs. Staff believes Section 366.93(4), F.S., and Rule 25-6.0423(7), F.A.C., establish a methodology of determining revenue requirements in a manner analogous to a rate case.

PEF provided, in Attachment A of Exhibits 6 and 8, its revenue requirement calculations for the MUR in-service portion of the CR3 Uprate project for the periods 2008 and 2009. (EXH 2, Tab 5, Nos. 47, 48) PEF asserted its revenue requirement calculations are in accordance with Rule 25-6.0423, F.A.C. (TR 783) No testimony addressing an alternative to PEF’s calculations was presented.

FIPUG’s pre-hearing position states that “if carrying costs continue to be collected through a cost recovery clause, 100% of the base revenue and wholesale sales revenue collected from the nuclear plant sales should be allocated to the recovery clause plus all base rate revenue in excess of the mid point of a utility’s last authorized rate of return.” During the hearing, FIPUG questioned witness Cross as to the proper application of AFUDC in PEF’s filing. (TR 151-155) FIPUG did not provide a witness nor present any exhibits at hearing that support or address its prehearing position. FIPUG also did not address this issue in its post hearing brief therefore, pursuant to the prehearing order, FIPUG has waived its position on this issue.

Rule 25-6.0423(7)(b), (d) and (e), F.A.C., which implements 366.93(4), F.S., provide the best guidance on this issue. Rule 25-6.0423(7)(b), F.A.C., states:

The utility shall calculate the increase in base rates resulting from the jurisdictional annual base revenue requirements for the power plant in conjunction with the Capacity Cost Recovery Clause projection filing for the year the power plant is projected to achieve commercial operation. The increase in base rates will be based on the annualized base revenue requirements for the power plant for the first 12 months of operations consistent with the cost projections filed in conjunction with the Capacity Cost recovery Clause projection filing.

Rule 25-6.0423(7)(d), F.A.C., states:

The rate of return on capital investments shall be calculated using the utility’s most recent actual Commission adjusted basis overall weighted average rate of return as reported by the utility in its most recent Earnings Surveillance Report prior to the filing of a petition as provided in paragraph (7)(a). The return on equity cost rate used shall be the midpoint of the last Commission approved range for return on equity or the last Commission approved return on equity cost rate established for use for all other regulatory purposes, as appropriate.

Finally, Rule 25-6.0423(7)(e), F.A.C., states:

The jurisdictional net book value of any existing generating plant that is retired as a result of operation of the power plant shall be recovered through an increase in base rate charge over a period not to exceed 5 years. At the end of the recovery period, base rates shall be reduced by an amount equal to the increase associated with the recovery of the retired generating plant.

Rule 25-6.0423(7)(b), (d), and (e), F.A.C., outlines how revenue requirements are to be determined for setting base rate changes associated with projects that can be included in the clause, and is consistent with that performed in a normal revenue requirement case. Staff recommends that revenue requirements for a phase or portion of a system in commercial service be determined as required by these rules. Based on the record, staff believes the recommended approach is consistent with PEF’s testimony and the positions taken by all parties except FIPUG. FPL did not provide testimony applicable to this issue.

At this time, only one project is affected by the Commission’s decision on this issue. That project is PEF’s MUR phase of the CR3 Uprate. The project was completed and placed into commercial service in January of 2008. Staff believes PEF followed Rule 25-6.0423, F.A.C., in calculating the revenue requirements applicable to the MUR phase. This issue is moot if, in Issue 1A, the Commission does not allow recovery of costs for a phase or portion of a system associated with a power plant that is in commercial service to occur through the NCRC.

Issue 1C:

How should the completion of site clearing work be determined for purposes of distinguishing between preconstruction and construction costs for recovery under the clause?

Recommendation:

In general, site clearing work is complete when the property has been prepared to a condition that can allow the initiation of the first construction activity. Distinguishing between preconstruction and construction costs should be considered on a case-by-case basis. (Laux, Bennett, Breman)

Position of the Parties

FPL:

Site clearing work is complete when the property has been prepared to a condition that can allow the initiation of the first construction activity. Generally, this means the removal of existing vegetation and soils to allow for the initiation of engineered civil work activities such as foundations and buried infrastructure. Ultimately, this is a factually specific determination that should be made individually for each site.

PEF:

In general, site clearing work will be completed when the types of costs defined as preconstruction costs in Rule 25-6.0423(2)(h) have been completed. At this time, PEF expects site clearing for Levy Units 1 and 2 to be complete when the site is in a condition and ready for the pour of the safety related concrete. For most items associated with the plant, PEF would tie completion to when site clearing is completed for the foundation of the plant. However, it may be reasonable to have a separate site clearing date for certain large associated facilities like a cooling tower or transmission projects.

AARP:

Same as OPC.

FIPUG:

(Pre-Hearing) A reasonable time for site clearing should be determined in this proceeding after which no construction costs should be collected through the clause.

PCS Phosphate:

Supports the position of OPC.

OPC:

The determination will be dependent on individual circumstances, and so must be considered on a case-by-case basis. However, OPC believes the determination would be based upon work related to the generating unit, and not related structures (such as transmission).

Staff Analysis:

This issue addresses a policy implementation matter concerning Rule 25-6.0423(2)(g) and (i), F.A.C. More specifically, the question is how the completion of site clearing work is to be determined, for the purpose of applying either preconstruction or construction cost recovery treatment within the clause.

Preconstruction costs are defined in Rule 25-6.0423(2)(g), F.A.C., as “costs that are expended after a site has been selected in preparation for the construction of a nuclear…plant, incurred up to and including the date the utility completes site clearing work.” Construction costs are defined in Rule 25-6.0423(2)(i), F.A.C., as “costs that are expended to construct the nuclear…plant including, but not limited to, the costs of constructing power plant buildings and all associated permanent structures, equipment and systems.”

Within the rule, preconstruction activities are time limited by the threshold of site clearing. However, construction costs are not similarly time limited in the rule. This prompts the question of whether any costs can be treated as construction costs for recovery purposes prior to site clearing being completed. The Commission’s consideration of this issue could affect Issues 7B, 9B, and 11B, addressing construction costs for PEF.

FIPUG, in its prehearing position, asserted that a reasonable time for site clearing should be determined in this proceeding, after which no construction costs should be collected through the clause. In their post-hearing positions, OPC, AARP, and PCS Phosphate agree that the determination of site clearing completion will be dependent on individual circumstances, and so must be considered on a case-by-case basis. However, OPC believes that determination should be based upon work related to the generating unit, and not related structures such as transmission. The interveners did not address this issue in their briefs.

In its post-hearing position, FPL states that site clearing work is complete when the property has been prepared to a condition that can allow the initiation of the first construction activity. Generally, this means the removal of existing vegetation and soils to allow for the initiation of engineered civil work activities such as foundations and buried infrastructure. FPL states that ultimately this is a factually specific determination that should be made individually for each site. Similarly, PEF states that in general, site clearing work will be completed when the types of costs defined as preconstruction costs in Rule 25-6.0423(2)(h) have been completed. In addition, PEF states that for most items associated with the plant, PEF would tie completion to when site clearing is completed for the foundation of the plant. However, it may be reasonable to have a separate site clearing date for certain large associated facilities like a cooling tower or transmission projects.

Staff agrees with the parties that the completion of site clearing for a project is dependent on individual circumstances, and should therefore be considered on a case-by-case basis. In general, site clearing work is complete when the property has been prepared to a condition that can allow the initiation of the first construction activity. This may necessitate more than one site clearing completion date, based upon the types of construction activities involved with a particular project. Staff recommends the Commission find that the completion of site clearing should be determined on a case-by-case basis.

PEF Issues

PEF Project Management

Issue 3A:

Should the Commission find that for the year 2007, PEF’s project management, contracting, and oversight controls were reasonable and prudent for Levy Units 1 & 2 project and the Crystal River 3 Uprate project?

Recommendation:

Staff recommends the Commission find PEF’s 2007 project management, contracting, and oversight controls were reasonable and prudent for the CR3 Uprate project. Consistent with the agreement between OPC and PEF, staff recommends the Commission defer making a determination regarding the prudence of PEF’s Levy 1 & 2 2007 project management, contracting, and oversight controls. (Laux, Breman)

Position of the Parties

PEF:

(1) PEF Position for CR3 Uprate Project.

Yes, pursuant to the stipulation reached between PEF, OPC, AARP, PCS Phosphate and staff, as fully reflected in the Prehearing Order.

(2) PEF Position for Levy Nuclear Project

Yes, pursuant to the stipulation reached between PEF, OPC, AARP, PCS Phosphate and staff, as fully reflected in the Prehearing Order.

AARP:

Same as OPC.

FIPUG:

PCS Phosphate:

Supports the position of OPC.

OPC:

(Pre-Hearing)

(1) CR3 Uprate Project

OPC and PEF stipulate that as it applies to nuclear uprate projects, the NCRC should be limited to those costs that are separate and apart from nuclear costs that would have been necessary to provide safe and reliable service had there been no uprate project. OPC and PEF will work with PSC Staff to develop an NFR form for use in the 2009 hearing cycle that specifies the information that a utility will provide in support of its request, that the uprate costs in its NCRC filing are separate and apart from costs that would have been necessary to provide safe and reliable service without the uprate. For the purposes of the 2008 NCRC hearings, OPC will not challenge the prudence of PEF’s 2006 and 2007 CR3 Uprate costs on the “separate and apart” issue. OPC’s position for the 2006 and 2007 CR3 Uprate costs, however, does not prevent OPC from raising the “separate and apart” issue for any CR3 Uprate costs incurred subsequent to 2007.

(2) Levy Nuclear Project

OPC and PEF agree that the following categories of costs: O&M, return on accumulated deferred tax asset (liability), site selection, pre-construction, construction, and calculation of the carrying costs in PEF’s NFRs, may be included in the calculation of the nuclear cost recovery amount to be recovered through the 2009 capacity cost recovery factor subject to the deferral of any finding as to the prudence of those costs until the 2009 nuclear cost recovery cycle, notwithstanding the language of subsection 25-6.0423(5)(c)3 of the Rule that such costs “shall not be subject to disallowance or further prudence review.” OPC and PEF further agree that PEF’s site selection costs will be recovered through the nuclear cost recovery clause in the same manner as pre-construction costs are recovered in Rule 25-6.0423(5)(a).

Staff Analysis:

This issue addresses the reasonableness and prudence of 2007 project management, contracting, and oversight controls incorporated by PEF as part of its Levy and CR3 projects. OPC, PEF, AARP and PCS Phosphate reached an agreement on the procedural posture of this case. FIPUG did not join in the agreement but took no post-hearing position on any of the issues identified in this hearing. The agreement reached by OPC, PEF, AARP and PCS Phosphate was to have the Commission consider the prudence of the 2007 costs for CR3 only. In considering the prudence of the 2007 costs, the parties stipulated that OPC would not challenge the prudence of PEF’s 2006 and 2007 CR3 Uprate costs on the “separate and apart” issue, Issue 7H, but would instead work with PEF, staff and the parties to develop NFRs reflecting more information showing costs to be “separate and apart.”

The agreement also addressed the 2007 costs for the Levy Units 1 & 2 project. OPC, PEF, AARP and PCS Phosphate agreed that the prudence review of PEF’s 2007 costs associated with the Levy Units 1 & 2 project would occur in the Commission’s 2009 proceeding. The current review would only address the reasonableness of PEF’s Levy project costs. Further, the parties agree that PEF may recover site selection costs in the same manner as preconstruction costs, and the issue of valuing land held for future use will be deferred until the 2009 proceeding. This agreement affects Issues 5B, 7B, 7C, and 7D.

Issues 3A and 3B are affected by the agreement in that the Commission may determine the prudence of PEF regarding CR3 Uprate project management (Issue 3A) and accounting management (Issue 3B). Finally, the stipulation affects Issues 7E, and 7F because OPC agreed not to challenge the prudence of those 2007 CR3 costs regarding the “separate and apart” issue raised in Issue 7H. Staff’s analysis and recommendations on all Issues include the agreements of the parties.

In reaching a recommendation, staff reviewed the record and the parties’ post hearing statements. The parties were requested to provide post hearing position statements and briefs. In its post hearing position statement brief, OPC stated that it participated in several full and partial stipulations but litigated only one issue – whether FPL followed its internal guidelines of using competitive bids. OPC’s brief, and staff’s analysis of this issue, appear on page 49 of this recommendation within Issue 2A. (OPC BR 1) OPC provided positions on all issues not fully stipulated. (OPC BR 2, 3-18)

PCS Phosphate confined its brief to discussion of PEF and asserted that the Commission must scrutinize the nuclear project cost and scheduling information. It urged the Commission to fully assess all material cost and schedule variations and take a hard look going forward as to the feasibility of each project. PCS Phosphate stated it supported the stipulations between OPC and PEF on Issue 1D. In all other aspects, PCS adopted OPC’s positions. (PCS Phosphate BR 1) AARP also adopted the positions of OPC. (AARP BR 1)

FIPUG provided a post hearing brief and statement of positions in which it takes a position that PEF’s proposed Levy plant exceeds the needs of customers. (FIPUG BR 1) FIPUG’s position also stated that the resultant rates are unfair and unreasonably excessive. (FIPUG BR 2) FIPUG argued that to alleviate rate shock the Commission should require better proof from PEF of its projected expenses. FIPUG argues that the Commission should disallow $150 million until better proof of the projections is provided using the new forms and procedures parties stipulated to in Issue 5A. (FIPUG BR 3) FIPUG did not offer post hearing position statements for any of the issues identified in the prehearing order for this proceeding. On those issues for which FIPUG had a prehearing position, but took no post hearing position, FIPUG has waived its position (Order No. PSC-08-0581-PHO-EI, issued September 8, 2008).

In PEF’s post hearing statement of issues and positions, it submits that the record conclusively demonstrates that PEF has met both statutory and rule requirements regarding recovery of costs for its CR3 Uprate and Levy projects. (PEF BR 1) PEF noted in its position that the parties stipulated to a reasonableness review of the costs of its Levy Nuclear Project and prudence review of its CR3 2006 and 2007 actual costs. (PEF BR 8) PEF argued that competent substantial evidence in the record support a Commission finding of prudence for its 2006 and 2007 costs for the CR3 Uprate project. According to PEF, the record also supports a finding of reasonableness for the remainder of CR3 costs, and all of the 2007, 2008 and 2009 Levy Nuclear Project costs. (PEF BR 8-9)

In his direct testimony, PEF witness Roderick describes the company’s project management and cost control policies and procedures. (TR 222 – 229, 275 - 282) He concludes his testimony in this area by asserting that PEF’s project management and cost control policies and procedures are consistent with best practices for capital project management in the industry. (TR 230) Witness Roderick was not cross-examined on this issue during the hearing.

OPC witness Jacobs provided direct testimony outlining his review of PEF’s project management and cost control activities. (TR 312) In his testimony, Witness Jacobs did not offer an opinion concerning the prudence of PEF’s project management, contracting and oversight control. Witness Jacobs was not cross-examined on this issue.

Staff witnesses Vinson and Fisher sponsored testimony that included the results of their management audit report. The focus of this report was an examination of internal control procedures established by PEF to track and manage construction schedules and costs for PEF’s two projects. (TR 348; EXH 19)

In their audit report witnesses Vinson and Fisher state, “We believe that even more extensive and detailed examinations of internal controls and project management controls should be performed to fully substantiate their adequacy and effectiveness.” (TR 349) During cross examination on this issue, witness Vinson further clarified this opinion by stating that PEF’s project management and internal cost controls are currently adequate, but PEF should continue fine tuning the process as the projects evolve. (TR 356) Staff will explore any fine tuning activities as part of its on-going discussions with the parties in this docket.

Based on the information in the record, including the management audits prepared by Mr. Vinson and Mr. Fisher, staff recommends that the Commission find PEF’s 2007 project management, contracting, and oversight controls to be reasonable and prudent for the CR3 Uprate project. In addition, consistent with the approved partial stipulation and agreement between the parties, the Commission should find that the Levy project management is reasonable but defer making a determination on prudence until a future NCRC proceeding.

Issue 3B:

Should the Commission find that for the year 2007, PEF’s accounting and costs oversight controls were reasonable and prudent for the Levy Units 1 & 2 project and the Crystal River 3 Uprate project?

Recommendation:

Staff recommends the Commission find PEF’s 2007 accounting and costs oversight controls were reasonable and prudent for the CR3 Uprate project. Pursuant to the approved partial stipulations, staff recommends the Commission defer making a determination of prudence for PEF’s Levy 1 & 2 2007 accounting and costs oversight controls. A determination on the appropriate method for valuing land held for future use at Levy Units 1 & 2 will be a part of the 2009 NCRC proceeding. (Laux, Breman)

Position of the Parties

PEF:

(1) PEF Position for CR3 Uprate Project.

Yes, pursuant to the stipulation reached between PEF, OPC, AARP, PCS Phosphate and staff, as fully reflected in the Prehearing Order.

(2) PEF Position for Levy Nuclear Project

PARTIAL STIPULATION: Yes, pursuant to the stipulation reached between PEF, OPC, AARP, PCS Phosphate and staff, as fully reflected in the Prehearing Order, and pursuant to the partial stipulation reached between all the parties as to the Lybass parcel, also fully reflected in the Prehearing Order.

AARP:

Same as OPC.

FIPUG:

PCS Phosphate:

Supports the position of OPC.

OPC:

(Pre-Hearing)

(1) CR3 Uprate Project

(2) Levy Nuclear Project

OPC and PEF agree that the following categories of costs: O&M, return on accumulated deferred tax asset (liability), site selection, pre-construction, and construction, in PEF’s NFRs, may be included in the calculation of the nuclear cost recovery amount to be recovered through the 2009 capacity cost recovery factor subject to the deferral of any finding as to the prudence of those costs until the 2009 nuclear cost recovery cycle, notwithstanding the language of subsection 25-6.0423(5)(c)3 of the Rule that such costs “shall not be subject to disallowance or further prudence review.” OPC and PEF further agree that PEF’s site selection costs will be recovered through the nuclear cost recovery clause in the same manner as pre-construction costs are recovered in Rule 25-6.0423(5)(a).

Agrees with staff’s position regarding witness Jeffery Small.

Staff Analysis:

This issue addresses the reasonableness and prudence of 2007 accounting and costs oversight controls incorporated by PEF in the Levy and CR3 projects. Two issues were identified prior to hearing concerning PEF’s accounting and cost control oversight. These include concerns on incremental construction costs for the CR3 Uprate project and the methodology that should be used to value land held for future use at Levy Units 1 & 2.

OPC witness Jacobs raised a general issue in his testimony concerning incremental, or separate and apart, construction type activities that may impact uprate project costs currently under construction by PEF and FPL. (TR 313) His concern as stated is,

As I understand the Nuclear Plant Cost Recovery rule, it is not intended to apply to the normal maintenance or replacement of equipment off existing nuclear units. Therefore, where such items would have been necessary in the absence of an uprate project, I believe that only the incremental costs required for the EPU projects – those over and above what would have been spent anyway – should be recoverable under the rule.

(TR 313)

Witness Jacobs provided an example in his testimony of a cost, which in his opinion, would not be considered incremental. (TR 314) However, a complete review of his testimony did not reveal any instance where he identified that PEF was requesting recovery of non- incremental costs for the CR3 Uprate project. (TR 314) PEF witness Roderick asserts in his rebuttal testimony that only items (costs) associated with the CR3 Uprate project are being requested. (TR 237) He further asserts that PEF implemented procedures and evaluations to exclude costs for regular maintenance from its petition. (TR 236)

Witness Small raised the second concern addressed in this issue. Witness Small’s testimony included his findings from the three audits he performed on PEF’s 2006 and 2007 nuclear costs. (TR 339-340; EXH 16, 17, and 18) Witness Small testified that PEF agreed to correct and true-up the cost impacts identified in his audit findings, except for audit finding number 1. (TR 340) Finding number 1 concerned the method of valuing land held for future use associated with land purchase for the Levy Unit 1 & 2 project.

In acquiring land for Levy Units 1 & 2, PEF made two purchases. These purchases included the Rayonier property and the Lybass property. In its filing, PEF indicated that all of the Rayonier property would be used at the Levy site, but only 314 acres of the 2,159 acres which make-up the Lybass property will be immediately needed for the Levy units. (TR 175 – 181, 292, 361, 119) The remaining 1,845 acres will be classified as land held for future use. Witness Small, in his testimony, questioned the method used by PEF to determine the market value of the land being held for future use (TR 119). In PEF witness Garrett’s rebuttal testimony, he took exception to witness Small’s finding. (TR 366) During the hearing, the Commission accepted a partial stipulation between OPC and PEF in which the parties agree to address this issue in the next recovery cycle. (TR 39)

Based on the information in the record including the financial audits prepared by witness Small, staff recommends the Commission find PEF’s year 2007 accounting and costs oversight controls were reasonable and prudent for the CR3 Uprate project. Consistent with the stipulation and agreement between the parties, staff recommends that the Commission defer making a determination regarding the prudence of 2007 accounting and costs oversight controls associated with PEF’s Levy Units 1 & 2. In addition, the Commission should defer making a determination on the appropriate method for valuing land held for future used associated with land purchases for Levy Units 1 & 2 until the 2009 proceeding.

PEF’s CR3 Uprate Project

Issue 7E:

What amount should the Commission approve as PEF’s final 2007 true-up of prudently incurred construction costs for the Crystal River 3 Uprate project?

Recommendation:

The Commission should approve as prudent an amount of $38,520,916 (gross system) as final 2007 CR3 Uprate project construction costs. The amount net of participant credits is $34,278,183 system ($33,136,826 jurisdictional). (Laux, Breman)

Position of the Parties

PEF:

$38,520,916 gross of joint owner billings.

AARP:

Same as OPC.

FIPUG:

PCS Phosphate:

PCS Phosphate agrees with and adopts the position of the OPC.

OPC:

Subject to the stipulation in Issue 7H, OPC does not recommend a specific adjustment.

Staff Analysis:

This issue addresses PEF’s request for final 2007 true-up of construction cost for the CR3 Uprate project. PEF witness Garrett provided support as to the amounts and method used to determine the requested construction costs. (TR 111 – 113) Witness Roderick provided descriptions of the construction activities that are associated with the costs requested for the 2007 period. (TR 202) No party suggested adjustments to PEF’s requested amount for this period.

Staff reviewed PEF’s calculations and supporting information and recommends that the Commission, consistent with the agreement and stipulation of the parties identified in Issues 3A and 3B, approve as prudent an amount of $38,520,916 (gross system) for 2007 CR3 Uprate project construction costs. The amount, net of $4,242,733 participant credits and other adjustments, is $34,278,183 system ($33,136,826 jurisdictional). (EX 3, 4)

Issue 7F:

What amount should the Commission approve as carrying charges on PEF’s prudently incurred 2007 construction costs for the Crystal River 3 Uprate project?

Recommendation:

The Commission should approve the amount of $925,842 as the carrying charges on prudently incurred 2007 construction costs for the CR3 Uprate project. (Laux, Breman)

Position of the Parties

PEF:

$925,842

AARP:

Same as OPC.

FIPUG:

PCS Phosphate:

PCS Phosphate agrees with and adopts the position of the OPC.

OPC:

Subject to the stipulation in Issue 7H, OPC does not recommend a specific adjustment.

Staff Analysis:

This issue addresses PEF’s request for carrying charges on 2007 construction cost for the CR3 Uprate project. PEF witness Garrett provided support as to the amount and method used in determining the requested carrying charges for the period. (TR 111) No party