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State of Florida
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Public Service Commission Capital Circle Office Center ● 2540 Shumard Oak Boulevard -M-E-M-O-R-A-N-D-U-M-
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DATE: |
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TO: |
Office of Commission Clerk (Cole) |
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FROM: |
Division of Economic Regulation (Kummer, Lee) Office of the General Counsel (Bennett) Office of Strategic Analysis and Governmental Affairs (Graves) |
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RE: |
Docket No. 080665-EI – Petition of Florida Power & Light Company for approval of long-term agreement for full requirements electric service with Lee County Electric Cooperative. |
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AGENDA: |
02/10/09 – Regular Agenda – Proposed Agency Action - Interested Persons May Participate |
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COMMISSIONERS ASSIGNED: |
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PREHEARING OFFICER: |
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SPECIAL INSTRUCTIONS: |
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FILE NAME AND LOCATION: |
S:\PSC\ECR\WP\080665.RCM.DOC |
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On August 21, 2007, Florida Power & Light (FPL) signed an agreement with Lee County Electric Cooperative (LCEC) for a long-term wholesale power sales agreement to provide full requirements electric service to LCEC. On September 2, 2008, FPL filed for Commission approval of the sales agreement in Docket No. 080001-EI.[1] At the Prehearing Conference in Docket No. 080001-EI on October 20, 2008, FPL agreed to remove this issue from consideration in the fuel docket and file a separate petition, on the understanding that the matter would be heard expeditiously so as to meet the December 31, 2009, deadline for regulatory approval stated in the Agreement. FPL filed the separate petition on November 10, 2008, in Docket No. 080665-EI.
LCEC currently purchases its wholesale power from Seminole Electric Cooperative (Seminole). As LCEC’s purchased power contract with Seminole neared its expiration date, LCEC approached FPL, seeking to purchase wholesale power to serve LCEC’s retail load. LCEC requested that FPL begin serving up to 300 Megawatts (MWs) of LCEC’s load in 2010, but the bulk of the total load of 1,100 MWs would not be required until 2014, when LCEC would become a full requirements wholesale customer. FPL has entered into a short term wholesale agreement for the load between 2010 and 2014, and is not seeking Commission approval of that contract. FPL is seeking Commission approval of the long-term sales agreement (Agreement) beginning in January 2014, when the full 1,100 MWs of load would become FPL’s responsibility. The initial term of the Agreement is for twenty years (ending December 31, 2033), and continues for an additional 20 years (ending December 31, 2053), unless either party chooses to terminate it.
Under the Agreement, LCEC’s load would be treated on an equal footing with FPL’s retail load. It is a system sale, which means LCEC will be assigned costs at system average cost for both capacity and fuel, just as retail ratepayers are. FPL will also include LCEC’s load in its Ten Year Site Plan (TYSP) when planning plant additions. FPL states that the rate charged to LCEC is consistent with the Federal Energy Regulatory Commission (FERC) requirements, and that LCEC has secured firm transmission service for the load under FPL’s FERC Open Access Transmission Tariff (OATT).
FPL represents that it has performed a system cost analysis, using the same methodology used in its TYSP, both with and without the LCEC load. The benefits to FPL’s retail ratepayers, according to the petition, result from netting increased fuel costs against reduced base rate costs to retail customers. The increase in fuel costs results from the need to run higher cost generation to serve the increased total load. The decrease in base rate costs results from a higher jurisdictional separation factor, which removes more generation costs from the revenue requirement used to set retail base rates. FPL also contends that the sale will allow it to leverage its economies of scale to spread costs of new plant over more load, as well as provide a reliable, efficient, cost effective and environmentally friendly source of power to LCEC’s retail customers.
FPL is not obligated by law to obtain Commission approval to enter into either a short or long-term wholesale contract with LCEC. However, FPL included a provision in the Agreement which requires Commission approval of the Agreement prior to execution. Wholesale contracts are at the discretion of the utility, subject to review by FERC. The Agreement would only trigger Commission action at the time the utility seeks recovery of any costs in a clause proceeding, or when costs are allocated in a base rate case. FPL stated that it is seeking Commission determination that the Agreement was “prudent and consistent with the interests of FPL’s retail customers.”[2] Formal Commission approval of the long-term wholesale Agreement is requested because FPL’s model shows that fuel costs will be higher in most years of the Agreement. FPL wishes to have the Commission formally recognize that base rate benefits outweigh the higher fuel costs over time so that they can avoid the need to justify the higher fuel costs each year in the fuel proceeding.
LCEC filed a letter supporting the Agreement and urging approval of FPL’s petition for approval as a “win” for both utilities’ customers. Representative Gary Aubuchon also filed a letter in support of the Agreement as a means of promoting the availability of diverse energy resources throughout the state. The letters are included as Attachment A. FPL’s original petition in this docket is attached as Attachment B.
In this matter, the Commission has jurisdiction over the rates and charges to FPL’s retail customers pursuant to Sections 366.05 and 366.06, Florida Statutes, but the terms and conditions of the Agreement for wholesale power are subject to FERC jurisdiction.
Issue 1:
Should the Commission approve as prudent the proposed wholesale power sale agreement between Florida Power & Light Company and Lee County Electric Cooperative?
Recommendation:
No. The Commission should decline to approve FPL’s Long-term Agreement For Full Requirements Electric Service with LCEC as prudent and consistent with the interests of FPL’s retail customers. (Kummer, Lee, Graves)
Staff Analysis: FPL’s request to the Commission to approve the prudence of FPL entering into a wholesale sales agreement is unique. As FPL confirmed in response to staff’s data requests, it has not sought Commission approval of the prudence of entering into a wholesale sale agreement before this docket. FERC is the agency having jurisdiction over the terms and conditions of wholesale sales agreements, and FPL is also seeking FERC approval of this Agreement. While jurisdiction over the terms and conditions of this Agreement rests with FERC, the Commission does have jurisdiction through the fuel clause over the inclusion of fuel revenues and expenses associated with separated wholesale sales. The regulatory treatment of those revenues and expenses have been the subject of several Commission orders, which are discussed in Issue 2. The Commission also has jurisdiction to determine the portion of total system cost which is assigned to retail and included in retail rate setting, i.e., the separation factor between wholesale and retail customers.
Staff believes that it is because of the potentially higher fuel costs to retail ratepayers, that FPL is seeking Commission approval of this wholesale agreement. Staff is of the opinion that this wholesale agreement will require FPL to use more of its higher costing generating units (intermediate and peak load units) resulting in a higher fuel cost recovery factor for both retail ratepayers and the wholesale customers. FPL has stated that it has the ability to go ahead with the Agreement in the absence of Commission approval, and also has the right to terminate the Agreement if the Commission fails to approve the Agreement. However, if the Commission does not approve the prudence of the Agreement, and with it, the recovery of the higher fuel costs, FPL would absorb those higher fuel costs if it cannot collect them from LCEC. If the Agreement is approved by this Commission, the risk associated with the higher fuel costs and any commensurate base rate benefits shifts to the retail ratepayers. Therefore, FPL is seeking approval of the Agreement prior to filing the matter with FERC.
Staff is concerned that, under the proposed Agreement, the higher costs passed through the fuel clause will exceed any base rate reductions realized through shifting a larger proportion of base rate costs to wholesale via a higher separations factor. Although both LCEC and retail ratepayers will pay the same average fuel costs, the fuel costs for retail ratepayers will be higher with the Agreement than without it. FPL’s analysis shows that, over the initial term of the Agreement, retail ratepayers pay more in total fuel costs than they receive in base rate benefits. Net benefits only accrue under the assumption that the LCEC Agreement terminates at the end of the initial 20-year term in 2033. Even after the termination of the Agreement, FPL ratepayers do not achieve cumulative net present value (NPV) benefits until the year 2051 under the most optimistic scenario not including solar.
The recommendation addresses three main topics: (1) the stream of costs and benefits as presented by FPL; (2) FPL’s alternative to reducing base rates to recognize the separations factor impact; and (3) the impact of a Commission decision that the Agreement is prudent.
Cost and Benefits Stream
FPL justifies approval of its Agreement on three bases: (1) retail customers will benefit by spreading the cost of generation over more kilowatts (kWs) through a higher jurisdictional separations factor; (2) LCEC customers will receive reliable and cost-effective service and benefit from FPL’s fuel diversity; and (3) the agreement will enhance FPL’s generating resources by building cost-effective and environmentally sound new generation to serve the greater needs of all Floridians, not just FPL’s retail customers.[3] Staff does not dispute the potential benefits to LCEC or to the state as a whole. Such societal benefits, however, should not be paid for only through higher rates to FPL’s retail ratepayers, which exceed any reasonable expectation of benefits.
To project the costs and benefits associated with the Agreement, FPL used the computerized generation expansion simulation model used to develop Ten-Year Site Plan (TYSP) projections. This model uses inputs on anticipated plant additions, expected load, fuel prices, and other associated operating costs. In all scenarios, FPL performed this analysis twice - both with and without the average LCEC load of approximately 1,100 MWs.
FPL’s original analysis filed with the petition was performed when the Agreement was negotiated in 2007. Subsequent to the 2007 analysis, FPL requested and received approval of a revision to its generation expansion plan in Dockets 080203-EI,[4] 080245-EI,[5] and 080246-EI.[6] Staff requested that FPL re-run the retail impact calculations using updated assumptions and a more recent resource plan. The four additional forecasts are: (1) August 2008 load forecast and fuel forecast; (2) August 2008 load forecast and October 2008 fuel forecast; (3) October 2008 load and fuel forecasts; and (4) October 2008 load and fuel forecasts with 100 MWs of solar generation added each year 2010-2040.
The analysis FPL presented with the petition showed net cumulative benefits to retail ratepayers, but that number only looked at costs and benefits over the first 10 years of the Agreement, not the full 20 years of the initial Agreement term. Based on the additional information provided, the NPV of the cumulative retail impact based on the initial 20-year term of the Agreement is negative for all but the last scenario, which assumes significant solar generation additions. The results of FPL’s analysis for the initial term through 2033 are illustrated below in Table 1.
Table 1: FPL NPV Retail Impact Analysis through 2033 ($Mil)
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August 2008 Load Forecast and Fuel Forecast |
August 2008 Load Forecast and Oct. 2008 Fuel Costs |
October 2008 Load and Fuel Forecast |
October 2008 Load and Fuel Forecast w/Solar Additions |
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2033 |
($434.0) |
($288.7) |
($298.0) |
$75.4 |
FPL argues that retail ratepayers will receive base rate benefits greater than the incremental fuel cost if the Agreement is evaluated over a longer time horizon. FPL’s analysis of the Agreement through 2060 shows positive benefits for retail ratepayers in three of the four scenarios, if FPL terminates the Agreement in 2033. If the Agreement is terminated, FPL argues that, at that point, the load served is strictly retail, so there is no “incremental” fuel cost attributable to wholesale load, and that retail load receives only the benefits of the plants partially paid for by LCEC. Table 2 below shows the positive benefits FPL projects, based on the longer time frame. Although the cumulative NPV is positive in 2060, because of the large negative cumulative impacts during the initial term of the Agreement, ratepayers do not begin to realize positive NPV benefits until 2051. The complete yearly analysis of cost and benefits is shown in Attachment D.
Table 2: FPL NPV Retail Impact Analysis through 2060, Assuming Agreement Termination in 2033 ($ Mil)
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August 2008 Load Forecast and Fuel Forecast |
August 2008 Load Forecast and Oct. 2008 Fuel Costs |
October 2008 Load and Fuel Forecast |
October 2008 Load and Fuel Forecast w/Solar Additons |
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2060 |
($105.9) |
$39.4 |
$23.0 |
$380.8 |
While it is mathematically possible to arrive at positive net benefits, the long lag between cost recovery and benefit realization results in serious intergenerational mismatches. The extended time frame through 2060, together with termination of the Agreement in 2033, necessary to create the positive NPV makes any such benefits speculative at best.
In asserting net benefits to its ratepayers, FPL relies on its ability to renegotiate or terminate the Agreement at the end of the initial term. FPL will recover all of its costs, either through base rates or through fuel. LCEC will receive power at less than incremental cost because FPL’s retail ratepayers are sharing the burden of higher fuel costs required to serve LCEC’s load. There is little reason to believe either party will desire changes to the Agreement terms later.
Implementation of Separation Factor Impact
Another concern is the timing of costs and benefits to retail ratepayers. The higher fuel costs will be paid each year. The benefits from the proposed sale rest on the sharing of demand related costs through the higher separations factor. Jurisdictional separation studies generally take place in a full rate case. In the absence of a base rate proceeding, the benefits evaporate on an annual basis. If retail customers are to realize the benefits used to justify the Agreement, rates must be adjusted to recognize the removal of the 1,100 MWs from the retail cost responsibility when LCEC becomes a full requirements customer in 2014. This would normally be reflected in a reduction in retail base rates commensurate with the removal of the cost responsibility. If base rates are not adjusted, retail customers see only higher fuel costs with no offsetting benefits.
As an alternative to a base rate reduction in 2014, FPL proposes to credit an amount equivalent to the amount of the base rate reduction through the Capacity Cost Recovery Clause beginning in January 2014, and continuing until FPL’s next rate case. In the next rate case, base rate costs would be separated on the full jurisdiction separation factor. FPL states that it “will commit to make an adjustment in the 2013 capacity cost recovery clause proceedings to credit customers, effective January 1, 2014, by the amount of reduced annual cost responsibility resulting from the lower jurisdictional separation factors...”[7]
It is staff’s understanding that FPL intends to fix the dollar amount of the credit as of 2014 and that amount would be credited each year to the capacity clause in setting the overall factor. If FPL fixes the dollar amount of the credit, rather than the per kwh reduction, it allows the amount of the credit per kwh to fluctuate each year, depending on the kwhs used to set the cost recovery factors. Under the Capacity Clause credit approach, future ratepayers will likely be shortchanged compared to the base rate reduction used to justify the Agreement.
Effect of Commission Approval of the Prudence of the Agreement
An order approving the prudence of this agreement may have long-term effects (40 years) during which time the Commission will have a more limited ability to review that decision of prudence. A Commission order, once final, becomes subject to the doctrine of administrative finality. In previous decisions, the Commission has acknowledged that administrative finality applies to its decisions.
We acknowledge that the doctrine of administrative finality applies to our final orders, and parties are entitled to the certainty that finality provides. See Austin Tupler Trucking, Inc. v. Hawkins, 377 So. 2d 679 (Fla. 1979) (finding that the Commission could not reopen dormant trucking certificate case after time for reconsideration had passed). See also, Florida Power Corporation v. Garcia, 780 So. 2d 34, 44 (Fla. 2001) (citing with approval Austin Tupler).
Order No. PSC-07-0816-FOF-EI, issued October 10, 2007, in Docket No. 060658-EI, In re; Petition on behalf of Citizens of the State of Florida to require Progress Energy Florida, Inc. to refund customers $143 million .
There are exceptions to the doctrine of administrative finality that would permit the Commission to review and change a previously made decision. The courts have recognized that administrative finality will not apply if it is shown that some mistake, misrepresentation, or fraud, or a matter of great public interest compels the Commission’s review. See Sunshine Utilities v. Florida Public Service Commission, 577 So. 2d 663, 666 (Fla. 1st DCA 1991) (review of a five-year-old rate order to correct a mistake); Reedy Creek Utilities v. Florida Public Service Commission, 418 So. 2d 249 (Fla. 1982) (review of a two and a half month order to correct a mistake and public interests were served); Richter v. Florida Power Corporation, 366 So. 2d 798 (Fla 2d DCA 1979) (re-open prior orders when there were issues of misrepresentation and fraud). While courts recognize that the Commission may, under certain circumstances, review its order once final, the Commission should be aware that it will be required to reach an additional finding to reconsider a prior decision.
Recovery of Nuclear Costs
Concerns have been raised in other dockets about whether the pre-payment of nuclear costs will be properly recovered from any wholesale customers who benefit from the lower cost nuclear power. In 2009, retail ratepayers will begin paying part of the total cost of new nuclear plants through the Capacity Cost Recovery Clause, pursuant to Rule 25-6.0423, Florida Administrative Code.[8] Since the wholesale load will benefit from the lower fuel costs, it is only fair that wholesale load contribute equitably to the cost of the plant which will generate that lower fuel costs.
After discussions with FPL, staff is comfortable with FPL’s assertion that retail load will pay only its appropriate separated portion of the total plant costs, just as it would have done in the absence of the pre-payment structure. It is staff’s understanding that the separation factor will be applied to the total plant costs before any pre-payment credits. Then, the entire amount of credits collected from ratepayers will be credited against only the portion of total costs which would have been borne by retail load in the absence of any pre-payments. As a result, when the plant goes on line, the amount included in retail rate base will be the jurisdictional share of the total costs less the pre-payments. The wholesale share of the costs will continue to reflect the full separation factor multiplied by the unadjusted plant costs, prior to any separation or crediting of pre-payments. Attachment C illustrates the calculations.
Summary
As FPL notes, wholesale contracts are subject only to FERC’s rules and procedures. FPL also admits that this is the first time it has sought Commission approval of a large long-term wholesale sales agreement. LCEC and FPL have concluded that the Agreement will be in the best interest of both utilities and their customers, and that it is consistent with Florida’s interest in diversifying the access to and utilization of generation resources within the state.
Staff accepts FPL’s argument that it will be able to leverage its economies of scale, and that the Agreement is consistent with Florida’s interest in diversifying the access and utilization of efficient generation within the state. However, FPL is asking the Commission to approve an Agreement whose term is 40 years with a possible termination after the first 20 years. FPL’s analysis shows that the cumulative value of the Agreement to retail ratepayers is negative for the term of the Agreement, and only becomes positive if the Agreement is not renewed and even then doesn’t generate positive benefits for an additional 18 years. While staff agrees that allowing LCEC’s customers to take advantage of the more efficient and diversified generation mix is desirable from a statewide perspective, we do not believe that this should be accomplished solely at the cost of higher rates to FPL’s retail ratepayers.
Therefore, staff recommends that the Commission decline to approve as prudent the proposed Lee County wholesale Agreement, as filed.
Issue 2:
Should the Commission approve the regulatory treatment of the costs associated with the wholesale Agreement?
Recommendation: Staff recommends that the Commission approve the regulatory treatment of the revenues and expenses associated with the wholesale agreement only if specific changes to FPL’s proposed regulatory treatment are made. Staff recommends the following changes: (1) the fuel cost charged to retail ratepayers should be adjusted on an annual basis so the incremental fuel cost is no greater than the base rate benefit; (2) the credit through the Capacity Cost Recovery Clause recognizing the base rate benefit should be fixed on a per kwh basis, not a dollar basis, as would be done if base rates were adjusted; (3) FPL should provide notice to the Commission if there is a change in circumstance regarding the effect the regulatory treatment has on ratepayers; and (4) FPL should be required to bring this issue back to the Commission at least 12 months prior to the scheduled review by the parties to renew or terminate the Agreement. (Kummer, Bennett)
Staff Analysis:
Staff recognizes that certain societal benefits may be realized through this Agreement. Those benefits should not, however, be achieved through increased costs to FPL’s retail ratepayers which exceed any benefits they realize from the Agreement. Under FPL’s proposal, any risk associated with an increase in fuel prices or changes in future generation additions are shifted from FPL’s shareholders to FPL’s retail ratepayers. As stated in Issue 1, the Commission does not have jurisdiction over the terms and conditions of the wholesale sales agreement. That is FERC’s jurisdiction; the Commission does not have the same resources and perspectives for reviewing wholesale sales agreements that FERC has. Accordingly, it would be better for the Commission to focus its scrutiny on the matters effected by this Agreement over which it has jurisdiction, the regulatory treatment of increased fuel costs resulting from the wholesale sale.
As noted in Issue 1, FPL’s proposed regulatory treatment will negatively impact FPL’s retail ratepayers. Commission staff has reviewed several prior Commission orders regarding the regulatory treatment of wholesale sales with regard to matching of fuel costs and base rate benefits. Order PSC-97-0262-FOF-EI[9] stated that, as generic policy, long-term wholesale sales were to be separated on average system cost for both base rate and fuel costs. If a utility chose to enter into an agreement which did not recover those average costs, average cost would still be credited to fuel as if the utility had recovered the average cost of fuel from the wholesale customer. The order goes on to say that the utility’s shareholders will, in effect, be required to pay for any shortfall associated with fuel revenues on the wholesale side. The order did, however, leave the door open for different treatment of fuel costs on a case-by-case basis if an overall benefit to the retail ratepayers could be demonstrated.
Based on the exemption in Order No. PSC-97-0262-FOF-EI, Tampa Electric Company (TECO), in a later docket, requested the Commission determine the treatment of fuel and non-fuel costs associated with sales to FMPA and Lakeland. For the FMPA/Lakeland sale, the average fuel cost was higher than the incremental fuel to serve the wholesale load. In order not to discourage wholesale sales, the Commission allowed TECO to credit the retail fuel and environmental clauses with the incremental cost of serving the wholesale load.[10] TECO was then allowed to make up the difference between the incremental fuel and the average fuel costs from operating revenues because the Commission determined that retail ratepayers received a net benefit from a sale exceeding the amount necessary to make the cost recovery clauses whole.
In contrast, the incremental cost to add LCEC is higher than average, resulting in higher average system costs to both LCEC and FPL’s retail load. To remain consistent with Order No. PSC-97-1273-FOF-EU, the regulatory treatment of the wholesale agreement should reflect LCEC as paying incremental, not average, fuel costs in order to hold the retail ratepayers harmless. At a minimum, the regulatory treatment should allow the fuel costs charged to retail ratepayers to be reduced such that the incremental fuel costs do not exceed the base rate benefits received. This adjustment can be made in the annual fuel filings by calculating the incremental fuel costs and allocating those costs to the wholesale jurisdiction. Under this regulatory mechanism, the incremental fuel may be recovered by FPL charging LCEC the incremental cost of fuel to serve its load, or by FPL absorbing the difference between the average cost with and without LCEC load.
Second, using the Capacity Clause mechanism FPL proposed to apply the base rate credit achieves a result comparable to a base rate reduction only under certain circumstances. A base rate reduction ensures the same reduction on a cents per kwh basis until base rates are changed again. Cost recovery factors are not a fixed charge per kwh, but fluctuate depending on the dollar amount to be recovered and the number of projected kwhs for the time period. If a dollar amount is assigned to the base rate benefit and credited to the Capacity Clause calculations, the cents per kwh will change as the projected kwhs change each year. If FPL’s proposal to use the Capacity Clause to reflect the base rate credit is approved, this credit must likewise be fixed. This can be accomplished by calculating the credit separately and applying that credit to the Capacity Clause factor after all other calculations are completed.
Further, the Commission should not approve the regulatory treatment of the Agreement for the entire 40 year term of the Agreement. Too many factors can change over that time period, including general regulatory or legislative policy. The Commission should approve the regulatory treatment of the Agreement, but only under the conditions that FPL notify the Commission of changes in circumstances which affect retail ratepayers, and that FPL bring this issue back to the Commission prior to FPL determining whether to continue with the Agreement for an additional 20 years.
Staff is not recommending that the Commission make a determination of prudence, even if the regulatory treatment is modified as staff proposes. Consistent with the Commission orders as discussed, the Commission should only approve the regulatory treatment of fuel costs and retail base rate benefits, such that retail ratepayers are not harmed during the term of the Agreement.
Staff’s proposal is designed to be ratepayer neutral. Staff’s proposed treatment would be equally applicable if the incremental costs to serve LCEC doesn’t increase the average fuel cost to retail load. In that instance, there would be no negative impact on FPL, the retail load would pay no more in fuel than without LCEC load, and the base rate benefits would result in positive overall benefits to retail load. If the increase does increase the average fuel cost, retail ratepayers would not be subsidizing the LCEC load through higher fuel costs.
Issue 3: Should this docket be closed?
Recommendation:
Yes. Upon Commission vote on Issues 1 and 2, if no person whose substantial interests are affected by the proposed agency action files a protest within 21 days of the issuance of the order, this docket should be closed upon the issuance of a consummating order. (Bennett)
Staff Analysis:
Upon Commission vote on Issues 1 and 2, if no person whose substantial interests are affected by the proposed agency action files a protest within 21 days of the issuance of the order, this docket should be closed upon the issuance of a consummating order.
