685 1 BEFORE THE 2 FLORIDA PUBLIC SERVICE COMMISSION 3 ___________________________ : 4 In the Matter of : : 5 Proposed Amendment of : Rule 25-22.081, F.A.C., : DOCKET NO. 921288-EU 6 Contents of Petition; and : Proposed New Rule : 7 25-22.082, F.A.C., : Selection of Generating : 8 Capacity. : ___________________________ 9 THIRD DAY - AFTERNOON SESSION _____________________________ 10 VOLUME VI _________ 11 Pages 685 through 872 12 13 PROCEEDINGS: HEARING 14 BEFORE: CHAIRMAN J. TERRY DEASON COMMISSIONER SUSAN F. CLARK 15 COMMISSIONER LUIS J. LAUREDO COMMISSIONER JULIA L. JOHNSON 16 DATE: Friday, October 1, 1993 17 TIME: Commenced at 8:30 a.m. 18 Concluded at 4:45 p.m. 19 LOCATION: FPSC Hearing Room 106 Fletcher Building 20 101 East Gaines Street Tallahassee, Florida 32301 21 REPORTED BY: JOY KELLY, CSR, RPR 22 Bureau Chief SYDNEY C. SILVA, CSR, RPR 23 PAMELA A. CANELL Official Commission Reporters 24 -and- 25 LISA GIROD JONES, RPR, CM FLORIDA PUBLIC SERVICE COMMISSION 686 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 FLORIDA PUBLIC SERVICE COMMISSION 687 1 APPEARANCES: 2 3 (As heretofore noted.) 4 5 ADDITIONAL APPEARANCES: 6 MICHAEL PALECKI, FPSC Division of Legal Services, 7 101 East Gaines Street, Tallahassee, Florida 32301, 8 Telephone No. (904) 487-2740, appearing on behalf of 9 the Commission Staff. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 FLORIDA PUBLIC SERVICE COMMISSION 688 1 I N D E X _ _ _ _ _ 2 WITNESSES - VOLUME VI _____________________ 3 Name: Page No. _____ ________ 4 HUGH A. GOWER 5 Direct Examination by Mr. Neiser 691 Cross Examination by Mr. McGlothlin 699 6 KARL H. WIELAND 7 Direct Examination by Mr. Neiser 701 8 Cross Examination by Mr. Watson 712 Cross Examination by Ms. Rule 739 9 MICHAEL B. FOLEY, JR. 10 Direct Examination by Mr. Gaddy 741 11 Cross Examination by Mr. McGlothlin 744 12 ROBERT DOLAN 13 Direct Examination by Mr. Neiser 754 Cross Examination by Ms. Brownless 759 14 Cross Examination by Ms. Rule 770 Redirect Examination by Mr. Neiser 776 15 SAMUEL C. HADAWAY 16 Direct Examination by Mr. Willis 778 17 Cross Examination by Mr. Watson 787 Cross Examination by Mr. Palecki 788 18 JOHN ROWE 19 Direct Examination by Mr. Willis 793 20 Cross Examination by Mr. Watson 799 Cross Examination by Mr. Palecki 814 21 DON MESTAS 22 Direct Examination by Mr. Willis 818 23 Cross Examination by Ms. Brownless 822 Cross Examination by Ms. Rule 838 24 FLORIDA PUBLIC SERVICE COMMISSION 687 1 I N D E X _ _ _ _ _ 2 WITNESSES - VOLUME VI _____________________ 3 Name: Page No. _____ ________ 4 PAUL H. ELWING 5 Direct Examination by Mr. Bryant 844 6 GARY S. BRINKWORTH 7 Direct Examination by Mr. Hoffman 847 8 NORRIE McKENZIE 9 Direct Statement 851 Cross Examination by Mr. Neiser 854 10 Cross Examination by Mr. Cresse 855 11 DEBRA SWIM 12 Direct Statement 857 Cross Examination by Mr. Cresse 863 13 14 15 16 17 18 CERTIFICATE OF REPORTER 872 19 20 21 22 23 24 FLORIDA PUBLIC SERVICE COMMISSION 688 1 P R O C E E D I N G S _ _ _ _ _ _ _ _ _ _ _ 2 (Transcript continues in sequence from Volume 3 V.) 4 CHAIRMAN DEASON: Call the hearing back to 5 order. 6 This may be an appropriate time to try to 7 discuss some plans for the remainder of today. 8 We will work through lunch today so please 9 feel free to order in a lunch and to eat it here in the 10 hearing room or whatever you like. The Commissioners 11 I'm sure will be eating here at the bench. 12 As far as the evening plans are concerned, it's 13 my anticipation that if there is any way reasonably 14 possible that we can conclude the hearing today, that 15 certainly would be desirous. And if it could be done 16 without working terribly late, I will try to pursue that. 17 And when I say terribly late I'm speaking of 6:30, 7:00 18 this evening but not past that time. 19 If it appears that there is no way possible, I 20 see no need for even working that late. If we're going to 21 have to have another day we'll just conclude it at around 22 5:00, which is normal time. I can't predict what that's 23 going to be until we get into the proceeding if concluding 24 by 6:30 or 7:00 is even possible. 25 There's been a question as to whether some FLORIDA PUBLIC SERVICE COMMISSION 689 1 type of closing arguments are going to be allowed. 2 If there's time, that's fine with me, but you 3 know what the time is as well as I do. 4 If anyone has anything to add, that's pretty 5 much where we stand, and if anyone has any comments or 6 suggestions, we'll welcome to hear from you. 7 MR. WILLIS: I just spoken with Mr. Neiser 8 over the break -- with Mr. Hadaway, we would request 9 that, to be able to put him on this afternoon and to 10 take a read about 3:00 of where we are, and to work him 11 in around that time. 12 CHAIRMAN DEASON: Okay. Now, I've also had a 13 request from Ms. Swim and I've indicated to her that I 14 would try to accommodate her, and that is if it appears 15 that we're going to work late tonight and conclude the 16 hearing today, that she'd like some consideration to be 17 taken a little bit earlier. Unless there's strong 18 objections by others, I will try to accommodate her in 19 that request. But that's only if we feel like we're 20 going to work late and conclude today. If it appears 21 there's going to be another day required, she's 22 certainly willing to wait until the next day. 23 MR. NEISER: Mr. Chairman, my only suggestion 24 would be to try to get a straw vote as to how many 25 witnesses are still wanting to get on to the stand at FLORIDA PUBLIC SERVICE COMMISSION 690 1 this point. 2 I think some may have gone home, just maybe 3 checking right now here in the hearing room as to the 4 people who still would like to get on the stand will 5 give us some feel of how good we're doing. 6 CHAIRMAN DEASON: That's a very good 7 suggestion. Could we just have a simple show of hands 8 of all those individuals who wish to come forward at 9 some point during this proceeding and to give 10 testimony. 11 MR. WILLIS: I think Tampa Electric has one 12 that's not in the room. 13 CHAIRMAN DEASON: I count at least eight, and 14 if there are individuals not presently in the room, 15 that would be more. 16 MR. HOFFMAN: Mr. Chairman, Tallahassee may 17 have Mr. Brinkworth provide some brief comments as 18 well. He's not here right now. 19 CHAIRMAN DEASON: So we still have a 20 considerable number of people. Of course, the pace 21 could quicken as the day proceeds. 22 MR. NEISER: You've seen that happen before 23 on a Friday afternoon, haven't you? 24 CHAIRMAN DEASON: I have seen that happen 25 before. We'll go ahead, but my immediate announcement FLORIDA PUBLIC SERVICE COMMISSION 691 1 right now is, so that everyone will be on notice, that 2 we do plan to work through lunch. So whatever 3 arrangements you need to make, please do so. 4 Mr. Neiser? 5 MR. NEISER: Thank you, Mr. Chairman. 6 At this time we are calling Mr. Gower, who is 7 in the witness chair. 8 HUGH A. GOWER 9 appeared before the Commission and testified as follows: 10 DIRECT EXAMINATION 11 BY MR. NEISER: 12 Q Mr. Gower, I'd ask you if you would state 13 your full name, your current status of employment, your 14 address, if you would. 15 A My name is Hugh Gower. I'm self employed. My 16 address is 195 Edgemere Way South, Naples, Florida 33999. 17 Q And by whom have you been previously employed 18 most recently? 19 A Most recently I spent the last 33 years with 20 Arthur Andersen and Company in the practice of public 21 accounting. 22 Q Do you have any corrections to make to your 23 prefiled testimony? 24 A I do not. 25 Q All right. Mr. Gower, would you please FLORIDA PUBLIC SERVICE COMMISSION 692 1 summarize what you have presented to the Commission in 2 written form? 3 A I'd be happy to and I know it will please the 4 Commission to know that my testimony is short and my 5 summary will be even shorter. Although it will present 6 a contrary point of view to some of the views expressed 7 on the previous two days. 8 My testimony covers the financial accounting 9 and reporting requirements relating to purchased power 10 contracts which cover the output of specific generating 11 units or groups of units requiring the utility to 12 purchase a large percentage of the output, if not all. 13 Contracts which are long-term in nature, sometimes 14 covering the entire useful life of the plant, and which 15 impose the requirement on the utility to make fixed 16 capacity payments over a long period of time. For 17 financial accounting purposes, these are either 18 executory contracts or considered to be an outright 19 liability of the utility. 20 The accounting and reporting requirements 21 include disclosure of the nature and terms of the 22 contract, percentage of the plant being purchased, the 23 aggregate remaining fixed payments, the nature and 24 amount of variable payments, and in addition, if those 25 are deemed to be an outright liability of the utility, FLORIDA PUBLIC SERVICE COMMISSION 693 1 the contract is capitalized on the balance sheet of the 2 utility as a contractual right to the plant and a 3 related long-term debt. 4 These are the disclosure and accounting 5 requirements contained in generally accepted accounting 6 principles and the regulations of the Securities and 7 Exchange Commission. And the notion is to make the 8 facts, whatever they are, completely and fully visible 9 to users of financial statements who frequently use 10 those statements to make informed investment decisions. 11 These requirements are not applicable only to purchased 12 power contracts, but to any type of long-term contract 13 or significant financial commitment. 14 The notion is very simple: These contracts 15 which require the utilities to pay fixed amounts over a 16 long period of time have some attributes of 17 liabilities. They are either outright liabilities or 18 they're major commitments. The larger, the major 19 commitment or reliability in relationship to the 20 company's financial resources, the greater the risk. 21 And the risk is not just disallowance. It's the use of 22 the companies financial flexibility, plus the potential 23 risk that whatever those costs are, even if the 24 Commission is willing to allow the Company to charge 25 those costs, the market may not accept, and there are FLORIDA PUBLIC SERVICE COMMISSION 694 1 examples of that. 2 The issue is not whether purchased power has 3 a higher cost or a lower cost than utility ownership of 4 a generating unit, but merely accounting for those 5 cost, whatever they are. And towards that end and 6 towards the interest of good accounting, cost 7 accounting, and good economic analysis, my suggestion 8 is that the Commission require that to be considered. 9 That is, if higher capital costs to the utility are 10 attributable to purchased power contracts, and we've 11 heard testimony that that does take place and I agree 12 with that, Then those should be assigned to the 13 purchased power option in evaluating. Again, that 14 doesn't mean that purchased power would be more 15 expensive than utility ownership, it just means that 16 the cost accounting ought to be good and accurate and 17 economically correct. 18 Q (By Mr. Neiser) Mr. Gower, I believe it was 19 Dr. Roach yesterday on the stand that was commenting 20 about the structure of independent power producers and 21 that frequently they are structured with the use of a 22 partnership arrangement. From the accounting 23 perspective, can you give any insight as to any 24 concerns there? 25 A Yes. Well, the reason why they are FLORIDA PUBLIC SERVICE COMMISSION 695 1 structured as partnerships is to further the financial 2 strategy of the investors. And that financial strategy 3 -- and it's a good one, I'm not being critical of it at 4 all. The financial strategy of an investor in high 5 risk projects, a venture capitalist as an example, 6 their strategy is to at all times reduce the amount of 7 capital they have invested. That is one of the ways in 8 which they increase their return beyond that which 9 might be available to a utility owning a project. 10 The reason why a partnership is used is 11 because through a partnership, the benefits of the tax 12 losses which will occur in the early years of the 13 project pass through to the investors as contrasted to 14 utility ownership, tax deductions occur through 15 accelerated depreciation. If the utility owns the 16 power plant, those are retained in the deferred tax 17 reserves of the utility and reduce its rate base. 18 That's not so with a partnership. Those pass through to 19 the partners, they use those tax benefits to offset their 20 other income, which presumably would be substantial, and 21 that way they reduce their investment. 22 I'm not being critical of that in any way, 23 that's good financial strategy and that is how they are 24 able to craft a contract which may, in some 25 circumstances and does in many circumstances, offer a FLORIDA PUBLIC SERVICE COMMISSION 696 1 purchased power price to a utility which is cheaper 2 than if the utility owns the project itself. 3 The risk is and I'm sure investors in these 4 projects account for it is that, Congress in its 5 infinite wisdom, might again change the tax law, as 6 they did in 1986 and 1993, to retroactively change the 7 ability to use tax deductions. I think that's a 8 horrible thing. It's un-American, it's unfair, and it 9 shouldn't happen. But it has happened and it is a 10 risk, and that's one of the reasons why the suggestion 11 of Florida Power to use a diversified portfolio 12 strategy to mitigate risk is a good idea. 13 Q Mr. Gower, while you were offering your 14 comments, I believe it was Commissioner Clark who was 15 asking Mr. Wright when he was on the stand as to 16 whether there are any financial implications of an 17 option for a utility to purchase the generating unit at 18 the end of the contract. And are there any concerns 19 there, again from the accounting perspective? 20 A Well, it would have an implication, most 21 certainly if the utility had an option to purchase the 22 generating unit at the end of the contract or at some 23 point in the contract, at net book value as 24 Commissioner Clark suggested, that contract would be 25 required to be capitalized on the utility's balance FLORIDA PUBLIC SERVICE COMMISSION 697 1 sheet and shown as an outright liability. It would 2 also show the asset. 3 That's as contrasted to merely having a 4 disclosure in the footnote of how much money the 5 Company owes on the remaining fixed payments of the 6 contract. 7 From my point of view it makes no difference 8 whatsoever what the accounting is, whether it's 9 actually put on the utility's books or merely reported 10 in its footnotes, doesn't affect the economics of the 11 contract the costs are whatever the costs are and it's 12 either a better deal or not as good a deal as utility 13 ownership. There are some examples of purchased power 14 contracts which are, in fact, capitalized on the 15 utility's books, because of factors such as the option 16 to purchase. But it doesn't change the economics, it 17 just changes how it's shown on the company's books. So 18 there's no bias as a result of that against a purchased 19 power contract. 20 Q So there would be no competitive advantage 21 then resulting from this -- and that a purchased power 22 contract could still compete with the utility? 23 A Absolutely. Absolutely. It's whatever the 24 facts are and whatever all the costs are. As Mr. 25 Wright suggested, if the venture capital investors gave FLORIDA PUBLIC SERVICE COMMISSION 698 1 up the right to whatever residuals there were, then 2 their price to the utility would change. And I think 3 that would be right. We've seen that in real estate 4 contracts, lease transactions; a lot of that goes on in 5 the cable TV industry as well. 6 Q Mr. Gower, is it fair to say then the reason 7 Florida Power came to you for your testimony here is 8 that from the perspective and an outside independent 9 financial auditor of the financial statements of 10 Florida Power, if they require the recognition and 11 accounting of costs resulting from purchased power, that 12 in turn the Company ought to acknowledge those costs in 13 the evaluation of its bids for purchased power? 14 A Yes, that's true. And, of course, it's not 15 the outside auditors who require the accounting 16 recognition, it's the rules of generally accepted 17 accounting principles, and currently the SE -- excuse 18 me, the Security and Exchange Commission has a high 19 degree of interest in the treatment of purchased power 20 contracts, and they may impose requirements beyond 21 generally accepted accounting principles. And the 22 financial managers of any company, and utilities as 23 well, have to comply with those in preparing their 24 financial statements and reporting to the public. 25 As I say, the whole object of these required FLORIDA PUBLIC SERVICE COMMISSION 699 1 disclosures is merely to lay out the facts, whatever 2 they are, so that anyone who uses the company's 3 financial statements will understand them. 4 MR. NEISER: He's available for questioning. 5 CHAIRMAN DEASON: Mr. Cresse? 6 MR. CRESSE: Mr. Chairman, I have had the 7 opportunity to learn from Mr. Gower for about 14 years 8 and I hate to pass it up today to learn some more, but 9 in the interest of time, I'm going to do that. But I 10 want you to know I think it's a sacrifice on my part. 11 (Laughter) 12 CHAIRMAN DEASON: We appreciate your sacrifice. 13 CHAIRMAN DEASON: Mr. McGlothlin? 14 CROSS EXAMINATION 15 BY MR. McGLOTHLIN: 16 Q Mr. Gower, only a couple of questions. 17 You've described, I believe, from an 18 accounting standpoint to recognize any costs associated 19 with the purchased power option. Would you agree with 20 those other witnesses who have acknowledged that from the 21 standpoint of comparing purchased power to the build 22 option, it's important to identify, compare all costs of 23 both options for the benefit of the ratepayers? 24 A I certainly do agree with that. 25 Q Now, you've talked some about the particular FLORIDA PUBLIC SERVICE COMMISSION 700 1 capital structure that some independents may avail 2 themselves of. Would you agree that in order to be 3 competitive, either the independent or the utility has 4 to do a lot of things well and capital structure is 5 only one consideration? 6 A Certainly. The project has to be well 7 constructed and operated well to be competitive. 8 MR. McGLOTHLIN: I don't have any further 9 questions. 10 CHAIRMAN DEASON: Staff. Commissioners? 11 Thank you, Mr. Gower. 12 MR. GOWER: Thank you. 13 MR. NEISER: Mr. Gower, you dodged some 14 bullets today. Congratulations. 15 Thank you for being with us. 16 MR. GOWER: Thank you. 17 (Mr. Gower excused.) 18 _ _ _ _ _ 19 MR. NEISER: Next witness is Mr. Wieland. 20 21 22 23 24 25 FLORIDA PUBLIC SERVICE COMMISSION 701 1 KARL H. WIELAND 2 appeared before the Commission and testified as 3 follows: 4 DIRECT EXAMINATION 5 BY MR. NEISER: 6 Q Mr. Wieland, good afternoon. I'd appreciate 7 it if you would state your name and address for the 8 record, and who you are affiliated with. 9 A I'm Karl H. Wieland. My business address is 10 3201 34th Street South, St. Petersburg, Florida 33711 I'm 11 employed by Florida Power as director of business 12 planning. 13 Q Have you prepared some comments for the 14 benefit of the Commission on this rulemaking docket? 15 A Yes, I have. 16 Q Do you have any corrections to make? 17 A No. 18 MR. NEISER: All right. Before we proceed, 19 Commissioner Johnson, can you see the witness from 20 where that sign is? Let's do something about that. 21 Let's try it over here if we can. 22 Q (By Mr. Neiser) Mr. Wieland, would you 23 please summarize your prepared comments? 24 A Certainly. At the risk of maybe beating a 25 horse that's been beaten a lot today, namely, on the FLORIDA PUBLIC SERVICE COMMISSION 702 1 cost of capital issue and the impact on the purchased 2 power, I'd like to contribute a little bit additional 3 to that. 4 We've had a lot of discussions about the impact 5 of purchased power today and the fact that it should be 6 taken into account when they do a build-versus-buy 7 decision. I agree up front that the same considerations 8 need to be taken account into the build decision. 9 What I'd like to do today really, is to give 10 the Commission a little bit of comfort in the fact that 11 there are ways to actually make that calculation. That 12 it's not as difficult and involve as many factors as, 13 for example, the consideration of externalities. And 14 to do that I'd like to just very briefly walk you 15 through the way we would propose to treat those. 16 I'm not -- we're not here today to ask you to 17 accept this methodology or the numbers they are for 18 illustration to give you some comfort that this can 19 actually be done. I'd like to do that for the purchase 20 option and then I'd like to make a couple of comments 21 about how risk of construction and other things are 22 taken into account when you do the build option. 23 The final point I'd like to make is as the 24 other witnesses have stated, we believe that the rule 25 needs to be modified, that rather than just discussing FLORIDA PUBLIC SERVICE COMMISSION 703 1 these impacts, that they actually be -- that there's a 2 requirement to take them into account when the utility 3 comes to you with a build or buy proposal and a selection. 4 With that, let me put up a couple of charts 5 if I could. If I had a pointer I could do my Ross 6 Perot imitation today but -- okay, here we go. 7 Let me begin by saying, Commissioners, that 8 evaluating a decision as to build something or purchase 9 something and buying something, something we've been 10 doing for the last couple of decades, so what I'm 11 showing you is not anything that's been newly invented. 12 I certainly didn't invent it so I don't take credit for 13 that. I may take some credit of saying this ought to 14 be applied. But we routinely do the same analysis I'm 15 going to show you in-house. For example, to make the 16 decision that we just did recently as to whether to buy 17 a computer system and own it, in other words, or 18 whether we ought to go lease it from some third party. 19 We make the same decision for office buildings; some of 20 our buildings in district office are leased, some of 21 them we own. We make the same decisions that some 22 utilities do on cars. Sometimes you lease a fleet, 23 sometimes you own it. So the kind of decision-making 24 process and the kind of analysis is consistent with 25 that, and there's nothing new about it. FLORIDA PUBLIC SERVICE COMMISSION 704 1 Let me begin, the first thing that you do -- 2 and this is sort of the same thing that a company like 3 S&P does, is identify the total liability that you have 4 when you start entering into a contract where you have 5 to make fixed payments, and calculate the present value 6 of that. In Florida Power's case, I think you've been 7 told that we have approximately 1500 megawatts; some of 8 it from utilities, about a third of it -- the other 9 two-thirds from QFs. I make no distinction between 10 those two. 11 What you do is you look, you take a look at 12 all of the payments, the fixed payments, not the energy 13 cost, that you've obligated yourself to and you do a 14 present value calculation. In our case, that's about 15 $3 billion over the next 20 or 30 years. The reason 16 it's so large is because our capacity payments alone 17 are going to be reaching 300 million a year within two 18 years and escalating to as high as $500 million, so we 19 are talking about very large numbers. 20 Now, where of the analysis differs is that in 21 most lease-purchase analysis, that obligation is viewed 22 as 100% debt. When you do a purchase of a power 23 supply, that is generally not true. In fact, it ranges 24 -- and this again is something that is strictly taken 25 from S&P's methodology, it ranges all over the map from FLORIDA PUBLIC SERVICE COMMISSION 705 1 virtually nothing to 100%. These would be some of the 2 sale lease-back transactions that people have engaged 3 in in the years past with nuclear plants. Those S&P 4 would consider virtually debt equivalents. 5 On the extreme other end of the scale, you're 6 going to say, is there ever anything at zero? Yes. 7 Anything that does not have a fixed payment stream? The 8 broker system. We have contracts with other utilities to 9 buy on a broker system or with other arrangements on sort 10 of a daily basis with no commitment, that has absolutely 11 no risk. 12 What we're talking about here today for the 13 most part are performance-based contracts with 14 qualifying facilities that basically say, "It doesn't 15 really matter whether we need the capacity or not as 16 the purchaser, as long as the owner of the facility 17 produces it, it gets paid." It only does not get paid if 18 the facility doesn't perform to certain standards. And 19 those contracts typically will be in the 10% to 50% range. 20 Now, how do you -- I don't want to spend a 21 whole lot of time going up on all of the factors that 22 S&P takes into account when they decide where that 23 falls. But three of them are very important because 24 they have been talked about a lot here today. One of them 25 is preapproval. One of them is a capacity cost recovery FLORIDA PUBLIC SERVICE COMMISSION 706 1 clause, and the other one is a regulatory out clause. 2 What S&P says, very specifically, that those 3 are three things out of many others that you have to 4 have, that you have to have in order to get down to the 5 minimum 10% level. Others include things like 6 dispatchability and a number of other factors. The 7 main point here is that -- because the point has been 8 made by a number of witnesses, if you have a capacity 9 cost recovery, and if you have preapproval, and if you 10 have a reg-out clause, then the risk goes away. 11 That may be their opinion, but it's not S&P's 12 opinion, and it's S&P's opinion is the one that counts 13 because they basically are the referee and the judge. 14 What they're saying, is very specifically, that in 15 order to get down to the minimum risk level, you have 16 to have all of those. What I'm doing here, and quite 17 frankly, I have spent a lot of my time speaking with 18 people like Curtis Moulton and Debbie Goldsmith at S&P, 19 convincing them that we should be right here at the 20 minimum. So we have told them all the great things 21 that we have. We have not gotten a final ruling of it 22 but I'm quite confident that they're going to look at 23 our arrangements as being very favorable, and at the 24 low end of the risk spectrum. But the risk again that 25 they're going to assign is not zero. FLORIDA PUBLIC SERVICE COMMISSION 707 1 Let me then just briefly say well, given that 2 what do you do with that? The methodology that we will 3 propose is very simple. It says that without a 4 purchase here is Florida Power's current debt/equity 5 structure, approximately 1.3 billion of debt and 1.7 6 billion of equity, which is about 43% debt and 57% 7 equity, including nonpreferred stock and things of that 8 nature. Our purchased power equivalent, using the 10% 9 risk factor and it's 10% of that $3 billion is $300 10 million. When you add that debt equivalent to your 11 regular debt, which is exactly what S&P does, And that 12 is strictly by their methodology, you distort the two 13 ratios. All of us now have 48% debt and 52% debt. And 14 all we're saying is that we have to rectify that. Not 15 only am I saying that, but S&P says that. It says, "If 16 you want to retain the same credit quality that you 17 have absent a purchase, you've got to get back to the 18 same debt structure that we would expect you to have 19 for that rating." 20 And to do that, you have to put additional 21 equity into the business. You can also do it by 22 getting higher ROEs, but my proposal is that it would 23 make more sense to put additional equity into your 24 capital structure in order to get back to the same 25 point where we were. In this example, to get back to FLORIDA PUBLIC SERVICE COMMISSION 708 1 43% debt and 57% equity, you need to add 175 million of 2 equity, not 300 because some of this equity is actually 3 used to pay down some debts, some roughly speaking, if 4 you have a 50/50 debt/equity structure then you only 5 have to put in 50 cents of new equity for every dollar 6 of purchased power obligation. 7 Another point I'd like to make here briefly 8 is you say, "Well, how do we know that that $300 9 million is the right number? What I would propose is 10 that we use the number that S&P calculates, not the one 11 I calculate, but the one that S&P calculates and uses 12 it. If you look at their latest ratings, it's a 13 document that's been talked about a little bit, the 14 June credit review, they are beginning to publish that 15 number. It's not in there for all of them yet, but 16 it's specifically for companies like San Diego Gas and 17 Electric and Southern California Edison, this book 18 actually contains what this number is. In other cases 19 they've told you what the recomputed ratios are, but 20 there's no problem obtaining that information. Once 21 S&P has finished with our analysis, which they're in 22 the process of going through, we can call them, you can 23 call them and they can say, "What is FPC's debt 24 equivalent?" And it will be -- you know, it may not be 25 exactly 300 million to begin with because it does change FLORIDA PUBLIC SERVICE COMMISSION 709 1 from year-to-year. But it's not a number that we make up. 2 So it's a number that's readily available and it's done 3 even if you went by an independent third party. 4 To summarize, how does this restructuring of 5 your capital structure affect your cost, and that's 6 really what the bottom line is. That $175 million has 7 a revenue requirement associated with it, 12% return 8 plus whatever income taxes that are associated with 9 that. And that, just in round numbers, is $34 million. 10 There's a benefit to it because you use that 11 money to pay down your debt. If you're using just 8% 12 for illustrative purposes, that will give you a net 13 effect, a net cost of about $20 million a year. 14 Now, when you put that in relationship to 15 capacity payments that are 300 million to 500 million a 16 year, you get a cost or an additional cost that's in 17 the neighborhood of 5% to 10%. 18 And the reason I bring that up is because, 19 you know, we've heard a lot about -- that there is a 20 cost, and at least I wanted to give you some idea as to 21 how big that cost is. And I don't think we're talking 22 about anything gigantic. 5% or 10% in my opinion is 23 something that easily can be overcome by any IPP just 24 from the cost of capital advantage that they have. The 25 fact they're going to purchase with 80% or 90% debt, FLORIDA PUBLIC SERVICE COMMISSION 710 1 rather than 50%. 2 Let me then make just a couple of other 3 comments about the build side. 4 You've heard a lot of discussion about yes, 5 we buy this argument, fine. But building is so much 6 worse. I don't necessarily agree with that. Clearly, 7 there is a risk associated with building. But to a 8 large degree the cost structure of the utility already 9 reflects that risk. When you folks give us 12% ROE, 10 the reason it's 12% and not 7% or 8% or 9% is because 11 of the risk premium. You know that we, as 12 equityholders, are going to be taking some risks. Now, 13 what are those? The risk of building a power plant and 14 getting it disallowed is one of them. The risk of our 15 expenses getting out of hand is another, the risk of 16 our revenues showing up is another. 17 And that -- so our cost, not that there is 18 not a risk to construction, but I think the point to 19 remember is that our cost already reflects that risk. 20 And only to the extent that the riskiness of what we 21 take on as new construction is out of line or exceeds 22 the risks that are part of our normal ongoing business 23 if there is some extra cost. And clearly, if we were 24 to go out tomorrow and announce that we were going to 25 build another nuclear plant, the perception in the FLORIDA PUBLIC SERVICE COMMISSION 711 1 financial community is that that risk is significantly 2 greater than what the 12% ROE allows for and what our 3 50/50 cap structure allows for. And it would 4 immediately trash our ratings, unless we did two 5 things: One is to convince them that we could mitigate 6 it, and two, that we decided that we're going to try to 7 finance all of that with equity and not float any debt. 8 Not that that could be reasonably done. 9 There's a second aspect to it and it's 10 important to remember that. 11 Another reason that the -- that construction 12 may carry risk but not necessarily an extra cost, is 13 because we build typically any project with the same 14 50% to 55% equity. So we put a lot of owner capital in 15 there to begin with which shields the amount of debt 16 that has to be borrowed. So again, that's already 17 accounted for. And finally, I think something that 18 also needs to be ignored and again when we present our 19 case to you sometime down the road when that decision 20 comes up, we intend to factor that in, is that the risk 21 with construction, and the risk with ownership, need to 22 be considered over the entire life cycle. The risks 23 are predominantly during the construction phase. I 24 mean, what people are worried about, and those are the 25 people that lend us money, are is it really going to FLORIDA PUBLIC SERVICE COMMISSION 712 1 cost what you think it's going to cost? And are the 2 regulators going to disallow some of those costs? 3 Now once that project is in rate base and 4 allowed, then the benefits of ownership become huge, 5 because now you've got cash flow generation, you have a 6 return on investment, and so there's sort of a 7 turnaround. The risks tend to be during the 8 construction period. And in order to properly analyze 9 the benefits and the risks and the costs associated 10 with the build option, you need to look at it over the 11 entire life cycle. 12 Those are the comments I have. And again as 13 I mentioned, we don't expect you as part of the rule to 14 say, "Yes, here's how to do it." The only thing we ask 15 is that the rule become specific enough to where this 16 kind of analysis goes beyond just a discussion stage, 17 but actually becomes part of the analysis that's 18 required in front of this Commission. 19 MR. NEISER: Thank you, Mr. Wieland. He's 20 available for questions. 21 CHAIRMAN DEASON: Mr. McGlothlin? Mr. Watson? 22 CROSS EXAMINATION 23 BY MR. WATSON: 24 Q Mr. Wieland, I'm Ansley Watson. 25 Would the method you have proposed here and FLORIDA PUBLIC SERVICE COMMISSION 713 1 in your testimony be used only for the purpose of 2 comparing the net present value revenue requirements of 3 a purchase option with those of a build option, or 4 would you suggest that they be used for other 5 regulatory purposes as well? 6 A Well, it's to do the build-versus-buy option. 7 It may be applicable to other things but you'd have to 8 get more specific. 9 Q For example, you wouldn't expect the 10 Commission, in a revenue requirements proceeding, to 11 use this imputed or reconstructed capital structure for 12 ratemaking purposes? 13 A Yes. I think I am saying that. What I'm 14 suggesting is that to the extent that the utility has 15 to maintain its financial integrity with purchased 16 power, that the utility has to revise its capital 17 structure exactly in the same manner that I'm proposing 18 here, so that when there is a rate case and a rate 19 issue, those costs actually get incorporated into the 20 decisions. Yes, I think -- 21 Q But that would be true only if the purchase 22 option were selected by the utility as the least-cost 23 option at any given point in time. 24 A Yes. 25 Q All right. So the real purpose, then, would FLORIDA PUBLIC SERVICE COMMISSION 714 1 be to add on to the costs associated with the purchase 2 option for the purposes of comparing it with the build 3 option. If those additional costs that are identified 4 by your proposed method result in a choice by the 5 utility of the build option, because it turns out to be 6 cheaper, then the Commission would not need to make 7 these capital structure changes, because you wouldn't 8 have to issue additional equity that you say you should 9 issue. 10 A Well, I think there is still the issue that 11 when the utility builds, when it comes in for a rate 12 case and determines the revenue requirements for that, 13 the capital structure that the utility has at that time 14 for whatever reason, in this case a building, will 15 still be at issue, so it's there indirectly. 16 Q I understand that. But that's a function of 17 what the utility has done in terms of making an 18 investment in new plant. 19 A Yes. 20 Q And that investment would be supported by 21 whatever the capital structure of the utility was at 22 the time the investment was made, or after the making 23 of the investment? 24 A Yes, I think so, other than -- one of the 25 things I'm saying is that your capital structure may be FLORIDA PUBLIC SERVICE COMMISSION 715 1 affected by the fact that you made the investment. 2 Q Correct. I understand that. 3 A Sure. 4 Q So you either get the cap structure that 5 reflects the investment made by the utility in order to 6 pursue the build option, or after having pursued the 7 build option, versus a capital structure such as that 8 you have suggested if despite the add-on to the IPP 9 cost for purchase, if you select the buy option? 10 A If I understood you right, I think it's yes. 11 Q Mr. Wieland, in your direct testimony on Page 12 7, Lines 24 to 25, and then continuing over on to Page 13 8, Lines 1 to 3, you state, "The Company's credit 14 rating has been sustained despite the fact that the 15 financial community is aware of the Company's plans to 16 construct generation capacity. There is no question 17 that FPC has the financial strength to finance Polk 18 County 1 and 2, as well as additional generation 19 capacity, without endangering its credit quality." 20 In making this statement do you rely fairly 21 heavily on the fact that Florida Power Corporation's 22 credit rating has not been disturbed by your 23 construction plans? 24 A Well, I think I rely on it more than that. 25 That's one factor. But the credit rating agencies know FLORIDA PUBLIC SERVICE COMMISSION 716 1 of our construction plans; they see our capital 2 outlays; they see the kinds of financial ratios that we 3 will be maintaining. So they look at it, but part of 4 my job is to look at that too. Part of my job as a 5 company, when I do financial planning, is to go out and 6 look to make sure that what we have in terms of a 7 construction project does the same thing, namely, not 8 endanger our financial well-being. 9 Q Right. And very clearly it might help out a 10 little bit. Very clearly, if I see that happening, 11 then what you look at is, (a), is there some other way 12 of getting there, and certainly, the purchase option is 13 one that we have looked at in the past and will 14 continue to. 15 Q Yes, sir. And you, being prudent, as do the 16 rating agencies, look out into the future in making 17 judgments about most of these matters, do you not? 18 A Well, I don't know if we look out in the 19 future because I'm being prudent. We don't have much 20 choice in the matter. 21 Q Correct. But I'm saying you look into the 22 future as a matter of course? 23 A Yes. 24 Q I'd like to show you your form 10K filed with 25 the Securities and Exchange Commission. And I assume FLORIDA PUBLIC SERVICE COMMISSION 717 1 you've seen this document? 2 A I know they are around. Frankly, I haven't 3 read them. 4 Q Well, I'd like to call your attention to two 5 matters in the 10K. 6 A Okay. 7 Q I have an excerpt here, rather than using the 8 whole book. (Hands document to witness.) 9 Mr. Wieland, in the excerpts from Florida 10 Power Corporation's 10K that I've given to you, on Page 11 30, I guess the second portion under -- about the 12 middle of the page that's headed "Utility Revenues, 13 Fuel and Purchased Power Expenses," the second 14 paragraph basically spells out the fact that "revenues 15 in these categories include amounts resulting from 16 fuel, purchased purchase and conservation adjustment 17 clauses which are designed to permit full recovery of 18 these costs." And then it goes on to explain how those 19 cost recovery mechanisms work. 20 And you have indicated that the full recovery 21 of costs is contemplated by these adjustment clauses 22 that are in place? 23 A Yes. 24 Q Would you agree that Florida Power 25 Corporation has fully informed the financial community FLORIDA PUBLIC SERVICE COMMISSION 718 1 regarding its purchased power obligations? 2 A The purchased power obligations, from what I 3 recall, are disclosed in the management discussion 4 sections of the various documents that we file. 5 Q Correct. And you would find that on Pages 42 6 and 43 of the excerpt that I've given you, would you 7 not? For example, on -- after discussing the purchased 8 power agreements and the capacity payments and the 9 present value thereof that's shown on Page 43, the 10 second paragraph below that states "the Company does 11 not plan to vary materially the level of purchased 12 power it currently has under contract. The Company 13 believes that its current contracts allow for system 14 reliability and help reduce construction expenditures. 15 However, without a change in regulatory policy, these 16 contracts could weaken its overall credit ratings." 17 Now, despite this disclosure and the fact 18 that S&P is fully informed also about what it is 19 Florida Power Corporation has done and is doing, the 20 market, and in particular S&P has not downgraded 21 Florida Power Corporation's credit rating, has it? 22 A That's correct. Although I'll be very frank 23 with you, that is probably the single biggest concern 24 that we have at this stage. 25 We are pleased that we have not been FLORIDA PUBLIC SERVICE COMMISSION 719 1 downgraded. We are concerned a great deal that it is 2 just a matter of time. Because, clearly, when you look 3 at what our restated ratios look like, when you take 4 that into account and we've done that calculation -- 5 Q And you've graphically depicted them in some 6 of the charts -- 7 A Exactly. 8 Q -- attached to your testimony? 9 A It tells you that you're not really a double 10 A anymore because as you may know, we're double A-minus 11 to begin with. So it's not like we have a tremendous 12 amount of cushion. 13 I can tell you that we have told S&P that we 14 will do what is within our power to try to remain 15 there. If you read their latest credit review of us, 16 it mentions purchased power. It also mentioned 17 specifically a very strong dedication to credit 18 quality. What we have, in essence, asked them to do 19 and will continue to do, is that this is a relatively 20 new issue, and it's something that has been defined and 21 come up with over the last couple of years. Don't 22 hammer us right out of the box. Give us a chance to 23 first of all, you know, have you tell us what your 24 expectations are, and give us a chance to respond. 25 And we hope to be able to do what we can in FLORIDA PUBLIC SERVICE COMMISSION 720 1 order to maintain the rating, but there's certainly no 2 guarantee at this stage. Just the fact it hasn't 3 happened does not give me a great deal of comfort. 4 Q I see. Now back to Page 43 of your 10K, the 5 last sentence that I quoted off of there, says, 6 "However, without a change in regulatory policy, these 7 contracts could weaken its," Florida Power's 8 Corporation's, "overall credit ratings." 9 You have cost recovery clauses in place; you 10 have contract preapproval. What other or additional 11 regulatory policies does Florida Power Corporation feel 12 are appropriate to prevent purchased power from 13 weakening its credit rating? 14 A The recognition that a change in capital 15 structure is necessary to compensate for that. I did 16 not write this so I can't tell you everything it had in 17 mind. That would be my interpretation, is that the 18 Commission has to recognize that yes, there is some 19 liability, and it does change and affect your ratios, 20 and they feed to be fixed, which is very much, from 21 what I've understood, is what Southern California asked 22 their Commission to do. I'm not totally familiar with 23 that but it's the same concept. 24 Q So you would construe the sentence that I 25 quoted out of here to mean take corrective actions in FLORIDA PUBLIC SERVICE COMMISSION 721 1 terms of changing the capital structure to the extent 2 you do decide to make purchases rather than build? 3 A Yes. And it may not be that we will ask the 4 Commission to change it for us because the Commission 5 doesn't dictate the capital structure as it is. 6 What we envision is that when we come to the 7 Commission during the rate case, and we have a capital 8 structure which may have been adjusted for that, you 9 know, from our own perspective, is that the Commission 10 doesn't say, "No. Wait a minute. If you have too much 11 equity without giving us a chance to explain, well, 12 here is why we have this additional equity." 13 Q Correct. (Pause) On Page 5 of your 14 testimony, and this is related to the questions I just 15 asked you: At Lines 11 and 12 you indicate that "FPC 16 will continue to monitor its credit measures and take 17 corrective actions necessary to preserve its credit 18 standing." What corrective actions might these be? 19 A Primarily, making sure that our debt/equity 20 structure and our coverage ratios for interest are 21 sufficient to maintain the credit standing. And to 22 some degree that's going to be some give-and-take 23 between us and the credit agencies, because, you know, 24 it's one of those things where they have not told us 25 exactly what their expectations are down to the nearest FLORIDA PUBLIC SERVICE COMMISSION 722 1 detail. But that discussion will continue, and we will 2 just do what we can. 3 Now, what I cannot guarantee clearly is that 4 if the cost of that is too much or if we simply feel we 5 can't issue the equity, somewhere along the line we 6 also have to make a decision is it even feasible to 7 keep the rating. At this stage we think it is but I 8 can't make those guarantees down the road. 9 Q I see. And, likewise, you cannot guarantee 10 that if you are not able to maintain the various 11 financial indicators that are required by S&P to 12 maintain the rating, you can't guarantee that S&P will 13 downgrade you? 14 A No. In fact, I hope they don't. 15 Q Have your lenders recognized what is shown in 16 your charts, or have they recognized the purchases that 17 Florida Power Corporation is making now, and will be 18 making in the not too distant future? 19 A Well, I'm not sure that I've got the 20 expertise to say that. I almost have to go back and 21 reach back to Mr. Miller's testimony, who is a lender 22 basically, he represents them. And when he tells me 23 that, "Yes, we look at what S&Ps are doing and we are 24 aware of those," then that tells me, yes, they are very 25 much aware of that and take that into consideration. FLORIDA PUBLIC SERVICE COMMISSION 723 1 What I have not had is any direct contact 2 with the lenders because that's not part of my job. 3 Q Okay. You're not here today saying that 4 because of the purchases you've made, that your cost of 5 debt has increased? 6 A No. 7 Q At Pages 9 and 10 of your testimony you talk 8 about purchasing power providing no cash flow for the 9 utility to use in financing future generation projects. 10 And over on Page 10, at Lines 2 through 5, you state 11 "Those investors receive all of the benefits of the 12 cash from depreciation and their return on investment, 13 but have absolutely no obligation to use those funds in 14 order to build future facilities for the purchasing 15 utility." 16 Here you're making a statement with respect 17 to the investors in an independent power project from 18 whom you might purchase? 19 A Yes. 20 Q Does a utility have a obligation to use cash 21 flows from depreciation and return on investment to 22 build future facilities? 23 A I would go back and say that a utility has an 24 obligation to provide service to customers. Exactly 25 how it chooses to do that, I'm not sure is that FLORIDA PUBLIC SERVICE COMMISSION 724 1 relevant. The way it finances new construction, 2 typically is from the funds, the internal funds as they 3 are sometimes called; come from depreciation, come from 4 deferred taxes and come from a return on the 5 investment. 6 Q Correct. And to the extent you -- well, you 7 make a statement on Page 9 that purchased power 8 provides no cash flow whatever for the utility. 9 A That's right. 10 Q Now, is that really correct? 11 A Yes. Simply because every dollar of 12 purchased power capacity is recovered through the 13 capacity cost recovery clause, dollar for dollar. We 14 pay a dollar, we recover a dollar; there's nothing that 15 goes to the company. 16 Q But your rates are not comprised only of fuel 17 or purchased power cost. When you turn around and sell 18 the product basically that you have purchased from the 19 IPP or from Southern Company or from some other 20 utility, do you not receive at least some return on 21 your investment in your distribution facilities, for 22 example. Because of the fact that when the price to 23 your customer, who is buying from you, includes not 24 only a portion to recover your fuel and purchased power 25 cost, but it also includes a base rate for your FLORIDA PUBLIC SERVICE COMMISSION 725 1 service, does it not? 2 A Right. 3 Q Is there not a -- isn't that where you 4 basically recover your cost of service as a utility? 5 A Not for capacity. Simply because you have a 6 separate clause. 7 I think your argument might be valid if you 8 had that as part of base rates but it's not. The 9 purchased power and fuel are strictly on their own 10 regulatory mechanism, so its revenues flow exactly with 11 the expense. So there really is nothing that in any 12 way, shape or form, stays with the utility. 13 Q To recover those costs, in other words, the 14 -- if you recover what you would have normally 15 recovered through base rates for your investment in the 16 plant that generated the capacity and energy? 17 A Right. 18 Q Do you recover through the clause your 19 transmission cost? 20 A No. Those are all in base rates. 21 Q Correct. That's what I'm saying. When you 22 send your bill to the customer who ultimately consumes 23 the electricity you sell, that bill is in several 24 parts. 25 A Right. FLORIDA PUBLIC SERVICE COMMISSION 726 1 Q It has a base rate for whatever class of 2 service the customer is taking. 3 A Uh-huh. 4 Q And that base rate includes a return to the 5 utility, does it not? 6 A It includes a return on its investment along 7 with all of the other expenses that are not under a 8 separate clause. 9 Q Correct. 10 A And the problem is that with purchased power 11 there is no investment. 12 Q Okay. 13 A So, therefore, there is no indirect benefit 14 from that. 15 Q Could we say that you're receiving a return 16 through your base rate on the generating plant that is 17 in your rate base but which was not used to produce the 18 particular electricity being purchased by the customer? 19 A I'm not sure I know how to answer that, 20 because we don't color code our electrons as to where 21 they come from. 22 Q You can't. 23 A The intent of base rates is to make the 24 utility whole for its investment, a return on that 25 investment, and other expenses that it has. FLORIDA PUBLIC SERVICE COMMISSION 727 1 Q Correct. I guess my point is that when you 2 purchase power from an IPP, you pay a capacity payment 3 and you pay an energy payment. 4 A Right. 5 Q When you turn around and sell the energy that 6 you have purchased, you don't just charge your 7 purchaser for the energy at cost? 8 A Yes, we do. 9 Q Do you not charge a base rate in connection 10 with that sale as well? 11 A No. No. Everything we buy, whether it's 12 from another utility or from a NUG, is recovered purely 13 through the capacity cost recovery mechanism. 14 Q There's no charge for distribution, 15 transmission? 16 A Well, but that's -- 17 Q Meter reading? 18 A Sure. Sure. But that's a charge to take 19 care of those investments and those expenses. 20 Q I understand that. But you make that charge 21 in addition to the charge for the energy you have sold? 22 A The entire cost of purchased power and the 23 revenues that it would get from that are treated in the 24 fuel or purchased power cost recovery clause, and 25 there's no mixing of that with base rates. They are FLORIDA PUBLIC SERVICE COMMISSION 728 1 two completely separate items. 2 Maybe it would be easier, because I'm really 3 having a problem with that. Either I'm not 4 understanding your question or maybe you don't 5 understand the mechanism. But, you see what I'm 6 saying? All of the expenses, every dollar that we 7 spend for fuel and capacity costs, and energy 8 conservation is in that same category, every dollar we 9 spend is matched with a dollar of revenue; not base 10 revenues, but a dollar of revenue that comes from those 11 recovery factors. 12 Q I understand that completely. Let me see if 13 I can get the pot right here. (Pause) 14 You buy one kW from an IPP. 15 A Okay. 16 Q Okay. Forget the capacity side. What do you 17 pay the IPP for that kW? Whatever you contracted to 18 pay; is that right? 19 A Sure. 20 Q Okay. You sell 1 kW to a residential 21 customer, okay? 22 A Okay. 23 Q Are there charges on the residential 24 customer's bill for that one kW in addition to whatever 25 your fuel adjustment charge is at the time? FLORIDA PUBLIC SERVICE COMMISSION 729 1 A For that purchase? 2 Q Yes. 3 A Yes. It's under an item called "capacity 4 cost recovery." 5 Q Okay. There is no base rate residential 6 charge for that? 7 A No. 8 Q How do you know when to leave the base rate 9 off of the 1 kW that your residential customer is 10 billed for when you don't color code the energy and 11 capacity? 12 A I'm sorry. I don't understand that. 13 COMMISSIONER CLARK: Mr. Watson, I'm having a 14 hard time understanding the point you're trying to 15 make. And since this is rulemaking, why don't you just 16 state it -- 17 MR. WATSON: I'm trying to understand how a 18 utility, which charges its tariff rates, does not 19 charge its tariff rate when it turns around and sells 20 purchased power. 21 MR. WIELAND: Well, it does charge a tariff 22 rate. 23 Q (By Mr. Watson) But you said it's not on the 24 bill. 25 A No, I didn't say that; it is on the bill. FLORIDA PUBLIC SERVICE COMMISSION 730 1 It's on the bill as a separate item. In other words, 2 the recovery for fuel and purchased power is on the 3 bill. 4 Q I understand that. 5 A Okay. But it's not part of base rates. 6 Q I understand that. But there is also, when 7 the residential customer gets the bill for that kW, is 8 there a customer charge on the bill for that month? 9 A Sure. 10 Q Is there an energy charge for the 1 kW on 11 that bill? Right out of your tariff. 12 A An energy charge. 13 Q Yes. 14 A When you say that 1 kW, a kilowatt hour maybe 15 might be better for residential. 16 Are you talking about the purchased power 17 kilowatt hour or just -- 18 Q I'm talking about you sell electricity to 19 your customer. 20 A Uh-huh. He gets billed, like 8.00, 8.50, or 21 something, for a customer charge and so many cents per 22 kilowatt hour for energy -- 23 Q Right. 24 A -- so many cents per kilowatt hour for fuel 25 and so many cents per kilowatt hour for capacity. FLORIDA PUBLIC SERVICE COMMISSION 731 1 Okay? 2 Q Correct. Now, he gets the customer charge, 3 the energy charge, the fuel adjustment charge, the 4 capacity charge. 5 A Right. 6 Q Whether or not the kWh that he is purchasing 7 that month was generated by one of your plants or by an 8 IPP with whom you have a contract? 9 A No. The base rate would include whatever 10 plant investments we have. 11 Q I understand. 12 A If you purchase something, then, in essence, 13 his purchased power cost would go up. I'm really 14 trying to be responsive but I'm having a hard time 15 understanding. 16 MR. NEISER: Mr. Chairman, let me just -- 17 MR. WATSON: I thought that this was fairly 18 clear. 19 COMMISSIONER CLARK: Not to me. 20 MR. NEISER: And I understand. It's not a 21 matter of being recalcitrant, it's a matter of 22 communication. Let me just try this. 23 What I think Mr. Wieland is trying to say, is 24 yes, there is a base rate charge to the customer when 25 there is purchased power that is going to them. But FLORIDA PUBLIC SERVICE COMMISSION 732 1 those revenues that are received through that base rate 2 charge pay for nothing other than what the company has 3 invested in and/or has in the way of operation and 4 maintenance expenses. None of those dollars go towards 5 the cost of the purchased power. 6 MR. WATSON: I understand that completely. 7 What do those dollars go to? 8 MR. NEISER: To the investments of the 9 company, such as the transmission lines and the 10 distribution lines, and for the salaries of people and 11 maintenance expenses. 12 MR. WATSON: Are those cash flows to the 13 utility? 14 MR. NEISER: Clearly, but to reimburse it for 15 its investment and its operating and maintenance 16 expenses. None of those cash flows go to help pay for 17 purchased power. 18 MR. WATSON: I agree with that 100%. 19 MR. NEISER: Then I think both of us don't 20 understand your question. 21 MR. WATSON: I just asked if there were cash 22 flows to the utility and you said "Yes, but." I 23 understand "yes"; he's already given me the "but" in 24 his testimony. 25 Now, they may go for investment in plant to FLORIDA PUBLIC SERVICE COMMISSION 733 1 the extent that the return portion of the base rate is 2 not paid out as a dividend. 3 Do you understand that? I mean there's a 4 return to the utility in your base rate. 5 MR. NEISER: No, we have a problem, because I 6 think Mr. Wieland is clearly stating, and I would agree 7 totally with what he's saying, there is no markup, not 8 one dollar markup to the customer for purchased power. 9 MR. WATSON: Listen, I'm -- 10 MR. WIELAND: Let me -- 11 MR. WATSON: Basically, we recover our 12 purchased gas cost the same way you recover your fuel 13 adjustment cost. However, to the extent you are 14 charging a base rate on your resale of power purchased 15 from a nonutility generator, there is a return on your 16 equity investment in your entire company included in 17 that rate, or else your rates aren't very well 18 designed. 19 CHAIRMAN DEASON: Maybe I can simplify this. 20 I'll give it a shot anyway. 21 There may be a problem talking about cash 22 flow and profit or markup. I think what Mr. Neiser is 23 saying is that when that kilowatt hour from the NUG 24 goes through the system, that that kilowatt hour that 25 registers on the metering is billed and that goes to FLORIDA PUBLIC SERVICE COMMISSION 734 1 pay for costs that have already been incurred by the 2 utility in providing that service. 3 So there's really no additional profit -- but 4 there is cash flow, and I think that's what Mr. Watson 5 is getting at is the question is about cash flow. So, 6 yes, the kilowatt hour comes from a NUG and goes 7 through the system and registers on the meter, it 8 generates cash flow. Now, whether that cash flow 9 results in any additional profit or not is a whole 10 different question but I don't think that's his 11 question. It's strictly cash flow. 12 Now, am I understanding the question? 13 MR. WATSON: That's correct, but to take it 14 just -- and I'd love to get off of this. 15 Q (By Mr. Watson) To take it just a little bit 16 further, to the extent that the utility's base rates 17 were set properly to recover its cost of service, and 18 to the extent that that cost of service includes a 19 return on the utility's investment; which the utility 20 is not obligated to spend for a new plant; which it is 21 not obligated to pay out as a dividend; which it is 22 permitted to use in any way that is prudent, there is 23 some -- a portion of the cash flow is also returned, 24 which can be used, albeit small an amount, it is some 25 return for future investment for the utility. Do you FLORIDA PUBLIC SERVICE COMMISSION 735 1 disagree with that? 2 A Well, I don't think so but I'm not really 3 sure I fully -- 4 Let's see if this is right: Clearly, the 5 cash flow that we collect from base rates is in excess 6 of the cash flows we have to meet bills. Because one 7 of the expenses, one of the major ones is depreciation 8 which is not a cash expense. And my whole point of my 9 testimony is that that's cash flow that we use to build 10 new power plants. 11 And, you know, if I got the gist of your 12 question right, you're asking me, isn't there some 13 cash flow from the fuel or from purchased power. 14 And my response is that no, that -- yes, we have 15 cash coming in, but, then, it's only enough to pay 16 the bills, and -- 17 CHAIRMAN DEASON: Let me ask a question, Mr. 18 Watson. I hate to interrupt, but we need to get 19 through this. 20 If you had no purchased power and you 21 generate a kilowatt hour of electricity from your own 22 plant, it goes through the meter and you bill for it, 23 there is a small portion of that kilowatt hour which is 24 recovery of depreciation expense. 25 MR. WIELAND: Yes, sir. FLORIDA PUBLIC SERVICE COMMISSION 736 1 CHAIRMAN DEASON: It's a small portion which 2 is return on equity investment. 3 MR. WIELAND: Right. 4 CHAIRMAN DEASON: And both of those are cash 5 flow above the normal requirements of cash outflow. In 6 other words, depreciation expense is normally 7 considered a source of funds. 8 MR. WIELAND: Exactly. 9 CHAIRMAN DEASON: And to the extent you have 10 return on equity, that's funds available to pay 11 dividends or to reinvest in the business. 12 MR. WIELAND: Exactly. 13 CHAIRMAN DEASON: Now, if you replace that 1 14 kilowatt hour, do nothing else except just buy it from 15 a NUG, it still goes through the same transmission 16 lines and distribution and it registers on the meter. 17 And you bill it and you get the same dollar of revenue 18 from the customer for that. And to the extent that 19 there is a small portion of that which is a return on 20 equity, that's cash flow to the company. And to the 21 extent there's a small portion of that which is 22 depreciation expense, that's cash flow to the company. 23 Now, is that right or wrong? 24 MR. WIELAND: Well, no, I think that's right. 25 What you're saying, Commissioner, is that if we decide FLORIDA PUBLIC SERVICE COMMISSION 737 1 to buy it from somewhere else rather than generating it 2 ourselves, the cash flow from base rates does not 3 change. 4 What happens, though, is there may be an 5 additional expense for the purchased power which may be 6 offset by fuel savings. But that cash flow gets washed 7 out in the fuel recovery clause. 8 CHAIRMAN DEASON: It may be the same cash 9 flow and maybe not additional dollars coming to you, 10 but the sale of that kilowatt hour from the NUG does 11 generate the same revenue as if you had generated it 12 yourself. And whatever cash flow your kilowatt hour 13 would have generated, theirs generates the same cash 14 flow. 15 MR. WIELAND: That's exactly right, 16 Commissioner. But the difference is that we don't get 17 any additional cash flows. Our cash flows are what 18 they are. If we buy more purchased power, there is no 19 additional cash flow, and I think that's really the 20 basic issue. 21 CHAIRMAN DEASON: Right. There's maybe 22 nothing additional. I don't know if Mr. Watson assumes 23 there is. I'm not assuming there is in my question. 24 There may be nothing additional, but there is cash flow 25 generated. FLORIDA PUBLIC SERVICE COMMISSION 738 1 MR. WIELAND: Because what I'm struggling 2 with, Commission, and, you know, you know that I'm very 3 involved with fuel adjustment, purchased power cost 4 recovery. And one of the basic premises that we all 5 work with is that there is no earnings, there is no 6 return; it's a flow-through. 7 CHAIRMAN DEASON: And I don't think the 8 question relates to earnings; it's a question of cash 9 flow, and the two may be related but they are certainly 10 not the same. 11 MR. WIELAND: No. So that's why I'm 12 struggling, you know, trying to understand. 13 What I'm hearing is that it really isn't a 14 flow-through, and I'm saying, well, unless we're doing 15 something wrong that I'm not aware of, that where we 16 keep something. And the only place where I can see a 17 little bit of extra cash flow is this 80/20 split on 18 economy. But beyond that, I'm lost -- 19 CHAIRMAN DEASON: Well, you could argue, and 20 it's probably too small to even measure, but to the 21 extent that there are some variable operating and 22 maintenance expense at a plant you don't have to incur 23 because you buy, there may be some small fraction of a 24 fraction. 25 MR. WIELAND: Yes, but I'm almost assuming FLORIDA PUBLIC SERVICE COMMISSION 739 1 that's too small to -- yes. That's absolutely right. 2 MR. WATSON: I'm looking primarily at the 3 return on equity, and I think I have gotten clear, with 4 help from the Chairman, what I wanted to make clear. 5 And, Mr. Wieland, I have no further 6 questions. Thank you very much. 7 MR. WIELAND: Thank you. 8 CHAIRMAN DEASON: Thank you, Mr. Watson. 9 Staff. 10 CROSS EXAMINATION 11 BY MS. RULE: 12 Q Mr. Wieland, I'm Marsha Rule from the 13 Commission Staff. 14 In one of your examples earlier you mentioned 15 that the example didn't distinguish between purchases 16 of power from utilities or from nonutility generators. 17 Is that correct? 18 A I'm sorry. Did you say "distinguish"? I 19 mean, I'm basically treating them the same. 20 Q Exactly. 21 A Okay. 22 Q There is a difference in a lot of contracts 23 between utilities and utility generators. So, aren't 24 those contracts typically a lot shorter? 25 A Contracts between utilities? FLORIDA PUBLIC SERVICE COMMISSION 740 1 Q Uh-huh. 2 A They vary all over the map. Typically, they 3 are shorter. But the contract we have with Southern 4 Company, for example, goes, I think, all the way to the 5 year 2010, if I recall. So it's fairly lengthy, but 6 most of them tend to be shorter. And when we do this 7 credit analysis, the net present value is going to be 8 lower the shorter amount or the shorter the contract 9 term is. 10 Q From a risk standpoint, does the term of the 11 contract make any difference? 12 A Yes. I would think so, simply because the 13 longer you lock in on something, the more things can 14 change, the more uncertainty there is. 15 MS. RULE: Thank you. 16 CHAIRMAN DEASON: Thank you. 17 Thank you, Mr. Wieland. 18 I want to apologize to the court reporter. I 19 said everybody could have lunch and we worked through 20 lunch. Obviously, she can't eat while she works like 21 the rest of us can. 22 We're going to take a break, give Joy an 23 opportunity to get some lunch, and as soon as she's 24 finished with lunch, we'll get started back. And I 25 don't know exactly how long that's going to be. But FLORIDA PUBLIC SERVICE COMMISSION 741 1 I'll leave that up to Joy to do as quickly as she can. 2 (Recess was taken at 3:00 p.m.) 3 - - - - - 4 CHAIRMAN DEASON: We need to call the hearing 5 back to order so I can eat my lunch. 6 Mr. Neiser. 7 MICHAEL B. FOLEY, JR. 8 appeared before the Commission and testified as 9 follows: 10 DIRECT EXAMINATION 11 BY MR. GADDY: 12 Q Good morning, sir. Would you please state 13 your name and business address for the record? 14 A Yes, my name is Mike Foley. My business 15 address is 3201 34th Street South, St. Pete, Florida. 16 Q And your employer? 17 A Florida Power Corporation. 18 Q What is your position with Florida Power? 19 A Director of System Planning. 20 Q Did you prefile testimony in this docket? 21 A Yes, I did. 22 Q Do you have any corrections to that? 23 A No, I do not. 24 Q Mr. Foley, will you please summarize your 25 testimony? FLORIDA PUBLIC SERVICE COMMISSION 742 1 A I will briefly. 2 As Director of System Planning for Florida 3 Power, my job is to identify the resources needed to 4 supply our customers with a continuous supply of 5 reliable, economic electricity. 6 I cannot see the future; no one can. 7 Therefore, in the supply of generating capacity we've 8 used the portfolio approach rather than depending on 9 any one type of resource. 10 Our planned Year 2000 capacity mix is nuclear 11 7%, coal 20%, oil and gas 17%, demand-side management 12 20%, and purchased power 14%. 13 Even though there is diversity among the 14 suppliers of purchased power, there are several typical 15 characteristics they tend to have in common. One is 16 the majority are natural gas-fired combined cycles, at 17 least in Florida; they are highly leveraged and their 18 only obligation is to their stockholders. 19 NUG owners don't have a obligation to serve 20 and no contract can make them continue to operate if 21 they are losing money. 22 Thus, due to their similarities, there is a 23 chance that they could be vulnerable to some 24 common-mode failure. Therefore, the portfolio approach 25 would urge that caution be observed before abandoning FLORIDA PUBLIC SERVICE COMMISSION 743 1 the traditional utility ownership mode to total 2 reliance on purchased power. 3 It is with this in mind that I recommended in 4 my testimony in addition to the Commission's proposed 5 rule to require that once a utility's purchased power 6 reliance exceeds its capacity reserve margin, that's 7 15% in the case of Florida Power, that the utility show 8 why an additional purchase will be beneficial to its 9 ratepayers. This is tying on to what Mr. Rosenzweig 10 proposed when he proposed 20% to 30%. And as a 11 planner, I would feel more comfortable with an even 12 lower margin at the point at which this presumption 13 reverses. 14 And the purpose of this is to make it clear 15 for those that follow this hearing, the ones that 16 aren't here are and that read the rule, that the 17 Commission intended for all factors to be considered, 18 not just the price and the determination of what 19 capacity to add. 20 With this addition, I generally endorse the 21 Commission's proposed rule. And with respect to the 22 Staff's alternate rule, I agree with Mr. Woodbury, who 23 was the next-to-the-last witness yesterday, that the 24 utility's bid price shouldn't be required to be 25 published in the RFP. FLORIDA PUBLIC SERVICE COMMISSION 744 1 And finally, if the Staff's alternate rule is 2 adopted, I think it would be very beneficial to include 3 many of the clarifying intentions explained by Mr. 4 Ballinger in the first day of this hearing. 5 That concludes the summary of my testimony. 6 Q Thank you Mr. Foley. He's available for 7 questioning, Mr. Chairman. 8 CHAIRMAN DEASON: Mr. McGlothlin. 9 CROSS EXAMINATION 10 BY MR. McGLOTHLIN: 11 Q Mr. Foley, one of the other witnesses, I 12 think it was Mr. Rosenzweig, referred to your 15% 13 criterion. Do I understand correctly that your 14 proposal has to do with a perceived reliability 15 function as opposed to anything about the cost of 16 capital impacts, as some of the other witnesses have 17 been testifying to? 18 A Yes. 19 Q I'm going to refer you to Page 8 of your 20 comments. You state at Line 8, "Florida Power's 21 current reserve margin criterion is 15%. Limiting the 22 reliance on purchased power to 15% ensures that there 23 will be adequate resources available in the event of a 24 disruption in the purchased power supply." So your 25 concept there is that the resources that you own will FLORIDA PUBLIC SERVICE COMMISSION 745 1 be back-stopping the resources that you buy in case 2 they are not available to you; is that right? 3 A Yes. 4 Q And in terms of referring to the reserve 5 margin, the 15%, there is implicit in that a 6 contemplation that all of the purchased power resources 7 will be unavailable at one time; is that right? 8 A Yes. 9 Q Now, I want to pose a very simple scenario to 10 you, a very simple hypothetical. If I have two units 11 -- let me preface that. You've heard references to the 12 ability of independents to establish a track record of 13 availabilities of 90% and better? 14 A Yes. 15 Q Okay. If I have two units, each of which has 16 an availability of 90%, it follows, doesn't it, that 17 the probability that one might be out or unavailable at 18 any one time is 10%? 19 A I agree to that. 20 Q And would you agree that to calculate the 21 probability that both of those units will be out at the 22 same time, the calculation would be .10 times .10, 23 which is a 1% probability? 24 A I agree to that. 25 Q Now, would you agree that if I have three FLORIDA PUBLIC SERVICE COMMISSION 746 1 units, each having an availability of 90%, the 2 calculation is .10 times .10 times .10, which one-tenth 3 of 1%? 4 A I would agree with that, too. 5 Q Now, I don't want to go step by step, but I 6 went up to seven units, Mr. Foley, and I calculated the 7 probability that seven units, having availability of 8 90%, would be out at one time to be 9 one-one-hundred-thousandth of 1%. Would you accept 10 that, subject to check? 11 A Yeah, and before we get to No. 7 could I add 12 a statement? 13 Q One more question. Is it true that you have 14 presently some 30 or more contracts with different 15 power supplies that you purchase? 16 A I think that's correct. 17 Q So the probability that all of your purchased 18 power resource would be unavailable at any one time is 19 pretty small, isn't it? 20 A Calculated in the way that you're 21 calculating, assuming that the availability, the actual 22 operating availability is the determining factor, I 23 agree with the whole premise of what you've done. 24 My concern is not with that, not that the 25 nonutility generators are not good operators. You are. FLORIDA PUBLIC SERVICE COMMISSION 747 1 I take no quarrel with that. My only concern as a 2 planner is that there are common-mode failures lurking 3 out there, potentially -- I'm not going to say they are 4 going to happen even -- that could result in the 5 continued operation to cease of a source of capacity 6 that has no obligation to serve. And I outline some of 7 the things that I could think of. 8 I'm way out of my field, but Mr. Gower this 9 morning talked about something about the tax law 10 changing that is apparently pretty important to the 11 profitability or the high return on nonutility 12 generation. That's a common mode that happens to be 13 common to all of the nonutility generation. If that 14 law changed and you could no longer continue to make 15 money, as Commissioner Lauredo said, the rule of the 16 whole, or something like that -- "if you're in a hole, 17 stop digging." 18 The concern is that a prudent planner looks 19 for these common-mode failures, and if there are some, 20 then you start getting more cautious and you start 21 trying to factor these things into your decision 22 process. And it's these common-mode failures that I'm 23 urging that the Commission recognize the potential for, 24 and urge utilities to not go headlong into this thing. 25 Q Would you also take into account the FLORIDA PUBLIC SERVICE COMMISSION 748 1 contractual rights that have been established and the 2 contractual provisions for those occurrences and make 3 some estimate as to how real or how speculative that 4 probability is? 5 A You can, yes, but to the extent that you can 6 force someone to continue with a contract, operate when 7 they are in that hole to make them keep digging, I 8 don't think a contract can do it. 9 Q All right. I want to pose one more question 10 to you and to simplify things, rather than pass out a 11 document, I'm going to reduce just a few items on it to 12 something on the easel. 13 What I've provided you is a one-page excerpt 14 for a recent ten-year site plan of Florida Power 15 Corporation. And I will be referring to the entry for 16 the summer of 1993 on the top left. 17 Is it true that when Florida Power 18 Corporation calculates its reserve margin, the 19 calculation is to take total capacity resources, 20 subtract the firm peak demand, and the difference is 21 the reserve margin in megawatts. That's, basically, 22 the calculation for reserve margin, is it not? 23 A I guess so. 24 Q Well, if you'll look below the calculation of 25 the firm peak demand to the items that go into the FLORIDA PUBLIC SERVICE COMMISSION 749 1 calculation of total capacity resources, would you 2 agree that to arrive at that number you would take 3 generating capacity, plus QF capacity purchase, plus 4 firm purchased power plus the interchange power, which 5 is intrastate. Are those four items added to arrive at 6 the total capacity resources? 7 A This is your exhibit, I guess so. 8 Q Well, it's taken from your annual report. 9 COMMISSIONER CLARK: I mean, that sounds 10 right to me. What's wrong it with it? 11 MR. FOLEY: Well, there's nothing wrong with 12 it. I don't know where he's going. I don't know why 13 he doesn't put this on himself rather than trying to 14 lead me into something I don't where he's going. 15 Q (By Mr. McGlothlin) It's a very simple point 16 and I'm not trying to be mysterious. My final question 17 to you is isn't it true, then, that in calculating 18 reserve margin you include your purchased power 19 resources in calculating the reserve margin for Florida 20 Power Corporation? 21 A I would agree to that, absolutely. 22 Q So, in essence, all of your resources are 23 backing up all of your other resources? 24 A I agree to that, yes, sir. 25 Q And it's not true that your company-owned FLORIDA PUBLIC SERVICE COMMISSION 750 1 resources are backstopping purchased power? 2 A That's correct. All of them. They depend on 3 each other to be there for the total amount because we 4 need to have not just 100% of the customer's demand 5 available, but that amount plus a reserve margin. 6 Q In your last determination of need case, 7 Florida Power Corporation proposed to receive a 8 determination of need for Polk County Units 1, 2, 3 and 9 4; is that correct? 10 A That's right. 11 Q And part of the rationale for asking for a 12 determination of need for all of those units was 13 Florida Power Corporation's contention that increased 14 purchased power would be a threat to its capital 15 rating; is that right? 16 A I think a more fair characterization was that 17 we believe that no more purchased power could compete 18 with the Polk County capacity given all the factors 19 that were presented in the need case; and that there 20 was no reason to submit that capacity to a further bid. 21 If there is a distinction there -- 22 Q Your position was not that you shouldn't buy 23 more purchased power because of the impacts on Florida 24 Power, but because nobody else could compete with you? 25 A Yes. When you factored in all of the things FLORIDA PUBLIC SERVICE COMMISSION 751 1 we've talked about here today. 2 Q In any event, the Commission denied your 3 total request. And is it your understanding that part 4 of the rationale for not certifying 3 and 4 was that 5 the time available would give competitive alternatives 6 the opportunity to present their proposal to you? 7 A That's correct. And we've subsequently 8 agreed with the Commission and the wisdom of not going 9 ahead and granting the need for that capacity because 10 our load growth has decreased significantly. And had 11 we gone forward with purchased power agreements. We 12 might be faced with a situation, should they have 13 competed effectively with the Polk capacity, to be in a 14 situation where we had obligations to go forward with a 15 contract and not have a need. 16 That's one of the costs that we're urging be 17 factored into this process, that it's not always 18 without risk to go forward with a purchased power 19 contract in light of the lost flexibility associated 20 sometimes. 21 Q You're referring to the slippage in the 22 in-service date of 3 and 4? 23 A Yes. 24 Q Polk County 3 and 4 remain your next proposed 25 planned units, do they not? FLORIDA PUBLIC SERVICE COMMISSION 752 1 A The ten-year site plan covers a time period 2 in which there is nothing else beyond Polk 3 and 4 3 other than the potential for a third 500 kV line, which 4 being studied very, very closely. 5 Q But in your construction plan Polk County 3 6 and 4 remained the next unit identified; is that right? 7 A Well, we don't have a plan after ten years, I 8 guess is what I'm trying to say. 9 Q Well, at Page 8, Line 14, you make this 10 statement. "Purchase of power exceeding 15% of our 11 megawatt capacity would not be advisable." Well, that 12 sounds to me not that you're proposing that the effects 13 be considered, but it's your position that you ought 14 not buy any more. 15 My question to you is: Does Florida Power 16 propose to utilize this 15% reliability consideration 17 that's identified as a reason why it should build Polk 18 County 3 and 4 and should not be required to 19 competitively procure that capacity? 20 A No. That decision has not been made, and I 21 concede to you that that language does read, or could 22 be concluded to read, that we don't intend to purchase 23 above 15%. That is not the intent of our proposal, but 24 rather as Mr. Rosenzweig suggested that when a utility 25 gets up in this range, that the reversal of the FLORIDA PUBLIC SERVICE COMMISSION 753 1 presumption be made; that the utility should look very 2 cautiously and carefully, and this Commission should 3 expect the utility to do so when it exceeds a certain 4 level. He proposed 20% to 30%, as a planner I'm a lot 5 more conservative than he is, and the thing that gives 6 me greater comfort is something less than that and a 7 reserve margin is a nice target. There's nothing magic 8 about it. I'll grant you that right up front. 9 Q Would you agree that the Commission should 10 consider all of the evidence bearing on the reliability 11 of independent power in determining whether your 12 proposal is reasonable or not? 13 A Yes. 14 MR. McGLOTHLIN: No more questions. 15 CHAIRMAN DEASON: Mr. Moyle, Staff, 16 Commissioners? Thank you, Mr. Foley. 17 (Mr. Foley excused.) 18 - - - - 19 MR. NEISER: Our final witness is Robert 20 Dolan. 21 22 23 24 25 FLORIDA PUBLIC SERVICE COMMISSION 754 1 ROBERT D. DOLAN 2 appeared before the Commission as testified as follows: 3 DIRECT EXAMINATION 4 BY MR. NEISER: 5 Q Good afternoon, Mr. Dolan. Would you please 6 state your name, address and business affiliation, 7 please, for the record? 8 A Yes. My name is Robert D. Dolan. My 9 business address is 3201 34th Street South, St. 10 Petersburg, Florida 33711, and I am employed by Florida 11 Power Corp. 12 Q Mr. Dolan, have you prefiled some rebuttal 13 testimony in this proceeding? 14 A Yes, sir, I have. 15 Q Do you have any corrections to make in it? 16 A I have one correction on Page 4, Line 11. 17 The typing created a new type of generation. It should 18 have been "intermediate" instead of "immediate" 19 generation. 20 Q Okay. And recognizing that your total 21 testimony is only about five pages long, can you give 22 us a brief summary? 23 A Yes, I could. Florida Power is suggesting 24 that the Commission consider the portfolio approach to 25 utility resources in order to ensure cost effective and FLORIDA PUBLIC SERVICE COMMISSION 755 1 reliable generation for the ratepayers. We are also 2 suggesting some language additions to the Commission 3 rules that all costs should be included in the 4 evaluation for increases or decreases in cost to 5 capital rather than just a discussion of these costs. 6 This is necessary for all resources to compete on the 7 same basis. 8 Also Florida Power has had probably as much 9 experience as any utility in the state of Florida in 10 contracting for NUG capacity. These contracts, our 11 oldest firm contract, was executed in December of 1984. 12 We have 1100 megawatts worth of NUG capacity under 13 contract, and we have found that contracting does not 14 have all the benefits that direct ownership has. 15 The reasons for this is that when a contract 16 is executed both parties presumably assume they have a 17 well-crafted document. I don't think we sign a 18 contract that we thought was bad when we signed it. 19 But neither party at the time of the execution of the 20 contract has a perfect knowledge of what may happen in 21 the future and circumstances can change radically in 22 just a couple of years. 23 Also contracts have numerous disputes and, in 24 fact, we've had probably slight disputes with every one 25 of our contracts. We've had other disputes which have FLORIDA PUBLIC SERVICE COMMISSION 756 1 been litigated before this Commission, or will be 2 litigated soon. And there are a couple that you'll 3 probably see very soon. One we've already discussed 4 with you all at the Dade County need petition a few 5 months ago where the fluctuations and the output are 6 causing costs to be incurred by ratepayers in excess of 7 our avoided cost. 8 Other problems that we're having is that 9 we've had two gas-fired combined cycles that do not 10 have any fuel -- No. 2 oil is the fuel backup. Destec 11 -- Barry Huddleston, I guess, yesterday said he 12 believed that Destec, being a prudent developer, always 13 has No. 2 oil as a backup fuel for a natural gas-fired 14 facility. I believe Barry, after checking with his 15 management yesterday, realized that the Tiger Bay 16 facility does not have No. 2 oil backup also we do not 17 -- the air products facility or Orlando Cogen does not 18 have No. 2 oil backup. These are things or costs that 19 may come up that if we owned that generation, we would 20 have No. 2 oil backup. We thought when we wrote the 21 contracts that it was required in the language we 22 interrupted; obviously, they're interrupting the 23 language differently. 24 Also one other thing that we do not want, as 25 Mike Foley mentioned, is for us to publish our avoided FLORIDA PUBLIC SERVICE COMMISSION 757 1 cost in the RFP process. 2 Florida Power in January of '91 issued an RFP 3 where we published our avoided cost. It's obvious when 4 you look at those -- the bid submittals that they were 5 tied to avoided cost. Several of them are at 100% of 6 avoided cost, so if we hadn't have published it, most 7 likely the cost would have been lower. It couldn't 8 have been exactly 100% of avoided cost. 9 And the Commission here heard from several 10 NUG developers about the well-crafted contract. And 11 dealing with contracts on a full-time basis at Florida 12 Power, I would like to see that well-crafted contract, 13 because a well-crafted contract is in the eyes of the 14 beholder, whether that be the bank, whether that be the 15 developer or whether that be the utility. And they may 16 all have different views of what they think is a 17 well-crafted contract. 18 Other problems we've had with some of our 19 contracts, and it just happened this week during this 20 hearing, is we had to cycle off several of our big 21 fired oil plants due to the contracts we have not 22 having dispatchability. Now, when Florida Power 23 executed those contracts, we felt like, for one, that 24 we could achieve dispatchability through the economics. 25 Well, it's gotten obvious, we've got 480 megawatts FLORIDA PUBLIC SERVICE COMMISSION 758 1 on-line today. We didn't get that. We also thought 2 our load growth, both peak load growth and minimum load 3 growth, were going to be at a greater rate than we've 4 experienced in the last few years. That's another 5 example of where if we had had direct control, we would 6 be lowering the output of these units. 7 Also in the permitting of several of the 8 facilities, the NUGs, in trying to get their permits as 9 speedily as they could, put burdens on themselves that 10 probably a utility wouldn't. 11 Tiger Bay's facility, due to air permits -- 12 or Destec's due to air permits can only dispatch to 80% 13 of their full load capacity. It has nothing to do with 14 the technology; but when it goes to lower levels, it 15 exceeds the emissions allowed by the state air permit. 16 And, again, as Chairman Cresse pointed out, 17 the utility has an obligation to serve to its 18 ratepayer. It has a social obligation that is enforced 19 by either the state governor or this Commission. The 20 NUG only has an obligation to its investors, and it may 21 deliver under a social obligation but only if it will 22 not incur increased cost to its investors or 23 stockholders. 24 I think that concludes my summary. 25 MR. NEISER: Mr. Dolan is available for FLORIDA PUBLIC SERVICE COMMISSION 759 1 questioning. 2 CHAIRMAN DEASON: Ms. Brownless. 3 CROSS EXAMINATION 4 BY MS. BROWNLESS: 5 Q Good afternoon, Mr. Dolan. I want to look at 6 Page 4 of your testimony. If I look at Page 4 up here 7 on Lines 4 and 5 you say that you're opposed to the 8 revelation of your own avoided cost; is that correct? 9 A Yes. 10 Q What exactly do you mean when you say 11 "avoided cost"? Is that the number that is used to 12 develop your generation expansion plan? 13 A Well, this avoided cost was used in our 14 generation expansion plan and also used -- it was being 15 developed for NUG purchases. 16 Q Well, I can make this real brief. After you 17 identified whatever your next avoided unit was, did you 18 use a generic cost for that avoided unit or did you use 19 some combination of generic cost, for example, an EPRI 20 TAG cost and Florida Power-specific cost? 21 A When we develop the generation expansion plan 22 and the cost associated with the units, we use a 23 combination of things including EPRI information, 24 constructor's information and FPC's experience. 25 Q Okay. But the cost that you used was not a FLORIDA PUBLIC SERVICE COMMISSION 760 1 sharp-pencil cost tied down to a particular site where 2 FPC would build that unit, was it? 3 A The cost was a more generic cost. We did not 4 have EPC contracts or any contracts for vendors of the 5 equipment, so it was an estimate using our best 6 knowledge at the time. 7 Q And much of that information was basically 8 industry-wide known, generic information? 9 A That's true. 10 Q When you say also on Page 5 here that you 11 think the utility should be able to submit a 12 confidential bid when you're talking about Staff's 13 alternative rule. When you say "a confidential bid," 14 what you're talking about there is your actual 15 sharp-pencil price, is it not? 16 A That's correct. 17 Q Which wouldn't necessarily be the information 18 that Staff was requiring be provided on the front end 19 of its rules; is that correct? Wouldn't necessarily be 20 the same? 21 A That's correct, but it may influence the 22 bidders by showing the avoided cost. It may influence 23 their price. 24 Q And I just want to add one point. Your fuel 25 projections are already made known to the general FLORIDA PUBLIC SERVICE COMMISSION 761 1 public through the fuel purchased power cost recovery 2 clause proceedings that happen every six months, are 3 they not? 4 A That's correct. 5 Q Okay. So that information is public 6 knowledge also, right? 7 A I believe it is. 8 Q In the CEPA rule we've suggested that when a 9 utility bids, it be allowed to recover its cost exactly 10 as any other bidder. Do you disagree with that 11 recovery mechanism? 12 A Well, I think Florida Power would prefer to 13 keep traditional ratemaking going on in our generation 14 expansions and have the prudence reviewed by this 15 Commission. I believe Florida Power's track record in 16 the past, and this Commission may correct me if I'm 17 wrong, we have come in at below cost for all of our 18 generation, except for one that I can think of which 19 was our nuclear plant built in the mid '70s. So that 20 the ratepayers in the past, and in the construction of 21 CR4 and 5, the Intercession City peakers, Debary 22 peakers have incurred lower costs by allowing the 23 traditional regulatory prudence and revenue 24 requirements of actual utility construction cost. 25 Q But let me just ask you a question. So you FLORIDA PUBLIC SERVICE COMMISSION 762 1 prefer to rate base your plant rather than have a 2 dollar-for-dollar immediate cost recovery through the 3 fuel adjustment clause? 4 A Yes, ma'am. 5 Q Do you understand that the CEPA's rule would 6 allow you, based upon whatever bid price you have, to 7 let your ROE float? 8 A That's the way I understand it. 9 Q And your utility doesn't think that's an 10 advantage to the utility? 11 A It could be an advantage to the utility but 12 it also could be a disadvantage to the utility because 13 we're getting into more and more competitive ties with 14 the price of your product. If it was artificially 15 higher, or higher than it has to be, it could affect 16 your ability to compete. It's a short-term gain for a 17 long-term loss. 18 Q So you would rather protect your ROE. I 19 mean, instead of taking -- instead of developing a bid 20 price which has an ROE in it of whatever it has, you 21 would rather have a guaranteed return? 22 A A guarantee? I don't think the Commission 23 here guarantees a return for us, but an allowed utility 24 rate of return considering prudence, yes. 25 Q That's interesting. You've mentioned some FLORIDA PUBLIC SERVICE COMMISSION 763 1 problems you've had with your cogeneration contract? 2 A That's correct. 3 Q And most of the examples you used, I believe, 4 are affiliated or associated with the seven contracts 5 that were all negotiated at one time; is that correct? 6 A Well, it was eight. But out of the RFP, 7 although the contract with Destec or the old general 8 Peat, EcoPeat contracts, which are much older -- the 9 bulk of them are of the '88 vintage, negotiated in 10 1988. 11 Q Well, setting aside for a minute what you 12 refer to as the Tiger Bay project or the Destec 13 project, I think the Air Products contract is one of 14 the seven or the eight that came through as a piece. 15 Didn't Florida Power Corporation, 16 essentially, write a contract and tell the people who 17 participated in that RFP, "Here's the contract; this is 18 what we want. You do this; give your best price to do 19 this"? 20 A That's correct. In that RFP we published a 21 contract. It was for several reasons. 22 One, we actually needed that fourth type of 23 generation. We needed immediate generation in the '91, 24 '95 time frame. We did the bid in that year. We felt 25 like needing those resources in such a quick time that FLORIDA PUBLIC SERVICE COMMISSION 764 1 showing the base contract would speed up the RFP 2 process because we didn't have time to waste. And the 3 first -- 4 Q Did it? 5 A Obviously, it did because we issued the RFP I 6 believe January 11th. The last contract was executed, 7 I believe, March 17th. 8 Q Those contracts are all virtually identical, 9 I mean, with regard to all major aspects of the 10 contract, are they not? 11 A They had some slight changes. One of them 12 could either be a small power producer or a cogen, 13 another one had two sites. They all had different 14 prices, but materially they were, essentially, the 15 same. 16 Q Was it one of Power Corp's rationale for 17 doing this that the NUG community could provide that 18 power faster than Power Corp could, bring it on line 19 quicker? 20 A That was one of the things we were looking -- 21 a lot of those projects that bid, one us already on 22 line, the Dade County facilities, several others were 23 in fairly late stages of development, maybe had 24 submitted air permits already. So several of those 25 projects had probably been in the development stages FLORIDA PUBLIC SERVICE COMMISSION 765 1 for a year. 2 Q Have, in fact, those projects, to your 3 knowledge, all the eight contracts involved, proceeded 4 a pace? I mean, do you think there is anybody that is 5 not actually going to deliver the contracted for 6 capacity that you all wanted? 7 A All of the contracts are under construction, 8 although ownership changed several times and some 9 contracts have consolidated. There were two, a 10 phosphate and orimulsion contract became a natural gas 11 contract at one facility, but all of them are under 12 construction or are already in operation. 13 Q Do you have any reason to believe that all of 14 that capacity that was committed will not be built and 15 come on line in a timely fashion? 16 A Like I said, four of them are already under 17 commercial -- under operation and four are coming on 18 line at their schedule or maybe slightly ahead. 19 Q Would you have had the ability when you put 20 that model contract together to require complete 21 dispatchability and also to specifically require a 22 backup fuel if it was a gas facility diesel or if it 23 was a coal facility gas? Could you have done that in 24 your contract? Was there any reason why you couldn't 25 have done that? FLORIDA PUBLIC SERVICE COMMISSION 766 1 A The first one on dispatchability, obviously, 2 we could have done that. At the time we did not, and 3 this is the problem I pointed out with contracts. We 4 thought we could get the dispatchability through 5 economics and maybe didn't need as much dispatchability 6 as we're finding we need. 7 On the backup fuel issue, we thought we 8 handled that in the contract. We stated in the 9 contract that deliveries of energy could not be 10 interrupted except for events of force majeure by the 11 fuel transporter or supplier. 12 Q Uh-huh. 13 A Looking back we should have just said, "Why 14 don't you have 72 hours of fuel on site?" These are 15 some of the problems that I mentioned in contracting 16 for capacity rather than ownership because we thought 17 we had done what we were talking about, that we -- now 18 if we did a contract again, there's numerous things we 19 would change about that contract, including regulation 20 specs to prevent the Dade County problem, complete 21 dispatchability as we did later in the CFR contract. 22 Just specify and you'll have so many hours of backup 23 fuel -- 24 Q But it wasn't the question of the NUGs not 25 doing what you wanted, it was a question of you not FLORIDA PUBLIC SERVICE COMMISSION 767 1 telling them to do those specific things; is that 2 correct? 3 A There's two things. One is we didn't tell 4 them to do certain specific things, like dispatchability, 5 which we're trying to negotiate with some of them at 6 this time, which is difficult. But the other we 7 thought, as I mentioned, we felt we had taken care of 8 the problem. Then upon reading the language, got a 9 different interpretation. And we're not through with 10 the interpretation of that language on the No. 2 oil 11 backup, I can guarantee that. 12 Q Thank you, Mr. Dolan. To my own financial 13 interest, I'm glad to hear that. 14 Had the seven units been built by Florida 15 Power Corporation and not been purchased power, would 16 those units still be in rate base, assuming that they 17 were constructed? You wouldn't take units out of rate 18 base because you were not going to run them at the 19 capacity factor that you originally anticipated they 20 would be run at, would you? 21 A I'm not sure I understand the question. 22 We're not talking about -- by these guys creating 23 dispatchability problems, we're trying to fix the 24 dispatchability problem and we're not talking about 25 changing their capacity. FLORIDA PUBLIC SERVICE COMMISSION 768 1 Q But I guess here's my point. If you had 2 built these plants yourself -- 3 A Yes. 4 Q -- you would have put them in rate base, 5 would you not? 6 A Hopefully, if this Commission would have 7 allowed us to. 8 Q God willing, right? 9 A Yes. 10 Q And if the operation of those particular 11 units was different than you originally anticipated, 12 because they were going to be used more of the time or 13 less of a time or instead of on peak they were going to 14 be used at some other time. Would you take them out of 15 rate base? 16 A No, not if they were used and utilized 17 equipment. If they were put in extended cold shutdown 18 as we have done units, they would have been taken out 19 of the rate base but not if they were being utilized. 20 Q Because what one would look at was how 21 prudent it was at the time that you constructed that 22 facility, would you not? That would be the analysis to 23 see whether they should be subsequently removed from 24 rate base? 25 A That's right. FLORIDA PUBLIC SERVICE COMMISSION 769 1 Q So then why should not the analysis, when one 2 looks at purchased power in the kind of instances which 3 you describe, also focus on what was reasonable and 4 prudent at the time, and what your own best judgment 5 was at the time when you entered into those agreements? 6 A I think we agree with that. We're not 7 talking about just because we don't -- we've been 8 negotiating with the people to try to solve the minimum 9 load issue because it's not specified in the contract 10 specifically; it is specified in some Commission's 11 language. But we're not talking about taking them out 12 of the rate base. We're just talking about maybe 13 having them help us that which may, in fact, help 14 themselves to solve this problem. 15 If we had had direct ownership of the plants 16 rather than through a contract, there wouldn't be an 17 issue of, you know, interpretation of the contract. 18 We'll just pick up the phone and call the plant manager 19 and tell him to shut down or back off to a certain 20 level. 21 Q But your ratepayers would still be paying for 22 that capacity, would they not? 23 A They would pay for it whether it was under 24 the cogen contract or as if we had built it ourselves. 25 MS. BROWNLESS: Thank you, Mr. Dolan. That's FLORIDA PUBLIC SERVICE COMMISSION 770 1 all I have. 2 CHAIRMAN DEASON: Staff? 3 CROSS EXAMINATION 4 BY MS. RULE: 5 Q Mr. Dolan, I'm Marsha Rule of the Commission 6 Staff. 7 In ARK Energy's September 20th comments they 8 included a draft rule, and one of the provisions in 9 their draft rule was that upon request by a potential 10 bidder, the utility issuing the RFP or the utility with 11 whose transmission system the bidder intends to 12 interconnect, if different, would verify the adequacy 13 and feasibility of the bidders proposed transmission 14 interconnection, and there's provision for a 15 nonrefundable fee of $2,000 for the service. 16 How have you handled interconnection in these 17 contracts in the past? Do you have a procedure for an 18 advanced feasibility study? 19 A Well, I guess I have two points on that. One, I 20 guess, they talked about a $2,000 nonrefundable cost. In 21 the past, and I don't have one of the contracts with me 22 but my memory says that we were using a $10,000 refundable 23 deposit on the interconnection cost. 24 Most of the studies may only take $2,000, 25 $3,000; we've refunded all of the interconnection FLORIDA PUBLIC SERVICE COMMISSION 771 1 studies but I think we would prefer to have a higher 2 amount refundable. 3 But the other problem I have with ARK's 4 proposal is I'm not sure how we would ever do the 5 interconnection study. Say we put out an RFP, and just 6 make it 500-megawatts as the RFP, and people have been 7 stating earlier that people are getting responses maybe 8 10 to 1 megawatts, so we get 5,000 megawatts to study, 9 which may be located everywhere. How would we ever 10 figure out the interconnection cost without doing a 11 complete permutation of every, project because an 12 interconnection in Leon County affects our transmission 13 system also in Jefferson County. I mean, it isn't just 14 a local interconnection. These projects are getting 15 bigger and they overload transmission lines everywhere, 16 so I'm not sure that we would ever get the study done 17 because you would almost have to plug all of them into 18 the system at one time and evaluate the 19 interconnections. 20 It would be much better, and this is how we 21 did our other RFP, is you pick the winners; you maybe 22 give them preliminary information about where -- you 23 know, don't locate here, do locate here, or, you know, 24 all ten of you can't locate on the same industrial 25 park. And do the interconnection cost estimates after FLORIDA PUBLIC SERVICE COMMISSION 772 1 either the short list is chosen or some smaller list 2 because, you know, the developers, obviously if they 3 ride out and they see big wire, they probably -- we 4 could do some kind of cost estimates very 5 preliminarily, but they may change drastically 6 according to which ones get picked. 7 As I said before, do we do their cost 8 estimate as if nobody else existed? And then we come 9 up with a cost estimate and then it ends up you pick -- 10 and a lot of these RFPs, you don't have just one 11 winner, you have multiple winners -- when we plug all 12 -- and let's just make it like our RFP -- all eight of 13 the contracts together, they dramatically affected each 14 other's interconnections. Maybe in our RFP, all of 15 them located in Polk County, the bulk of them located 16 in Polk County utilizes a lot of the common pieces of 17 the same transmission grid. 18 To shorten my answer, I'm not sure -- the 19 costs I don't agree with and I'm not sure the process 20 they propose is workable or of any benefit to have the 21 interconnection cost up front because there's no way we 22 could do good interconnection costs not knowing how 23 many of the projects get selected. 24 MS. RULE: Thank you. 25 COMMISSIONER CLARK: Mr. Dolan, you FLORIDA PUBLIC SERVICE COMMISSION 773 1 apparently support Enron's view that there should be 2 competitive negotiations between the parties at the 3 conclusion of the RFP process. 4 MR. DOLAN: That's correct. 5 COMMISSIONER CLARK: Did you hear 6 Mr. Wright's suggestion this morning that you really 7 just negotiate with the winner? 8 MR. DOLAN: Well, you know, when I said 9 Enron's proposal to do competitive negotiations, you 10 could either do that with just the winner or with one 11 or two or three other -- with a small group or just 12 with the winner. But there's no reason to not 13 negotiate terms and conditions that may benefit every 14 party involved, the ratepayer, the utility and the 15 nonutility generator, because you just happen to submit 16 a contract in the RFP. And the next thing I have about 17 the CEPA rule about not being able to negotiate, this 18 contract may live for 30 years. Does that mean you 19 could never renegotiate a term, such as we're trying to 20 do with some of our NUGs, to get some sort of 21 dispatchability, that you would just be -- you've got 22 to live with that forever regardless of whether 23 circumstances may change where renegotiation would 24 benefit all the parties. 25 COMMISSIONER CLARK: Well, the one thing that FLORIDA PUBLIC SERVICE COMMISSION 774 1 concerns me about having a negotiation after the RFP 2 process is you can -- I can envision a situation where 3 you have a winner, and you negotiate on some things 4 that you feel need to be fine-tuned, if you will, and 5 the person that comes in second says, "Hey, wait a 6 minute. You know, if you had offered -- if that had 7 been part of the deal I could have offered you a better 8 price and been the low bidder." Don't we invite more 9 litigation that way? 10 A You potentially could invite more litigation. 11 But in this process, as we find in our standard offer, 12 the losing NUGs have a tendency to litigate and it's 13 just a matter of them trying to find their issue. 14 Because there's a lot of money involved. 15 COMMISSIONER CLARK: Well, do you think under 16 your thought that there should be a competitive 17 negotiation, should you have to first -- you determine 18 the winner of the RFP process and then you begin 19 negotiations with them. If you can't reach a 20 satisfactory contract between that particular NUG and the 21 utility, then you could go to the next one. Do you think 22 that's the way it should work, or should you be able to 23 negotiate simultaneously with, say, the top three? 24 A I would perceive if we did this that we would 25 negotiate with the winner first and try to come to a FLORIDA PUBLIC SERVICE COMMISSION 775 1 conclusion. At that point, according to how long it took, 2 you may negotiate with number two or reissue your RFP. 3 According to what your needs were, because if it took a 4 long time they -- their submittal may be stale also. 5 COMMISSIONER CLARK: Okay. 6 CHAIRMAN DEASON: Thank you, Mr. Dolan. 7 MR. NEISER: One or two questions. 8 MS. RULE: Excuse me -- oh, I'm sorry. I 9 wanted to let you know Staff has another question at 10 some point in time. 11 CHAIRMAN DEASON: You want to go ahead and ask 12 your question now and then Mr. Neiser can wrap it up. 13 Q (By Ms. Rule) Mr. Dolan, in your testimony 14 -- I'm sorry, in your comments you express some concern 15 about Staff's alternative rule needing clarification to 16 ensure that utilities can submit a confidential or sealed 17 bid. And the question is would Power Corp be willing to 18 be held to the bid price if it were a sealed bid? 19 A I guess Florida Power preferred Mr. 20 Ballinger's interpretation on Wednesday where we would 21 not be held to the sealed bid if we could prove 22 prudency. That the overruns were prudent. 23 If it's the -- but I may, you know, add to 24 that that if the only way we were allowed to compete 25 was to live by our bid, I think we probably would. FLORIDA PUBLIC SERVICE COMMISSION 776 1 Q Thank you. 2 REDIRECT EXAMINATION 3 BY MR. NEISER: 4 Q Mr. Dolan, in response to a couple of 5 questions from Ms. Brownless, I think the question 6 related to would we take units out of rate base if we 7 found ourselves in a position of not needing at a time 8 some generation. 9 Has the Company in the past ever taken some 10 units out of rate base and put them in extended cold 11 standby at a time when there was excess generation 12 related to demand? 13 A Yes. I thought I added that in my response 14 to Ms. Brownless, that, you know, if we were not using 15 the units or were not used and useful for whatever 16 reason, and they were put into extended cold shutdown, 17 we would take them out of the rate base. Although, if 18 we just changed their dispatch order or arrangement, as 19 had we done with many of our units, we would not take 20 them out of the rate base. 21 Q And is that flexibility with regard to taking 22 a unit out of rate base, putting it into extended cold 23 shutdown, is that flexibility lost with the purchased 24 power contract? 25 A It's my belief that it is. I think people FLORIDA PUBLIC SERVICE COMMISSION 777 1 have mentioned, you can write in a lot of flexibility 2 in contracts, such as delaying in-service dates or 3 other things, but they come at huge costs to the 4 ratepayer to get that flexibility, that with utility 5 ownership they get more naturally. 6 Q And with response to the question about how 7 much litigation would this process develop, do you 8 foresee the amount of litigation being in direct 9 proportion to the number of rights that are created by 10 a bidding rule? 11 A I think I concur with that. From just 12 looking at CEPA's rule, it took about a year and a half 13 if the RFP went -- if there were no blips in the whole 14 RFP process, I could envision numerous hearings, 15 including going to the Supreme Court at several 16 different stops along the way. Where if you did a 17 one-stop process, as we did in our RFP in January of 18 '91, selected eight winners, 559-megawatts of capacity, 19 had numerous losers, it was adopted, the RFP was 20 approved at the Commission at a PAA in July and had no 21 intervenors in the process. 22 MR. NEISER: That's all I have. 23 CHAIRMAN DEASON: Thank you, Mr. Dolan. Are 24 we ready now to proceed with TECO's presentation? 25 MR. WILLIS: Yes, we are. I'd like to call FLORIDA PUBLIC SERVICE COMMISSION 778 1 Dr. Hadaway. 2 DR. SAMUEL C. HADAWAY 3 appeared before the Commission and testified as 4 follows: 5 DIRECT EXAMINATION 6 BY MR. WILLIS: 7 Q Could you please state your name, occupation 8 and business address? 9 A My name is Sam Hadaway. I am president of 10 FINANCO, INC., a utility consulting firm in Austin, Texas. 11 My address is 3445 Executive Center Drive, Austin, 78731. 12 Q Could you please give a brief summary of your 13 educational background and training, as well as a 14 summary of your testimony, please? 15 A I have a Ph.D. in finance. I've served as a 16 college professor early in my career. I went from that 17 to the Public Utility Commission in Texas, where I was 18 the chief economist and chief financial witness. And 19 for the past ten years I have been involved with 20 FINANCO, I've been president of the Company for the 21 past five years. 22 I can go into more detail than that if you'd 23 like, but that's basically what I do. 24 Commissioners, I'm pleased to be here. I was 25 retained by Tampa Electric to discuss the financial FLORIDA PUBLIC SERVICE COMMISSION 779 1 issues that are involved in Paragraph 7 of your 2 proposed rule. I'm always nervous or concerned, or at 3 least apprehensive about coming into a room with this 4 many attorneys involved in it. And I was getting more 5 and more that way as I was thinking about coming up to 6 get to testify today, but then I remembered that John 7 Rowe was going to follow me in a few minutes and that 8 he is from Georgia Tech. And I got to thinking about 9 young men that are from his school that are coming over 10 here to do battle tomorrow. And I thought more and 11 more about the Chairman's comments that all risks are 12 relative. And so I'm feeling better about being here 13 instead of somewhere else. That's really what we're 14 here about. 15 Specifically, my testimony addresses the 16 effects on the cost of capital that may occur from the 17 utilities entering into a long-term purchased power 18 contract. I have some comments about that that I will 19 summarize. 20 I will also briefly touch on the areas of the 21 fairness issue; is it unfair or are there potential 22 situations of unfairness that may arise if a nonutility 23 generator can lever up its capital structure; if it can 24 use to its advantage financial leverage. 25 And then also, very, very brief, and I don't FLORIDA PUBLIC SERVICE COMMISSION 780 1 know that I'll say anything about this unless someone 2 wants to ask me a question about it, but in my 3 testimony there is also a brief section about the 4 reliability issue as it relates to the capital 5 structure of the nonutility generator. 6 But basically what it amounts to is you have 7 seen many, many comments from the Wall Street 8 community, particularly from the rating agencies, about 9 the various kinds of risks that are associated with the 10 alternative ways of doing things. And Moody's is 11 listed, and then you've seen these things before, but 12 they've listed six different categories of risk that 13 come about and they say, right up front, that these 14 risks apply to one degree or another to either a 15 purchase situation or to the build situation. And I've 16 also got some brief notes at the end of my outline here 17 that I've prepared for the past couple of days, where I 18 want to comment specifically on some of the things that 19 Dr. Roach said about some of these issues. 20 But basically Moody's list of six risk 21 elements start out with demand, risk, as you heard Dr. 22 Brown speak about on the first day we were here; Supply 23 risk, which has to do with whether the particular 24 resource will be there when you need it; operating 25 risk; construction risk; rate base risk, which is FLORIDA PUBLIC SERVICE COMMISSION 781 1 something we haven't had a lot of discussion about in 2 the past couple of days, And then also regulatory risk. 3 Well, all of these things are sort of put together, but 4 what we all know is that there is really no way to have 5 a free lunch. Risk exists. And it doesn't go away 6 just because we package a project slightly differently, 7 or if we slice the pie up in different ways. 8 So a question that I think, that we've all 9 been grappling with in these proceedings, and in 10 proceedings elsewhere around the country, has to do 11 with how can it be a lower priced situation if you do 12 it through a nonutility generator than if you had the 13 same kind of situation done by the utility itself. And 14 I guess I'm still puzzled by that to some extent 15 myself. Particularly some of the extreme statements 16 about -- well, particularly that Dr. Roach made, I 17 guess. I'll come back to those. 18 But I was also taken by the comments that Mr. 19 Reilley gave to you yesterday, late in the afternoon, and 20 I guess I do agree with what he had to say. 21 There are indeed risks, either way you go 22 about it. And you need to look at these things almost 23 in each situation on a case-by-case basis. 24 The demand risk to me, having been involved 25 with the Texas Commission for a good portion of my FLORIDA PUBLIC SERVICE COMMISSION 782 1 career, the thing that has struck me about that 2 discussion, it's not just whether the regulator might 3 disallow a particular item that has been included in 4 the cost of service or not disallow it. Certainly, 5 Florida is looked at and your purchased power 6 adjustment clause is viewed as one of the most 7 constructive ways of dealing with this kind of thing. 8 But to me the demand risk issue is much more than that. 9 You've heard witnesses today, and I believe yesterday 10 as well, and also Moody's quote some of these in their 11 write-ups about Gulf States' situation with its 12 purchased power contract with the Southern Company. 13 Well, from the time I was with the Texas 14 Commission, and later on working in other forums 15 related to that purchased power contract, I know that 16 Gulf States entered into that purchased power contract 17 when they were about to lose a gas contract that was 18 very, very favorable at a time when gas prices were 19 expected to go out the roof and they needed the 20 capacity. By the time it was all said and done, the 21 transmission line was built by the thousand megawatts 22 of capacity. They had lost a major position of their 23 industrial load in Louisiana. The world changed. The 24 situation that faced them when they finally started to 25 receive that power and needed to recover for it really FLORIDA PUBLIC SERVICE COMMISSION 783 1 didn't provide any good way of doing it. The rates 2 were already pretty high and they couldn't recover. 3 And according to the Moody's review, and based on some 4 other information I've seen elsewhere, Gulf States 5 ended up paying $300 million to buy out of that 6 contract with Southern Company and as you know, they're 7 in the process of no longer being an independent 8 utility company, they've been bought by another 9 interest. 10 On the other hand, I have also been involved 11 in another case that was mentioned by one of the 12 witnesses about Texas -- New Mexico Power Company. 13 They had been basically a distribution kind of company, 14 had no generation in Texas of their own, but decided to 15 build two state-of-the-art, fluidized bed combustors to 16 burn on site lignite, and various other kinds of fuels, 17 if necessary. And they went into that to produce about 18 30% of their own power. By the time they had built 19 those units -- again the world had changed, gas had not 20 gone up in price like they thought it would. The 21 difficulty that they faced in the courts and elsewhere, 22 have left that company because of the build decision in 23 a very, very serious situation. 24 So what it amounts to in my mind is that the 25 build versus buy can go either way. But to make FLORIDA PUBLIC SERVICE COMMISSION 784 1 comparisons, as you've heard some people do, about the 2 risk of building when you're talking about a nuclear 3 power plant, versus the risk that we're talking about 4 in some of these purchase contracts, is not a good 5 comparison. That's not the right focus, because 6 there's not much risk for a utility, a major utility to 7 build 100-megawatt combined cycle facility for itself. 8 It could do that and from my experience with the rating 9 agencies, it shouldn't cause a blip in the rates. At 10 the same time, up to a certain point, small amounts of 11 purchased power obviously are not going to cause a 12 major concern by the rating agencies. They say that in 13 their rating reports. 14 So to look at the situation ahead of time, 15 and try to set down this is the way we're always going 16 to it is very, very hard. Sometimes it will be better 17 to negotiate purchased power contracts. Sometimes it 18 will be better to build a facility. 19 I heard some comments -- operationally I 20 don't know too much about these, I'm not engineer, but 21 where if a utility is building a facility, particularly 22 a small one, and they see that there is a slight 23 change, they may have the flexibility to move it around 24 a little bit. Whereas, if they had said, "We're going 25 to start funding your nonutility generator fixed FLORIDA PUBLIC SERVICE COMMISSION 785 1 charges," they have to take up the contract on the time 2 period when it's set. So there are all those kind of 3 tradeoffs that I don't know how you make a rule ahead 4 of time that can cover all of those things. 5 That's probably the main point of my 6 testimony. Also, though, I do have a section that 7 talks about this debt equivalence issue. Having been 8 an old college professor at one time, it's hard for me to 9 sort of leave lay Dr. Roach's comments that the fixed 10 costs associated with additional purchased power contracts 11 don't cause risk unless they're defaulted upon. 12 Any time that you have fixed charges on the 13 income statement ahead of the equity shareholders 14 returns, their risk has changed. Clearly the question 15 is: Do those risks change more if you build or buy? 16 And those are the kinds of things that you have to 17 trade off. But the examples that you have seen, and I 18 won't go through one, there is one in my testimony -- 19 where if you take on additional fixed charges ahead of 20 your equity payments, that you must offset that with 21 additional equity is just plain common sense economics. 22 It's in every textbook that you see anywhere. And it 23 doesn't matter whether the accounting profession 24 absolutely requires that the contracts be capitalized 25 and put on the balance sheet or not. That's simply the FLORIDA PUBLIC SERVICE COMMISSION 786 1 way things work. The risk is increased depending on 2 where the fixed charges are. And again, those things 3 are very hard to predetermine. 4 Okay. Those are the principle things that I 5 wanted to talk about. I don't think that I have a 6 strong feeling about the reliability issue relative to 7 the amount of equity that's in a nonutility generator's 8 situation, but we all have many, many things, and maybe 9 that's where Commissioner Lauredo was coming from. 10 We've seen situations where large amounts of debt 11 worked just fine as long as fuel prices are stable and 12 the situation is as it has been for the past four, five 13 years, it all works great. But when the situation 14 changes, we've seen the S&L industry, we've seen the 15 real estate industry, we've seen the effects that large 16 amounts of debt can have. So those things should be 17 considered. They shouldn't necessarily be thrown out, 18 because that's the way that kind of business is done. 19 But they are important. And they should be considered 20 and they are there as a risk. 21 In terms of whether that creates a situation 22 that's not fair, again, there's no reason not to take 23 advantage of an opportunity that exists to lower costs. 24 But at the same time in comparing two proposals, one 25 beside the other, it is simply not an adequate FLORIDA PUBLIC SERVICE COMMISSION 787 1 comparison to ignore the differences in risk and other 2 factors that are caused by different capital 3 structures. That's the extent of my comments. If I 4 have any -- if someone has any questions I'll be happy 5 to answer. 6 CHAIRMAN DEASON: Mr. Watson? 7 CROSS EXAMINATION 8 BY MR. WATSON: 9 Q Dr. Hadaway, I'm Ansley Watson, and I appear 10 today for CEPA. 11 Would I be correct in giving your testimony 12 the following overall characterization, let me ask you 13 this: Would it be that both the buy and build options 14 of a utility have risks just as would a utility's 15 decision to do neither when faced with the need for 16 additional generating capacity? 17 A Yes. 18 Q And doesn't your testimony really say that 19 the Commission should look at the cost associated with 20 each of the two options on a case-by-case basis? 21 A That's the principle thrust of it. I think 22 that the main thing, the main point that I would want 23 to make, though, is that I do not believe that the 24 build option in the same size and the same kind of 25 technology is more risky than the purchase option. FLORIDA PUBLIC SERVICE COMMISSION 788 1 Q And you are aware that there are those who have 2 testified here who would disagree with that feeling? 3 A That's right. I think reasonable people can 4 disagree on that point. 5 Q Absolutely. Thank you. 6 CHAIRMAN DEASON: Mr. Palecki. 7 MR. PALECKI: Yes. Mike Palecki for the 8 Commission Staff. I haven't made an appearance yet, so 9 I guess I should do that now. 10 CROSS EXAMINATION 11 BY MR. PALECKI: 12 I just have a couple of questions. We heard 13 Florida Power Corporation testify that the risk reaches 14 the area of concern when you achieve 20% to 30% of 15 purchased power, would you agree with that? 16 A I don't have a specific level in mind. It's 17 sort of a continuum to me. 18 Q Are you aware of the percentage of purchased 19 power on TECO's system? 20 A No, I'm not. 21 Q Are you aware at all whether TECO is at that 22 20% to 30% purchased power level? 23 A I don't know. I haven't investigated that at 24 all. 25 Q Do you have any input that you could provide FLORIDA PUBLIC SERVICE COMMISSION 789 1 to the Commission on how it should handle a utility 2 that avoids having purchased power on its system? As 3 you're aware, the Commission is required by statute to 4 encourage cogeneration. Do you have any ideas in -- if 5 the Commission had to deal with a utility with very 6 little purchased power that was not amenable -- or 7 seemingly not amenable to going after more purchased 8 power? 9 A We've heard other people testify, I believe 10 today and certainly in previous days, that if those 11 options are out there, and if the utility chooses a 12 different resource, then the utility has a burden to 13 show that the reasons for choosing that other resource 14 were good. And others have the opportunity, and 15 certainly do in rate case settings, to say, "These 16 other things were there when you decided to build this 17 power plant. We don't think it was prudent for you to 18 do this, this and this." Fortunately, in the state of 19 Florida you have not had the kinds of desperate 20 situations that I have seen, not just in Texas but in 21 other states as well, where major, major disallowances 22 came about over these kinds of issues. But that's the 23 appropriate forum. 24 The utility has to make its own choices. It 25 has to be managed the way its management believes that FLORIDA PUBLIC SERVICE COMMISSION 790 1 it should. But at the time they bring those choices to 2 the regulator, then the regulator has the last call on 3 that. And then that's where your job is to look at the 4 situation and say, "Is this the prudent thing to do?" 5 Q Do you think it's reasonable for a rule to be 6 implemented that would require a utility to place or to 7 go after purchased power when it has very little 8 percentagewise on its system? 9 A Again, I view this as -- I said continuum 10 before about the 20% to 30%, But it depends on the 11 circumstances. I know of utilities that have some sort 12 of avoided cost, energy-based standard offers that if 13 someone wants to sell them energy at that price, 14 they'll buy it. But they don't need capacity, or in 15 their view they don't, and at least to date many of 16 them have not. Therefore, they have not had any 17 capacity charges that they would even pay to QFs. 18 So not knowing exactly the situation you're 19 asking me about, I may be way off base on your example, 20 but you have to look at the situation, and if it's not 21 prudent for that utility to not take advantage of other 22 opportunities that are out there, then this Commission 23 has every opportunity to look at what the utility 24 brings in and offers to them, you know, when they try 25 to rate base a plant. FLORIDA PUBLIC SERVICE COMMISSION 791 1 MR. PALECKI: Thank you. We have no further 2 questions. 3 COMMISSIONER CLARK: I would like to ask Tom 4 Ballinger something just to make sure I understand 5 things. 6 The capacity cost recovery factor, it's our 7 intention to move all purchased power into that clause 8 and out of rate base as companies come in for a rate 9 case? 10 MR. BALLINGER: I don't think so. 11 COMMISSIONER CLARK: All right. Refresh my 12 memory as to what -- 13 MR. BALLINGER: I think the intent of it is 14 to treat purchased power, nonutility purchased power, 15 to allocate it based on cost of service methodology. 16 So we're allocating it much like base rates, instead of 17 on a per kilowatt hour charge. It's also in my 18 understanding used as kind of a interim basis for 19 purchases before you have a rate case. 20 COMMISSIONER CLARK: Then I've gotten it 21 exactly opposite when you would go to the next rate 22 case. 23 MR. BALLINGER: A utility-built plant would 24 go into rate base. 25 COMMISSIONER CLARK: All right. What about FLORIDA PUBLIC SERVICE COMMISSION 792 1 purchased power? 2 MR. BALLINGER: That would stay in the cost 3 recovery clause. 4 COMMISSIONER CLARK: Do we currently have 5 purchased power in base rates now? 6 MR. BALLINGER: If we do, there is very 7 little, and it would only be long-term purchases. Over 8 the last few years, we've moved from having both 9 economy purchases and unit power sales or capacity 10 purchases from base rates into the capacity recovery 11 clauses, and for a variety of reasons, mainly because 12 of the problems of forecasting what those sales would 13 be 14 and trying to guess those revenues in setting rates. 15 COMMISSIONER CLARK: Okay. 16 MR. PALECKI: Commissioner, at a very early 17 stage, one of the very early iterations of a draft rule 18 for this particular docket, the Staff had drafted a 19 proposal that would have put all purchased power, as 20 well as utility-built plant, through the clause, but we 21 withdrew from that position, and we no longer advocate 22 that particular avenue. But that was one of the early 23 drafts that we probably submitted to the various 24 Commissioners. 25 CHAIRMAN DEASON: Any further questions? FLORIDA PUBLIC SERVICE COMMISSION 793 1 Thank you, Dr. Hadaway. 2 MR. WILLIS: Can Dr. Hadaway be excused? 3 CHAIRMAN DEASON: Yes. 4 (Dr. Hadaway excused.) 5 MR. WILLIS: Call Mr. Rowe 6 - - - - - 7 JOHN ROWE 8 appeared before the Commission and testified as 9 follows: 10 DIRECT EXAMINATION 11 BY MR. WILLIS: 12 Q Please give your name, address and business 13 affiliation? 14 A My name is John Rowe. I'm Vice President of 15 Regulatory Affairs for Tampa Electric Company, P.O. Box 16 111, Tampa, Florida 33601. 17 Q Would you please summarize your testimony? 18 A Yes. Commissioners, good afternoon. 19 Our company was the first utility in Florida 20 to go through the power plant need process after it 21 became effective, and we've been a party to three 22 determinations of need before this Commission. 23 I've been deeply concerned about much of what 24 I've heard so far in this hearing and about what I've 25 read in some of the comments that have been filed. FLORIDA PUBLIC SERVICE COMMISSION 794 1 It's pretty clear from the number of parties 2 represented, particularly those hanging on late on 3 Friday afternoon, that a great deal of money must be at 4 stake. 5 What I believe is being examined here is 6 whether the regulated model is broken or whether it can 7 be materially improved so that consumers can realize 8 any additional benefits. And my remarks address a few 9 policy issues which you're now facing. Mr. Mestas and, 10 of course, Mr. Hadaway that you heard just have spoken 11 to other aspects of the rule consideration, which we 12 ask you to examine as well. 13 I would like to reiterate a few points that I 14 would suggest that you understand, keep in mind and use 15 as guidelines as you weigh the comments. 16 The first of these is that after all the 17 procedures have been decided and all the rules have 18 been followed and all the results have been known, 19 regardless of what you decide to do, only the regulated 20 utilities in the Commission are left to be responsible 21 to the public. Only the utilities in the Commission 22 have a statutory obligation to do that. 23 Secondly, I believe that the consumer's 24 number one concern is that they will be able to get 25 electric service when they need it and where they want FLORIDA PUBLIC SERVICE COMMISSION 795 1 it. The price the consumer pays is certainly 2 important, but the price only becomes primary when 3 they're assured of reliability. And we're not talking 4 about how long a single plant may run. All machinery 5 breaks eventually, and it's usually at an unplanned or 6 inconvenient time. As far as the consumer is 7 concerned, they want to know about their service at 8 their given point in time and whether they can get it. 9 1989 Christmastime is probably the best and most recent 10 evidence that we have of that. 11 The third point is that if utilities are not 12 held responsible for their decisions about how to meet 13 their statutory obligations and some other approach 14 fails, the Commission may be blamed for preempting the 15 process that worked previously. 16 And I think we've been talking about an 17 approach that we've had for a number of years that has 18 worked pretty well and it continually needs tuning up, 19 and all of us ought to look for that, but it hasn't 20 been irretrievably broken. 21 Providing a detailed specific set of 22 procedures in selection criteria may well be in the 23 best interest of the nonutility generators. But, I 24 believe that it's unnecessary to provide all that 25 detail and all of those selection criteria, all of the FLORIDA PUBLIC SERVICE COMMISSION 796 1 utility's plans for generation in order to bid on a 2 project. The fact that many companies have been able 3 to bid on projects and many utilities have been able to 4 buy nonutility generation is pretty good evidence of 5 that. It hasn't been done in the past and I don't 6 believe it needs to be done in the future. 7 But, in any I event, the real question is 8 whether the selection process will be in the consumer's 9 best interest. Again, the primary purpose of this 10 process is not to promote competition. The primary 11 objective is to adopt the process which best serves and 12 protects the consumers of this state. 13 The present process of selecting generation 14 can be tuned up, as I mentioned, but there's no 15 evidence that it has been broken. And the benefits of 16 competition, in large part, can be realized for 17 consumers without encouraging nonutility ownership of 18 the generation. We've kind of spoken to it in terms of 19 economic risks here and there. But, in fact, if you 20 were to require a utility to bid out the cost of 21 constructing the plant, but then the utility owns the 22 plant, the utility continues to own it and we have a 23 pretty well-regulated model. But the consumer has been 24 protected largely from the construction risk that goes 25 on. FLORIDA PUBLIC SERVICE COMMISSION 797 1 When ownership is shifted to other parties, 2 there are some real problems with assigning the 3 responsibilities for failures. A certain amount of 4 that can certainly be taken into account by contract, 5 but as many have mentioned, we're still looking for 6 that well-crafted contract. And when there are 7 disputes, as there inevitably will be over the long 8 term, there is a cost of litigating those problems. 9 If you decide to make material changes in the 10 selection process, we believe you need a rule to 11 reflect those changes. There's just too much at stake 12 here for the consumers for you to forego making a rule 13 altogether, so we think you ought to have some kind of 14 rule. But I urge you to make that rule very flexible, 15 allowing for creativity to operate for the particular 16 circumstances that exist with respect to each of the 17 regulated utilities at the time it makes that 18 generation decision to be recognized and for the 19 consumers to be protected under your oversight. I urge 20 you not to box yourselves in to detailed procedures, 21 which are certainly untested at this point. 22 We recommend that you give more serious 23 consideration to the original Staff rule proposal, as 24 modified very slightly by Mr. Mestas and he will speak 25 to those particular modifications; they're minor. FLORIDA PUBLIC SERVICE COMMISSION 798 1 We believe that anyone in Florida, with very 2 few exceptions, who builds generation in Florida should 3 be required to go through the need process. And that 4 if you adopt some form of bidding as being the only way 5 that people demonstrate that the selection they've made 6 is cost effective, that everyone should have to go 7 through that process. Each party should operate under 8 the same rules and demonstrate that they're operating 9 or generating need will be met with the most 10 cost-effective solution. 11 However, I do believe that true cogeneration, 12 and when I say "true cogeneration," I mean, the kind 13 that comes from waste heat of industrial processes as 14 opposed to some of the so-called PURPA machines, what 15 we call and recognize in Florida is most of the 16 generation -- cogeneration that we have. And 17 cogeneration from solid waste disposal facilities, 18 which are owned by the government, should be exempted 19 from the bidding process. That is, there should be 20 some set aside for that because I believe that they 21 serve other important public policy objectives as well. 22 And I believe, as the law says, that facilities under 23 75 megawatts should be exempted. 24 Allowing nonutility entities to own and 25 operate a significant portion of the generating FLORIDA PUBLIC SERVICE COMMISSION 799 1 capacity of a regulated utility is really an untested 2 quantum change in regulation. And the Commission 3 should proceed very carefully in experimenting with 4 this form of deregulation. As you're well aware, the 5 delicate balance between consumers, regulation and 6 utilities is on the line. 7 So our bottom line is that we believe it 8 would not be in the best interest of Tampa Electric's 9 customers for you to adopt a detailed rule, which on 10 the front end restricts your regulatory discretion to 11 ensure on a case-by-case basis that we, the regulated 12 parties who serve, can continue to fulfill that 13 obligation that we have. 14 That concludes my summary. 15 MR. WILLIS: Mr. Rowe is available for 16 questions. 17 CHAIRMAN DEASON: Mr. Watson. 18 CROSS EXAMINATION 19 BY MR. WATSON: 20 Q Good afternoon, Mr. Rowe. 21 A Mr. Watson. 22 Q Does Tampa Electric Company use various fuels 23 in its generating plants? 24 A We do. We use primarily coal but we use 25 several fuels. FLORIDA PUBLIC SERVICE COMMISSION 800 1 Q And do you obtain that fuel by contract? 2 A We do. 3 Q If your suppliers were to fail to deliver the 4 fuel to operate your generating plants, would that 5 affect Tampa Electric Company's ability to provide 6 service? 7 A Sure it would, assuming we couldn't get it 8 from an alternative source. 9 Q You rely on that contract that you have with 10 your supplier? 11 A Obviously we do rely on it. We also rely on 12 ourselves to provide a margin of error by providing a 13 certain amount of inventory at the plant, by looking 14 for alternative sources of power as they may be 15 available. Ultimately, it's not just the fuel that is 16 the critical factor, it's whether there is power 17 available to deliver to the customers. That's what 18 they want. 19 Q Correct. And being a prudently managed 20 utility you also have a reserve margin in your 21 generation? 22 A We try to. 23 Q You make the statement at Page 11 of your 24 prefiled testimony at Lines 21 to 22 that "We believe 25 that it is impossible to assure consumers of FLORIDA PUBLIC SERVICE COMMISSION 801 1 reliability and continuity simply by contract." 2 Is that consistent with Tampa Electric 3 Company's relying on a mere contract for fuel, which is 4 an important ingredient in your generation? 5 A No, sir, I don't think it is in that we don't 6 think it's possible to assure consumers of reliability 7 and continuity simply by relying on a single fuel 8 contract either. You have to provide for some other 9 means of providing the power. And the contract that we 10 have with fuel suppliers, as well crafted as we may try 11 to make it be, has obviously, not from past history, 12 turned out to be as reliable as we would like it to be. 13 Q Immediately following that statement you say, 14 "It should be noted at the outset that the more 15 ironclad a contract is, the less likely it is that a 16 nonutility generation" -- I assume you mean generator 17 -- "will sign it at a reasonable price." 18 Does this reflect any attitude on your part 19 or on the part of Tampa Electric that the power 20 purchase agreements approved by this Commission over 21 the past several years should be deemed imprudent? 22 A I'm not in the business of judging prudency. 23 I think that -- and I'm not familiar with the contracts 24 that the Commission has approved in that way. I was 25 making a general statement about the relationship FLORIDA PUBLIC SERVICE COMMISSION 802 1 between the number of terms and conditions that one 2 puts into a contract and the willingness of a party who 3 has a slightly different objective to sign it. The 4 more onerous the person who's seeking to buy a 5 particular good or service makes a contract to protect 6 himself, the more difficult it is, generally, for the 7 other person to provide that at perhaps the price they 8 would like to. 9 Q But if the party to whom the contract is 10 offered knows that these are the terms that are being 11 offered; and if I want to play in this game, this is 12 what I have to price and that is made available to all 13 comers. Isn't that sort of what competition is all 14 about or at least part of it? 15 A As a general statement, I would say 16 competition is certainly related to that, yes, sir. I 17 think, however, that we're not exactly in full 18 competition here. We have considered some elements of 19 competition and the utilities themselves are certainly 20 not full competitors by their nature in law. We're 21 constituted in a somewhat different way. And the 22 question that faces us is how quickly or how slowly 23 will we and should we move toward a less monopoly model 24 and toward a more competitive model? 25 Q And I guess that's, in large measure, the FLORIDA PUBLIC SERVICE COMMISSION 803 1 general thrust of your testimony that the Commission 2 should be wary of changing a system that has been in 3 place for some time? 4 A Not to say that change should not take place, 5 but they should certainly be wary of it because it is a 6 system that in the past has worked very well. And I 7 would hate to throw out all the good aspects of what 8 has worked well, unless it has a real promise, in fact, 9 a good certainty that it will be better. 10 Q Mr. Rowe, as part of your capacity mix at 11 Tampa Electric Company, do you rely on any purchases 12 from other utilities or from cogenerators? 13 A We do. 14 Q Approximately what percentage of the capacity 15 on your system or your total capacity is represented by 16 nonutility generator purchased power? 17 A I really don't have the number. 18 Q Do you know how much you purchase from other 19 utilities? 20 A No, I don't. 21 Q Do you have any long-term purchase contracts 22 with either nonutility generators or other utilities? 23 A There is a long-term purchase contract with 24 TECO Power Services, an affiliated producer. 25 Q Okay. FLORIDA PUBLIC SERVICE COMMISSION 804 1 A Mr. Mestas will be able to tell you about our 2 cogeneration contracts. That's his area of specialty. 3 Q At Page 14 of your testimony, Lines 4 through 4 8, you make the statement that "If an investor-owned 5 utility or if investor-owned utilities can no longer 6 own generating facilities, their ability to earn a 7 return for their investors will fall dramatically. 8 This can lead to very serious consequences for their 9 customers." 10 Mr. Neiser asked Dr. Roach yesterday -- were 11 you here when the exchange occurred -- whether the 12 shareholders of a utility are compensated for purchased 13 power the way they are when they invest in the 14 utility-built generation. Do you recall that question? 15 A No, I don't, but I accept that. 16 Q Well, let me ask you this: The fact that the 17 ability of a utility investor to earn a return -- in 18 other words, the shareholder's ability to earn a return 19 -- should this be a consideration if the particular 20 utility that we're talking about cannot provide what is 21 determined to be the best deal for its ratepayers? 22 A I still think it should, and let me 23 elaborate, if I may. I think it goes back to the 24 statement that I made about the competitive model 25 versus the monopoly model and how quickly or how slowly FLORIDA PUBLIC SERVICE COMMISSION 805 1 we ought to move from one to the other. If we make a 2 move where suddenly we have decided to take the major 3 investment that has been made by utilities over a 4 period of time, and in order to try to get the best 5 price for customers -- and that's another question 6 about whether indeed it would be if we went to other 7 kinds of generation -- we interrupted the expectations 8 of the investors in the company materially. There are 9 people who invest in our company who would be hurt by 10 that. The value of their stock would drop, and I think 11 that's a matter to be considered. There are many 12 people that rely on utility stocks. They're teachers', 13 unions and they're retired people, and they are people 14 like you and me. And they're relying on an adequate 15 return, on a fair return on investment. It's not that 16 they won't earn a return on the remaining investment, 17 but incrementally their growth in their investment and 18 the growth in their stock will not be what they 19 expected, and their stock will fall as a result. And I 20 think that needs to be taken into effect. 21 Wherever there's been a quantum change in a 22 too short a period of time, whatever that means, in a 23 deregulated sort of industry, someone, some party, in 24 some cases several parties, have suffered consequences 25 that have been undesirable. FLORIDA PUBLIC SERVICE COMMISSION 806 1 Now, the new model may turn out to work very 2 well, but somebody had to lose something in order for 3 the new model to work. And I would not like to see 4 that happen in this industry. I would like to find a 5 way that we can take on the benefits of competition in 6 an orderly and defiant way without destroying the best 7 of what's gone on before. 8 Q Well, you talk in your testimony -- I forget 9 exactly where it is -- about the regulatory compact? 10 A Yes. 11 Q Should the consideration that you just 12 finished discussing -- let me ask you this, should the 13 utility be permitted to make the investment in its own 14 plant and dedicate that investment to public service, 15 when the service to which it is dedicated can be 16 provided at a lower overall cost to the public? I 17 mean, if we want to get into social considerations? 18 A I think that if all of the appropriate costs 19 are measured that that won't be necessary. 20 Q Your comments and some of the questions that 21 Mr. Cresse has asked other witnesses rely in substance 22 almost solely on the utility's obligation to serve for 23 their justification, and that's my opinion. Isn't the 24 obligation to serve a part of the regulatory compact 25 you described on Page 4 of your testimony? FLORIDA PUBLIC SERVICE COMMISSION 807 1 A Yes, I think it is. Yes, sir. 2 Q Now, that compact assumes that the utility 3 owns all of its distribution, transmission and 4 generation facilities, doesn't it? 5 A I'm not sure that it speaks to it. That's 6 certainly the way that it's been done in the past. 7 Q Well, let's assume these services were 8 unbundled, as they are and have been in the natural gas 9 industry for quite some time. Would the regulatory 10 compact you describe continue to apply to generation? 11 A I would have to have more information than 12 that. It kind of depends on -- well, the regulatory 13 compact is what the regulatory compact is. I can tell 14 you how it's worked in the past and how it's worked 15 well. And that's exactly the question facing us. What 16 should be the compact, I think, for the future? 17 If one were to define regulation as being 18 quite different, and if I understand what you intend to 19 mean by unbundling to mean that the generation supply 20 portion of electric service is deregulated entirely, 21 then it would be a quite different world. And I really 22 haven't contemplated how far that might go and what it 23 would be take to unwind it, but I would hope that we 24 would avoid the problems that happen in the gas 25 industry when that happened and just as I know you went FLORIDA PUBLIC SERVICE COMMISSION 808 1 through them. 2 Q Well, let's just assume that a world in which 3 you have a company or a number of companies that 4 provide generation, all wholesale power producers, and 5 you have other companies that provide transmission 6 service. And then you have a distribution company, 7 which basically is how the natural gas industry is 8 structured today. In other words, your generator is 9 your natural gas supplier or producer, your 10 transmission company is a transmission pipeline, 11 interstate or intrastate. And then you have folks like 12 our local distribution companies here in Florida, 13 Peoples Gas, West Florida Natural Gas, City Gas, and 14 they are local distribution companies. 15 Local distribution companies in the gas 16 industry rely entirely on contracts with the pipelines 17 for transmission and the producers or gas marketers for 18 their gas supply. In your case, let's say that your 19 distribution electric utility, it would have to 20 contract with Transco and Genco in order to get what it 21 needs to distribute at the distribution company, would 22 it not? 23 A It sure sounds that way. 24 Q If you assume that example in the electric 25 industry, where under Chapter 366 does the obligation FLORIDA PUBLIC SERVICE COMMISSION 809 1 to serve fall? 2 A I couldn't tell you. I mean, I can't say 3 exactly how that falls. Chapter 366, I'm sure, was 4 written again in the context of assuming the model the 5 way that it had been, but I don't have a legal opinion 6 as to exactly what would apply. 7 Q What happens when a utility fails to meet its 8 obligation to serve? 9 A Typically the Commission takes action either 10 to correct the utility or to penalize it. 11 Q Now, are these -- is the imposition of a 12 penalty, either through the return on equity or a 13 monetary fine or whatever, is that a certainty for the 14 utility in that case? 15 A When the Commission decides that it's going 16 to penalize, I think it's pretty certain that the 17 utility is going to pay. Is that what you asked me? 18 Q Yes. I mean, is it certain, number one, that 19 a penalty is going to be imposed, and if it's going to 20 be imposed, is it certain what the amount is going to 21 be? 22 A I think you'd have to ask the Commission 23 that. Assuming that there has been something 24 appropriate to penalize and the Commissioners decide 25 that, as to the certainty of whether they would FLORIDA PUBLIC SERVICE COMMISSION 810 1 consider a particular event penalizable, or whatever, I 2 think they are the best ones to ask. 3 Q So you're basically saying it's uncertain? 4 A Yeah, in that respect I guess it's uncertain. 5 Q If a nonutility generator with whom you have 6 a contract to deliver energy and capacity fails to 7 deliver per the contract, isn't there a pretty -- isn't 8 it fairly certain that it's not going to get paid? 9 It's a take-and-pay situation? 10 A That's another if that you have. It kind of 11 depends on that well-crafted contract that you 12 mentioned and how well the lawyers are able to deal 13 with it. 14 Q Does TECO Power Services have an obligation 15 to serve Tampa Electric Company other than that created 16 by contract? 17 A That's a good question. I would say from a 18 legal point of view that it does not. I would say that 19 from the view of this particular Commission, that it 20 certainly would pierce through that corporate 21 relationship and expect TECO Power Services to be held 22 to, at least, if not a higher standard of performance 23 than someone who was not affiliated. 24 Q Do you obtain reliable service from TECO 25 Power Services? FLORIDA PUBLIC SERVICE COMMISSION 811 1 A Yes, since January 1. 2 Q And that's a relationship that is governed 3 only by a contract. 4 A Other than that that I described, except that 5 if they are not behaving the right way, we've got a 6 short cut to try to solve that problem without having 7 to go to the lawyers to do it. 8 Q All right. Were there any penalties imposed 9 on Florida's investor-own electric utilities as a 10 result of their inability to meet customer's needs 11 during the December '89 Christmas freeze? 12 A You mean were there fines or that sort of 13 thing? I'm not aware of any in that respect. There 14 was certainly an awful lot of effort put into 15 explaining what happened, and there were a number of 16 changes that were made as a result of it. I don't 17 think I'd call those penalties, but there were changes 18 made. 19 Q Cost of being regulated. 20 A Yes, sir. 21 Q Can you recall, Mr. Rowe, when the last time 22 a Florida investor-owned electric utility was penalized 23 for failure to live up to its obligation to serve? 24 A I can't tell you a date. If you want to call 25 disallowance as a failure to the obligation to serve, I FLORIDA PUBLIC SERVICE COMMISSION 812 1 could cite any number of those but I couldn't put the 2 date on them. 3 COMMISSIONER CLARK: Mr. Watson, do you have 4 an example of what constitutes their failure of the 5 obligation to serve? 6 MR. WATSON: I'd love to hear one from the 7 electrics. We've heard about it all today. 8 Q (By Mr. Watson) Could you give me an example 9 of what constitutes a failure to meet the obligation to 10 serve? 11 A Are you asking me have we failed? 12 Q No. I'm asking if you can give an example of 13 what would constitute a failure to meet this obligation 14 we've heard about for the last three days. 15 A I'll try. 16 Suppose that a given company failed to have 17 adequate reserves, knowing that a reserve margin was 18 necessary, and this Commission had found that a reserve 19 margin was necessary, and then the Company failed to 20 provide that sort of capacity. And then as a result of 21 that customers were not served or they had to incur a 22 much larger cost than expected. I would say that's a 23 failure of the obligation to serve. 24 Q Wouldn't it be the failure to have the 25 reserves, more so than it would obtaining capacity or FLORIDA PUBLIC SERVICE COMMISSION 813 1 energy at a much higher cost that would constitute the 2 failure? 3 A The bottom line result is the same. The 4 customers weren't served. 5 COMMISSIONER CLARK: Have we had any 6 situations where customers weren't served, such that 7 you would consider it -- consider that a utility did 8 not meet its obligation to serve? Has that ever 9 happened? 10 MR. ROWE: I'm not aware of that, 11 Commissioner. I think that the relationship, as I 12 said, has been one where we're constantly reminded of 13 it. And with this Commission's oversight and the 14 responsibility of the utilities, we worked very hard so 15 that that didn't happen. And I'm not aware of a 16 quantum failure on the part of the compact. 17 COMMISSIONER CLARK: Mr. Watson, is it your 18 view that the 1989 blackouts constituted a failure to 19 serve, to meet that obligation? 20 MR. WATSON: No, I don't believe it did 21 COMMISSIONER CLARK: Okay. 22 MR. CRESSE: Mr. Chairman, I can jiggle 23 Mr. Watson's memory just a moment. There has been a 24 penalty imposed by this Commission on an electric 25 utility for having too many short -- actually, it's FLORIDA PUBLIC SERVICE COMMISSION 814 1 tree trimming. In a specific geographic area in this 2 state, the utility neglected to keep that, and they 3 were having these "flickers." This Commission imposed 4 a penalty on that particular utility. 5 In addition, I think the guidelines which the 6 Commission uses are the performance standards which are 7 required under your rule for an electric company, the 8 expectations that you have for performance under those 9 rules. 10 MR. WATSON: Could I ask Mr. Cresse if he's 11 aware of any instance other than the one he just cited 12 where a utility has been -- 13 MR. CRESSE: No, I left shortly after that. 14 MR. WATSON: Thank you. That's all the 15 questions I have. 16 CHAIRMAN DEASON: Staff. 17 MR. PALECKI: I just have three questions. 18 CROSS EXAMINATION 19 BY MR. PALECKI: 20 Q What percentage of nonutility generation is 21 on TECO's system? 22 A Mr. Palecki, I think Mr. Watson asked me that 23 same question. I still don't know the answer. 24 Q Has TECO ever solicited bids or issued a 25 request for proposals for nonutility generation? FLORIDA PUBLIC SERVICE COMMISSION 815 1 A I don't know. 2 Q Is there any reason to believe that TECO 3 would do so absent a Commission rule specifically 4 requiring bidding or RFPs? 5 A I think it's -- with the present 6 circumstances and the history of the need process that 7 it would be pretty difficult for TECO to come in and 8 justify its cost without having gone through some sort 9 of an analysis. But it would depend upon the point in 10 time that TECO were coming in. Certainly TECO would 11 consider what it believes is out there and I think it 12 would be prudent to find out what is out there. But, 13 again, it depends upon the circumstances at the time 14 that they are requesting generation, the kind of 15 generation that they believe is necessary, as to 16 whether it would be appropriate to do so at the time. 17 I think that the Company would have to come 18 in and justify to the Commission why it didn't do it if 19 it wanted to own the generation. But just as we did in 20 the last case here, it's been cited before today with 21 the Department of Energy grant, we would have expected 22 had that not come along, that some sort of a bid 23 process would have been necessary to justify our cost 24 effectiveness. Some sort of bidding. 25 Now, what I had in mind at that time was that FLORIDA PUBLIC SERVICE COMMISSION 816 1 we would be required to put out the construction cost 2 to bid, as opposed to bidding for the power outright. 3 That was the stage of the philosophy at that time. 4 But as we pointed out to the Commission and 5 the Commission agreed, that in order to take advantage 6 of that particular grant, there wasn't time to go 7 through a full alternative power bidding process and 8 still be able to secure the bid for the Department of 9 Energy. So that was an exception to the rule that I 10 believe has kind of existed out there without a formal 11 rule being in place. 12 MR. PALECKI: Thank you. We have no further 13 questions. 14 MR. WILLIS: We ask that Mr. Rowe be excused 15 and call Mr. Mestas. 16 CHAIRMAN DEASON: Before we do that, there 17 were a few things I wanted to do. 18 First of all, what we're going to do is we're 19 going to take a short break. But before we do that, 20 I'm going to make a request that all interested 21 persons, to the extent possible, try to reach some type 22 of consensus as to what our time requirements are going 23 to be for the remainder of this hearing. If it is at 24 all possible to finish today, and when I say today, 25 that means something around the hour of 6:30, certainly FLORIDA PUBLIC SERVICE COMMISSION 817 1 no later than 7 o'clock, and whether there's going to 2 be the need for closing arguments, and even the 3 possibility of whether closing arguments maybe could be 4 substituted for some presentation we otherwise would 5 get at this late hour, as is always a possibility. 6 And also be cognizant of the fact that the 7 Chair has the right and the prerogative, as has been 8 noticed, to put time limits on presentations. The 9 Chair has certainly been reluctant to do that in the 10 first two and three-fourths days of this hearing, but 11 as the hours grow shorter and shorter that may be a 12 requirement. 13 So just given all of those considerations, I 14 would welcome any comments or suggestions from the 15 parties as to how would be the best way to proceed for 16 the remainder of today's activities. 17 We're going to take ten. Thank you. 18 (Brief recess.) 19 CHAIRMAN DEASON: I understand that in the 20 spirit of cooperation and in the spirit of recognizing 21 that this is Friday afternoon, that we've come to a 22 consensus that we probably can be out of here by 5:00. 23 And, in fact, I am tempted that come 5:00, I will just 24 turn this little button down here by my side which 25 turns off the microphones and declare the hearing over. FLORIDA PUBLIC SERVICE COMMISSION 818 1 So everyone just please act accordingly. 2 I think Mr. Mestas is the next witness. 3 DON MESTAS 4 appeared before the Commission and testified as 5 follows: 6 DIRECT EXAMINATION 7 BY MR. WILLIS: 8 Q Would you please state your name, address and 9 business affiliation? 10 A Yes, my name is Don Mestas. My business 11 address is 702 North Franklin Street, Tampa, Florida 12 33602. And I am employed by Tampa Electric Company. 13 Q Would you please give a brief summary of your 14 testimony? 15 A Yes, thank you. 16 The purpose of my comments is to address 17 certain issues the Commission should bear in mind as it 18 considers the adoption of a rule pertaining to the 19 selection of generating capacity. 20 I am proposing the revised rule suggestions 21 to the Staff's alternative recommendation, which will 22 protect the interest of Tampa Electric and its 23 customers, while at the same time, providing both 24 nonutility and other utility suppliers with a 25 meaningful opportunity to participate in supplying a FLORIDA PUBLIC SERVICE COMMISSION 819 1 portion of the generation resources required to meet 2 the needs of the state. 3 The rule revisions I am proposing encourages 4 flexibility. The rule should be permitted to evolve over 5 time as circumstances change and as additional experience 6 with competitive bid solicitations is gained. 7 We can support the Staff's revised alternative 8 rule as proposed by Mr. Ballinger with the following 9 modifications. And we, likewise, reject portions of Mr. 10 Huddleston's proposed CEPA rule based on its 11 incompatibility with these proposed modifications. 12 The rule should not be unduly detailed and 13 restrictive of the Commission's regulatory discretion. 14 The Commission should retain fail-safe stocks to ensure 15 that it is the utility's customers' interest that are 16 best served. The rule should not foster the pursuit of 17 litigation. The rule should recognize the benefits of 18 negotiations between bidders and the utility. The rule 19 should avoid inclusion of unnecessary technical 20 details, which could lead to multiple legal challenges 21 based on so-called rights created by the rule. The 22 rule should recognize that it is the electric utility's 23 ultimate obligation to serve customers in Florida. The 24 rule should focus on the protection of electric utility 25 customers rather than on electric utility competitors. FLORIDA PUBLIC SERVICE COMMISSION 820 1 The rule should result in a careful measured step 2 toward competitive bid solicitations, rather than a 3 giant leap into a hole. The rule should guard against 4 any attempt or inclination to simply exclude new 5 utility-owned generation all together. The rule should 6 not alter the fact that it is the utility's 7 responsibility before this Commission to establish the 8 need for additional generating capacity to meet its 9 obligation to serve its customers. 10 A utility should be able to seek a waiver 11 from the bid rule and other supply-side opportunities 12 should continue to remain as viable options. A 13 utility's plan for transmission additions for deferring 14 capacity should not be part of a supply-side 15 competitive bid rule. Issuing an RFP bid package for 16 capacity resources up to seven years in advance of 17 actual need may eliminate the utility's flexibility to 18 avoid cost. 19 The utility should not be required to provide 20 proprietary computer models, databases or its cost 21 estimates and financial assumptions in its bid 22 solicitation package. The utility should evaluate and 23 select bids and then commence negotiations prior to 24 executing a purchased power agreement with a successful 25 bidder. FLORIDA PUBLIC SERVICE COMMISSION 821 1 The utility should be permitted to reject all 2 bids, if not in its customers best interest. The 3 utility must justify such action before this 4 Commission. The utility, and not the rule should 5 determine what is an adequate bid security deposit and 6 total security performance deposit on the basis of each 7 RFP it issues on a case-by-case basis. If the utility 8 provides the additional capacity to meet its needs, it 9 should be permitted to continue to be eligible to 10 recover its investment so long as the utility is 11 regulated by this Commission through proven traditional 12 rate base procedures. 13 The provisions of a bid solicitation rule for 14 capacity procurement should apply to municipal and REAs 15 as well as IOU electric utilities. I would stress the 16 importance of allowing flexibility in this process in 17 permitting the rule to evolve over time, as additional 18 experience is gained with competitive bid 19 solicitations. 20 MR. WILLIS: Mr. Mestas is available for cross. 21 CHAIRMAN DEASON: Ms. Brownless. 22 23 24 25 FLORIDA PUBLIC SERVICE COMMISSION 822 1 CROSS EXAMINATION 2 BY MS. BROWNLESS: 3 Q Good afternoon, Mr. Mestas, I'm Suzanne 4 Brownless. 5 I just want to go through your modifications 6 to the Staff rule so I understand what modifications 7 you've made and how your process works as opposed to 8 what the Staff has previously described their process 9 would be. 10 Am I correct that your RFP process would be 11 initiated and it would be at that point in time, at the 12 point where you decided not to have an RFP process, that 13 you would get a waiver from the Public Service Commission? 14 A Yes. The utility company would first 15 determine what its capacity needs are. And it would 16 decide how it intended to meet those needs. And if it 17 thought that the proper way to meet those needs was to 18 build and own or to solicit competitive bids for that 19 capacity, it would petition the Commission, identify 20 its needed capacity and indicate at that time how it 21 intended to fill that capacity need. 22 Q And I assume that that would be, for example, 23 if you thought that you wanted to build a coal plant, 24 that that would, in fact, be six or seven years prior 25 to the in-service date of the coal plant that this RFP FLORIDA PUBLIC SERVICE COMMISSION 823 1 waiver proceeding would be taking place. At the 2 beginning of your planning process, in other words. 3 A To the extent it was a baseload unit with 4 that kind of lead time and the commitment needed to be 5 made, yes. 6 Q Okay. Then if you decided to go with the RFP 7 process, you would let the RFP, which you developed 8 yourself in-house, and then you would submit a sealed 9 bid, if you decided to participate, to a third party 10 who would hold all the bids? 11 A That's correct. 12 Q Okay. The third party would give all those 13 sealed bids back to you after recording, I guess, 14 whatever -- what everybody's price was, right? 15 A At the conclusion of the RFP expiration 16 period, the bids would be returned to the utility for 17 evaluation. 18 Q Okay. And then the utility would develop a 19 short list? 20 A That's correct. 21 Q Okay. Would the criteria, by which the 22 utility screened the bidders, be announced at any time 23 in your process? 24 A Yes, we would include a selection and 25 evaluation criteria, if you would, in the RFP process. FLORIDA PUBLIC SERVICE COMMISSION 824 1 A weighting criteria to indicate those factors which 2 are important to us in terms of both what's been 3 referred to as priced and unpriced factors. 4 Q And could that be something as simple as a 5 price that's going to be 60% and a nonprice that's 6 going to be 40%? 7 A Whatever the evaluation process that we 8 elected to use would be indicated in the RFP package. 9 Q How would subjective criteria be handled in 10 this notification process as you envision it? 11 A I think to the extent that subjective 12 criteria is necessary in the evaluation of an RFP 13 proposal, it would be indicated to the extent we could. 14 I don't intend to say here that subjectivity would be 15 entirely absent the evaluation process. But we ought 16 to be in a position to justify the decision we've made 17 based on an evaluation of the proposal and on good 18 solid subjectivity. 19 Q Okay. My understanding of your rule is that 20 once you looked at all of the bids, you would retain 21 the right to reject all bids; is that correct? 22 A That is correct. 23 Q And then at that time, you would proceed, if 24 it was a plant greater than 75 megawatts, to come to 25 the Commission and utilize the current need FLORIDA PUBLIC SERVICE COMMISSION 825 1 determination process? 2 A If we rejected the bids, the option would be 3 either how to obtain the capacity that's still 4 required. It could be a reissue of the RFP, it could 5 be a determination by the utility to build or it could 6 be an opportunity to secure the capacity from some 7 other resource. 8 Q Or you could rebid? 9 A I thought I mentioned that. We could rebid, 10 I'm sorry. 11 Q Assuming you go through the bidding process 12 and get your short list of bidders and you go to a need 13 determination, what would be at issue in the need 14 determination under your plan as you perceive it? 15 A From our perspective, there would be no 16 issue. We would have selected at that point in time 17 what we've considered to be the most optimum, least cost 18 reliable alternative available to us. And we would 19 proceed before the Commission in terms of meeting our 20 generation needs with whatever that option selected is. 21 Q I guess what I'm getting at is right now in a 22 need determination there's really two pieces to it. One 23 piece is the megawatt need, is this capacity actually 24 needed. And the other piece is has the utility or the QF 25 or whoever is coming in provided the most cost-effective FLORIDA PUBLIC SERVICE COMMISSION 826 1 alternative. Would those still be the issues that would 2 able to be litigated in that process? 3 A No. What I mentioned earlier on and what I 4 perceive to be the sequence is that we would appear 5 before the Commission, initially, identifying the level 6 of capacity that's required to meet our expansion 7 requirements. In other words, we would identify the 8 capacity and when we need it and the type and that sort 9 of thing. And concurrent with that, we would indicate 10 how we would proceed to obtain that capacity and why. 11 We could either seek a waiver at that point in time, or 12 issue or submit an RFP at that point in time and 13 indicate a willingness to solicit bids. 14 Q Okay. So you really are proposing a 15 bifurcated process where your need is identified on the 16 front end and you get some indication at that time how 17 you propose to fill it? 18 A That's exactly correct. 19 Q And then you would come back in a subsequent 20 proceeding -- 21 A With how we intend to fill that need. 22 Q -- and say, okay, this is how we did it? 23 A That's exactly right. 24 Q Under your proposal, does the utility have to 25 bid to build or can it be the default builder? FLORIDA PUBLIC SERVICE COMMISSION 827 1 A The utility could build in either of those 2 two cases. For instance, if the utility elected to 3 seek a waiver for cause and was able to sufficiently 4 justify before this Commission why a waiver from the 5 RFP or solicitation package was appropriate, then, of 6 course, we would proceed with the construction of the 7 facility. We may very well solicit competitive bids in 8 terms of contract construction for the project at that 9 point in time. 10 Alternatively, at the conclusion of a 11 solicitation package in which we, for whatever reasons, 12 found ourselves in a position to reject those bids, 13 then the alternative at that point in time would be, of 14 course, again, to justify before this Commission why we 15 found it necessary to reject those bids. And it must 16 be with cause. Having reached that conclusion, then 17 our options are open again in terms of how to replace 18 or obtain the capacity that we sought to obtain through 19 the RFP package. 20 Q So your process could result, in fact, in a 21 reiterative to the process because you may be back to 22 ground zero at the end of -- 23 A That clearly would not be the indication or 24 our desire. But it's not to say that in some 25 instances, based on the quality of bids, one should not FLORIDA PUBLIC SERVICE COMMISSION 828 1 be forced to accept a bid that does not meet the 2 criteria that are set out in the package. 3 Q We heard Mr. Ballinger testify earlier that 4 the Staff does not pursue competitive bidding where the 5 utility bids because they thought it was inherently 6 unfair for the utility to score its own bidding in 7 relation to other folks. That seems to be a common 8 sense rational. How do you respond to that? 9 A Well, I certainly can't plow any new ground 10 in that area. It's been discussed several times this 11 afternoon. I believe ultimately the decision in terms 12 of who the adequate builder of that new plant will be, 13 will be determined in this hearing room. And if that's 14 the case, I believe, again, if it's a utility that has 15 the obligation of utilizing that power, seeing that 16 it's on line when it needs it, to meet its load 17 requirements, to serve its customers, that it's dispatched 18 properly, that it's the right kind of technology, that it 19 has some reliability and viability in terms of the 20 technology, that we ought to play a very front-end role in 21 selecting the units that will be provided to meet those 22 capacity needs that we've identified. 23 Q Okay. And you don't think there would be any 24 inherent bias in favor of your own bid. 25 A Clearly, if it was inherently biased, then FLORIDA PUBLIC SERVICE COMMISSION 829 1 as it reached this location, the opportunity to point 2 that out would be immanent amongst the participants in 3 the proceeding. 4 Q Let me ask it this way: Do you believe if 5 you participated in your own bid, the level of scrutiny 6 would be quite intense? 7 A Yes, I do. But think about this, there are 8 several options with respect to -- first of all, the 9 utility participating in its own bid solicitation, 10 which is a possibility, certainly. You know, the 11 utility bid could be the lowest bid offered, at which 12 point in time I wouldn't suspect that the list of 13 intervenors would diminish, but, nonetheless, it could 14 clearly be the lowest bid of the proposals accepted. 15 On the other hand, it could be -- way to the 16 other extreme, heaven forbid, but it could fall off the 17 table and be the highest one. Well, talk about 18 subjectivity, it might be very difficult in those 19 circumstances to use all the subjectivity, inherent 20 subjectivity you may wish to utilize and pull that bid 21 into the realm of other more competitively based bids. 22 So the other alternative would be if you have 23 a close grouping of bids to provide that capacity, 24 which included the utility's bid, then at that point in 25 time, you know, we would utilize what we consider to be FLORIDA PUBLIC SERVICE COMMISSION 830 1 the most obviously fair evaluation of what we should 2 select to meet our needs. And then we would be 3 prepared to stand on that recommendation in support and 4 before this Commission and the intervenors. 5 Q Under your process would TECO Power Services 6 have the ability to bid in your own service territory, 7 in TECO Power's service's territory? 8 A Actually, the way we have proposed our bid 9 package is that if the electric utility company 10 intended to submit a bid in the RFP package, that the 11 affiliate utility company would not. 12 Q Okay. So it would be an either/or kind of 13 situation under your plan? 14 A Yes. 15 Q How does your process treat standard offered 16 contracts as we know them today, or how would they 17 treat the standard offered contracts? 18 A Yes. It's somewhat silent on that. I 19 recognize that the Staff had intended to have the 20 standard offered contracts for smaller QFs of 100 kW or 21 less, in addition to having some either set asides or 22 specific waiting criteria for cogenerators in solid 23 waste facilities in the rule. As it relates to 24 standard offers, I must tell that in my personal 25 opinion, setting aside standard offers for cogenerators FLORIDA PUBLIC SERVICE COMMISSION 831 1 of 100 kilowatts or less is, I think, meaningless. 2 Q Okay. But, nonetheless, required by federal 3 law? 4 A Well, there is an opportunity to purchase 5 from them. The fact that you have a so-called standard 6 contract is necessarily a requirement. 7 Q Okay. Does your answer also apply to small 8 power producers, renewables and the other categories of 9 folks that the Staff has -- 10 A Yes. As Mr. Rowe indicated, as well as it 11 related to the Staff's proposed ruled, I think there 12 ought to be some opportunity to focus on the municipal 13 solid waste and the cogen, True cogen type facilities 14 in the bidding procedure. 15 Q How would you determine Tampa Electric's avoided 16 cost under your process? And I have a very simple 17 question. Would it be the avoided cost number that's 18 associated with your planning parameters, for example, 19 something that can be developed from a ten-year site plan? 20 A Yes, it would be, Suzanne, similar to the 21 question you asked earlier. It would be our best 22 estimate based on EPRI Tag numbers, our own personal 23 experience in what we know to be the most recent cost 24 for that type of unit. 25 Q If a successful bid were completed, would you FLORIDA PUBLIC SERVICE COMMISSION 832 1 consider avoided cost being set at your bid price, 2 winning bid price or the next to the lowest winning 3 price or some permutation of the bid -- 4 A Yes, I think there would be good reason at the 5 conclusion or subsequent to an RFP process to have 6 identified a new avoided cost price based on actual 7 numbers. 8 Q Okay. I'm curious -- 9 A If the following unit is somewhat similar in 10 scope and nature, if one unit is a baseload unit and 11 the next unit in your generation expansion plan happens 12 to be a peaking unit, for instance, you wouldn't want 13 to use your baseload unit, although it was the most- 14 recently executed unit as your avoided cost. 15 Q But if there were two combined cycles? 16 A If they were similar, you would, certainly. 17 Q Okay. I'm curious about how your short list 18 negotiations would be conducted. Would it be conducted 19 -- would you negotiate with the first guy and see what 20 you can do with him; in other words, the lowest bidder 21 assuming it's not you, of course, because we assume 22 you're going -- if you have the lowest price then you 23 wouldn't do any negotiations -- one at a time or would 24 you do like four guys in four rooms and just go around? 25 Q Well, honestly I really haven't thought all FLORIDA PUBLIC SERVICE COMMISSION 833 1 that through, and I don't know why it's really 2 necessary to -- and that's some of the flexibility I 3 think we ought to have. If you narrowed it down to one 4 bidder and that's the only fellow you're going to 5 negotiate with and you've eliminated an awful lot of 6 leverage in terms of negotiations, I think that perhaps, 7 and, again, I'm not real firm on this but from my own 8 thought, it might be that if the utility has selected two 9 or three bona fide competitive providers of the service, 10 then we ought to have an opportunity to negotiate with 11 each of them and select that ultimate proposal which ends 12 up in the most least cost-effective proposal. 13 Q Let me tell you, frankly, what the IPPs are 14 concerned about, is that you have this nice competitive 15 bidding process and everybody is ranked and then, let's 16 say, bidder No. 1 had built a combined cycle plant as 17 what he proposed, and he proposed -- and its location 18 was in Orlando, and it had certain criteria to it. And he 19 didn't make the cut, he didn't make the short list. And 20 his price was, let's say, a dollar a megawatt, to make 21 this a simple thing. All right. Now, we get down to the 22 short listed negotiations. QFs are concerned that what 23 results from this -- 24 A QFs or IPPs? 25 Q Well, IPPs. The Independents. We're going FLORIDA PUBLIC SERVICE COMMISSION 834 1 to lump them all together in the NUG category; not you 2 guys, the not-you-guys category. They're concerned 3 that the project that comes out of this negotiated 4 process, in fact, ends up being very similar to what was 5 rejected on the front end and never made it to the short 6 list. How would you propose to limit your negotiations on 7 the back end so bidders on the front end would see it as 8 fair? 9 A It would seem to me in that situation that 10 the bidder with the lowest cost ought to be in the best 11 position to conclude the negotiation process most 12 satisfactorily. He's already got a leg up on all the 13 competition. He comes into the negotiation process 14 with the lowest price. The company is looking to 15 provide that generating capacity at its lowest cost. 16 COMMISSIONER CLARK: But isn't it possible 17 through your negotiations that that price will go up 18 because you want certain things in the contract? 19 MR. MESTAS: Possibly, yes. It could very well. 20 COMMISSIONER CLARK: And I think what Suzanne 21 is saying is that there is a very real possibility that 22 what you finally negotiate is really what looked like 23 the bid of an unsuccessful bidder. And that happens. 24 It happens in construction contracts where you deal 25 with the lowest bidder and then you begin negotiating FLORIDA PUBLIC SERVICE COMMISSION 835 1 and lo and behold, if the other bidders had had that 2 opportunity or known those changes were there -- 3 MR. MESTAS: Well, again, as I preface my 4 remarks, let me just say, again, my concept would be to 5 select the two or three lowest bidders in the 6 solicitation process and commence the negotiations with 7 them in order to find that proposal which best meets 8 our needs at the least cost. And it just seems to me 9 it would be a logical place to start with those who'd 10 come in with the lowest price. 11 COMMISSIONER CLARK: And just through that 12 process you would have to be cognizant of the fact that 13 you can't then negotiate up or negotiate a deal that is 14 really what somebody else offered at a better price? 15 MR. MESTAS: Again, that's a problem with 16 only looking at one way of obtaining capacity as the 17 means for supplying -- the competitive bid rule as 18 being the only means to supply capacity. There are 19 opportunities to negotiate contracts for that capacity 20 that should be and do, in fact, currently exist today 21 where we can sit down with independent utilities or 22 nonutility generators and meet our requirements on an 23 individually negotiated contract basis. So that's the 24 reality of the competitive bid solicitation. 25 But competitive procurement, I believe in FLORIDA PUBLIC SERVICE COMMISSION 836 1 terms of ultimately selecting that supplier that will 2 provide that generating capacity, must come as a result 3 of ongoing negotiations at the conclusion of the 4 solicitation process. There are just not enough sheets 5 of paper to identify all the terms and conditions, as 6 you've heard many times today, to carry that agreement 7 over a 15- or 30-year period. It will be subsequently 8 revisited many times otherwise. 9 Q I have three more questions. How much QF 10 capacity do you have on your system right now as of 11 1993? 12 A In the neighborhood of -- well, we have 13 approximately 400 megawatts of QF capacity in our system 14 serving load that we previously served. And we have an 15 additional 250 to 300 megawatts of QF capacity in our 16 system that is under contract with other utilities. 17 Q Okay. Let me ask this question a different 18 way and more briefly. I understand that you have four 19 contracts right now with third parties, qualifying 20 facilities or small power producers that sell 21 electricity to Tampa Electric; is that correct? 22 A QFs? 23 Q QFs or SPPs, small power producers? 24 A We have currently two QF contracts in the 25 contract with TECO Power Services that we're purchasing FLORIDA PUBLIC SERVICE COMMISSION 837 1 power from that are in commercial operation today. We 2 have an additional QF contract with an in-service date 3 in 1995. 4 Q Okay. How many megawatts is that capacity? 5 Let's put TECO Power Services in a different box. How 6 many megawatts is the contract -- 7 A We would have in the neighborhood of 440 8 megawatts or so of QF capacity in our system of which 9 40 megawatts to ultimately 60 megawatts are engaged in 10 firm capacity contracts with Tampa Electric Company. 11 And the other 370 to 400 megawatts of QF capacity is 12 being utilized to offset internal load, such as to 13 offset cost in excess of our avoided cost. 14 Q Would it be fair to say that that's roughly a 15 little more than 1% of your -- 16 A No. The way I would calculate that that's in 17 the neighbor of 12% or 13% of QF capacity in our 18 system, serving load that we otherwise had served. 19 Q Excluding self-service generators? 20 A Well, if you wish to exclude the self-service 21 generators, then clearly we're talking about something 22 in excess of 1%. 23 Q Okay. But not much more than 1%? 24 A Not much more. 25 MS. BROWNLESS: That's all I have. Thank FLORIDA PUBLIC SERVICE COMMISSION 838 1 you, Mr. Mestas. 2 CHAIRMAN DEASON: Staff? 3 CROSS EXAMINATION 4 BY MS. RULE: 5 Q I'm Marsha Rule of the Commission Staff. One 6 question. 7 Under your rule proposal, if the utility were 8 to bid, would you be willing to be bound to that bid? 9 A Yes, if we submitted a seal bid, we would be 10 bound by that bid. 11 Q For the life of the contract? 12 A Under the requirements that if other parties 13 in that particular situation were also bound by that 14 same bid, yes. 15 MS. RULE: Thank you. 16 CHAIRMAN DEASON: Thank you, Mr. Mestas. I 17 hope you can catch your flight. 18 MS. MESTAS: Thank you. 19 (Mr. Mestas excused.) 20 _ _ _ _ _ 21 CHAIRMAN DEASON: That concludes TECO's 22 witnesses; is that correct? 23 MR. WILLIS: That's correct. 24 CHAIRMAN DEASON: Okay. Next on my list is 25 Gulf Power. FLORIDA PUBLIC SERVICE COMMISSION 839 1 I want to make one thing clear, I have one 2 party who has sat very patiently through this entire 3 proceeding, it's LEAF, and whatever we do today we're 4 going to hear from Ms. Swim before 5:00. 5 MS. SWIM: Thank you. 6 CHAIRMAN DEASON: So can you conclude your 7 witnesses before 5:00, Mr. Stone? 8 MR. STONE: Mr. Chairman, in the interest of 9 time, I have no witnesses. Our comments have already 10 been inserted into record and we would just simply like 11 to state that Gulf Power Company favors the Commission 12 retaining a great deal of flexibility in its rule, so 13 that we don't make concrete decisions today that would 14 hamper the ability of the companies to tailor their 15 selection process to the particular needs they face at 16 the time of their particular selection. We very much 17 are cognizant of our obligation to serve and we very 18 seriously work towards fulfilling that obligation. 19 And that concludes our comments. 20 COMMISSIONER CLARK: If you had to align 21 yourself with the other investor-owned utilities, would 22 you align yourself with FPC or TECO? 23 MR. STONE: To be perfectly candid with you -- 24 COMMISSIONER CLARK: For purposes of this 25 proceeding. (Laughter) FLORIDA PUBLIC SERVICE COMMISSION 840 1 MR. STONE: We've pretty much aligned 2 ourselves with the Commission's draft rule, the 3 original rule, the one that was in the notice of 4 rulemaking. We have notice that there were some 5 suggestions or refinements to that rule that FPL 6 suggested that we reviewed those as adequate 7 suggestions. But we believe that it's appropriate to 8 recognize that there are differences among utilities, 9 and there are differences within a utility over time. 10 And we think that the Commission's rules ought to 11 recognize that fact and allow us to be flexible, 12 recognizing that that gives us the obligation to vary 13 our selection procedures based on the circumstances we 14 face at that time. 15 COMMISSIONER CLARK: Okay. 16 CHAIRMAN DEASON: Thank you, Mr. Stone. The 17 next on my IOU list is FPL. Are there any 18 presentations to be made by Florida Power and Light? 19 MR. CHILDS: We have no oral presentations. 20 CHAIRMAN DEASON: Thank you, Mr. Childs. 21 That brings me to the municipals. 22 MR. WILLINGHAM: I have a short presentation and 23 then Paul Elwing from Lakeland will give a few comments 24 and also Tallahassee wants to put on a witness. 25 CHAIRMAN DEASON: Okay. And you -- let me FLORIDA PUBLIC SERVICE COMMISSION 841 1 ask you, how long will it take for you to give your 2 comments, Ms. Swim? 3 MS. SWIM: I think for me to just give my 4 comments would not take more than ten minutes. I don't 5 know whether there will be any questions on it. 6 CHAIRMAN DEASON: Okay. And Mr. Willingham, 7 how long do you anticipate the entire presentation for 8 the municipals? 9 MR. WILLINGHAM: Less than 20 minutes. 10 MR. McKENZIE: Mr. Chairman? 11 CHAIRMAN DEASON: Yes. 12 MR. McKENZIE: I think I'm the only gas 13 utility representative, I'm Norrie McKenzie with 14 Peninsula Pipeline. I think I'm the last or only gas 15 utility. I would like to have five minutes for 16 comments, please. 17 CHAIRMAN DEASON: Okay. I think we can get 18 to everyone. Right now we'll proceed down the list. 19 We won't take anyone out of order, at least for the 20 present time. The list that I have for the municipal 21 electrics has City of Lakeland first. Is there anyone 22 here from the City of Lakeland? 23 MR. WILLINGHAM: Yes. But before we put 24 Lakeland on I'd like to give just a few comments about 25 where we're going with our comments to the rule. FLORIDA PUBLIC SERVICE COMMISSION 842 1 CHAIRMAN DEASON: Please proceed. 2 MR. WILLINGHAM: Thank you. 3 My name is Bill Willingham, I represent FMEA and 4 FMPA. We filed comments regarding our concerns and a few 5 recommendations to the Commission's proposed rules. 6 One thing I would like to clarify is that 7 we're not advocating a rule that requires the IOUs to 8 be subject to a bidding rule. We merely suggested 9 comments which would take municipals out, but still 10 require the municipals to follow some sort of RFP 11 process, not necessarily the process that applies to 12 investor-owned utilities. 13 One concern that I've heard that I have from 14 the comments during this hearing is Mr. Ballinger's 15 comments that municipals should come in on a 16 case-by-case basis and request a waiver of those 17 selections that generically do not apply to municipals. 18 We've requested today just to be eliminated from the 19 rule as far as they apply to municipals, and we can do 20 away with it once and for all. We generally believe 21 that Mr. Ballinger's comments regarding the fox 22 guarding the henhouse does not apply to municipals. 23 Again, the distinction between municipals are 24 not advocating that it does apply to the IOU's or the 25 co-ops. And, in fact, you've heard testimony from CEPA FLORIDA PUBLIC SERVICE COMMISSION 843 1 and ARK stating that the existing rules are adequate 2 for municipalities. 3 The municipals really have little or no 4 incentive to build their own generation. We're also 5 subject to the Sunshine laws and our evaluation of the 6 generation alternative is to conduct it at a public 7 hearing, which is overseen by elected officials. And 8 this is prior to submitting our need petition to this 9 Commission. We really just believe there's no fox in 10 our case. 11 We believe that the record of the proceeding 12 is sufficient to -- for the Commission to exclude 13 municipalities, if not all utilities, from a predefined 14 RFP procedure. 15 In addition, Mr. Sharma from KUA testified as to 16 the problems that the proposed rule will impose upon 17 municipal utilities. 18 At this time this is the end of my comments 19 and I'd like to present Paul Elwing from Lakeland, who 20 will describe briefly Lakeland's process and some of 21 the concerns that Lakeland has with the rule. 22 CHAIRMAN DEASON: Okay. 23 MR. WILLINGHAM: Also we late-filed some 24 testimony for Mr. Elwing and there's additional copies 25 on the counter over there. FLORIDA PUBLIC SERVICE COMMISSION 844 1 Mr Elwing? 2 PAUL H. ELWING 3 appeared before the Commission and testified as 4 follows: 5 DIRECT EXAMINATION 6 BY MR. BRYANT: 7 Q Mr. Elwing, would you please state your name 8 and your employer? 9 A Yes. My name is Paul H. Elwing, and my 10 business address is 501 East Lemon Street, Lakeland, 11 Florida 33801. And I work for the City of Lakeland, an 12 electric municipal utility. I'm also here on behalf 13 the Florida Municipal Power Agency and Florida 14 Municipal Electric Association. 15 Q Would you briefly summarize your comments? 16 A Yes, sir. Lakeland, as a municipal, is 17 respectfully requesting the Commission's consideration 18 of excluding municipals from the proposed rules. 19 Lakeland feels that the current rules are adequate for 20 the Commission to regulate or oversee municipal 21 generation additions. 22 The bidding rules as being proposed, we feel, 23 will yield no better results to the municipals but will 24 result in cost, both in dollars and in flexibility. 25 As we heard some earlier witnesses state, FLORIDA PUBLIC SERVICE COMMISSION 845 1 costs as high as $300,000 have been bandied around. 2 We're not taking issue what the exact cost is but there 3 is a dollar cost there. And participating in a process 4 that gives no additional benefit to our customers, our 5 ratepayers, we do not feel is a prudent use of our 6 ratepayers' money. 7 Also, as Mr. Sharma from Kissimmee Utilities 8 stated yesterday, a formal process such as is being 9 presented here can limit our flexibility through lost 10 opportunities due to the inherent timings in these 11 proposals, as well as being able to -- we would like to 12 be able to dynamically adjust the process to meet the 13 local and public concerns as we look to new generation 14 sources. 15 Some of these issues can conflict with local 16 city government authority. We're governed by city 17 commission and they are elected officials. And they 18 reserve the right to make the final decision-making 19 processes when the municipal utility goes out for 20 generation sources. 21 Supply options that we, as the utility, 22 present to our city commissions are exhaustively 23 reviewed by our city commissions, who are answering 24 directly to the citizens through the public hearings. 25 And when going through the public hearing process, the FLORIDA PUBLIC SERVICE COMMISSION 846 1 municipal utility must have the flexibility to be able 2 to change its criteria to meet the need and concern of 3 the public. A specified procedure to go through, such 4 as some of the things we've heard in this proceeding, 5 would limit that ability. 6 When our city fathers then determine what is 7 the best alternative or choice for their customers, 8 then we, as the utility arm of the city, bring that 9 decision before this body of the PSC for your view. We 10 respectfully would like to retain that same process 11 that we currently have now. 12 That concludes my comments. 13 Q Thank you. May I ask one quick question? 14 You generally are not opposed to employing an 15 RFP process but you would like to stick with the RFP 16 process you currently use; is that correct? 17 A That is correct. We support an RFP process, 18 and we would just like to be able to design that 19 process to meet our needs and for it to be flexible. 20 MR. BRYANT: Thank you very much. 21 Mr. Elwing and myself are both available for 22 any comments and requests. 23 CHAIRMAN DEASON: Okay. Questions? Staff, 24 Commissioners? 25 Thank you, Mr. Elwing. FLORIDA PUBLIC SERVICE COMMISSION 847 1 MR. ELWING: Thank you. 2 (Mr. Elwing excused.) 3 - - - - - 4 MR. CHAIRMAN: Mr. Hoffman? 5 MR. HOFFMAN: Thank you, Mr. Chairman. 6 My name is Ken Hoffman on behalf of the City 7 of Tallahassee. We call Mr. Gary S. Brinkworth. 8 GARY S. BRINKWORTH 9 appeared before the Commission and testified as 10 follows: 11 DIRECT EXAMINATION 12 BY MR. HOFFMAN: 13 Q Mr. Brinkworth, could you state your name and 14 by whom you are employed and in what capacity? 15 A Yes. My name is Gary S. Brinkworth. I'm 16 employed by the City of Tallahassee as a superintendent 17 of System Planning. My business address is City Hall, 18 300 South Adams Street, Tallahassee, Florida, Zip Code 19 32301. 20 Q Mr. Brinkworth, has the City of Tallahassee 21 filed comments addressing the original proposed rule 22 and responsive comments addressing Staff's alternate 23 proposed rule in this proceeding? 24 A Yes, we have. 25 Q Could you provide a brief summary of the City FLORIDA PUBLIC SERVICE COMMISSION 848 1 of Tallahassee's comments? 2 A Yes, I will. (Pause) 3 The City of Tallahassee supports generally 4 comments that you've previously heard from other 5 municipal utility witnesses regarding a concern we have 6 for the suggestion by Staff that we seek waivers for 7 individual issues within the rule which we find to be 8 nonapplicable to municipal utilities. 9 The City feels that approach is unnecessarily 10 burdensome on us, requiring us to bring to this 11 Commission the burden of proof, why we should be 12 excluded. And it will increase our legal cost and the 13 other costs that we would incur to pursue a resource 14 solicitation. 15 We would suggest that the Commission consider 16 either writing into the rule specific exclusions for 17 municipal utilities or possibly collecting rule 18 provisions and writing them into a separate rule 19 directed only at municipal electric utilities. 20 The City has a general concern for what we 21 perceive to be a tendency in the alternative proposed 22 rule submitted by Mr. Ballinger to allow the Public 23 Service Commission to encroach on the local regulatory 24 authority of the City Commission to the City of 25 Tallahassee. We believe that it's very important that FLORIDA PUBLIC SERVICE COMMISSION 849 1 we preserve the right to use our local regulatory body 2 to select the methodology and the criteria that we 3 would utilize to select resources for the local 4 electric utility. 5 We also believe that the so-called 6 "sealed-bid approach" to capacity selection is, in 7 fact, appropriate for municipal utilities. The City's 8 current process contemplates a sealed-bid process. We 9 believe, in fact, that that sealed-bid process tends to 10 reduce the appearance of an unfair advantage on the 11 part of the local municipal electric utility by 12 requiring us to follow the same requirements and 13 stipulations that any other outside bidder would have. 14 Our process, as it's developed right now, 15 requires a third-party evaluator for the sealed bids, 16 and that evaluator is engaged and managed directly by 17 the City Commission, which is our regulatory body. 18 We also believe that the requirement in the 19 Staff's proposed alternative Rule 25-22.082(5), 20 regarding the filing of the RFP at the Public Service 21 Commission prior to release, should be designated for 22 us as an information filing only. 23 We feel this way because by the time that RFP 24 has been developed and ready for issue, we've had 25 extensive public involvement, a lot of public hearings, FLORIDA PUBLIC SERVICE COMMISSION 850 1 a lot of town meetings, a lot of interaction with our 2 customer owners. And we would be very concerned that 3 the filing of that RFP before the PSC would imply that 4 there is an opportunity for this regulatory body to 5 alter the conditions of the RFP which were selected by 6 our local regulatory authority. 7 Finally, the City is very concerned about the 8 suggestion located in alternative proposed Rule 9 25-22.082(6), regarding the preference for special 10 resource types, that is high-efficiency cogenerators, 11 renewable resources and waste energy facilities. 12 We believe that that, again, preempts the 13 local regulatory authority of our City Commission and 14 may require us to give preference to generation or 15 capacity types that, in fact, our community and our 16 customer owners have no interest in. 17 That concludes my summary. 18 Q Thank you, Mr. Brinkworth. 19 MR. HOFFMAN: He's available for questions, 20 Mr. Chairman. 21 CHAIRMAN DEASON: Questions? (Pause) I 22 think there are no questions. 23 Thank you for your patience and for your 24 presentation. 25 (Mr. Brinkworth excused.) FLORIDA PUBLIC SERVICE COMMISSION 851 1 - - - - - 2 CHAIRMAN DEASON: Mr. McKenzie, I believe you 3 indicated maximum of five minutes. 4 MR. MCKENZIE: Yes, sir. You can cut me off. 5 CHAIRMAN DEASON: All right. 6 NORRIE McKENZIE 7 appeared before the Commission and testified as 8 follows: 9 MR. McKENZIE: My name is Norrie McKenzie. 10 I'm vice president of Business Development for 11 Peninsula Pipeline Company, a proposed subsidiary of 12 Southern Natural Gas, an interstate pipeline that 13 serves seven southeastern states. 14 Southern Natural is owned by SONAT, Inc., 15 headquartered in Birmingham, Alabama. My business 16 address is 4 Greenway Plaza, Houston, Texas 77046. My 17 comments are brief. 18 As I understand the 1993 Florida Electrical 19 Power Coordinating Group's ten-year site plan, it 20 projects electrical generating plants with natural gas 21 as their primary fuel by the year 2002 to have a gas 22 requirement of over 3 billion cubic feet per day or 3 23 bcf per day. 24 Today the natural gas capacity into Florida 25 is approximately 1 bcf per day. Florida Gas FLORIDA PUBLIC SERVICE COMMISSION 852 1 Transmission's current expansion will increase that 2 capacity to 1.5 bcf per day. This projects a 3 tremendous natural gas deficit or demand. 4 Peninsula Pipeline will supply natural gas 5 transportation. Although natural gas transportation 6 cost of electricity may seem small, it is not 7 insignificant. For example, a 235-megawatt plant may 8 cost $235 million using the $1,000 per kilowatt rule of 9 thumb. 10 This plant would require 45,000 MMBtu per day 11 of natural gas. At today's commodity cost of natural 12 gas of approximately $2.25 per MMBtu, this represents 13 $40 million per year, not including the transportation 14 of that fuel. This commodity portion is usually 15 market-sensitive and passed directly through to the 16 electrical ratepayer. 17 Taking, for example, Florida Gas' Phase III 18 transportation rates, including fuel of approximately 19 85 cents per MMBtu, the transportation of this fuel 20 would cost approximately $14 million per year. Over a 21 15- to 20-year plant life, the transportation of fuel 22 alone could approximate the original cost of the plant. 23 In fact, if electrical generation cost 3.5 cents per 24 kilowatt hour, this 85 cents represents approximately 25 20% of the cost. Therefore, the electrical ratepayer FLORIDA PUBLIC SERVICE COMMISSION 853 1 deserves the lowest cost fuel transportation 2 alternative. 3 One way to ensure that ratepayers receive 4 that low-cost alternative is competitive bidding; 5 without it, it may not happen. For instance, the 6 present agreement between Florida Power Corporation and 7 ANR Southern Pipeline Company dated April 8th, 1993, 8 provides that Florida Power tender the natural gas 9 transportation for approximately 470 megawatts of 10 future gas requirements. 11 In other words, Florida Power has already 12 contracted for natural gas transportation for two 13 235-megawatt plants that are not certificated, two 14 units above and beyond the proposed Polk County Units 1 15 and 2, which are certificated. If Florida Power 16 self-builds, for example, similar units, Polk County 3 17 and 4, the gas transportation is already contracted. 18 In this case competitive bidding would at least allow 19 transportation alternatives to be considered, ensuring 20 that the electrical ratepayer receives the lowest cost 21 fuel transportation alternative. 22 I share the Commission's concern of the 23 social responsibility to serve. The natural gas 24 industry also has this responsibility. 25 We're entering the first winter where natural FLORIDA PUBLIC SERVICE COMMISSION 854 1 gas will flow under the Federal Energy Regulatory 2 Commission's Order 636, which may and I hope will be 3 the last step in deregulating the natural gas industry. 4 To date, I think natural gas consumers will 5 tell you that they have benefited by deregulation and 6 now have more choices than ever and lower cost options 7 due to increased competition. 8 The natural gas industry and the electrical 9 industry are very analogous. And I believe the 10 ultimate electrical consumer will benefit and enjoy the 11 benefits of increased competition in the electrical 12 generation sector, including the inherent competition 13 that will result in natural gas transportation. 14 Did I make it? 15 CHAIRMAN DEASON: I believe you did. 16 MR. MCKENZIE: I'm open for questions, if you 17 have any. 18 CHAIRMAN DEASON: Questions for Mr. McKenzie? 19 Mr. Neiser? 20 CROSS EXAMINATION 21 BY MR. NEISER: 22 Q Just to inquire as to whether or not you are 23 actually aware that there has been a contract entered 24 into for Units 3 and 4 at the Polk County site as 25 opposed to possibly confusing that with our existing FLORIDA PUBLIC SERVICE COMMISSION 855 1 Anclote units? 2 A No, sir. As I understand the precedent 3 agreement, it is for up to -- and this includes future 4 expansions -- for up to 300 million cubic feet, or 5 300,000 MMBtu per day or 300 million cubic feet per 6 day. Anclote is 120 of that 300. Polk County Units 1 7 and 2 would be 90, to bring that 120 plus 90 up to 210, 8 leaving an additional 90 out of that 300; that would be 9 another 470 megawatts. 10 It doesn't necessarily say that they have to 11 be Units 3 and 4 of Polk County, but that they are any 12 future expansions Florida Power may have. 13 Q Okay. Could that possibly be options rather 14 than the actual contract for that capacity? 15 A The way I read it, it states that Florida 16 Power Corp must tender future gas transportation needs 17 to what is considered SunShine or ANR. 18 MR. NEISER: I tried. Thank you. 19 CHAIRMAN DEASON: Mr. Cresse? 20 CROSS EXAMINATION 21 BY MR. CRESSE: 22 Q In your opening statement were you indicating 23 that there's more demand for gas than there is supply? 24 A I indicated that the electrical site plan 25 projects by Year 2000 that there is over 3 bcf of FLORIDA PUBLIC SERVICE COMMISSION 856 1 electrical plants that will have natural gas as their 2 primary fuel. Today there is 1 bcf or approximately 1 3 bcf of capacity into the state. 4 Q Are you suggesting, then, that under the 5 certification of need process the Commission should not 6 certify any more need that is dependent upon natural 7 gas until the pipeline meets that deficit? 8 A No, sir. I think if you'll run the numbers, 9 you'll see that there are probably 2 bcf of electrical 10 generation capacity in the state today that has natural 11 gas as their primary fuel. So you have 2 bcf today 12 with 1 bcf capacity, you're going to have three in the 13 future with more. 14 Q And does that mean that if natural gas is a 15 cheaper source of fuel than the alternative, which is 16 being used today, then we're paying more for the 17 alternative than we should if natural gas is available? 18 A If what you stated is correct, I believe that 19 would be an appropriate assumption. 20 Q Do you have an understanding that natural gas 21 today in the market is cheaper than No. 6 oil? 22 A I take it is as a fact, if you're stating it. 23 Q Thank you. 24 A If you're stating that as a fact, I take it 25 as a fact. FLORIDA PUBLIC SERVICE COMMISSION 857 1 CHAIRMAN DEASON: Staff? 2 Thank you, Mr. McKenzie. 3 MR. McKENZIE: Yes, sir. Thank you for the 4 opportunity. 5 (Mr. McKenzie excused.) 6 - - - - - 7 CHAIRMAN DEASON: Ms. Swim. 8 DEBRA SWIM 9 appeared before the Commission and testified as 10 follows: 11 MS. SWIM: Commissioners, I'm here on behalf 12 of the Legal Environmental Assistance Foundation, and I 13 made an appearance earlier. 14 We have filed comments in this case, and for 15 today's purposes I would like to also submit the 16 written comments that we filed on March 10th of '93, 17 which are also part of the record but they weren't part 18 of the record today, so I want to make sure they're 19 included. 20 On the topic of generation selection, LEAF 21 offers comments in two areas: one in terms of process 22 and the other in terms of substance. Substance-wise, 23 generation procurement procedures need to factor in the 24 environmental and the associated economic costs of 25 energy service alternatives. FLORIDA PUBLIC SERVICE COMMISSION 858 1 Despite the best available control 2 technology, there are pollution impacts from power 3 plants. Coal pollutes the public's air and water, 4 generally speaking, more than gas; and gas pollutes the 5 public's air and water, generally speaking, more than 6 solar or more than increased efficiency in the delivery 7 of energy services. 8 The failure to factor in these environmental 9 costs also poses significant economic impacts to 10 ratepayers. For example, there is an effort in recent 11 Clean Air Act amendment compliance cases that have been 12 before you to deal with the cost of complying with 13 increases in environmental requirement. And that means 14 that the customers of the utilities that chose to rely 15 on plants that pollute more are facing significant 16 increases to fund more stringent pollution control 17 requirements. 18 The Commission's cost-effectiveness 19 assessment of generation alternatives should factor 20 these environmental and associated economic impacts 21 into the decision of what's the most cost-effective 22 alternative. And LEAF has four specific 23 recommendations in this regard. 24 First, we would like to see the Commission 25 open up an environmental cost docket to attempt to FLORIDA PUBLIC SERVICE COMMISSION 859 1 monetize these costs. In the Cypress case and in the 2 Staff recommendation I'll read one sentence for you, 3 "There does seem to be a consensus among the 4 participants in this proceeding that the issue," 5 referring to environmental externality quantification, 6 "should receive further review and study on a generic 7 basis, and Florida Power and Light recommends that as 8 the appropriate next step." 9 We urge you to take that step and open a 10 docket to start looking at this issue. And I would 11 suggest probably that if you did so, you could probably 12 get the Department of Environmental Protection to 13 participate in that effort and provide expertise in 14 areas where you haven't had that in the past. 15 But while we're discussing these issues, we 16 also want to see you incorporate a less precise 17 approach in the rule that's before you today. And we 18 have some general recommendations in this regard. One 19 approach would be to establish -- to set aside a 20 reasonable percentage of the need for capacity that's 21 identified for renewable resources and for 22 highly-efficient cogenerators. And then within that 23 set-aside percentage allow these resource providers to 24 compete on a least-cost basis. 25 At the Solar and Renewables Conference we had FLORIDA PUBLIC SERVICE COMMISSION 860 1 in Cocoa Beach a couple of weeks ago, I talked to a lot 2 of the people who do this as their business. And it 3 really could make a big difference if we just had a 4 small set-aside for them, allow them to compete on the 5 basis of least cost to allow these clean industries the 6 place that they need in the state of Florida. 7 Another approach that is less precise than 8 monetizing is to an adder or discount approach. What 9 you would do is create an adder for some or all of the 10 supply-side resources. For example, carbon-emitting 11 resources or fossil fuel resources, or alternatively 12 some form of discount or credit for renewable or 13 efficiency resources. 14 You could get even less precise, if that was 15 your choice, and just generally require utilities to 16 factor environmental impacts and their associated 17 economic impacts into resource planning; or create, in 18 some fashion, a direct incentive such as a higher rate 19 of return for utilities that emphasize these 20 environmentally benign measures. 32 states have some 21 kind of environmental externality requirements, and we 22 urge Florida to join them. 23 And my last recommendation in the area of 24 substance is we would like to see the Commission in 25 this rule create an opportunity for energy service FLORIDA PUBLIC SERVICE COMMISSION 861 1 companies, that is energy efficiency entrepreneurs, to 2 compete with generation suppliers to meet capacity 3 needs that are identified. 4 Your action in the conservation goals area 5 where you decide how much of Florida's efficiency 6 potential should be captured by Florida's utilities 7 investments, could leave a lot of room open for 8 efficiency entrepreneurs to operate, you know, in the 9 generation selection mode. Depends on what you do, but 10 there is a huge potential out there, and these are 11 companies that deserve some support. 12 That brings me to the process comments that I 13 referred to earlier. 14 LEAF agrees with Staff's witness, Tom 15 Ballinger, that our purpose here is to avoid the 16 eleventh-hour surprises that came up in the Cypress 17 need determination case, although there is another 18 surprise that we wish to avoid. 19 In a need determination case, there are two 20 things at issue: One, is there a need for generation? 21 And the other is, which option should meet that need? 22 It's a surprise associated with the issue of whether 23 there is a need that we want to avoid. 24 In recent need determination cases, the 25 Commission made findings that the utilities' FLORIDA PUBLIC SERVICE COMMISSION 862 1 demand-side management efforts were deficient and that 2 they should be more aggressive. Nonetheless, the 3 Commission found that there was a need for generation 4 despite these acknowledged deficiencies in the 5 utilities' DSM efforts. And, thus, at best, the 6 evaluation that's required by Section 403.519, that is 7 whether conservation measures are reasonably available 8 to mitigate the need for a new plant, came too late in 9 the process to really matter. 10 Now, our ideal solution to this problem would 11 be for the Commission to require each utility to 12 develop and implement a least-cost integrated resource 13 plan, and we will be sponsoring testimony in this 14 regard in the conservation goals rule docket. 15 In the interim, we express our support for 16 CEPA's bifurcated process, since it would allow the 17 Commission the opportunity to make a more timely and, 18 thus, a more meaningful evaluation of the utility 19 demand-side management efforts. 20 In this way we can avoid the eleventh-hour 21 surprises that come up when you have a single hearing 22 that combines both an assessment of whether there is a 23 need and exactly how we should fill that need. 24 That concludes my remarks. 25 CHAIRMAN DEASON: Questions for Ms. Swim? FLORIDA PUBLIC SERVICE COMMISSION 863 1 Mr. Cresse? 2 MR. CRESSE: Mr. Chairman. 3 CROSS EXAMINATION 4 BY MR. CRESSE: 5 Q In your last statement you seem to be 6 suggesting a bifurcated hearing. Do you agree with 7 Tampa Electric's proposal, Mr. Mestas' proposal, that 8 there would be a determination of need, then they go 9 out for bid? 10 A I haven't looked over -- I was not sent 11 Tampa's proposal and I haven't looked it over. 12 Q All right. Let me clarify the question then. 13 Do you believe that there should first be a 14 determination of need for capacity and then 15 subsequently another hearing to determine whether or 16 not that capacity has been obtained in the most 17 cost-effective manner? 18 A Yes. I think that is CEPA's proposal. 19 Q All right. Now, would you agree that in that 20 first hearing all of the issues of whether or not 21 they've had adequate conservation programs and whether 22 they can meet that need through additional conservation 23 programs, and so forth and so on, could be the subject 24 of the first hearing. But once that hearing has been 25 held on that subject and the Commission has voted, that FLORIDA PUBLIC SERVICE COMMISSION 864 1 it doesn't come up again in the second hearing? 2 A That's fine, just with the understanding that 3 the first hearing is a 120.57 type of proceeding. 4 Q Is that -- I don't know what that means but 5 as long as you're talking about evidentiary hearing, 6 legal talk, so you can cross examine people and have a 7 good time doing all that, right? 8 A Yes. 9 Q Okay. So looking at it from the utility's 10 standpoint, then you say in the first hearing we prove 11 up our need and we don't have to see LEAF in the second 12 hearing. Is that a fair statement? 13 A Well, it depends on how much you're investing 14 in renewables and highly-efficient cogenerators. 15 Q But in the second -- they would have already 16 made that decision in the first hearing, would they 17 not? The second hearing would be devoted to fair 18 process and least cost? 19 A The second proceeding, the way I understand 20 your question, would be devoted to selecting how to 21 meet that need. 22 Q That capacity requirement? 23 A So, yes, that issue would be decided in the 24 first hearing. 25 Q All right. You mentioned something about a FLORIDA PUBLIC SERVICE COMMISSION 865 1 set-aside for renewal and high efficiency and so forth. 2 Does that exist now, today, in terms of a cogenerator 3 or a qualifying facility having available to it a price 4 that it can sign a contract for today? 5 A Well, I'm not -- 6 Q Is that a form of set-aside? 7 A I've looked at the comments submitted by 8 Barney Capeheart, on behalf of the highly-efficient 9 cogenerators, and it is their position that it's 10 necessary to have more of a recognition for the role of 11 highly-efficient cogenerators. And that's what we're 12 looking for. 13 Q Well, you say "more of a role." Do you want 14 highly-efficiency generators to be paid more than the 15 lowest-cost alternative or equal to the lowest-cost 16 alternative? 17 A Well, there's a range of ways to approach it: 18 One approach is to have a set-aside for the 19 highly-efficient cogenerators. And then within that 20 percentage of need that's set aside, allow the 21 competition on a least-cost basis. Another approach 22 would be to give a modest price preference in 23 recognition of the value of this resource in terms of 24 environmental impact and associated economic impact. 25 Q Maybe my question wasn't clear. FLORIDA PUBLIC SERVICE COMMISSION 866 1 Would you want this Commission to require a 2 utility to pay a higher price than the least-cost unit 3 available because that person was using renewable fuels 4 or was a high-efficiency unit? Should they be paid a 5 premium above what's least cost is what I'm asking you? 6 A Yes. That's what I answered, yes. 7 Q And the answer to that was "yes"? 8 A Yes. 9 Q Let me ask you this question: If they're 10 high efficiency, why would they need a premium? 11 A Well, I would refer you to the testimony of 12 Dr. Barney Capeheart to document that they're not 13 receiving it. And the fact that they're not receiving 14 it shows that they need it. 15 Q So the electric ratepayers should subsidize 16 the highly-efficient cogenerators? 17 A The benefits of high-efficient cogeneration 18 are directed by the legislature. The legislature 19 directed the Commission to favor highly-efficient 20 cogenerators and to favor renewable resources. And I 21 think in terms of following the legislative directive 22 in this regard for the policies that the legislature 23 had in that directive, you know, yes, that's -- 24 Q So the Commission is violating the law? 25 A I'm saying that the Commission has the FLORIDA PUBLIC SERVICE COMMISSION 867 1 authority to do this and they haven't. 2 Q Well, then they were authorized as opposed to 3 being directed; is that correct? 4 A That's right. 5 Q There is a distinction in that, is there not, 6 under the law, between being authorized to do something 7 and directed to do it? 8 A Yeah, sure. 9 Q Okay. You're asking the Commission somehow 10 to take into consideration environmental impacts in 11 certification of need; is that correct? 12 A You know we are urging the Commission to take 13 into account environmental impacts. And, you know, one 14 place would be in certification of need, but that's 15 not, I mean, necessarily limited to. 16 Q I understand that. But for this hearing, 17 you're asking it for that period? 18 A That's right. Basically, in terms of their 19 selection of generation resource, which is the topic of 20 this hearing. 21 Q Are you asking basically what, under the 22 statute, is the economic regulation of utilities to 23 become the environmental regulator or to participate in 24 environmental regulation because the environmental 25 regulation is not adequate to protect the citizens of FLORIDA PUBLIC SERVICE COMMISSION 868 1 this state? 2 A No, I don't think so. 3 Q Why, then, should the economic regulator be 4 requested to get involved in environmental regulation? 5 A Well, you know, despite the best available 6 pollution control technology, there are environmental 7 impacts, as I explained earlier in my testimony, from 8 the construction and operation of power plants and the 9 type of power plant or basically energy resource 10 selected has varying impacts. And it's the 11 Commission's rule to have some oversight into those 12 varying impacts. 13 I'm not suggesting that they set the 14 environmental standards but acknowledge that the 15 pollution impacts and the associated economic impacts 16 from the pollution impacts exist and take some 17 accounting for that as they make decisions over which 18 generation alternative is preferable. 19 MR. CRESSE: Thank you. 20 CHAIRMAN DEASON: Mr. Neiser? Mr. 21 McGlothlin? Staff? Commissioners? 22 Thank you, Ms. Swim. (Pause) 23 (Ms. Swim excused.) 24 _ _ _ _ _ 25 According to my list, we have exhausted it FLORIDA PUBLIC SERVICE COMMISSION 869 1 and there are no other presenters at this time. If I'm 2 mistaken, please identify yourself, because this is 3 your last opportunity. 4 Okay. I know that some interested persons 5 have inquired about the possibility of having closing 6 arguments. I know some parties have indicated that 7 they think that is unnecessary or have agreed not to 8 engage in closing arguments. But I've had an 9 indication that at least one individual wishes to do 10 so. And I've indicated that up until the hour of 5:00 11 that that would be permissible. I'm not soliciting it, 12 but if it is coming, let's go ahead and have it. 13 MS. RULE: Well, I think some people have 14 already left thinking that it was not going to happen 15 who perhaps would have stayed around had there been an 16 indication it would be available. 17 CHAIRMAN DEASON: Mr. Moyle, what's your 18 pleasure? I've had an indication that some people 19 thought there were not going to be closing arguments 20 and that it may be unfair for you to engage in yours 21 when others thought there were going to be none. 22 MR. MOYLE: Well, Mr. Chairman, I realize the 23 time on a Friday afternoon, after three days of long 24 and often exhausting testimony, but I had -- probably 25 very presumptuous, but I had the idea in my mind, FLORIDA PUBLIC SERVICE COMMISSION 870 1 particularly after Mr. Cresse made his closing in the 2 middle of the proceedings. And I had a couple of 3 points to make that might be helpful to the Commission, 4 not as much in the nature of a closing argument, as 5 personal observations. And since this is a Rule 120.45 6 rule hearing, I thought I would do it. But I don't 7 want to do anything that's going to unfairly prejudice 8 anybody else. 9 CHAIRMAN DEASON: Well, that's what my 10 concern is at this point is, if there are other parties 11 who felt like that there were not going to be closing 12 arguments and have since vacated the room, I don't want 13 to give anyone unfair advantage. But all parties have 14 the opportunity to file further comments or responses 15 to whatever has been said or whatever has taken place 16 in this hearing. Is that correct? 17 MS. RULE: That's correct. Transcripts 18 should be available the 15th of October, with the 19 comment deadline October 29th. 20 CHAIRMAN DEASON: Mr. Moyle, I would just 21 encourage you to do that in written form. And I will 22 assure you that they will at least receive my 23 attention, and I'm assure the other Commissioners will 24 review that as well. 25 MR. MOYLE: Okay. May I just -- these are FLORIDA PUBLIC SERVICE COMMISSION 871 1 not intended to be a brief, but may I do it in 2 correspondence with copies to everyone? 3 CHAIRMAN DEASON: Is that permissible, Ms. Rule? 4 MS. RULE: Yes. 5 CHAIRMAN DEASON: That will be fine. Thank 6 you for your understanding. 7 MR. MOYLE: Thank you. 8 CHAIRMAN DEASON: Thank you all for a very 9 enjoyable three days. (Laughter) 10 MS. RULE: Mr. Chairman, Mr. Jenkins from the 11 Staff had a request. 12 CHAIRMAN DEASON: I'm sorry. Hold on everyone. 13 MS. RULE: Joe Jenkins had a request. He 14 would like people to cover something particularly in 15 their comments if they file them. 16 He noted that there had been a lot of 17 discussion about the risk of disallowance and wondered 18 what it would take in the changes of the law or rules 19 or statutes for you all to be comfortable that there 20 wasn't going to be a risk of disallowance. In the 21 interest of his question, you may wish to cover that. 22 CHAIRMAN DEASON: Thank you. Thank you all. 23 (Thereupon, the hearing concluded at 4:45 24 p.m.) 25 - - - - - FLORIDA PUBLIC SERVICE COMMISSION 872 1 F L O R I D A ) 2 : CERTIFICATE OF REPORTERS ________________________ COUNTY OF LEON) 3 We, JOY, KELLY, CSR, RPR; SYDNEY C. SILVA, 4 CSR, RPR; PAMELA A. CANELL, Official Commission Reporters, and LISA GIROD JONES, RPR, CM. 5 DO HEREBY CERTIFY that the hearing in Docket No. 921288-EU, was heard by the Florida Public Service 6 Commission at the time and place herein stated; it is further 7 CERTIFIED that we stenographically reported the said proceedings; that the same has been 8 transcribed under our direct supervision, and that this transcript, consisting of 871 pages, Volumes I through 9 VI, inclusive, constitutes a true transcription of our notes of said proceedings. 10 DATED this 12th day of October, A. D., 1993. 11 ___________________________ __________________________ 12 JOY KELLY, CSR, RPR SYDNEY C. SILVA, CSR, RPR Chief, Bureau of Reporting Official Commission Reporter 13 ____________________________ 14 PAMELA A. CANELL Official Commission Reporter 15 (904) 488-5981 16 ____________________________ LISA GIROD JONES, RPR, CM 17 18 STATE OF FLORIDA) 19 : COUNTY OF LEON ) 20 21 The foregoing certificate was acknowledged before me this 12th day of October, 1993, 22 by JOY KELLY, SYDNEY C. SILVA, PAMELA A. CANELL and LISA GIROD JONES, who are personally known to me. 23 24 ________________________________ Evelyn L. Borschel 25 Notary Public - State of Florida FLORIDA PUBLIC SERVICE COMMISSION