DATE:	August 11, 2011
TO:	Office of Commission Clerk (Cole)
FROM:	Division of Economic Regulation (Mouring, Cicchetti, Draper, Maurey, Salnova, Springer) Office of the General Counsel (Klancke, Barrera, Young)
RE:	Docket No. 110138-EI – Petition for increase in rates by Gulf Power Company.
AGENDA:	08/23/11 – Regular Agenda – Decision on Interim Rates – Participation is at the Discretion of the Commission
COMMISSIONERS ASSIGNED:		All Commissioners
PREHEARING OFFICER:		Edgar
CRITICAL DATES:		09/06/11 (60-Day Suspension Date)
SPECIAL INSTRUCTIONS:		None
FILE NAME AND LOCATION:		S:\PSC\ECR\WP\110138.RCM.DOC

 

Case Background

This proceeding commenced on July 8, 2011, with the filing of a petition for a permanent rate increase by Gulf Power Company (GPC or Company).  The Company is engaged in business as a public utility providing electric service as defined in Section 366.02, Florida Statutes (F.S.), and is subject to the jurisdiction of the Commission.  GPC serves more than 431,000 retail customers in 8 counties in Northwest Florida.

GPC requested an increase in its base rates and charges to generate $93,504,000 in additional gross annual revenues.  The Company based its request on a projected test year ending December 31, 2012.  GPC stated that this test year is the appropriate period to be utilized because it represents the conditions to be faced by the Company, and is representative of the customer base, investment requirements, and overall cost of service to be realized for the period when the new rates will be in effect.

GPC has also requested an interim rate increase in its base rates and charges to generate $38,549,000 in additional gross annual revenues.  The Company based its interim request on a historical test year ended March 31, 2011.

On July 12, 2011, the Office of Public Counsel (OPC), filed its notice of intervention in this proceeding.[1]  A hearing has been scheduled for December 12-16, 2011.[2]

This recommendation addresses the interim rate increase request and the suspension of the requested permanent rate increase.  The Commission must take action to suspend the permanent rates and act on the interim request within 60 days of the filing, which is on or before September 6, 2011.  The Commission has jurisdiction over this request for a rate increase and interim rate increase under Sections 366.06 and 366.071, F.S.

Discussion of Issues

Issue 1: 

 Should the $93,504,000 permanent base rate increase and the associated tariff revisions requested by GPC be suspended pending a final decision in this docket?

Recommendation: 

 Yes.  The $93,504,000 permanent base rate increase and the associated tariff revisions requested by GPC should be suspended pending a final decision in this docket.  (Mouring)

Staff Analysis: 

 GPC filed its petition, testimony, and MFRs on July 8, 2011.  The Company has requested a total permanent base rate increase of $93,504,000 based on a projected test year ending December 31, 2012.

Historically, the Commission has suspended the requested permanent base rate schedules in order to adequately and thoroughly examine the basis for the new rates.  The suspension of the rate increase is authorized by Section 366.06(3), F.S., which provides:

Pending a final order by the commission in any rate proceeding under this section, the commission may withhold consent to the operation of all or any portion of the new rate schedules, delivering to the utility requesting such increase, within 60 days, a reason or written statement of good cause for withholding its consent.

Staff recommends that the Commission suspend the requested permanent rate schedules to allow staff and any intervenors sufficient time to adequately investigate whether the request for permanent rate relief is appropriate.

Issue 2: 

 Is GPC's proposed March 2011 interim test year rate base of $1,544,185,000 appropriate?

Recommendation: 

 Yes.  The appropriate March 2011 interim test year rate base for GPC is $1,544,185,000.  (Mouring)

Staff Analysis: 

 In its filing, the Company proposed an interim test year thirteen month average rate base of $1,544,185,000 for the period ended March 31, 2011.  Staff has reviewed the rate base adjustments made in the current interim filing for consistency with the Commission approved adjustments in the Company’s last rate case proceeding.[3]  Based on staff’s review, it appears that GPC has made the applicable and appropriate adjustments that are consistent with the last Order.  Staff’s recommendation of whether GPC is entitled to the proposed interim increase is discussed in Issue 6.  If it is determined that interim relief should be granted to GPC in this case, staff agrees that $1,544,185,000 is the appropriate amount of rate base for the March 2011 interim test year.  The calculation is shown on Attachment A.

It should be noted that the historical test year ended March 31, 2011, was utilized in part to develop the December 2012 projected test year for the requested permanent base rate increase.  The historical test year data is currently being audited as part of the normal ratemaking review process in this docket.

Issue 3: 

 Are GPC's proposed return on equity of 10.75 percent and its overall cost of capital of 6.45 percent reasonable for the purpose of determining interim rates?

Recommendation: 

 Yes.  GPC’s proposed return on equity of 10.75 percent and overall cost of capital of 6.45 percent are reasonable for purposes of determining interim rates.  (Springer, Cicchetti)

Staff Analysis: 

 For purposes of its interim rate request, GPC used an overall cost of capital of 6.45 percent based on a return on equity (ROE) of 10.75 percent and the capital structure for the historical test year ended March 31, 2011.  Pursuant to Section 366.071(2)(a), F.S., the appropriate ROE for purposes of determining an interim rate increase is the minimum of the Company’s currently authorized ROE range.  Staff believes that both the ROE and the adjustments recognized in the capital structure are consistent with GPC’s last rate case approved in 2002 by Order No. PSC-02-0787-FOF-EI.[4]

 

            Staff agrees that the capital structure for the historical test year ended March 31, 2011, and an ROE of 10.75 percent results in an overall cost of capital of 6.45 percent.  Attachment B details the calculation of the Company’s overall cost of capital.

Issue 4: 

 Is GPC's proposed March 2011 interim test year net operating income of $76,009,000 appropriate?

Recommendation: 

 Yes.  The appropriate March 2011 interim test year net operating income for GPC is $76,009,000.  (Mouring)

Staff Analysis: 

 The proposed interim test year net operating income of $76,009,000 is the twelve month amount for the test year ended March 31, 2011.  Staff has reviewed the net operating income adjustments made in the current interim filing for consistency with the Commission approved adjustments in the Company’s last rate case proceeding.  Based on staff’s review, it appears that GPC has made the applicable and appropriate adjustments that are consistent with the last Order.  Staff’s recommendation of whether GPC is entitled to the proposed interim increase is discussed in Issue 6.  If it is determined that interim relief should be granted to GPC in this case, staff agrees that $76,009,000 is the appropriate amount of net operating income for the March 2011 interim test year.  The calculation is shown on Attachment A.

It should be noted that the historical test year ended March 31, 2011, was utilized in part to develop the December 2012 projected test year for the requested permanent base rate increase.  The historical test year data is currently being audited as part of the normal ratemaking review process in this docket.

Issue 5: 

 Is GPC's proposed interim net operating income multiplier of 1.634048 appropriate?

Recommendation: 

 Yes.  GPC’s proposed interim net operating income multiplier of 1.634048 is appropriate.  (Mouring)

Staff Analysis: 

 On MFR Schedule G-18, the Company calculated a net operating income multiplier of 1.634048 using a 35 percent federal income tax rate and a 5.5 percent state income tax rate.  Additionally, the Company applied a .072 percent factor for regulatory assessment fees.  Staff has reviewed the Company’s calculation of the net operating income multiplier and is not proposing any adjustments.  Therefore, staff recommends that 1.634048 is the appropriate net operating income multiplier.  The calculation is shown below.

 

 

Issue 6: 

 Should GPC's requested interim revenue increase of $38,549,000 and percentage increase factor of 8.882 be granted?

Recommendation: 

 Yes.  GPC's requested interim revenue increase of $38,549,000 and percentage increase factor of 8.882 should be granted.  (Mouring, Draper)

Staff Analysis: 

 GPC requested interim rate relief of $38,549,000 for the historical test year ended March 31, 2011.  This would allow the Company to earn an overall rate of return of 6.45 percent and the minimum of the range of return on equity of 10.75 percent.  After a determination of the permanent rate increase has been made, the interim rate increase will be reviewed to determine if any portion should be refunded to the ratepayers.

The calculation of the $38,549,000 of interim rate relief and the percentage increase factor is shown below.

 

Issue 7: 

 How should the interim revenue increase for GPC be distributed among the rate classes?

Recommendation: 

 The percentage increase factor approved in Issue 6 should be applied uniformly to all existing base rates and charges to derive the interim base rates and charges, as required by Rule 25-6.0435, Florida Administrative Code (F.A.C.).  The interim rates should be made effective for all meter readings made on or after thirty days from the date of the vote approving any interim increase.  GPC should file tariff sheets for administrative approval that reflect the Commission-approved interim base rates and charges.  If the Commission approves a different percentage increase factor, GPC shall refile Schedule G-22, for staff review, to show the calculation of all base rates and charges based on the Commission-approved percentage increase factor.  The Company should also give notice to customers of the interim increase commencing with the first bill for service that reflects the increase.  (Draper)

Staff Analysis: 

 In Issue 6, staff has recommended an interim increase of $38,549,000 and a percentage increase factor of 8.882 percent.  Rule 25-6.0435, F.A.C., requires that any percentage increase factor be applied uniformly to all existing base rates and charges to derive interim base rates and charges.  Attachment C shows the proposed interim revenue increase to the various rate classes.  MFR Schedule G-22 shows present rates and proposed interim rates for all rate classes.  If the Commission approves a different percentage increase factor, GPC shall refile Schedule G-22, for staff review, to show the calculation of all base rates and charges based on the Commission-approved percentage increase factor.  GPC should also file tariff sheets for administrative approval that reflect the Commission-approved interim base rates and charges.

Attachment D contains present rates and proposed interim rates for the major rate classes.  Attachment E contains monthly residential bills at various usage levels that show the impact of the interim rates. A residential customer using 1,000 kilowatt-hours would see their bill increase by $4.49 per month from $122.67 to $127.16 (including Gross Receipts Taxes).

            The interim rates should be effective for all meter readings made on or after thirty days from the date of the Commission vote approving any interim increase.  GPC should be required to give appropriate notice to customers commencing with the first bill for service that reflects the approved interim increase that explains the nature, purpose, and effect of the increase.  A copy of the notice should be submitted to staff for approval prior to its issuance.

Issue 8: 

 What is the appropriate security to guarantee the amount collected subject to refund?

Recommendation: 

 The appropriate security to guarantee the funds collected subject to refund is a corporate undertaking.  (Salnova)

Staff Analysis: 

 Gulf Power Company has requested that all funds collected subject to refund be secured by a corporate undertaking.  The criteria for a corporate undertaking include sufficient liquidity, ownership equity, profitability, and interest coverage to guarantee any potential refund.  Staff reviewed the financial statements of the Company to determine if GPC can support a corporate undertaking for its potential refund obligation.  Based on an estimated six-month collection period of interim rates for GPC, staff has determined the maximum amount of revenues that may need to be protected is $19,274,500.  GPC’s 2008, 2009 and 2010 financial statements were used to determine the financial condition of the Company.  Staff’s analysis shows GPC experienced a slight decline in its equity ratio in 2010, but the 44.9 percent equity ratio is still sufficient.  Further, net income has been on average 6 times greater than the requested corporate undertaking amount.  GPC’s financial performance over time has demonstrated adequate levels of profitability, liquidity, interest coverage, and equity capitalization to support a corporate undertaking in the amount requested.

 

Staff believes GPC has adequate resources to support a corporate undertaking in the amount requested.  Based on this analysis, staff recommends that a corporate undertaking of $19,274,500 be approved.  Staff’s brief financial analysis is only appropriate for deciding if the Company can support a corporate undertaking in the amount proposed and should not be considered a finding regarding staff's position on other issues in this proceeding.

Issue 9: 

 Should this docket be closed?

Recommendation: 

 No.  This docket should remain open pending the Commission’s final resolution of the Company’s requested rate increase.  (Klancke, Young, Barrera)

Staff Analysis: 

 This docket should remain open pending the Commission’s final resolution of the Company’s requested rate increase.

Attachment A

Gulf Power Company

Docket No. 110138-EI

Interim Test Year

March 31, 2011

 

 

Attachment B

 

Gulf Power Company

Docket No. 110138-EI

Interim Test Year

March 31, 2011

($000s)