Recommendation (Regular)

Public Service Commission
Capital Circle Office Center 2540 Shumard Oak Boulevard
Tallahassee, Florida 32399-0850

Case Background

On November 4, 2004, Florida Power & Light Company (“FPL” or “Company”) filed a petition seeking authority to recover prudently incurred restoration costs, in excess of its storm reserve balance, related to the hurricanes that struck its service territory in 2004. In its petition, FPL asserted that as a result of Hurricanes Charley, Frances, and Jeanne, FPL estimated its extraordinary storm-related costs to be approximately $710 million, net of insurance proceeds, which would result in a deficit of approximately $356 million in its storm reserve fund at the end of December 2004. By its petition, FPL proposed to recover $354 million of this estimated deficit through a monthly surcharge to apply to customer bills over a 24-month recovery period. According to FPL’s petition, the amount that was in the storm reserve as of December 31, 2004 was approximately $354 million.

On November 19, 2004, FPL filed a petition seeking approval to implement its proposed surcharge on a preliminary basis, subject to refund, pending the Commission’s final order in this docket. Along with its petition, FPL filed a tariff sheet reflecting its proposed surcharge by rate class. By Order No. PSC-05-0187-PCO-EI, issued February 17, 2005, the Commission granted FPL’s request to implement its proposed surcharge on a preliminary basis, and the preliminary surcharge became effective, subject to refund, for meter readings taken on or after February 17, 2005.

By Order No. PSC-05-0283-PCO-EI, issued March 16, 2005, the Commission granted FPL leave to amend its original petition to reflect an updated estimate of the storm-related costs contained in its original petition. In its amended petition, filed February 4, 2005, FPL updated its estimate of extraordinary storm related costs to approximately $890 million, net of insurance proceeds, which would result in a deficit of approximately $536 million in its storm reserve fund at the end of December 2004. By its amended petition, FPL proposes to recover $533 million of this estimated deficit through a monthly surcharge to apply to customer bills based on a 36-month recovery period. FPL’s request is listed below:

	Original Petition filed 11/4/04	Amended Petition filed 2/4/05
Extraordinary Storm-related Costs	$819,000,000	$999,000,000
Insurance Proceeds	$109,000,000	$109,000,000
Storm Reserve Fund	$354,000,000	$354,000,000
Negative Balance	$356,000,000	$536,000,000
Amount Requested	$354,000,000	$533,000,000

On April 6 and April 11-13, 2005, the Commission held customer service hearings in Ft. Myers, Port Charlotte, Daytona Beach, Melbourne, Stuart, and West Palm Beach. Several individuals spoke at these service hearings, most of whom represented city/county governments (i.e. mayors, commissioners, school superintendents, emergency management officials, etc.), local civic associations, and various local chamber of commerce representatives. For the most part, these individuals were highly complimentary towards FPL’s hurricane restoration efforts, although few addressed the specific issues concerning amounts to be recovered.

On April 20 and 21, 2005, the Commission conducted a technical hearing on FPL’s amended petition. Along with FPL, the Office of Public Counsel (“OPC”), Florida Industrial Power Users Group (“FIPUG”), Florida Retail Federation (“FRF”), Thomas P. and Genevieve E. Twomey (“Twomeys”), and AARP participated as parties to the proceeding. Following the hearing, each party filed a post-hearing brief and/or statement of issues and positions.

Like the other Florida investor owned utilities, FPL operates under a self insurance program for its distribution and transmission facilities. This became necessary when insurance became cost prohibitive as a result of the devastation caused by Hurricane Andrew in 1992. As a result of this change to self insurance, FPL conducted a study (1993 Study) of the different accounting methods for a self insurance program.

One of the major issues in this docket is the appropriate methodology to be used to determine the amount of storm restoration costs to be charged to the storm reserve (Issues 1 and 2). In FPL’s 1993 Study, FPL presented three methods to determine the amount of storm-related costs to be charged to the storm reserve.

The first method is the Actual Restoration Cost Approach. Actual restoration costs are defined as those direct and indirect costs incurred to safely restore customer service, or to return plant and equipment to its original pre-storm operating condition. The result of the Actual Restoration Cost Approach is to restore the plant in service and accumulated depreciation accounts to their pre-storm balances. To accomplish this, all storm-related restoration costs, both O&M and capital, are charged to the storm reserve. Essentially, this approach mimics the replacement cost insurance that FPL had prior to Hurricane Andrew in 1992. This is the approach that FPL has utilized in charging costs to the storm reserve since 1993 and is the approach advocated by FPL in this docket.

The second method presented by FPL in its 1993 Study is the Actual Restoration Cost Approach with Net Book Value Adjustment. Under this approach, the actual restoration costs charged to the storm reserve are reduced by capitalizing the normal replacement cost of replaced facilities less the net book value of the retired assets.

The third and final method presented by FPL in its 1993 Study is the Incremental Cost Approach. Using this approach, the actual restoration costs are reduced by non-incremental, or normal, O&M expenses. According to FPL, however, the actual restoration costs would be increased to recover incremental indirect costs such as lost revenue. As envisioned by FPL, no costs would be capitalized to rate base under this approach. Rather, all capital costs are charged to the storm reserve.

Neither the second nor the third method included in FPL’s 1993 Study was advocated by any party in this docket. However, a fourth method was advocated by the OPC.

OPC’s witnesses presented a fourth method identified as the “OPC Storm Damage Guidelines.” In general, the OPC guidelines are a combination of FPL’s Actual Restoration Cost Approach with Net Book Value Adjustment and the Incremental Cost Approach methodologies. On the capital side, the OPC guidelines capitalize normal replacement cost of plant and account for retirements and the cost of removal. Only the incremental or extraordinary costs are charged to the storm reserve under this method. For O&M expenses, the OPC guidelines only allow incremental O&M expenses to be charged against the storm reserve. However, the OPC guidelines prohibit the consideration of any lost revenue or uncollectible expenses.

In this recommendation, staff recommends a modified Incremental Cost Approach. This approach is also a combination of the Actual Restoration Cost with Net Book Value Adjustment Approach and the Incremental Cost Approach. This approach is similar to the methodology advocated by OPC except for the consideration of incremental indirect costs (Issue 15). Under this approach, extraordinary costs are charged to the storm reserve. This includes both capitalizing the normal replacement cost of plant and allowing incremental O&M expenses to be charged against the storm reserve. In addition, some normal costs, to the extent there are lost revenues, are recommended for recovery as part of the Storm Recovery Surcharge.

Issue 15 is one of the most controversial issues contained in the recommendation. This issue addresses the inclusion of incremental indirect costs such as lost revenues. Staff has presented a primary and an alternative recommendation concerning the issue of including the effect of lost revenues in calculating the costs to be charged to the storm reserve. Staff in its primary recommendation recommends not allowing lost revenues as an indirect cost. Rather, Primary Staff recognizes lost revenues by including those normal O&M expenses in the calculation of the surcharge up to the level of the normal O&M costs previously excluded by other staff adjustments. Staff also has an alternative recommendation that recommends lost revenues not be given any consideration in the calculation of the costs to be charged to the storm reserve. Below is a table providing a summary by issue of Staff’s primary recommendation:

FPL Estimated 2004 Storm Damage Costs (System) $999,000,000

Less: Insurance Reimbursements (109,000,000)

Net 2004 Storm Damage Costs 890,000,000

Less: Staff Adjustments

Issue 4 – Non-Management Payroll Expense (10,900,000)

(Removed to prevent double recovery)

Issue 5 – Managerial Payroll Expense (21,100,000)

(Removed to prevent double recovery)

Issue 8 – Tree Trimming Expense (1,000,000)

(Removed difference between actual & budgeted)

Issue 9 – Vehicle Expenses (5,261,887)

(Removed to prevent double recovery)

Issue 11 – Advertising & Public Relations Expense (1,552,410)

(Removed the amount over budget)

Issue 13 – Replacement Capital Costs (58,000,000)

- Cost of Removal (12,200,000)

- Contributions in Aid of Construction (21,700,000)

(Removed the normal capital cost)

Issue 15 – Normal O&M Cost Offset 33,814,297

- Uncollectible Expenses 6,000,000

(Primary added normal cost back equal to

uncollectible account and incremental portion

of lost revenue. Alternative excludes the

$33,814,297.)

Total System Adjustments (91,900,000)

Adjusted for System Adjustments 798,100,000

Retail Jurisdictional Separation Factor x 0.99525

Adjusted Jurisdictional 2004 Storm Damage Costs To Be

Charged Against Storm Reserve $794,309,025

The Commission has jurisdiction over this matter pursuant to Chapter 366, Florida Statutes, including but not limited to Sections 366.04, 366.05 and 366.06, Florida Statutes.

Storm Cost Categories	Amount Requested	Staff Adjustments	Amount Recommended
Issue 4 – Non-managerial Salaries	$ 45,389,456	$ (10,900,000)	$ 34,489,456
Issue 5 – Managerial Salaries	62,196,295	(21,100,000)	41,096,295
Issue 7 – Employee Training Costs^{^[1]}	0	0	0
Issue 8 – Tree Trimming	89,435,466	(1,000,000)	88,435,466
Issue 9 – Fleet Vehicles	8,088,117	(5,261,887)	2,826,230
Issue 10 – Call Center^{^[2]}	0	0	0
Issue 11 – Advertising	1,703,454	(1,552,410)	151,044
Issue 12 – Uncollectible Accounts	0	0	0
Issue 13 – Normal Plant In service	58,000,000	(58,000,000)	0
- Cost of Removal	12,200,000	(12,200,000)	0
- CIAC	21,700,000	(21,700,000)	0
Issue 15 – Lost Revenue^{^[3]}	0	33,814,297	33,814,297
- Catch-up, Incremental Work^{^[4]}	0	0	0
- Uncollectible Accounts^{^[5]}	0	6,000,000	6,000,000
Uncontested Restoration Costs	591,287,212	0	591,287,212
Total Storm Costs	$ 890,000,000	$ (91,900,000)	$ 798,100,000

Summary of Storm Damage Issues

Discussion of Issues

Issue 1: What is the legal effect, if any, of FPL’s 1993 storm cost study and Order No. PSC-95-0264-FOF-EI entered in Docket No. 930045-EI on the decisions to be made in this docket?

Recommendation:

The methodology proposed in FPL’s 1993 storm cost study does not represent the standard by which the Commission must determine which costs are appropriately charged to FPL’s storm damage reserve. In Order No. PSC-95-0264-FOF-EI, the Commission did not expressly approve the methodology proposed in FPL’s study and made no finding that the methodology was “reasonable” or “appropriate” or otherwise should be used as the continuing standard for charging costs to the storm reserve. (C. Keating, K. Fleming)

Position of the Parties

FPL:

The Commission approved accounting standards submitted by FPL pursuant to Commission order. FPL must adhere to Commission orders and has relied upon the Commission’s order. Storm restoration costs were booked in accordance with the approved standards and were included in the Storm Damage Reserve deficit that was reported as an asset in the Company’s 2004 financial statements. Changing the standards retroactively would undermine the basis for financial reporting. Nothing has occurred that alters the propriety of using the approved standards.

OPC:

The study and order are not legally dispositive. FPL bases its opposition to many of OPC’s adjustments solely on the ground that FPL’s treatment is consistent with this 1993 study and Order No. PSC-95-0264-FOF-EI. Yet, in the order the Commission said only that FPL study was “adequate.” Moreover, FPL no longer has transmission and distribution insurance, meaning the circumstances cited by FPL have changed.

FIPUG:

The 1993 study and Order No. PSC-95-0264-FOF-EI are not dispositive of the issues regarding the manner in which FPL should account for the storm-related costs in this proceeding. In addition, the Order did not prejudge cost recovery from FPL’s ratepayers under the storm damage reserve.

AARP:

FPL’s 1993 study and Order No. PSC-95-0264-FOF-EI are not legally dispositive of the accounting methodology that the Commission should require FPL to apply to 2004 storm costs. The study and order do not preclude the Commission from requiring FPL to share in the costs of restoring its system to the point that its earnings are reduced to 10 percent, which remains a fair and reasonable return in the current market.

TWOMEYS:

FRF:

Staff Analysis:

Background

By Order No. PSC-93-0918-FOF-EI, issued June 17, 1993, in Docket No. 930405-EI, In re: Petition to implement a self-insurance mechanism for storm damage to transmission and distribution system and to resume and increase annual contribution to storm and property insurance reserve fund by Florida Power and Light Company (“1993 Order”), the Commission authorized FPL “to implement a self insurance approach for the costs of repairing and restoring its transmission and distribution systems in the event of hurricane, storm damage or other natural disaster” through annual contributions to its Storm and Property Insurance Reserve Fund (“storm reserve”). In addition, the Commission required FPL to prepare and submit a study addressing primarily two matters: (1) the appropriate amount to be contributed annually to its storm reserve; and (2) the types of costs that FPL intended to charge to its storm reserve.

In response to the 1993 Order, FPL filed its study on October 1, 1993 (“1993 Study” or “Study”). With respect to the appropriate annual contribution to the storm reserve, the 1993 Study recommended a $7.1 million annual accrual. With respect to the types of costs to be charged to the storm reserve, the 1993 Study described three alternative approaches for determining the amounts to be charged to the storm reserve and recommended use of an approach identified as the “Actual Restoration Cost” Approach.

In Order No. PSC-95-0264-FOF-EI, issued February 27, 1995, in Docket No. 930405-EI (“1995 Order”), which is attached hereto for reference as Attachment A, the Commission addressed the 1993 Study. (Attachments to the 1995 Order are not included in Attachment A as they are not relevant to the resolution of this issue.) The 1995 Order was entitled “Notice of Proposed Agency Action Approving Storm Damage Study and Adjustments to Self Insurance Mechanism.” With respect to the Study, the Commission stated at page 4 of the Order, in relevant part:

FPL’s study provided sufficient analysis to indicate the appropriate annual amount that should be contributed to the storm reserve fund at this time.

In addition, the study addressed the issues raised in the [1993 Order] concerning the types of expenses that would be charged to the reserve. However, we have the authority to review any expenses charged to the reserve for reasonableness and prudence. FPL states that it would use the Actual Restoration Cost Approach for determining the appropriate amounts to be charged to the reserve. This methodology is consistent with the manner in which replacement cost insurance works.

While the Commission found the study sufficient to indicate the appropriate annual amount to be contributed to FPL’s storm reserve, it ultimately did not approve the $7.1 million annual accrual proposed in the study, but instead approved an annual accrual amount of $10.1 million arrived at through subsequent discussions between FPL and the Commission’s staff.^{^[6]} With respect to the types of costs to be charged to the storm reserve, the Commission made no express findings concerning the appropriateness or reasonableness of the methodology proposed in the Study. The Commission stated that it was “considering the appropriateness of opening a rulemaking proceeding to establish uniform guidelines for determining when the storm reserve should be charged and what costs should be charged to it.”^{^[7]}

The Commission stated its conclusions concerning the 1993 Study in an ordering paragraph at the conclusion of the Order, which stated:

ORDERED that the storm damage study submitted by Florida Power & Light Company is hereby found to be adequate.

Argument of the Parties

At issue is whether the Commission, by its 1995 Order, approved the methodology proposed in FPL’s 1993 Study concerning the types of costs to be charged to the storm reserve and, in turn, whether the Commission’s decisions in this docket are limited to determining whether FPL complied with that methodology. FPL argues that the Commission, in its 1995 Order, approved use of the Actual Restoration Cost Approach recommended in the Study and cannot now apply a new standard retroactively. Each of the Intervenors takes the position that the Study and the 1995 Order are not legally dispositive of the Commission’s decisions in this docket concerning what costs are appropriately charged to the storm reserve.

In support of its position, FPL emphasizes the title of the 1995 Order, “Notice of Proposed Agency Action Approving Storm Damage Study and Adjustments to Self Insurance Mechanism.” Based on the title of the 1995 Order, FPL asserts that the Commission approved the 1993 Study, thus necessarily approving FPL’s recommendation that the Actual Restoration Cost Approach be used for charging costs to the storm reserve. FPL also cites to a passage in the Order that it believes shows the Commission’s intent to approve the categories of costs that should be charged to the storm reserve. That passage reads:

FPL asserts that the Commission, by that language, retained only the authority to review the reasonableness and prudence of specific charges that FPL may make in the categories listed in the Study. FPL states that it has consistently applied the Actual Restoration Cost Approach in accounting for the costs of eight storms between 1993 and 2003, without challenge from the Commission or any party. Finally, FPL asserts that none of the Intervenors have provided evidence demonstrating that circumstances have changed warranting a departure from the Actual Restoration Cost Approach.

In support of its position, OPC emphasizes that the Commission, in its 1995 Order, found only that the Study was “adequate” and referred to the possibility of convening rulemaking proceedings to develop uniform standards for storm accounting applicable to all utilities. OPC dismisses FPL’s conclusion that the lack of a rulemaking proceeding to date signifies the Commission’s support for the Actual Restoration Cost Approach, instead arguing that the lack of a rulemaking proceeding signifies only that the need recognized by the Commission remains unfulfilled. OPC states that its position is not altered by the fact that FPL used this methodology between 1993 and 2003 without controversy; OPC asserts that those occasions were simply not sufficiently material to attract attention, and that the issue remained latent during that period.

OPC further argues that if the Commission does regard its 1995 Order as a form of approval, changes in circumstances since the issuance of that order allow the Commission to consider use of a different approach. OPC asserts that FPL, in the 1993 Study, justified its Actual Restoration Cost Approach, in part, on its expectation that it would continue to have in place commercial insurance on its transmission and distribution facilities. OPC notes that the Study stated:

Use of the Actual Restoration Cost Approach is consistent with replacement cost insurance and avoids the cumbersome (and potentially arbitrary) accounting for storm restoration utilizing two different methodologies.

OPC points out that FPL today has no insurance on its transmission and distribution facilities, which constitute the bulk of its storm-vulnerable assets. OPC contends that this change in circumstances allows the Commission to consider using a different methodology.

Staff Analysis

Staff believes that the Commission’s 1995 Order was not intended to approve the methodology proposed in FPL’s 1993 Study as the standard by which the Commission must determine which costs are appropriately charged to FPL’s storm reserve. In reaching this conclusion, staff recognizes that the title of the 1995 Order indicates that it “approved” the Study, but believes that the body of the Order, and a review of other Commission orders, strongly suggests that such approval was not intended for the purpose asserted by FPL in this proceeding.

While the title of the 1995 Order indicates that it “approved” the 1993 Study, the Order does not expressly approve or otherwise state any intent to implement the specific recommendations contained in the Study. First, with respect to the appropriate annual contribution to the storm reserve, the Commission found the study sufficient to indicate the appropriate annual amount to be contributed to FPL’s storm reserve but did not approve the $7.1 million annual accrual proposed in the study. Second, with respect to the types of costs to be charged to the storm reserve, the Commission did not expressly approve the methodology proposed in FPL’s study and made no finding that the methodology was “reasonable” or “appropriate” or should otherwise be blessed as the continuing standard for charging costs to the storm reserve. Third, the Commission concluded the Order by finding only that the Study was “adequate.” In this context, staff believes that the title of the Order was intended to express that the 1993 Study sufficiently satisfied the requirements of the Commission’s 1993 Order requiring that the Study be conducted and submitted. Giving effect to the Order title as proposed by FPL would require going beyond the specific language and findings in the Order.

Staff’s view of the 1995 Order is consistent with Commission orders addressing the same issue with respect to other investor-owned electric utilities in Florida. In particular, in Order No. PSC-95-0255-FOF-EI (“TECO Order”)^{^[8]}, issued just four days prior to FPL’s 1995 Order, the Commission addressed the same issue with respect to Tampa Electric Company (“TECO”). In that Order, which was also entitled “Notice of Proposed Agency Action Order Approving Storm Damage Study,” the Commission specifically found that the replacement cost approach proposed in a study submitted by TECO was “a reasonable methodology for determining the appropriate amounts to be charged to the storm reserve.” Further, as it did in FPL’s 1995 Order, the Commission noted that TECO’s proposed approach was consistent with the provisions of TECO’s prior insurance coverage. Despite having made a specific finding that TECO’s proposed approach was reasonable – a finding notably absent from the 1995 Order – the Commission went on to explain the extent of its authority to review costs charged to TECO’s storm reserve:

While we sympathize with Staff’s concerns regarding the appropriateness of particular proposed expenses listed by TECO, it is our understanding that this list is merely setting forth examples of expenses that the utility may wish to charge against storm reserves. The list is a general guideline of categories to be recovered; it is neither all inclusive or exclusive. Because of the unpredictable nature of any given storm, it seems premature to make a determination of the prudency of any particular charge at this time. In the event of a storm, the utility will bear the burden of showing that specific charges against reserves are prudent and reasonable. . . . We retain the right to review the costs and disallow any that are found to be inappropriate.

Based on this Order, it appears to staff that the Commission, by retaining the authority to review the prudence and reasonableness of costs charged to the storm reserve, also intended to retain its authority to determine whether a particular category of costs was appropriately charged to the storm reserve. The Commission left the burden on the utility to show that specific charges against storm reserves are appropriate.

Staff’s review of Commission orders related to other electric utilities shows that the Commission intended that each utility be held to the same standard. Most notably, in an order addressing a request by Gulf Power Company to amortize hurricane-related expenses to its storm reserve^{^[9]}, the Commission cites the TECO Order in the same breath as the 1995 Order as the standard for the Commission’s review of costs charged to a utility’s storm reserve.

In conclusion, staff recommends that the Commission find that the 1995 Order was not intended to approve the methodology proposed in FPL’s 1993 Study as the standard by which the Commission must determine which costs are appropriately charged to FPL’s storm reserve. If the Commission believes that the methodology set forth in the 1993 Study was established as a standard for charging items to the storm reserve, then Issues 2, 4, 5, 7, 8, 9, 10, 11, 12, 13, 14, and 15 become moot.

Issue 2: Is the methodology in Order No. PSC-95-0264-FOF-EI, issued in Docket No. 930405-EI, for booking costs to the Storm Damage Reserve the appropriate methodology to be used in this docket?

Recommendation:

No. A modified incremental cost approach is the appropriate methodology to be used in this docket for booking costs to the Storm Damage Reserve. (Slemkewicz)

Position of the Parties

FPL:

Yes. Nothing has occurred that would alter the propriety of using the standards approved in Docket No. 930405-EI.

OPC:

No. FPL’s proposed methodology would lead to double recovery of costs covered by base rates and would distort the relationship between installed plant and depreciation accounts.

FIPUG:

No. FPL’s storm-related costs should be limited to those that are incremental to the level of normal operating and maintenance expenses that would have otherwise been incurred.

AARP:

No. The storm damage reserve should be limited to extraordinary costs that are incremental to the amounts that FPL would have spent on the replacement plant, cost of removal, and O&M in the absence of the storms.

TWOMEYS:

FRF:

No. FPL’s storm-related costs should be limited to those that are incremental to the level of normal operating and maintenance expenses that would have otherwise been incurred.

Staff Analysis:

One of the major issues in this docket is the appropriate methodology to be used to determine the amount of storm restoration costs to be charged to the storm reserve. In FPL’s 1993 Study, FPL presented three methods to determine the amount of storm-related costs to be charged to the storm reserve.

The first method is the Actual Restoration Cost Approach. Actual restoration costs are defined as those direct and indirect costs incurred to safely restore customer service, or to return plant and equipment to its original pre-storm operating condition. (EXH 24, p. 9) The result of the Actual Restoration Cost Approach is to restore the plant in service and accumulated depreciation accounts to their pre-storm balances. (TR 117) To accomplish this, all storm-related restoration costs, both O&M and capital, are charged to the storm reserve. Essentially, this approach mimics the replacement cost insurance that FPL had prior to Hurricane Andrew in 1992. (TR 210) This is the approach that FPL has utilized in charging costs to the storm reserve since 1993 and is the approach advocated by FPL in this docket.

The second method, presented by FPL in its 1993 Study, is the Actual Restoration Cost Approach with Net Book Value Adjustment. Under this approach, the actual restoration costs charged to the storm reserve are reduced by capitalizing the normal replacement cost of replaced facilities less the net book value of the retired assets. (EXH 24, p. 10)

The third and final method, presented by FPL in its 1993 Study, is the Incremental Cost Approach. Using this approach, the actual restoration costs are reduced by non-incremental, or normal, O&M expenses. According to FPL, however, the actual restoration costs would be increased to recover incremental indirect costs such as lost revenue. As envisioned by FPL, no costs would be capitalized to rate base under this approach. Rather, all capital costs are charged to the storm reserve. (EXH 24, p. 10)

Neither the second or third method included in FPL’s 1993 Study was advocated by any party in this docket. However, a fourth method was advocated by the OPC.

OPC’s witnesses presented a fourth method identified as the “OPC Storm Damage Guidelines.” (TR 390-391) In general, the OPC guidelines are a combination of FPL’s Actual Restoration Cost Approach with Net Book Value Adjustment and the Incremental Cost Approach methodologies. On the capital side, the OPC guidelines capitalize normal replacement cost of plant and account for retirements and the cost of removal. Only the incremental or extraordinary costs are charged to the storm reserve under this method. For O&M expenses, the OPC guidelines only allow incremental O&M expenses to be charged against the storm reserve. However, the OPC guidelines prohibit the consideration of any lost revenue or uncollectible expenses.

Staff generally agrees with Mr. Majoros that only extraordinary costs should be charged to the storm reserve. This includes both capitalizing the normal replacement cost of plant and only allowing incremental O&M expenses to be charged against the storm reserve. However, staff believes that the OPC guidelines are too restrictive in certain areas such as lost revenue and uncollectible expenses. Therefore, a modified approach is appropriate. It should be noted, however, that there is an alternate staff recommendation in Issue 15 that lost revenues should not be charged to the reserve.

In staff’s opinion, a modified incremental cost approach that addresses both capital items and income statement items is the appropriate methodology to be used for booking costs to the storm damage reserve in this docket. As a result, staff has recommended in Issues 4, 5, 8, 9, 11, 13, and 15 that various adjustments be made that are appropriate under the modified incremental cost approach methodology. However, if the Commission should determine that the actual restoration cost approach is the appropriate methodology to be used by FPL, Issues 4, 5, 7, 8, 9, 10, 11, 12, 13, 14, and 15 become moot. These issues address the types of costs that can be charged to the storm reserve if the modified incremental cost approach is utilized.

Issue 3: Were the costs that FPL has booked to the Storm Damage Reserve consistent with the methodology in the study filed on October 1, 1993, by the Company in Docket No. 930405-EI?

Recommendation:

Yes, the costs that FPL has booked to the Storm Damage Reserve appear to be consistent with the methodology in the study filed on October 1, 1993, in Docket No. 930405-EI. (Slemkewicz)

Position of the Parties

FPL:

Yes. Costs booked to the Storm Damage Reserve were recorded consistent with the methodology in the 1993 Study approved by the Commission in the 1995 Order.

OPC:

They appear to be consistent, although it is worth noting that portions of the 1993 study reflect the expectation that accounting entries would involve payments by insurance companies, not customers.

FIPUG:

No position.

AARP:

They appear to be consistent, although it is worth noting that portions of the 1993 study reflect the expectation that accounting entries would involve payments by insurance companies, not customers.

TWOMEYS:

They appear to be consistent, although it is worth noting that portions of the 1993 study reflect the expectation that accounting entries would involve payments by insurance companies, not customers.

FRF:

Yes, but the costs thus booked are not appropriate for determining the level or amount of costs to be charged to the storm reserve in these proceedings.

Staff Analysis:

FPL, as well as the intervenors who have taken a position, agree that FPL has apparently booked the costs to the Storm Damage Reserve in a manner that is consistent with the Actual Restoration Cost Approach described in FPL’s 1993 Study. Using this methodology restores the plant in service accounts and the accumulated depreciation reserve to their pre-storm balances. (TR 117) FPL witness Davis stated that the charging of all costs incurred, both O&M and capital, to the storm reserve was the accounting treatment addressed in its 1993 Study. (TR 84) In addition, OPC witness Majoros agreed that his review of FPL’s filing did not reveal any deviation from the Actual Restoration Cost Approach accounting treatment that was included in the study filed in Docket No. 930405-EI. (TR 446) Staff witness Piedra, who sponsored the staff audit report, also testified that FPL had recorded the costs using the Actual Restoration Cost Approach. (TR 488, 496)

Based on the testimony presented in this docket, it appears that FPL did book the costs to the storm damage reserve using a methodology consistent with the methodology in its 1993 Study. Staff would point out, however, that the appropriateness of using the Actual Restoration Cost Approach is addressed in Issue 2.

Issue 4: Has FPL quantified the appropriate amount of non-management employee labor payroll expense that should be charged to the storm reserve? If not, what adjustments should be made?

Recommendation:

No. FPL’s non-management employee labor expense should be adjusted to reflect only the incremental costs above its budgeted levels for the year end 2004. To prevent FPL from collecting twice through rates for its employee regular pay, the Commission should disallow $10.9 million of the amount FPL charged to the storm reserve. (Joyce)

NON-MANAGEMENT EMPLOYEE LABOR EXPENSE
FPL Requested Charge to Storm Reserve	$45,389,456
Staff Recommended Charge to Storm Reserve	$34,489,456
Staff Recommended Adjustment	$10,900,000

Position of the Parties

FPL:

Yes. FPL has booked payroll costs to the Storm Damage Reserve consistent with the methodology in the 1993 Study approved by the Commission in the 1995 Order. No adjustment is necessary

OPC:

No. Consistent with the principle that FPL should charge to the storm damage reserve only incremental and extraordinary costs, the Commission should require FPL to remove $10.9 million of non-management employee labor payroll expense from the amount charged to the storm reserve because it is already included in the budgeted amounts supported by base rates.

FIPUG:

FPL’s storm-related costs should be limited to those that are incremental to the level of normal operating and maintenance expenses that would have otherwise been incurred.

AARP:

TWOMEYS:

FRF:

No; FPL has not appropriately quantified such costs. FPL’s claimed storm-related costs, including non-management employee labor payroll expense, should be limited to those that are incremental to the level of normal operating and maintenance expenses that would have otherwise been incurred. To correct FPL’s inappropriate claims for employee expense, a total of $32 million (for both managerial and non-managerial payroll expense) of the amount FPL charged to the storm reserve should be disallowed.

Staff Analysis:

FPL has requested to charge $45,389,456 of non-management employee labor expense to the storm reserve. FPL stated that, as discussed in Issue 3 above, there is no dispute in the record that FPL recorded costs consistent with the Actual Restoration Cost Approach. Storm-related payroll costs -- regular, overtime and temporary relieving pay -- are specifically identified as properly chargeable to the storm reserve under the Actual Restoration Cost Approach. (TR 106)

FPL states that OPC’s incremental approach to payroll costs would introduce undesirable incentives. In meeting the objective of safe and rapid restoration, FPL states that it mobilizes virtually the entire organization in the restoration effort in one way or another. FPL also states that the normal work of those who are assigned directly to storm support is either performed by others “doubling down,” or is done later, usually with overtime. According to FPL, if regular base compensation is not allowed to be charged against the storm reserve, the incentive is not to utilize available FPL resources but instead to leave them to perform their regular work and increase the utilization of contractors and “foreign” utilities. FPL further states that this would not only slow overall restoration efforts (since FPL resources can be mobilized more quickly than third parties can be brought in), but would also be more costly for customers because the unit costs of outside resources is significantly higher, on average, than FPL’s costs. (TR 725)

OPC asserts that FPL demands that customers pay twice for the same work. OPC witness Majoros argues that FPL has improperly moved O&M expenses to the storm fund that customers already bear through the base rates that they pay. (TR 395) Witness Majoros testified that by moving all O&M expenses associated with the storm repair effort to the storm reserve, without taking into account the normal level of expenditures funded by base rates that customers pay, effectively requires customers to pay twice for the same costs. He referred to the practice as “double dipping.” (TR 396). Witness Majoros stated that charging those costs to the storm reserve would fail to recognize that FPL’s basic rates include recovery of normal cost, such as base salaries. He stated that FPL’s proposal would collect twice; once through base rates and again through the proposed base rate surcharge. Witness Majoros concluded that this practice is not fair to ratepayers and that it would unjustly enrich FPL’s management and shareholders. (TR 397)

According to OPC, FPL attempts to justify charging its base salaries to the storm account by claiming that it has catch-up and backfill work. (OPC BR 10) OPC states that the fact that there may be catch-up and backfill work to be done by employees once they conclude working on the storms does not justify making customers pay twice for those employees’ regular salaries for their normal eight hour work day. Nor does the fact that FPL would have allocated some of its work force differently justify allowing FPL to “double dip” now. Further, OPC states that the burden would be on FPL to prove that any catch-up work and backfill costs are properly chargeable to the storm account. (OPC BR 10-11)

OPC states that FPL witness Davis claimed that if one is to determine whether there was any “double dipping” one would have to ask whether total avoided base rate costs are greater than base rate revenue losses. (OPC BR 11) (TR 107) OPC contends that this argument again misses the basic point of “double dipping.” Customers are paying twice for the same regular salary, once through base rates and again in a storm surcharge. OPC asserts that since the storm account was designed to compensate the Company for costs to restore service to the customers, and lost revenue is not a cost of restoring service, this could not legitimately be charged to the storm account. (OPC BR 11) Staff notes that the issue of lost revenues is being addressed in Issue 15.

OPC emphasizes that while FPL should be focusing on restoring power in the safest and most efficient manner, it also has a duty to ensure that the costs it incurs are prudent and cost effective to the customers under the given circumstances. OPC states that cost shifting to essentially collect twice for the same eight hours worth of work is neither cost effective for the customer nor prudent. (OPC BR 11) OPC witness Majoros stated that while FPL’s “double dipping” approach based on its 1993 study may be appropriate for tax or insurance purposes, it is absolutely wrong when seeking a rate increase from customers. (TR 398) He further stated that the Commission staff auditor agreed that it is Commission policy not to allow “double dipping” and that the “double dipping” cost should be disallowed. (TR 494)

OPC concludes that the Commission should remove the cost of non-management employee labor payroll expense from the amount charged to the storm reserve because it is already included in the budgeted amounts supported by base rates. To do otherwise would have customers paying twice for the same costs for non-management employee labor regular salaries. (OPC BR 12)

Staff agrees with OPC witness Majoros that by moving all O&M expenses associated with the storm repair to the storm reserve, without taking into account the normal level of expenditures funded by base rates that customers pay, requires customers to pay twice for the same costs. Staff believes that FPL has not demonstrated that the non-management labor expense it charged to the storm reserve is not already being recovered in its base rates. Further, staff notes that the appropriateness of lost revenues and catch-up work will be addressed in Issue 15. As such, staff recommends that FPL’s non-management employee labor expense should be adjusted to reflect only the incremental costs above its budgeted levels for the year end 2004. To prevent FPL from collecting twice for its employee regular pay, the Commission should disallow $10.9 million of the amount FPL charged to the storm reserve.

Issue 5: Has FPL properly treated payroll expense associated with managerial employees when determining the costs that should be charged to the storm reserve? If not, what adjustments should be made?

Recommendation:

No. FPL’s managerial employee payroll expense should be adjusted to reflect only the incremental costs above its budgeted levels for the year end 2004. To prevent FPL from collecting twice for its employee regular pay, the Commission should disallow $21.1 million of the amount FPL charged to the storm reserve. (Joyce)

MANAGERIAL EMPLOYEE PAYROLL EXPENSE
FPL Requested Charge to Storm Reserve	$62,196,295
Staff Recommended Charge to Storm Reserve	$41,096,295
Staff Recommended Adjustment	$21,100,000

Position of the Parties

FPL:

Yes. FPL has booked payroll costs to the Storm Damage Reserve consistent with the methodology in the 1993 Study approved by the Commission in the 1995 Order. No adjustment is necessary.

OPC:

No. The Commission should disallow $21.1 million of managerial payroll expense from the amount that FPL charged to the storm reserve.

FIPUG:

Agree with OPC’s Position: The Commission should require FPL to remove $18,300,983 of managerial payroll expense from the amount that FPL charged to the storm reserve.

AARP:

No. The Commission should require FPL to remove $21.1 million of managerial payroll expense from the amount that FPL charged to the storm reserve.

TWOMEYS:

No. The Commission should require FPL to remove $21.1 million of managerial payroll expense from the amount that FPL charged to the storm reserve.

FRF:

No; FPL has not appropriately quantified such costs. FPL’s claimed storm-related costs, including managerial employee payroll expense, should be limited to those that are incremental to the level of normal operating and maintenance expenses that would have otherwise been incurred. To correct FPL’s inappropriate claims for employee expense, a total of $32 million (for both managerial and non-managerial payroll expense) of the amount FPL charged to the storm reserve should be disallowed.

Staff Analysis:

FPL noted that, as discussed previously, there is no dispute in the record that it recorded costs consistent with the Actual Restoration Cost Approach. FPL contends that storm-related payroll-regular, overtime and temporary relieving pay are specifically identified as properly chargeable to the storm reserve under the Actual Restoration Cost Approach. (TR 106) (EXH 24)

FPL stated that OPC gives no rationale in the Prehearing Order for their position, but FPL assumes that it is based on the use of OPC’s “incremental” approach. FPL also stated that there is no record support for the amount of OPC’s proposed management payroll adjustment. Further, FPL stated that as discussed in Issue 4, OPC’s incremental approach to payroll costs would introduce undesirable incentives. (FPL BR 8-9) Lastly, FPL asserted that even if Mr. Majoros’ adjustments were appropriate, he has overstated it substantially because he failed to take into account the approximately 6% of regular payroll that is charged to adjustment clauses and approximately 22% that is charged to capital on an annual basis. (TR 107)

OPC witness Majoros testified that FPL proposes to charge the full labor costs associated with storm recovery efforts to the storm reserve. This includes normal salaries, which are included in the Company’s annual budget. He stated that the ratepayers are paying for these salaries through base rates. (TR 403) Mr. Majoros further stated that customers should not be required to pay for these regular salaries twice. (TR 403). Requiring customers to pay twice for the same costs by moving all O&M expenses associated with the storm repair effort to the storm reserve without taking into account the normal level of expenditures funded by base rates paid by customers is “double dipping.” (TR 396) As acknowledged by witness Majoros, it may be appropriate to use a “replacement cost” approach for calculating tax losses and insurance claims, but it is absolutely wrong when seeking a rate increase for customers. He contends that the Commission should implement strict accounting procedures for FPL to follow to eliminate the increased rates that result when customers are required to pay twice for the same expense. (TR 398)

OPC acknowledged that FPL witness Davis relied heavily on his assertion that the Commission approved the accounting methodology set forth in FPL’s 1993 Study. OPC stated that witness Davis’ reliance on FPL’s accounting methodology as a justification for “double dipping” in the present case is misplaced and unwarranted. OPC further stated that for the reason discussed in the issue specifically addressing the import of the 1993 study, it is clear that the Commission did not specifically approve FPL’s accounting methodology. (OPC BR 13-14)

OPC noted that witness Davis also claimed that there are other costs, catch-up work, backfill work, and lost revenues, which he uses to excuse FPL’s seeking to “double dip” in this instance. (TR 104 - 105, 107) OPC stated that while catch-up work and backfill work may be appropriately charged to the storm account if they are proven to be incremental costs of storm restoration, they do not excuse “double dipping.” Staff notes that the issue of lost revenues is being addressed in Issue 15.

OPC witness Majoros testified that FPL witness Davis’ attempt to lessen the amount FPL identified as the amount it charged to the storm account by claiming that a portion of these salaries are charged to cost recovery clauses and capital. Witness Majoros further testified that these arguments are without merit because FPL can still charge the salaries attributable to the clause through the clause proceeding. He also testified that FPL is charging all of its payroll/labor costs, even those generally associated with capital expenditures, to the storm account without differentiating between capital and O&M costs. (TR 399) In conclusion, OPC stated that $21.1 million attributable to management employee labor cost should be excluded from amounts charged to the storm reserve. (OPC BR 14)

As stated in the previous issue, staff agrees with OPC witness Majoros that moving all O&M expenses associated with the storm repair to the storm reserve, without taking into account the normal level of expenditures funded by base rates that customers pay, requires customers to pay twice for the same costs. Staff believes that FPL has not demonstrated that the managerial employee expense it charged to the storm reserve is not already being recovered in its base rates. Further, staff notes that the appropriateness of lost revenues and catch-up work will be addressed in Issue 15. As such, staff recommends that FPL’s managerial employee labor expense should be adjusted to reflect only the incremental costs above its budgeted levels for the year end 2004. To prevent FPL from collecting twice for payroll associated with managerial employees, the Commission should disallow $21.1 million of the amount FPL charged to the storm reserve.

Issue 6: At what point in time should FPL stop charging costs related to the 2004 storm season to the storm reserve?

Recommendation:

FPL should stop charging costs to the storm reserve no later than July 31, 2005, for restoration work related to the 2004 storm season. In addition, the follow-up project cost in question must be demonstrated to be related to the 2004 storm damages and a staff audit of the follow-up projects is necessary to ensure that FPL followed its stated procedures differentiating the regular and storm-repair work orders and that FPL followed the cost accounting methodology approved in this proceeding. (Lee, McNulty)

Position of the Parties

FPL:

Application of PSC Rule 25-6.0143, Florida Administrative Code, provides that all costs determined to be the result of storm damages should be charged to the Storm Damage Reserve.

OPC:

FPL should stop charging amounts related to the 2004 storm season to the storm damage reserve after foreign utilities have departed, FPL employees are no longer working overtime hours, and the contractors that FPL employs routinely are working at a normal rate.

FIPUG:

FPL should stop charging such costs to the storm damage reserve effective January 1, 2005, or at the conclusion of storm restoration activities, whichever is sooner. Such costs should not exceed $890 million.

AARP:

FPL should stop charging amounts related to the 2004 storm season to the storm damage reserve after foreign utilities have departed, FPL employees are no longer working overtime hours beyond the level normally expected, and the contractors that FPL employs routinely are working at a normal rate.

TWOMEYS:

FPL should stop charging amounts related to the 2004 storm season to the storm damage reserve after foreign utilities have departed, FPL employees are no longer working overtime hours beyond the level normally expected, and the contractors that FPL employs routinely are working at a normal rate.

FRF:

FPL should stop charging such costs to the storm damage reserve effective January 1, 2005, or at the conclusion of storm restoration activities, whichever occurred first.

Staff Analysis:

OPC argues that the Commission should establish a cut-off date for expenses to be charged to the storm reserve. Witness Majoros testified that FPL should stop charging items to the storm reserve once normal operations have resumed, outside contractors have been sent home, and employees are back to working a normal workweek. (TR 405) In its post hearing brief, OPC recognized that this point in time has been difficult to determine and suggested that, based on FPL witness Williams’ testimony, the appropriate cut-off date is July 31, 2005. (BR 15-16) The positions of FIPUG, FRF, TWOMEYS, and AARP appear to be based on the argument made by witness Majoros or based on a January 1, 2005, date that limits the charges to the calendar year of the hurricanes.

FPL argues that its accounting practice is consistent with the direction given by Rule 25-6.0143, Florida Administrative Code, because application of the rule provides that all costs determined to be the result of storm damages should be charged to the storm reserve. Witness Davis cited the 1995 Order that he believes allowed follow-up work which occurred after Hurricane Andrew to be charged to the reserve. (TR 109-110, 216-217) Witness Davis argues that the appropriate criterion for determining whether costs of the repair work should be charged to the storm reserve is the root cause of the work, not the timing of the work. (TR 110)

Staff believes at issue here is not whether FPL’s practice is consistent with the accounting methodology prescribed by the rule or the 1993 Study. The issue of whether there should be some adjustments to FPL’s cost accounting approach is addressed in several accounting issues, such as Issue 2. At issue here is whether additional criteria for storm restoration cost recovery should be established based on the timing of the work and the absence of “foreign” (non-FPL) utilities or outside contractors. The concern is operational rather than accounting. (TR 218)

Staff does not believe the record supports a cut-off date based on the absence of foreign utilities or other factors that would indicate the utility’s normal operations have resumed. After the emergency phase of restoration ended and normal operation resumed, FPL began multiple sweeps of its system to bring its infrastructure back to pre-failure state. (TR 529) FPL witness Williams testified that the projects which OPC witness Majoros believed to be questionable were follow-up projects conducted in the second phase of storm restoration to permanently repair damages caused by the hurricanes. (TR 528-531) As a policy, setting an arbitrary cut-off date based on the calendar year or the absence of “foreign” utilities may give a perverse incentive for utilities to rush the work and to retain foreign utilities or outside contractors in a less cost effective manner. Depending on the nature and extent of the damage caused by a hurricane, permanent repair may require less than several weeks or more than one year. (TR 217-218) Therefore, staff believes a case-by-case review is a better policy.

At the hearing, witness Williams provided the estimated completion dates of the feeder and lateral work (June 30 and July 31, 2005, respectively), described FPL’s procedures that differentiate the regular and storm-repair work orders, and stressed FPL’s use of bidding to perform the work in a cost effective manner. (TR 529, 531-532, 548) Further, FPL has provided a revised cost estimate of $26 million for its incomplete storm-related projects with a cap on the total amount. (TR 569) Given the nature and the extent of the hurricanes impacting the state in 2004 and the demonstration by FPL as described above, staff believes the estimated completion date of July 31, 2005 is reasonable.

In addition, staff believes the follow-up project cost must be demonstrated to be related to the 2004 storm damages and a staff audit after project completion is a more effective way to limit the amount in question. A staff audit can address whether FPL followed its stated procedures, whether FPL followed the cost accounting methodology approved in this proceeding, and whether the actual costs exceeded FPL’s cost estimate or the cap. FPL witness Davis agrees that a Commission staff review after project completion is reasonable. (TR 219)

In conclusion, FPL should stop charging costs to the storm reserve no later than July 31, 2005, for restoration work related to the 2004 storm season. In addition, the follow-up project cost in question must be demonstrated to be related to the 2004 storm damages and a staff audit of the follow-up projects is necessary to ensure that FPL followed its stated procedures differentiating the regular and storm-repair work orders and that FPL followed the cost accounting methodology approved in this proceeding.

Issue 7: Has FPL charged to the storm reserve appropriate amounts relating to employee training for storm restoration work? If not, what adjustments should be made?

Recommendation:

Yes. FPL has not charged any employee training costs to the storm reserve. No adjustment is necessary. (Kyle)

Position of the Parties

FPL:

Yes. No pre-storm training costs have been charged to the Storm Damage Reserve. No adjustments should be made

OPC:

Employee training, including training for storm-related activities, is a normal function for which customers should not be required to bear charges through the storm damage reserve. FPL has not charged any training costs to the storm damage reserve in this case. OPC disputes a methodology that would allow such charges, but is not at issue with FPL as it applies to this case.

FIPUG:

Agree with OPC’s Position: Employee training, including training for storm-related activities, is a normal function for which customers should not be required to bear charges through the storm damage reserve.

AARP:

Employee training, including training for storm-related activities, is a normal function for which customers should not be required to bear charges through the storm damage reserve.

TWOMEYS:

Employee training, including training for storm-related activities, is a normal function for which customers should not be required to bear charges through the storm damage reserve.

FRF:

No; FPL has not appropriately quantified such costs. Employee training is a basic function, and accordingly, the costs for such training are not appropriately charged to the storm damage reserve and not appropriately recovered through any storm surcharge.

Staff Analysis:

OPC witness Majoros testified that FPL would collect for certain storm related costs twice: first, as part of base rates, and again as part of the storm reserve. (TR 397) In his rebuttal, FPL witness Davis testified that restoration activities are performed in accordance with detailed plans and procedures, which are practiced before hurricane season. (TR 104) FPL witness Whalin described these activities in detail. (TR 15-17) Witness Davis also testified that all of the costs associated with these activities are charged to normal operating costs, not to the storm reserve. (TR 104) None of the parties rebutted this testimony.

In its brief, OPC states that it appears that the utility has not charged any of the annual employee training activities to the storm reserve, and reiterates its belief that it would not be appropriate to do so. (OPC BR 17) FRF has stated in its position that FPL has not properly quantified the costs of training charged to the storm reserve; however, neither FRF nor any other party has stated an amount by which the reserve should be adjusted for training costs.

Staff believes that FPL’s un-rebutted testimony is credible, and that no training costs which are part of normal activities have been charged to the storm reserve. Accordingly, staff recommends that no adjustment should be made.

Issue 8: Has FPL properly quantified the costs of tree trimming that should be charged to the storm reserve? If not, what adjustments should be made?

Recommendation:

No. The costs of tree trimming included in the storm reserve should be reduced by $1 million. (Kyle, Lee)

FPL Requested Charge to Storm Reserve	$89,435,466
Staff Recommended Charge to Storm Reserve	$88,435,466
Staff Recommended Adjustment	$ 1,000,000

Position of the Parties

FPL:

Yes. Only tree trimming costs incurred in conjunction with storm restoration have been charged to the Storm Damage Reserve. No adjustments should be made.

OPC:

No. The Commission should disallow the difference between the amount budgeted for tree trimming and the amount FPL actually spent of tree trimming. Based on the 2004 budget, $1 million should be disallowed. However, based on the six months closest to the hurricanes $4.2 million should be disallowed.

FIPUG:

Agree with OPC: The Commission should disallow $4,220,000 from the amount that FPL charged to the storm damage reserve.

AARP:

No. The Commission should disallow the difference between the amount budgeted for tree trimming and the amount FPL actually spent on tree trimming. Based on the 2004 budget, $1 million should be disallowed. However, based on the six months closest to the hurricanes $4.2 million should be disallowed.

TWOMEYS:

FRF:

No; FPL has not appropriately quantified such costs. The Commission should disallow $4.2 million of FPL’s claimed storm-related costs related to tree-trimming.

Staff Analysis:

OPC witness Majoros testified that “tree trimming expense should be limited to the amounts which exceed FPL’s normal expenses. I do not have enough information to make an adjustment for tree trimming expense at this time.” (TR 404) FPL’s response to OPC Interrogatory No. 49 states that the total tree trimming expense charged to the storm reserve was $89,435,466. Budgeted tree trimming expense for 2004 was shown as $47 million, and actual expense was shown as $46 million. (EXH 35) Also included in FPL’s response was monthly detail of FPL’s budgeted and actual tree trimming expenses for January 2004 through January 2005. (EXH 35)

During cross examination, FPL witness Davis acknowledged that the comparison of the budgeted verses actual amounts indicated that, for the six month period from August 2004 through January 2005, the budgeted amount exceeded actual expenditures by approximately $4.2 million. (TR 150) In its brief, OPC states that, based on Mr. Davis’ testimony and the favorable variance in the 2004 budget, tree trimming expense charged to the storm damage reserve should be reduced by $1 million. (OPC BR 18) Further, OPC states that, based on the favorable budget variance during the six month period from August 2004 through January 2005, the adjustment should be $4.2 million dollars.

In its brief, FPL states that it disagrees with OPC’s proposal to adjust tree trimming expenses to the extent that they cause the utility to exceed its budget for that activity. FPL states, however, that if OPC’s approach were used, the amount of the adjustment should be limited to the $1 million variance from the annual budget. In Footnote 9 to its brief, FPL argues that “comparing only segments of an annual budget improperly ignores any cyclical or variable impacts reflected in the full budget cycle.” The utility also notes that, in arriving at other proposed adjustments, OPC witness Majoros compared salaries and vehicle expenses to annual budgeted amounts. (FPL BR 12)

Staff notes that the utility’s budgeted tree trimming expense for the period January 2004 through July 2004 was approximately $26.6 million, while its actual recorded expenses were approximately $28.8 million. (EXH 35) Staff believes that this unfavorable variance of $2.2 million for the period preceding the hurricanes supports FPL’s argument that events other than the storm restoration effort could impact a budget variance. Based on its analysis of the evidence in the record, staff believes that it is reasonable to use the annual budget variance as the appropriate adjustment to remove non-incremental costs from the amount charged to the storm reserve. Therefore, staff recommends that the tree trimming expenses included in the storm damage reserve be reduced by $1 million.

Issue 9: Has FPL properly quantified the costs of company-owned fleet vehicles that should be charged to the storm reserve? If not, what adjustments should be made?

Recommendation:

No. The costs of company-owned fleet vehicles charged to the storm reserve should be reduced by $5,261,887. (Kyle)

FPL Requested Charge to Storm Reserve	$8,088,117
Staff Recommended Charge to Storm Reserve	$2,826,230
Staff Recommended Adjustment	$5,261,887

Position of the Parties

FPL:

Yes. FPL has charged vehicle costs to the Storm Damage Reserve consistent with the methodology in the 1993 Study approved by the Commission in the 1995 Order. No adjustment should be made.

OPC:

No. FPL would have incurred the fixed costs and normal operating costs of its vehicles in any event. The amount charged to the storm reserve should be limited to one half the fuel cost charged to the storm, reflecting the additional shifts during which the vehicles were operated. The amount of $5.26 million should be disallowed

FIPUG:

Agree with OPC: FPL would have incurred the fixed costs and normal operating costs of its vehicles in any event. The amount charged to the storm reserve should be limited to one half the full cost charged to the storm, reflecting the additional shifts during which the vehicles were operated. The Commission should disallow $5,261,887 from the amount that FPL charged to the storm damage reserve.

AARP:

TWOMEYS:

FRF:

No. Through its claimed storm-related costs, FPL is attempting to require its customers to pay twice for basic levels of vehicle fleet expenses. The Commission should disallow $5.26 million of the amount that FPL seeks to recover through its proposed surcharges.

Staff Analysis:

OPC’s position makes two contradictory statements. First, OPC states that vehicle costs charged to the storm reserve should be limited to one half of the fuel costs charged to the storm reserve. Then, OPC states that an adjustment should be made to FPL’s proposed charge to the storm reserve in the amount of $5.26 million. In its response to OPC Interrogatory No. 31, the utility provided a breakdown of vehicle costs charged, or proposed to be charged, to the storm reserve. This breakdown reflected total vehicle costs of $8,088,177, including fuel costs of $947,140. (EXH 18) FPL’s response also identified $5,261,887 as the amount of vehicle costs included in its 2004 budget, but did not provide a breakdown of this amount by category. In its response, the utility also agreed that $5,261,887 was the amount the utility would have incurred in the normal course of business, whether or not there were hurricanes. (EXH 18) FPL identified one half of the fuel costs charged to the storm damage reserve as $473,570, but did not agree that costs in excess of that amount should be disallowed. (EXH 18) There is nothing in the record quantifying the amount of fuel costs included in FPL’s budgeted amount of $5,261,887. An adjustment to limit vehicle expense to one half of the fuel costs would be $7,614,607 (the excess of $8,088,177 over $473,570). This is in contrast to the adjustment of $5,261,887 proposed by OPC witness Majoros (TR 404)

In its brief, FPL states that it has charged vehicle expenses to the storm reserve in accordance with the Actual Restoration Cost Approach. (FPL BR 13) As discussed in Issues 1 and 2, staff does not believe that the methodology proposed by FPL in the 1993 Study is or should be the standard of review in this case. FPL also argues that, even if OPC’s proposed incremental approach is used, the proposed adjustment of $5,261,887 should be decreased by $2.4 million, because that portion of the budgeted amount was related to capital projects. (FPL BR 13) (TR 111). OPC objects to this rationale, stating that FPL does not differentiate between capital costs and operating expenses in its breakdown of charges to the storm reserve. (FPL BR 20) (TR 399)

Staff believes that an adjustment allowing only one half of the fuel cost charged to the reserve would be excessive, and is not supported by the record, including OPC witness Majoros’ testimony. Staff believes that, in order to prevent customers from being charged twice for the same cost, it is appropriate to remove from the vehicle costs charged to the storm reserve the amount identified by FPL as the cost it would have incurred whether or not the hurricanes occurred. Accordingly, staff recommends that the vehicle expenses included in FPL’s charges to the storm reserve be reduced by $5,261,887.

Issue 10: Has FPL properly determined the costs of call center activities that should be charged to the storm reserve? If not, what adjustments should be made?

Recommendation:

Yes. Only incremental costs of call center activities were charged to the storm reserve. No adjustment is necessary. (Kyle)

Position of the Parties

FPL:

Yes. FPL has charged incremental costs of the call center operation to the Storm Damage Reserve consistent with the methodology in the 1993 Study approved by the Commission in the 1995 Order. No adjustment should be made.

OPC:

OPC recommends no adjustment because FPL charged no call center expenses to the reserve. OPC is not at issue with FPL with respect to call center activities.

FIPUG:

FPL’s storm-related costs should be limited to those that are incremental to the level of normal operating and maintenance expenses that would have otherwise been incurred.

AARP:

FPL’s storm-related costs should be limited to those that are incremental to the level of normal operating and maintenance expenses that would have otherwise been incurred.

TWOMEYS:

FPL’s storm-related costs should be limited to those that are incremental to the level of normal operating and maintenance expenses that would have otherwise been incurred.

FRF:

No; FPL has not appropriately determined and quantified such costs. FPL’s claimed storm-related costs should be limited to those that are incremental to the level of normal operating and maintenance expenses that would have otherwise been incurred.

Staff Analysis:

In his direct testimony, OPC witness Majoros stated: “Call center expenses for the storm recovery should be limited to the call overloads created by the storms. I do not have sufficient information to make an adjustment for call center expense at this time.” (TR 404) In his rebuttal, FPL witness Davis responded that call center costs charged to the storm reserve consisted of incremental costs of staffing the function and training employees. (TR 101, 112) During cross examination, Mr. Majoros admitted that he had no evidence that FPL charged anything other than incremental call center costs to the storm reserve. (TR 470)

In its brief, OPC states that, based on Mr. Davis’ testimony, FPL properly determined the costs of call center activities that should be charged to the storm reserve, and charged only incremental call center costs to the reserve. (OPC BR 21) FRF has stated in its position that FPL has not properly quantified the costs of call center activities charged to the storm reserve; however, neither FRF nor any other party has stated an amount by which the reserve should be adjusted for call center costs.

Staff agrees with FPL and OPC that only appropriate incremental costs of call center activities have been charged to the storm reserve. Accordingly, staff recommends that no adjustment should be made.

Issue 11: Has FPL appropriately charged to the storm reserve any amounts related to advertising expense or public relations expense for the storms? If not, what adjustments should be made?

Recommendation:

No. The Commission should disallow $1,552,410 of the amount FPL charged to the storm reserve. This amount represents the difference between the advertising expense that was incurred and the amount that was originally budgeted for 2004. Further, in the future, FPL should exclude budgeted advertising and public relations expense from its storm reserve. (Joyce)

ADVERTISING/PUBLIC RELATIONS EXPENSE
FPL Requested Charge to Storm Reserve	$1,703,454
Staff Recommended Charge to Storm Reserve	$151,044
Staff Recommended Adjustment	$1,552,410

Position of the Parties

FPL:

Yes. Consistent with the methodology in the 1993 Study approved by the PSC in the 1995 Order, the only advertising or public relations expenses that were charged to the Storm Damage Reserve are safety and storm-related public service advertising. No adjustment should be made.

OPC:

No. FPL has a basic obligation as a public utility to keep its customers informed, particularly during emergencies. Customers should not be required to pay a surcharge to receive the benefits of this basic function. All advertising and/or public relations expense that FPL charged to the storm reserve, amounting to $1.7 million, should be disallowed.

FIPUG:

Agree with OPC: The amount of the negative deficiency calculated by FPL should be reduced by $1,700,000.

AARP:

No. The amount of the negative deficiency calculated by FPL should be reduced by $1,700,000.

TWOMEYS:

No. The amount of the negative deficiency calculated by FPL should be reduced by $1,700,000.

FRF:

No. FPL has a basic obligation to keep its customers informed, particularly during emergencies. The Commission should disallow $1.7 million of advertising and public relations expense that FPL charged to the storm reserve. (EXH 34, Int. No. 33)

Staff Analysis:

FPL stated that it charged safety and storm-related public service advertising and media costs to the storm reserve consistent with the Actual Restoration Cost Approach. (FPL BR 14) FPL witness Whalin testified that the Company provides information to the news media, customers, and community leaders regarding storm preparation, what to do in the event of an outage, as well as public safety messages. (TR 18) FPL witness Davis testified that all capital costs and all O&M costs incurred in connection with the three named hurricanes have been charged to the storm reserve. (TR 84) In response to OPC Interrogatory No. 33, FPL noted that it spent $1,703,453.54 in advertising for the 2004 hurricane season. (EXH 34)

OPC stated that as part of its Storm Damage Guidelines, all advertising expense (which includes any public relations expenses) should be excluded from the amount charged to the storm account. (TR 390) OPC stated that the purpose of its guidelines is to ensure that only extraordinary expenses are booked to the storm reserve. (TR 389) OPC argued that customers should not be required to pay a surcharge to receive the benefits of the basic function of keeping customers informed -- particularly during emergencies. OPC contends that ensuring public safety is part of the regulatory framework under which FPL is required to provide safe, reliable electric service within its territory. OPC further argued that FPL is obligated to restore service to customers as quickly and safely as possible after hurricanes, and that part of restoring service safely is making sure customers have current information regarding the emergency. Thus, OPC contends that the $1,703,453.54 charged to the storm reserve should be removed. (OPC BR 22-23)

Staff agrees with OPC that FPL should book only extraordinary expenses to the storm reserve account. The storm related costs that should be booked to the storm reserve should be limited to those that are incremental to the level of normal operating and maintenance expenses that would have otherwise been incurred. In response to Interrogatory No. 33(c), FPL stated that total advertising costs in the amount of $9,950,674 were incurred during 2004. FPL also stated that advertising expense in the amount of $9,799,630 was included in the 2004 budget. Staff recommends that FPL should only be allowed to book $151,044 to the storm reserve, which is the difference between the advertising expense that was incurred and the amount that was originally budgeted for 2004. As such, $1,552,410 ($1,703,454 less $151,044) should be disallowed.

Staff also agrees with OPC that communication is an important function that must be performed during an emergency. Ensuring public safety is part of the regulatory framework under which FPL is required to provide safe, reliable electric service within its territory.

Issue 12: Has uncollectible expense been appropriately charged to the storm reserve? If not, what adjustments should be made?

Recommendation:

FPL has not charged any uncollectible expense to the storm reserve. If the Commission follows the utility’s Actual Restoration Cost Approach, no adjustment should be made. However, if the Commission follows the Modified Incremental Cost Approach recommended by staff, uncollectible expense is addressed in Issue 15. (Joyce)

Position of the Parties

FPL:

FPL has not charged the Storm Damage Reserve with uncollectible accounts expense. If the Commission follows the methodology in the 1993 Study approved by the Commission in the 1995 Order, no adjustment should be made.

OPC:

It is inappropriate to charge any portion of uncollectible expense to the storm damage reserve. It appears that FPL has not charged any uncollectible expense to the storm damage reserve. OPC is not at issue with FPL on the subject of uncollectible expense.

FIPUG:

FPL should not charge uncollectible expense to the storm damage reserve.

AARP:

It is inappropriate to charge any portion of uncollectible expense to the storm damage reserve. It appears FPL has not made any such charges.

TWOMEYS:

It is inappropriate to charge any portion of uncollectible expense to the storm damage reserve. It appears FPL has not made any such charges.

FRF:

No. Uncollectible expense is not properly charged to the storm damage reserve because it is foreign to the restoration effort. No uncollectible expense should be allowed for recovery through this proceeding.

Staff Analysis:

Under OPC’s Storm Damage Guidelines, no uncollectible expense should be booked to the storm reserve. (TR 390-391) Further OPC stated that based on FPL response to Interrogatory No. 38, it appears that FPL has not charged any “uncollectible expense” to the storm reserve.

FPL witness Davis mentioned that the Company estimates that uncollectible accounts receivable increased nearly $6 million as collection efforts were suspended because the field collectors were mobilized for storm duty. (TR 109) However, in response to Interrogatory No. 38, when asked if the Company included an “uncollectible expense” in the amounts that it booked or proposed to book to the storm reserve, FPL answered “No.” (EXH 34 – Interrogatory No. 38)

FPL witness Davis stated that there is no dispute over this issue. FPL has not charged any uncollectible accounts receivable write-off expense to the Reserve. (TR 144) He also stated that Mr. Majoros acknowledged that he has no evidence to the contrary. (TR 471)

Staff agrees with FPL that there is no dispute over the amount of uncollectible expenses being charged to the storm reserve since FPL has not charged any uncollectible expense to the storm reserve. If the Commission follows the utility’s Actual Restoration Cost Approach, no adjustment should be made. However, if the Commission follows the Incremental Approach recommended by staff, uncollectible expense is addressed in Issue 15.

Issue 13: Of the costs that FPL has charged or proposes to charge to the storm reserve, should any portion(s) instead be booked as capital costs associated with its retirement (including cost of removal) and replacement of plant items affected by the 2004 storms? If so, what adjustments should be made?

Recommendation:

Yes. FPL should charge the normal cost of replacements, approximately $58 million, to rate base as plant in service. FPL should also charge the normal cost of removal, approximately $12.2 million, to the cost of removal reserve. In addition, the $21.7 million classified as Contributions in Aid of Construction (CIAC) should not be charged against the storm reserve. (Haff, Slemkewicz)

	Plant in Service	Cost of Removal	CIAC
Requested by Company	$58,000,000	$12,200,000	$21,700,000
Recommended by Staff	0	0	0
Adjustment	($58,000,000)	($12,200,000)	($21,700,000)

Position of the Parties

FPL:

No. FPL has appropriately accounted for additions, retirements and removal costs in accordance with the methodology in the 1993 Study approved by the Commission in the 1995 Order.

OPC:

Yes. FPL should be required to book the normal cost of replacements to plant in service and the normal cost of removal to the cost of removal reserve. The Commission should require FPL to charge $58 million to rate base for plant additions and charge $28 to $36 million to the cost of removal reserve. The Commission should reject FPL’s proposal to charge $21.7 million of “CIAC” to the storm damage reserve.

FIPUG:

Yes. FIPUG adopts the OPC’s findings with respect to cost of removal and recommends that an appropriate amount of the remaining storm asset restoration cost be applied to the depreciation reserve rather than to the storm reserve. The storm damage deficit surcharge should be reduced accordingly. FIPUG demands that FPL provide proof of the appropriate amount of storm damage cost to be capitalized.

AARP:

TWOMEYS:

FRF:

Yes. FPL should book to Plant In Service the amounts that it would normally spend on plant and charge the excess to the storm reserve. FPL’s proposal to charge $27 million to the storm reserve as CIAC should be disallowed. Additionally, FPL’s allowed storm costs should be offset by approximately $28 million to $36 million of removal costs for which FPL’s customers have already paid through the depreciation charges embedded in base rates.

Staff Analysis:

FPL witness Davis identified approximately $58 million of capital additions that were necessary to return FPL’s electric system to its pre-storm condition. (TR 117, 145) Approximately $36.4 million of “plant in service” was removed from service and retired due to storm damage. (TR 117, 145, 161) Witness Davis identified approximately $12.2 million for the cost of removal of storm-damaged plant items. (TR 117, 145, 161) Witness Davis also stated that it was necessary to record $21.7 million of Contributions in Aid of Construction (CIAC) to restore the accounts to their pre-storm levels. (TR 117, 145)

FPL believes that all storm-related plant additions and cost of removal should be charged to the storm reserve. This is consistent with the Actual Restoration Cost Approach proposed by the Company. FPL’s proposed treatment is consistent with the way that replacement cost insurance works. However, the intervenors assert that costs for new plant additions under normal operating conditions should be booked to plant in service rather than the storm reserve. The intervenors further assert that only new plant additions that exceed this level should be booked to the storm reserve. While there is disagreement over how the $58 million in capital additions should be booked, there appears to be no disagreement over the dollar amount.

As discussed in previous issues, staff recommends that FPL’s storm reserve be adjusted to remove items normally related to base rates. Consistent with that approach, staff recommends that the $58 million of capital costs associated with storm recovery efforts should be booked to rate base, as plant in service.

The intervenors disagree with how FPL booked cost of removal and with FPL’s estimate of the cost of removal. OPC witness Majoros testified that FPL’s storm-related removal costs should have been as high as $36.4 million, equaling the level of retired plant. (TR 435). Historic plant balance and depreciation reserve activity from FPL’s 2004 Depreciation Study, shows that poles, towers, and overhead lines for transmission and distribution have experienced costs of removal ranging from 88% to 162% of the amount of retirements. (EXH 37) Using historical data as a comparison, it might be expected that FPL’s cost to remove and retire $36.4 million of plant from service would far exceed the $12.2 million figure given by FPL witness Davis. However, witness Davis testified that FPL’s estimate for removal costs was taken from the FPL work management system, which tracks labor and other costs required to perform particular tasks. (TR 164, 167, 208)

Staff recommends that it is appropriate to use FPL’s $12.2 million removal cost estimate because this value was based on storm restoration activity tracked by FPL’s work management system. This value is closer to FPL’s actual removal cost than historic plant removal activity might indicate. Historic activity might be influenced by a number of factors such as age of retired plant or other unusual events. (TR 164-166) The goal is to book the actual cost of removal.

FPL witness Davis agreed that charging all capital costs to the storm reserve entailed quantifying the normal plant account amount and then adjusting that amount by an additional entry called CIAC. (TR 203-204) Witness Davis went on to further state that the adjustment was not really CIAC, but was the equivalent of it. The purpose of the $21.7 million “CIAC” adjustment was to reduce the $58 million of new gross plant back to the estimated $36 million of property retired as a result of the hurricanes. (TR 204) OPC witness Majoros testified that this CIAC adjustment was an artificial mechanism for aging new replacement plant items to a predetermined level equal to that which existed prior to the storms and should not be allowed. (TR 407) Staff agrees with witness Majoros that charging $21.7 million of “CIAC” against the storm damage reserve is not appropriate.

In conclusion, staff recommends that $58 million of capital costs should be booked to rate base as plant in service rather than to FPL’s storm reserve. Further, $12.2 million of removal costs should be booked to the cost of removal reserve rather than to the storm reserve. Staff also recommends that the $21.7 million classified as CIAC not be charged against the storm reserve.

Issue 14: Has FPL appropriately quantified the costs of materials and supplies used during storm restoration that should be charged to the storm reserve? If not, what adjustments should be made?

Recommendation:

Yes. FPL has properly quantified the costs of materials and supplies used during restoration that should be charged to the storm reserve. Therefore, no adjustment is necessary. (Joyce)

Position of the Parties

FPL:

Yes. Materials and supplies inventory costs directly related to storm restoration activities were appropriately charged to the Storm Damage Reserve in accordance with the 1993 Study approved by the Commission in the 1995 Order. No adjustments should be made

OPC:

FPL should charge only the costs of the materials and supplies used during restoration activities to the storm reserve. It should not charge the costs of replenishing supplies and inventories to the reserve. To the extent the Company has charged normal, annual costs to the storm account, that amount should be eliminated from amounts charged to the storm damage reserve. The difference between budgeted and actual costs of $1.5 million should be removed.

FIPUG:

FPL should provide proof that it is seeking recovery only for incremental materials and supplies required to restore its system.

AARP:

TWOMEYS:

FRF:

No; FPL has not appropriately quantified such costs. FPL’s claimed storm-related costs, including materials and supplies costs, should be limited to those that are incremental to the level of normal operating and maintenance expenses that would have otherwise been incurred. The Commission should disallow $1.5 million of claimed materials and supplies costs.

Staff Analysis:

Under OPC’s Storm Damage Guidelines, only those costs of materials and supplies that exceed the material and supplies expense anticipated under normal operations should be charged to the storm reserve. (TR 390) FPL witness Davis testified that the materials and supplies budget for Power Systems was almost spent in its entirety ($26.9 million vs. $25.4 million), yet incrementally more was spent on the storm restoration. (TR 101) Witness Davis claims that any adjustment would be insignificant because virtually the entire 2004 budget was spent without consideration of the amounts charged to the storm reserve. (TR 112) OPC argued that although witness Davis claims the amount between the budgeted amount and actual amount spent is insignificant, the amount totals $1.5 million. While this amount is not large in relation to the total dollar amount FPL is asking for in this docket, OPC asserts that protecting the customers from potential “double dipping” by the Company under any circumstances is significant regardless of the dollar amounts involved and that all dollars associated with this “double dipping” should be eliminated. (OPC BR 26)

OPC also contends that FPL should not charge the costs of replenishing supplies and inventories to the storm reserve. According to OPC, since there is a difference between the budgeted and actual costs for materials and supplies, the Company has not taken into account the normal, annual costs of replenishing materials and supplies. OPC states that to the extent the Company has charged normal, annual costs to the storm account, that amount – or $1.5 million - should be removed. (OPC BR 26)

FPL contends that there is no dispute over this issue. FPL stated that OPC’s position in the Prehearing Order is that “FPL should charge only the costs of the materials and supplies used during restoration activities to the storm reserve. It should not charge the costs of replenishing supplies and inventories to the reserve.” FPL further stated that OPC witness Majoros acknowledged that he has no evidence that FPL has charged materials and supplies inventory costs to the storm reserve in a manner inconsistent with OPC’s position. (TR 471) Lastly, FPL witness Davis testified that virtually the entire 2004 budget for materials and supplies was spent without regard to the amounts charged to the storm reserve. (TR 112)

Staff agrees that FPL should charge only the costs of materials and supplies used during restoration activities to the storm reserve and should not charge the costs of replenishing supplies and inventories to the reserve. FPL has stated that it has not charged any replenishment costs to the storm reserve. Further, OPC witness Majoros acknowledged that he had no evidence that FPL has charged materials and supplies inventory costs to the storm reserve in a manner inconsistent with OPC’s position. Staff agrees that FPL has not charged any costs of materials and supplies to the storm reserve. Therefore, staff recommends that no adjustment should be made.

Issue 15: If the Commission does not apply, in this docket, the methodology applied by FPL for charging expenses to the storm reserve pursuant to the study filed on October 1, 1993 by the Company and addressed by the Commission in Order No. PSC-95-0264-FOF-EI in Docket No. 930405-EI, should the Commission take into account:

a) Revenues lost by the Company due to the disruption of customer service during the 2004 storm season or the absence of customers after the storms;

b) Overtime incurred by Company personnel in work areas not directly affected by the storm due to loss of some personnel to storm assignments (backfill work);

c) Costs associated with work which must be postponed due to the urgency of the storm restoration and accomplished after the restoration was completed (catch-up work);

d) Uncollectible accounts receivable write-offs directly related to the storms; and

e) Incremental contractor, outside professional services and temporary labor costs due to work postponed due to the urgency of the storm restoration and accomplished after the restoration was completed.

Primary Staff Recommendation:

If the Commission approves staff’s recommendation on Issues 1 and 2 and uses a Modified Incremental Cost Approach rather than the Actual Restoration Cost Approach proposed by FPL, lost revenues and uncollectible accounts should be taken into account but not backfill work, catch-up work and expenses associated with contractors and outsides services. In taking into account lost revenues, the Commission should not consider lost revenues as indirect costs but should recognize that the normal O&M costs charged to the storm reserve by FPL and removed by staff in previous issues as recovered in base rates, were not recovered in base rates due to lost revenues. Therefore, the Commission should recognize lost revenues by including normal O&M costs that were not recovered in base rates totaling $33,814,297 and include uncollectible accounts receivable write-offs totaling $6,000,000 for a total of $39,814,297. The backfill work, catch-up work and expenses associated with contractors and outside services of $16,000,000 should not be taken into account. Furthermore, any recoveries of the directly-related uncollectible expense should be credited to reduce the amount of unrecovered storm damage costs. Moreover, directly-related uncollectible expense will be subject to the cumulative true-up at the end of the recovery period. (Romig, Devlin)


			Incremental	Uncollectible
		Catch-up	Contractor	Accounts
	Lost	& Backfill	& Outside	Receivable
	Revenue	Overtime	Services	Write-Offs	TOTAL

Requested by Company	38,200,000	9,000,000	7,000,000	6,000,000	60,200,000
Recommended by Staff	33,814,297	0	0	6,000,000	39,814,297


Staff Adjustment	4,385,703	9,000,000	7,000,000	0	20,385,703

Alternate Staff Recommendation: Alternate staff only disagrees with primary staff on the issue of lost revenues. Alternate staff recommends that the Commission not take into account any of the $38.2 million of lost revenues. (Willis)

Position of the Parties

FPL:

Yes. If the Commission departs from the methodology in the approved study, it should take into account impacts on the Company and expenses incurred that were directly caused by the hurricanes, but not charged to the Reserve. Such impacts and adjustments would include $38.2 million in lost base rate revenues, $9.0 million in overtime (catch-up work), $6 million in uncollectible accounts receivable write-offs directly related to the storms, and $7.0 million in incremental expenses associated with contractors and outside services.

OPC:

a. Lost revenues due to the impact of the 2004 storm season:

No. The storm reserve should be limited to the incremental and extraordinary costs of restoring service and repairing the physical system. “Lost revenues” are not costs at all, and labeling them as such does not make them so..

b. Overtime incurred by Company personnel in work areas not directly affected by the storm due to loss of some personnel to storm assignments (backfill work):

Only if the Commission first requires FPL to remove regular payroll costs from the storm reserve should it consider this category of overtime. The burden is on FPL to demonstrate and document that there was such overtime, and that it was caused directly by loss of personnel to storm assignments.

c. Costs associated with work which must be postponed due to the urgency of the storm restoration and accomplished after the restoration was completed (catch-up work):

Only if the Commission first requires FPL to remove regular, normal payroll costs from the storm reserve should it consider a claim for “catch-up” work. Further, the burden is on FPL to demonstrate that (a) specific catch-up work exists after the modifications, replacements and improvements, and (b) such work cannot be performed, as a result of the budgeting and scheduling processes, by employees during regular hours or by contractors during the normal amount of budgeted contract work.

d. Uncollectible accounts receivable write-offs directly related to the storms:

Uncollectible accounts receivable, consisting of money owed to FPL that FPL decides to write off, are not costs, and labeling them as such does not make them so. Further, the amount of uncollectibles “directly related to the storms” would be speculative. Finally, this item is duplicative of both “uncollectible expense” and “lost revenues,” neither of which is properly charged to the storm reserve.

e. Incremental contractor, outside professional services and temporary labor costs due to work postponed due to the urgency of the storm restoration and accomplished after the restoration was completed:

See (c) above for OPC’s position on item “e”.

FIPUG:

Agree with OPC.

AARP:

a. Lost revenues due to the impact of the 2004 storm season:

No. The storm damage reserve should be limited to the incremental and extraordinary costs of restoring service and repairing the physical system.

b. Overtime incurred by Company personnel in work areas not directly affected by the storm due to loss of some personnel to storm assignments (backfill work):

Only if the Commission first requires FPL to remove regular payroll costs from the storm reserve should it consider this category of overtime.

c. Costs associated with work which must be postponed due to the urgency of the storm restoration and accomplished after the restoration was completed (catch-up work):

Only if the Commission first requires FPL to remove regular, normal payroll costs from the storm reserve should it consider a claim for “catch-up” work.

d. Uncollectible accounts receivable write-offs directly related to the storms:

No. The storm damage reserve should be limited to incremental, extraordinary costs of restoring service and repairing the physical system. Uncollectible accounts receivable, consisting of money owed to FPL that FPL decides to write off, are not costs, and labeling them as such does not make them so.

No. The storm damage reserve should be limited to incremental, extraordinary costs of restoring service and repairing the physical system.