DATE:	October 14, 2010
TO:	Office of Commission Clerk (Cole)
FROM:	Division of Economic Regulation (Wu, Franklin) Office of the General Counsel (Brown, Bennett, Sayler)
RE:	Docket No. 100404-EI – Petition by Florida Power & Light Company to recover Scherer Unit 4 Turbine Upgrade costs through environmental cost recovery clause or fuel cost recovery clause.
AGENDA:	10/26/10 – Regular Agenda – Proposed Agency Action - Interested Persons May Participate
COMMISSIONERS ASSIGNED:			All Commissioners
PREHEARING OFFICER:			Brisé
CRITICAL DATES:			None
SPECIAL INSTRUCTIONS:			None
FILE NAME AND LOCATION:			S:\PSC\ECR\WP\100404.RCM.DOC

 

 Case Background

Florida Power & Light Company (FPL) has requested approval to recover the costs associated with a turbine upgrade to the Scherer Unit 4 coal generating facility through either the Environmental Cost Recovery Clause (ECRC) or the Fuel Cost Recovery Clause (Fuel Clause).  FPL asserts that with the installation of a new high pressure rotor to the Unit 4 turbine-generator, the plant will be able to generate approximately 35 MW of additional electricity output, which, in turn, will substantially offset the parasitic load imposed by the plant’s environmental equipment that is being installed to comply with the Environmental Protection Agency’s (EPA) Clean Air Interstate Rule (CAIR) and the Georgia Multipollutant Rule.  The environmental equipment to be installed at Unit 4 includes a baghouse, a scrubber, and a selective catalytic reduction system.  FPL originally planned to perform the turbine upgrade at the same time that the environmental equipment is installed at the unit, scheduled to take place during an outage in 2012.  In May 2010, however, the EPA issued a new greenhouse gas tailoring rule which FPL believes might require a New Source Review of Scherer Unit 4 for greenhouse gas emissions unless construction begins on the turbine upgrade prior to July 1, 2011. (75 Fed. Reg. 31513 et seq).   Therefore, FPL is presently planning to arrange for delivery of the high pressure rotor in June 2011, with installation to commence shortly thereafter.

  FPL expects to incur approximately $5-7 million in capital costs for the turbine upgrade, and asserts that the upgrade will result in net present value fuel savings to customers of approximately $240 million through 2045.

This is staff’s recommendation on the project’s eligibility for cost recovery through the ECRC or the Fuel Clause.  The Commission has jurisdiction over this subject matter pursuant to the provisions of Chapter 366, Florida Statutes (F.S.), including Sections 366.04, 366.05, 366.06, 366.825, and 366.8255.

 

Discussion of Issues

Issue 1: 

 Is FPL’s Scherer Unit 4 steam turbine upgrade project eligible for cost recovery through the ECRC?

Recommendation: 

 No.  The project does not meet established criteria for cost recovery through the ECRC.  (Brown, Wu)

Staff Analysis: 

 The ECRC, established in 1993 by the Florida Legislature, provides an investor-owned utility the opportunity to recover the costs associated with incremental changes in environmental regulations between rate cases.  Pursuant to Section 366.8255, F.S., only the utility’s prudently incurred environmental compliance costs are allowed to be recovered through the ECRC.  Environmental laws or regulations include “all federal, state, or local statutes, administrative regulations, orders, ordinances, resolutions, or other requirements that apply to electric utilities and are designed to protect the environment.”  Section 366.8255(1)(c), F.S.  The statute authorizes the Commission to review and decide whether a utility’s environmental compliance costs are recoverable through an environmental cost recovery factor.  A utility may submit a petition to the Commission describing its proposed environmental compliance activities and projected costs, and if the activities are approved, the Commission “shall allow recovery of the utility’s prudently incurred environmental compliance costs, including the costs incurred in compliance with the Clean Air Act, and any amendments thereto or any change in the application or enforcement thereof. . . .” Section 366.8255(2), F.S.  The statute provides that any costs recovered in base rates may not also be recovered in the ECRC.  Section 366.8255(5), F.S.  

The Commission first implemented the provisions of Section 366.8255, F.S., in Docket No. 930613-EI, In re:  Petition to establish an environmental cost recovery clause pursuant to Section 366.8255, Florida Statutes (Gulf Order).[1]  There, the Commission identified the criteria required to demonstrate eligibility for cost recovery under the ECRC.  The Commission interpreted the statute to prescribe three requirements for recovery of environmental compliance costs through the clause.  In the Gulf Order at page 6, the Commission said:

Upon petition, we shall allow the recovery of costs associated with an environmental compliance activity if:

1.  such costs were prudently incurred after April 13, 1993;

2. the activity is legally required to comply with a governmentally imposed environmental regulation enacted, became effective, or whose effect was triggered after the company’s last test year upon which rates are based; and,

3. such costs are not recovered through some other cost recovery mechanism or through base rates.

 

Beginning with the Gulf Order, and in several other decisions over the years, the Commission has considered proposals for recovery of environmental compliance costs on a case-by-case basis, and with some flexibility; but, it has required fundamental compliance with the provisions of Section 366.8255, F.S.  As the following review of Commission decisions indicates, and of particular importance to this case, the Commission has consistently enforced the requirement that projects eligible for ECRC cost recovery must be required to comply, or remain in compliance with, a governmentally imposed environmental regulation.

The Gulf Order allowed recovery through the ECRC of Gulf’s Environmental Auditing Program because the program ensured the efficient management of approved environmental programs to ensure cost-effective compliance with environmental regulations.[2]    It also allowed recovery for general air quality costs and emission monitoring costs associated with changes in the scope of compliance with existing environmental regulations and new environmental regulations.[3]  It denied recovery of Gulf’s Clean Coal Technology program, however, because the program was a discretionary, voluntary research and development program not needed for compliance with any environmental regulations.  

In Docket No. 990667-EI, In re: Petition by Gulf Power Company for approval of Plant Smith Sodium Injection System as new program for cost recovery through environmental cost recovery clause,[4] the Commission approved the project both to comply with new Clean Air Act Amendment (CAAA) Phase II requirements and to maintain compliance with existing air permit requirements.  In Docket No. 980007-EI, In re: Environmental Cost Recovery Clause,[5] the Commission approved Gulf’s additional groundwater monitoring equipment to continue to comply with an existing environmental requirement, because greater treatment capacity was needed.  In that docket, the Commission also approved two additional coal crushers that contributed to overall compliance with the CAAA at the Tampa Electric Company (TECO) Gannon station even though it was not clear that the additional crushers had initially been a part of TECO’s overall NOx compliance strategy for Phase II of the CAAA. 

In Docket No. 020648-EI, In re: Petition for approval of environmental cost recovery of St. Lucie Turtle Net Project for period of 4/15/02 through 12/31/02 by Florida Power & Light Company,[6]  FPL’s Nuclear Regulatory Commission (NRC) license to operate the St. Lucie nuclear power plant included Appendix B, which imposed certain requirements on FPL to protect several species of endangered sea turtles from entrapment in the cooling water intake canals of the plant.  The NRC requirements included installation and maintenance of a five-inch mesh barrier net across the intake canal.  Although the NRC requirements had not changed, FPL requested recovery of the costs for a new turtle net project, which included installation of a new net of sturdier material and support structures, conducting a bottom survey of the intake canal, maintenance dredging the canal in the vicinity of the net, and installing a sand pump near the net.  These additional activities were not specifically required by Appendix B, but FPL explained that they were necessary to ensure that the net worked properly so that it could continue to comply with its NRC license.  In this year’s ECRC docket FPL has requested approval of additional modifications to its Turtle Net Project, which FPL asserts are necessary to remain in compliance with the requirements of Appendix B.

In Docket No. 050958-EI, In re: Petition for approval of new environmental program for cost recovery through Environmental Cost Recovery Clause by Tampa Electric Company,[7] the Commission approved a new flue gas desulphurization system reliability program to amplify an existing program that the Commission had approved earlier, because the program would allow TECO to comply with additional requirements of its Consent Decree with the EPA, even though the specific project TECO engineered was not required by the Consent Decree.

Finally, in Docket No. 060162-EI, In re: Petition by Progress Energy Florida, Inc. for approval to recover modular cooling tower costs through environmental cost recovery clause,[8]  the Commission approved Progress Energy Florida’s (PEF) modular cooling tower project in order to continue compliance with wastewater discharge standards required by the Florida Department of Environmental Protection (DEP). PEF’s discharge permit limits the temperature of discharge water into the Gulf of Mexico from the Crystal River plants to 96.5 degrees Fahrenheit.  Increased inlet water temperatures from the Gulf during the summers of 2004 and 2005 forced PEF to reduce the output of the plants in order to remain in compliance with its discharge permit.  The modular cooling towers along the discharge canal provided additional cooling capacity that allowed PEF to comply with its permit and avoid numerous, expensive derates of its base load generating units.

The Office of Public Counsel (OPC) argued that the cooling towers project was not eligible for costs recovery through the ECRC.  OPC put forth several reasons for its position, but OPC’s fundamental concern was that utilities were attempting to inappropriately expand the use of the clause dockets to recover costs that should be addressed in base rate proceedings.  In Order No. PSC-07-0722-FOF-EI (Cooling Tower Order), the Commission acknowledged OPC’s concern, but asserted the need for flexibility in the application of the ECRC statute, as long as the basic criteria of the statute were met.  At page 8 of the Cooling Tower Order, the Commission said:

We believe that this interpretation is consistent with our prior decisions, and with the intent of section 366.8255, Florida Statutes, which permits recovery of a wide variety of costs associated with compliance with governmentally imposed environmental requirements, if the costs were incurred after section 366.8255 was enacted, and if the costs are not being recovered in base rates or another cost recovery mechanism.  We understand OPC’s concern that utilities have the incentive to pass many costs through cost recovery mechanisms, and we are attuned to that concern, but that cannot lead us to restrict the eligibility of environmental costs beyond what the statute contemplates. . . .  Further, we are not persuaded that a decision to approve the eligibility of the modular cooling towers project would lead to the scenario OPC’s witness Hewson describes, as long as we continue to require a direct nexus between the project, its compliance costs, and the relevant environmental requirement.

            FPL relies heavily on the Commission’s decision in the Cooling Tower Order to support its request for recovery of the turbine upgrade costs in this case.  According to FPL, PEF’s modular cooling tower project avoided reductions in generating plant output from discharge temperature requirements, and FPL argues that its turbine uprate project will offset reductions in generating unit output due to the installation and operation of pollution controls at the Scherer plant.  FPL does not take into account, however, the critical distinguishing fact between the two cases.  The modular cooling tower project was designed to allow PEF to run its Crystal River plants in compliance with a governmentally imposed environmental requirement, DEP’s wastewater discharge permit.  If PEF did not comply with the temperature requirements, it could not run its plants.  FPL’s turbine upgrade is not designed to allow FPL to run Scherer Unit 4 in compliance with a governmentally imposed environmental requirement. Without the turbine upgrade, it can still run its plant.  When the baghouse, scrubber, and selective catalytic reduction system, whose costs the Commission has approved for recovery through the ECRC, are installed in 2012, FPL will be in compliance with applicable environmental regulations, with or without the turbine upgrade.  In its response to Staff's 4th Set of Interrogatories No. 44 in Docket. No. 100007-EI, FPL agreed that "not proceeding with the upgrade of the steam turbine would not violate any federal, state or local environmental rule or regulation."  Allowing recovery of FPL’s turbine upgrade project to offset parasitic load from environmental equipment through the ECRC would open up a whole new, perhaps extensive, subset of recoverable costs.  Virtually every pollution control system creates a parasitic load for a generating unit.  Staff believes that this new subset of costs is not contemplated by Section 366.8255, F.S., or the Commission’s orders implementing the statute.

As this review of the Commission’s ECRC decisions indicates, the facts and circumstances of environmental compliance projects eligible for cost recovery vary considerably, but the principle that connects them is the Commission’s consistent insistence that the projects comply with the essential criteria of the statute and the Gulf Order, in particular here, the requirement that the projects be required to comply, or remain in compliance with, a governmentally imposed environmental regulation.  FPL’s Scherer Unit 4 turbine upgrade is a discretionary, voluntary project, not required by any known environmental rule or regulation.  Thus there is no “direct nexus between the project, its compliance costs, and the relevant environmental requirement.”  Staff recommends that the proposed project does not meet established criteria for recovery through the ECRC.

Issue 2: 

 Is FPL’s Scherer Unit 4 steam turbine upgrade project eligible for cost recovery through the Fuel Clause?

Recommendation: 

 No.  The project does not meet established criteria for recovery through the Fuel Clause. (Sayler, Bennett, Franklin)

Staff Analysis: 

 

History of Fuel Cost Recovery Clause

The fuel cost recovery clause (fuel clause) is a regulatory tool designed to pass through to utility customers the costs associated with fuel purchases.  The purpose is to prevent regulatory lag.  Regulatory lag occurs when a utility incurs expenses but is not allowed to collect offsetting revenues until the regulatory body approves cost recovery.  Regulatory lag has historically been a problem because of the volatility of fuel costs.  Regulatory lag is not of as much concern when expenses, such as capital improvements, and operations and management costs, can be planned for and included in base rate calculations.   Different states have addressed volatile fuel costs in differing ways.  Several jurisdictions, like Florida, have allowed recovery of fuel costs in a fuel adjustment clause.  The operation of the fuel adjustment clause varies from state to state.  The Commission’s practice of allowing cost recovery through the fuel adjustment clause has developed over the years.

From 1925 to 1951, prior to the Commission obtaining jurisdiction over investor-owned electric utilities, Florida’s electric utilities benefited from a monthly fuel adjustment clause.  Starting in 1951, when the legislature granted the Commission jurisdiction over investor-owned electric utilities, the utilities applied a Commission-approved formula and placed the resulting charge on customers’ bills.  While some auditing functions were performed by Commission staff, no formal public hearing was held.  In 1973-1974, a foreign oil embargo substantially increased the cost of oil, leading to increased consumer concern over fuel adjustment charges.  On October 7, 1974, the Commission opened a docket to fully review the clause process.[9]  Two days later, on October 9, 1974, the Attorney General issued an advisory opinion which stated that the practice of allowing changes in the fuel adjustment charges without a public hearing was illegal under Florida law. 74 Op. Att’y. Gen. Fla. 309 (1974).  On October 11, 1974, the first fuel adjustment clause hearing was held, which led to the approval of a stipulation that provided for a monthly hearing format on all fuel adjustment clauses.[10]  During the 1974 proceeding, the Commission also considered recommendations on the modification of the clause. Having considered input from interested parties, the Commission implemented a two-month lag between utilities filing for fuel clause recovery and the Commission’s decision on those cost recoveries.  At the time, the two month lag was intended as an incentive to the utilities to optimize fuel costs.

In 1980, the Commission modified the clause again.[11]  By Order 9273, utilities were able to collect fuel and fuel-related expenses on a current basis.  The Commission subsequently modified the recovery clauses to allow recovery on the projections of future fuel and fuel-related expenditures subject to a true-up hearing.  A true-up hearing is a hearing in which the utilities’ projected fuel expenditures are adjusted to recover only actual expenditures.  Also, during the time from 1980 to 1998, the Commission modified its fuel adjustment hearings, scheduling them from once a month to every six months to its current schedule, which is once a year

In 1985, the fuel clause was again amended to provide instruction as to those items that would be recoverable under the fuel clause.  Prior to the August 1985 fuel hearing, the Commission instructed parties and staff to “provide information necessary for the Commission to be able to consider at the August 1985 fuel adjustment hearing whether the utilities were passing appropriate fixed and variable costs associated with fuel receipts through their fuel adjustment clauses.”[12]  Order No. 14546 was the result of a stipulation between OPC, FPL, TECO, Gulf, and FPC (now PEF) after a workshop exploring the issue.    This policy consisted of two essential points which address the Commission’s application of the fuel adjustment clauses:

1.  When similar circumstances exist, the Commission should attempt to treat, for cost recovery purposes, specific types of fossil fuel-related expenses in a uniform manner among the various electric utilities.  At times, however, it may be appropriate to treat similar types of expenses in dissimilar ways.

2.  Prudently incurred fossil fuel-related expenses which are subject to volatile changes should be recovered through an electric utility’s fuel adjustment clause.  The volatility of fossil fuel-related costs may be due to a number of factors including, but not necessarily limited to:  price, quantity, number of deliveries, and distance.  Except as noted below, these volatile fossil fuel-related charges are incurred by the utility for goods obtained or services provided prior to the delivery of fuel to the electric utility’s dedicated storage facilities.  (Dedicated storage facilities mean storage facilities which are used solely to serve the affected electric utility.)  All other fossil fuel-related costs should be recovered through base rates.[13]

The Commission then discussed the parties’ specific applications of the Commission’s articulated policy.  For instance, the parties discussed “invoiced fuel charges.”  The invoiced fuel charges should include all price revisions and adjustments relating to volume and quality of fuel.  After discussing several specific applications of the policy, the parties then agreed that the Commission policy on fuel clause recovery should be flexible enough to cover some items that would normally go through base rates.  This fuel clause exception to base rate recovery was discussed as follows:

In addition to stipulating to the foregoing applications of policy, the parties also recommended to the Commission that the policy it adopts be flexible enough to allow for recovery through fuel adjustment clauses of expenses normally recovered through base rates when utilities are in a position to take advantage of a cost-effective transaction, the costs of which were not recognized or anticipated in the level of costs used to establish the utility’s base rates.  One example raised was the cost of an unanticipated short-term lease of a terminal to allow a utility to receive a shipment of low cost oil.  The parties suggest that this flexibility is appropriate to encourage utilities to take advantage of short-term opportunities not reasonably anticipated or projected for base rate recovery.  In these instances, we will require that the affected utility shall bring the matter before the Commission at the first available fuel adjustment hearing and request cost recovery through the fuel adjustment clause on a case by case basis.  The Commission shall rule on the appropriate method of cost recovery based upon the merits of each individual case.[14]

The Commission, in its findings in Order No. 14546, approved the stipulation of the parties and adopted them as its own.  The stipulated provisions (including the fuel clause exception to base rate recovery), were found by the Commission to be an appropriate extension of the policy established by Order No. 6357.[15]  As a result of the policy determinations, the Commission made two lists.  One list included charges properly considered in the computation of the average inventory price of fuel.  The other list contained items that were more appropriately considered in the determination of base rates.  It should be noted that each item on either list was a shortened reference to the detailed description of the types of costs the Commission discussed earlier in the order.[16]  It is Order No. 14546 that FPL is relying upon to request that capital costs for the steam turbine be included in the fuel cost recovery clause.  If approved, the costs associated with this item will be included in the 2011 fuel cost recovery clause hearing and collected beginning in 2012.

Application of Order 14546 to FPL’s Request

FPL is requesting an upgrade of the steam turbine (turbine upgrade) at the Plant Scherer Unit 4 coal plant be considered for possible recovery through the Fuel Clause. The turbine upgrade will offset the loss in unit output resulting from the installation of required pollution control equipment at the generating unit.  The turbine upgrade consists of installing a new high-pressure rotor that is projected to allow the unit to generate approximately 35 MW of additional electric output. The 35 MW of additional output will essentially offset the parasitic load of the pollution control equipment.  Scherer Unit 4’s heat rate will also be improved by a rate of more than 400 Btu/kWh as a result of the turbine upgrade, meaning the unit will be able to generate electricity more efficiently in addition to increasing its output.  FPL witness T.J. Keith states in FPL’s September 1, 2010 testimony, that the turbine upgrade will result in fuel savings of approximately $240 million on a net present value basis, compared to a cost of about $7 million to upgrade the steam turbine. Witness Keith also stated that the turbine upgrade qualifies for recovery through the Fuel Clause based on Order No. 14546, issued on July 8, 1985.[17]

            Order No. 14546 addresses the recovery of fossil fuel-related costs and states the following regarding appropriate cost recovery through the Fuel Clause:

 

Fossil fuel-related costs normally recovered through base rates but which were not recognized or anticipated in the cost levels used to determine current base rates and which, if expended, will result in fuel savings to customers. Recovery of such costs should be made on a case by case basis after Commission approval.

 

Staff believes the appropriate interpretation of Order No. 14546 is that capital projects eligible for cost recovery through the Fuel Clause should produce fuel savings based on lowering the delivered price of fossil fuel or otherwise result in burning lower price fuel at the plant.  In support of this, staff notes that the order discusses a "cost effective transaction," and gives as an example, "the cost of an unanticipated short-term lease of a terminal, to allow a utility to receive a shipment of low cost oil." (Order No. 14546, p. 3)  This example clearly connects fuel savings to a project that lowers the delivered price of fossil fuel (i.e., the input price).  In contrast, the steam turbine upgrade increases the output and efficiency of the coal plant, resulting perhaps in less fuel burned per kWh, but has no effect on the delivered price of coal. 

 

 

            A further example of a capital project that lowered the delivered price of fuel was approved in Commission Order No. PSC-95-1089-FOF-EI, issued on September 5, 1995.[18]  This order allowed FPL to purchase 462 high capacity aluminum rail cars for delivery of coal to Plant Scherer.  The purchase of the rail cars enabled FPL to obtain favorable transportation rate savings from railroad companies that exceeded the recoverable cost of the purchase.  This capital investment provided FPL customers an estimated $24 million in fuel savings, in the form of reduced fuel costs to FPL's customers, by lowering the delivered price, or input price, of coal.

 

            Staff further believes that the Commission's interpretation of Order No. 14546 should be narrow regarding "fossil fuel-related costs."  The turbine upgrade is a capital project that increases output and efficiency but is not specific to fossil fuel.  Such an upgrade could occur for a nuclear plant’s steam turbine. The turbine upgrade should not be considered a “fossil fuel- related cost,” and therefore should not be recovered through the Fuel Clause.

 

            A complete review of the capital costs that have been recovered through the fuel clause pursuant to Order 14546 is included in Attachment A.  As can be seen from that table, all but two of the orders are consistent with staff’s interpretation of Order 14546.  One of these orders deals with incremental security costs incurred by utilities as a result of the increase of costs at nuclear plants after the September 11, 2001 attacks.  The other order was referenced by FPL witness Keith.  Witness Keith states that Order No. PSC-96-1172-FOF-EI, issued on September 19, 1996,[19] supports FPL’s position that the turbine upgrade should be included in the fuel cost recovery clause.  Staff acknowledges that this order approved recovery through the Fuel Clause of costs associated with the thermal power uprate at FPL's Turkey Point nuclear-powered Units 3 and 4, a “non-fossil fuel-related” project.  Order No. 14546 states that a cost must be "fossil fuel-related" to be eligible for recovery through the Fuel Clause. Order No. 14546 also states, "Recovery of such costs should be made on a case by case basis after a Commission approval." In that particular case, the Commission granted recovery of a “non-fossil fuel-related” cost through the Fuel Clause.  However, Staff believes the appropriate policy, on a going forward basis, is to narrow capital project cost recovery through the Fuel Clause to projects that are “fossil fuel-related” and that lower the delivered price, or input price, of fossil fuel.

 

            Staff notes that for each order approving cost recovery through the fuel clause, limitations were placed on the recovery.  Those limitations included the number of years over which the project could be depreciated, the method of depreciation, the allowed recovery on return on investment, and a requirement that staff audit the actual costs to true-up the original projections and to verify the prudence of the individual cost components included for recovery.  Several of the projects also limited cost recovery to actual fuel savings.

 

            Although staff believes the turbine upgrade appears to be a cost effective project that would benefit FPL and its ratepayers, staff does not believe it is appropriate for cost recovery through the Fuel Clause. 

Issue 3: 

 Should this docket be closed?

Recommendation: 

 Yes.  If no person whose interests are substantially affected files a timely protest of the Commission’s Proposed Agency Action, this docket may be closed upon issuance of a Consummating Order.

Staff Analysis: 

 If no person whose interests are substantially affected files a timely protest of the Commission’s Proposed Agency Action, this docket may be closed upon issuance of a Consummating Order.