REVISED

DATE:	November 17, 2009
TO:	Office of Commission Clerk (Cole)
FROM:	Division of Economic Regulation (Slemkewicz, D. Buys, Davis, Laux, P. Lee, Draper) Office of the General Counsel (Brown)
RE:	Docket No. 090421-EI – Petition for Commission approval of base rate increase for costs associated with CR3 uprate project, pursuant to Section 366.93(4), F.S. and Rule 25-6.0423(7), F.A.C., by Progress Energy Florida, Inc.
AGENDA:	12/01/09 – Regular Agenda – Proposed Agency Action – Interested Persons May Participate
COMMISSIONERS ASSIGNED:			All Commissioners
PREHEARING OFFICER:			Argenziano
CRITICAL DATES:			None
SPECIAL INSTRUCTIONS:			None
FILE NAME AND LOCATION:			S:\PSC\ECR\WP\090421.RCM.DOC

 

 Case Background

In 2006, the Florida Legislature adopted legislation, Section 366.93, Florida Statutes (F.S.), encouraging the development of nuclear energy in the state.  In that section, the Legislature directed the Commission to adopt rules providing for alternate cost recovery mechanisms that would encourage investor-owned electric utilities to invest in nuclear power plants.  The Commission adopted Rule 25-6.0423, Florida Administrative Code (F.A.C.), which provides for an annual clause recovery proceeding to consider investor-owned utilities’ requests for cost recovery for nuclear plants.

This Commission granted Progress Energy Florida, Inc.’s (PEF or Company) need determination for the Crystal River 3 (CR3) Uprate on February 8, 2007.[1]  Once completed, the CR3 Uprate will provide an additional 180 megawatts of nuclear generation.  The CR3 Uprate will be accomplished in three phases.[2]  The reasonableness and prudence of the construction expenditures related to each phase of the CR3 Uprate project are subject to review in the Nuclear Cost Recovery Clause.[3]

Phase 1, the Measurement Uncertainty Recapture (MUR) phase, was completed during the 2007 refueling outage and went online on January 31, 2008.  A $1,297,979 base rate increase for the MUR phase was granted in Docket No. 080603-EI,[4] effective with the first billing cycle in January 2009.

During 2009, items associated with Phase 2, the Balance of Plant (BOP) phase, of the CR3 Uprate project will go into service.  On August 28, 2009, PEF filed a petition to increase its base rates by the $16,559,938 revenue requirements associated with the 2009 BOP phase of the CR3 Uprate project pursuant to Rule 25-6.0423(7), F.A.C.  According to PEF, these items do not increase the licensed output of the nuclear reactor, but will improve the efficient use of that output.[5]  PEF also has requested an additional $756,338 base rate increase for the 5-year amortization of Extended Power Uprate (EPU) assets that are being retired during 2009 pursuant to Rule 25-6.0423(7)(e), F.A.C.  In total, PEF has requested a base rate increase of $17,316,276.

Staff filed a recommendation on October 29, 2009, for the November 10, 2009, Agenda Conference.  On October 30, 2009, PEF filed an Amended Petition agreeing with staff’s proposed adjustments to reduce the requested total base rate increase from $17,316,276 to $16,812,605.  PEF also requested that the proposed base rate increase be made effective with the first billing cycle in January 2010.  Because the Amended Petition was filed subsequent to the filing of staff’s recommendation, the item was deferred from the November 10, 2009, Agenda Conference.  This recommendation addresses PEF’s Amended Petition.

Consistent with PEF's request for permanent rate relief in the Company's base rate proceeding (Docket No. 090079-EI), PEF has requested that the base rate increase for these assets being placed in service in 2009 be made effective with the first billing cycle in January 2010.  Given this, the Company plans to file one complete set of tariff sheets with new rates to include the increase requested herein and that approved in Docket No. 090079-EI.  These rates and tariff sheets will be filed for approval in compliance with final decisions related to revenue requirements, cost of service, billing determinants, and rate design made in this docket and in Docket No. 090079-EI, in accordance with the schedule established in Docket No. 090079-EI.

The Commission has jurisdiction over this subject matter pursuant to the provisions of Section 366.93, F.S., and other provisions of Chapter 366, F.S.

Discussion of Issues

Issue 1: 

 Should the Commission approve PEF's request to increase its base rates by $16,559,938 for the BOP phase of the CR3 Uprate project?

Recommendation: 

 No.  PEF’s request to increase its base rates by $16,559,938 for the BOP phase of the CR3 Uprate project should be reduced to $16,175,437, a reduction of $384,501.   This approval should be subject to true-up and revision based on the final review of the 2009 BOP phase expenditures in Docket No. 090009-EI, Nuclear Cost Recovery Clause.  (Slemkewicz, P. Lee, D. Buys, Davis, Laux)

Staff Analysis: 

 PEF has requested approval to increase its base rates by $16,559,938 for the BOP phase of the CR3 Uprate project.  During 2009, items associated with the BOP phase of the CR3 Uprate project will go into service.

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

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

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

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

(c) At such time as the power plant is included in base rates, recovery through the Capacity Cost Recovery Clause will cease, except for the difference between actual and projected construction costs as provided in subparagraph (5)(c)4. above.

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

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

 

In compliance with Rule 25-6.0423(7), F.A.C., PEF submitted its calculation of the annualized base revenue requirements for the BOP phase for the first 12 months of operations.  This calculation is shown on Schedule 1.  Staff has reviewed the calculation of the $16,559,938 jurisdictional annual revenue requirement.  In staff’s opinion, the annual revenue requirement calculation has been calculated in compliance with Rule 25-6.0423(7), F.A.C.

During staff’s review, it was discovered that PEF’s calculation included depreciation based on the rates proposed in its rate case in Docket No. 090079-EI.[6]  In staff’s opinion, it is premature to use the not-yet-approved depreciation rates proposed in the rate case.  Instead, staff believes that the current Commission-approved rates authorized in Order No. PSC-05-0945-S-EI[7] are the appropriate rates to be used in the revenue requirement calculation.  As shown on Schedule 1, the result of using the currently approved depreciation rates reduces the jurisdictional revenue requirement from $16,559,938 to $16,175,437, a reduction of $384,501.  Staff recommends approval of the $16,175,437 base rate increase.  As discussed in the Case Background, PEF agreed with this adjustment in its Amended Petition.

The 2009 expenditures related to the BOP phase are still under review in Docket No. 090009-EI.  A final determination of the reasonableness and prudence of the 2009 expenditures will not be made until 2010.  Per Attachment A to PEF’s petition, the increase in Electric Plant in Service included in the calculation is $111,441,133 ($102,156,973 jurisdictional), net of joint owners.  If the $111,441,133 amount is revised based on a final audit and review of the 2009 expenditures, the annual revenue requirement will have to be recalculated.  This would require a true-up of the revenues already collected and a revision of the related tariffs.  Therefore, staff further recommends that the approval of the $16,175,437 base rate increase be made subject to true-up and revision based on the final review of the 2009 BOP phase expenditures in Docket No. 090009-EI.

Issue 2: 

 Should the Commission approve PEF's request to increase its base rates by $756,338 for the 5-year amortization of the EPU assets that are being retired during 2009?

Recommendation: 

 No.  PEF’s request to increase its base rates by $756,338 for the 5-year amortization of the EPU assets that are being retired during 2009 should be reduced to $637,168, a reduction of $119,170. (Slemkewicz, P. Lee)

Staff Analysis: 

 PEF has requested approval to increase its base rates by $756,338 for the 5-year amortization of EPU assets that are being retired during 2009 pursuant to Rule 25-6.0423(7)(e), F.A.C., which states:

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

Per Attachment C to PEF’s petition, the net book value of the EPU asset retirements will be $7,200,939 at December 31, 2009.  This results in an annual amortization of $1,440,188 over the 5-year period.  In addition, PEF has proposed to offset the annual amortization by an annual depreciation credit of $615,113 resulting in a net annual amortization of $825,075 ($756,338 jurisdictional).  The depreciation credit recognizes that the retired EPU assets are included in PEF’s projected 2010 test year in its rate case in Docket No. 090079-EI.[8]

During staff’s review, it was discovered that PEF’s calculation included depreciation based on the rates proposed in its rate case in Docket No. 090079-EI.  In staff’s opinion, it is premature to use the not-yet-approved depreciation rates proposed in the rate case.  Instead, staff believes that the current Commission-approved rates authorized in Order No. PSC-05-0945-S-EI[9] are the appropriate rates to be used in the revenue requirement calculation.  As shown on Schedule 1, the result of using the currently approved depreciation rates increases the jurisdictional depreciation credit from $563,868 to $683,038, an increase of $119,170.  As a result, the jurisdictional 5-year amortization amount is decreased from $756,338 to $637,168, a reduction of $119,170.  Therefore, staff recommends that $637,168 is the appropriate annual amount for the 5-year amortization of the EPU assets that are being retired during 2009.  As discussed in the Case Background, PEF agreed with this adjustment in its Amended Petition.

Issue 3: 

 What is the appropriate effective date of the increase in base rates?  Should the Commission approve PEF’s proposal to add any revenue requirement increase approved in this docket to any approved revenue requirement increase in the pending base rate proceeding, Docket No. 090079-EI, for determining base rates?

Recommendation: 

 The revised base rates should become effective for meter readings taken on or after 30 days following the date of the Commission vote approving the BOP phase of the CR3 Uprate project.  Under the current schedule, that would mean for meter readings taken on or after December 31, 2009.  PEF should file tariff sheets for administrative approval by staff.  Yes.  PEF should file rates and tariff sheets for approval in compliance with final decisions related to revenue requirements, cost of service, billing determinants, rate design, and effective date made in Docket 090079-EI.  (Draper)

Staff Analysis: 

 In its original petition, PEF requested that the revenue requirement approved in this docket be added to the approved revenue requirement increase in the pending base rate proceeding in Docket No. 090079-EI.  However, the Commission deferred consideration of the base rate proceeding until January 2010.  In its Amended Petition, PEF requested implementation of revised base rates with the first billing cycle for January 2010.

 

            The first billing cycle day for January 2010 falls on December 28, 2009, which is less than 30 days from the Commission vote, which is scheduled for the December 1, 2009, Agenda Conference.  Consistent with prior Commission decisions that any change in base rates become effective 30 days following a Commission vote, staff recommends that the revised base rates should become effective for meter readings taken on or after 30 days following the date of the Commission vote approving the BOP phase of the CR3 Uprate project.  Under the current schedule, that would mean for meter readings taken on or after December 31, 2009.

 

In its Amended Petition, PEF provided a revised Attachment F showing a calculation of the current and proposed base rate energy charges based on the staff-recommended increase of $16,812,605. (See Schedule 2)  The increase is allocated to the rate classes consistent with PEF’s current 12 Coincident Peak and 1/13 Average Demand method.  PEF states that it will file tariff sheets for administrative approval.  The total base rate increase recommended in Issues 1 and 2 results in a $0.57 increase in the 1,000 kilowatt-hour residential bill.

 

PEF requested that the revenue requirement approved in this docket be added to the approved revenue requirement increase in the pending base rate proceeding, Docket No. 090079-EI.  PEF asked that those costs be allocated to retail rate classes and developed into individual rates consistent with methods and billing determinants approved in the base rate proceeding.  PEF is also requesting that the base rate increase for the assets placed in service in 2009 be effective with the first billing cycle in January 2010.  PEF states that it plans to file one complete set of tariff sheets with new rates to include the increase requested in this docket and that approved in Docket No. 090079-EI.

 

Staff agrees with PEF that any revenue increase granted in this docket should be added to any revenue increase granted in the rate case.  That insures that customers will not experience multiple rate changes which can lead to customer confusion and frustration.  The effective date of any base rate change is an issue in the rate case docket, subject to Commission approval.  Staff recommends that rates and tariff sheets be filed for approval in compliance with final decisions related to revenue requirements, cost of service, billing determinants, rate design, and effective date made in this docket and Docket No. 090079-EI, in accordance with the schedule established in Docket No. 090079-EI.

Issue 4: 

 Should this docket be closed?

Recommendation: 

 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.  (Brown)

Staff Analysis: 

 At the conclusion of the protest period, if no protest is filed this docket should be closed upon the issuance of a consummating order.

Schedule 2

PROGRESS ENERGY FLORIDA, INC.

DOCKET NO. 090421-EI