Case Background
On May 20, 2016,
Duke Energy Florida, LLC (DEF) filed a petition for approval to include in base
rates the revenue requirement for the Hines Chillers Uprate Project. By Order
No. PSC-13-0598-FOF-EI, the Commission approved the Revised and Restated
Stipulation and Settlement Agreement (RRSSA). Paragraph 16(a) of the RRSSA includes
provisions for DEF to seek recovery of the prudently incurred revenue
requirement of power uprates to existing DEF units, which may be placed
in-service prior to year-end 2017, through a separate base rate increase at the
time each unit is placed in service.
Subsequently, in
Order No. PSC-14-0590-FOF-EI, the Commission granted DEF a determination of
need for the Hines Chillers Uprate Project. Intervening parties in that proceeding
included the Office of Public Counsel (OPC), Florida Industrial Power Users
Group (FIPUG), White Springs Agricultural Chemicals, Inc. d/b/a PCS Phosphate
(PCS Phosphate), Calpine Construction Finance Company, L.P. (Calpine), and NRG
Florida, LP (NRG). The Commission weighed parties’ arguments, evaluated the
need for reliability and cost-effectiveness of various generation alternatives,
and found that the Hines Chillers Uprate Project represented an optimal
resource to meet DEF’s needs prior to 2018.
The Hines Chillers Uprate Project consists of
installation of chiller modules for the existing Hines Energy Center power
block units, a large chilled water storage tank, an auxiliary power system,
pumps and chilled water supply and return piping, and gas turbine air inlet
chiller coils. The installation of the chiller system on the existing Hines
Energy Center power block units (Hines Units 1 - 4) is designed to cool the gas
turbine inlet air, thus increasing the capacity of each power block while
maintaining fuel efficiency. Hines Units 1 - 4 have a total installed capacity
of approximately 1,900 megawatts (MW). Based on Order
No. PSC-14-0590-FOF-EI, the project is expected to increase the summer capacity
of those units by approximately 220 MW to meet the summer peak demand, which
DEF projected to grow to 9,439 MW by the summer of 2018.
The Commission
has jurisdiction pursuant to Section 366.06, Florida Statutes.
Discussion
of Issues
Issue 1:
What is the appropriate amount of revenue
requirement for the Hines Chillers Uprate Project?
Recommendation:
The appropriate amount of revenue requirement for DEF’s
proposed phase 1 rate increase associated with the Hines Chillers Uprate
Project is $16,676,114. The phase 2 revenue requirement and rate increase
should be addressed when DEF files a separate petition in August 2016. (Lee, Matthews,
McNulty, Slemkewicz)
Staff Analysis:
DEF is seeking to recover the full, prudently
incurred revenue requirement for the Hines Chillers Uprate Project pursuant to Paragraph
16(a) of the RRSSA. The project will be implemented in two phases. DEF is
requesting that the Commission approve the phase 1 revenue requirement of $16,676,114
and phase 2 revenue requirement of $2,915,328. However, it is only requesting
approval for the rate increase associated with the phase 1 revenue requirement
in this petition. The rate increase for phase 2 will be requested as part of a separate
petition in August 2016.
Cost Estimates and
Projected Performance
According to DEF witness Vann Stephenson’s (Stephenson) direct testimony
filed in this docket, the updated construction cost estimate for the Hines
Chillers Uprate Project is approximately $151 million. This is $9 million less
than the $160 million estimate provided
in Docket No. 140111-EI. In that proceeding, the Commission found the
construction cost estimate comparable to a similar project installed at the
Duke Energy Carolinas Dan River Combined Cycle project.
In addition, witness Stephenson’s direct testimony addressed DEF’s
effort to execute the project efficiently by selecting an Engineering Procurement
Construction (EPC) company by competitive bidding and by planning the construction in two phases to
align with already scheduled maintenance outages for the Hines Units. The first
phase, with an estimated cost of $127 million for work on Hines Units 1-3 and
the common equipment, is expected to be completed and placed into commercial
service in October 2016. The second phase, with an estimated cost of $24 million for the work
for Hines Unit 4, is expected to be completed in January 2017. Based on DEF’s
response to staff’s data request, cost
incurred to date is $101 million, with an estimated $50 million for the project
to be completed as planned.
Staff recognizes that the costs sought for recovery by DEF are still
estimates at this time. Regarding the issue of a potential variance from the estimate, DEF stated in its response
to staff’s data request that there is no such provision for modification of the base rate adjustments under paragraph
16(a) of the RRSSA. Paragraph 16 of the RRSSA provides different treatments for
units and uprates to existing units placed in-service and/or acquired/purchased
prior to year-end 2017. While specific true-up provisions in a manner similar
to cost recovery clauses are prescribed for the 2018 Generation Base Rate Adjustment
(GBRA) factor under 16(b) through 16(f), there is not a true-up mechanism under
paragraph 16(a) of the RRSSA.
Staff notes that even without such
a true-up provision, costs will be reset in DEF’s next general base rate case
proceeding if actual costs for the Hines Chillers Uprate Project differ from
what is approved in this docket.
In response to staff’s data request, DEF provided an updated comparison
of the current cost estimates
with those provided in Docket No. 140111-EI. DEF also identified the variables
that contributed to the total cost reduction, with the reduced costs mainly
caused by the contingency and not design changes. DEF also provided an update
of the projected performance, which is consistent with its projection in Docket
No. 140111-EI. Staff recommends DEF has demonstrated that costs of the Hines
Chillers Uprate Project are reasonable.
DEF is only requesting approval for the rate increase associated with the
phase 1 revenue requirement in this petition. DEF expects to file its petition
for the approval for the rate increase associated with phase 2 of the Hines
Chiller Uprate Project and the Osprey acquisition revenue requirement in August
2016. The reason for this separate filing is based on the timing of the Osprey project,
which is expected to come online in the same time period as phase 2 of the
Hines Chiller Uprate Project. While the cost estimate is reasonable, as
discussed earlier, staff recommends the phase 2 revenue requirement should be
addressed in the upcoming separate docket because revenue requirements and
rates are normally considered together.
Revenue
Requirement
Based on the
estimated cost to complete phase 1 of the Hines Chillers Uprate Project, DEF
calculated a revenue requirement of $16,676,114. In
accordance with paragraph 16(a) of the RRSSA, DEF utilized the capital
structure from its most recent actual earnings surveillance report
and a 10.50 percent return on equity to calculate the revenue requirement. The
revenue requirement calculations also include the recovery of O&M expenses,
depreciation expense, property insurance, and property tax. Staff has reviewed
the revenue requirement calculations and believes they have been appropriately
calculated.
Conclusion
The appropriate
amount of revenue requirement for DEF’s proposed phase 1 rate increase
associated with the Hines Chillers Uprate Project is $16,676,114. The phase 2
revenue requirement and rate increase should be addressed when DEF files a
separate petition in August 2016.
Issue 2:
Should the Commission approve DEF’s proposed tariffs
and associated charges?
Recommendation:
Yes. If the Commission approves Issue 1, the
proposed tariffs and associated charges should go into effect with the first billing
cycle in November 2016. If the Commission order is protested, DEF should be
allowed to implement the rates subject to refund pending the results of any
subsequent proceeding. (Guffey)
Staff Analysis:
As discussed in Issue 1, DEF has proposed to
increase its base rates by $16,676,114. DEF allocated this amount to all its
rate classes at a uniform percentage (0.99 percent) as shown in Exhibit C of
the petition consistent with the terms of the RRSSA. A residential customer who
uses 1,000 kilowatt-hours will see a $0.50 increase on the monthly bill. The proposed
tariffs are shown in Exhibit E of the petition.
In response to staff’s first data request, DEF stated that
customers will be notified of the rate changes via October bill inserts, DEF
website and via email for electronic bill customers.
DEF has requested that the proposed tariffs go into effect
with the first billing cycle in November 2016. Staff has reviewed the proposed
tariffs, calculation of the revised base rate charges and DEF’s responses to
data requests and recommends that they be approved. If the Commission order is
protested, DEF should be allowed to implement the rates subject to refund
pending the results of any subsequent proceeding.
Issue 3:
Should this docket be closed?
Recommendation:
Yes. If Issues 1 and 2 are approved, the tariff
should go into effect with the first billing cycle in November 2016. If a
protest is filed within 21 days of the issuance of the order, the tariff should
remain in effect, with any revenues held subject to refund, pending resolution
of the protest. If no timely protest is filed, this docket should be closed
upon the issuance of a consummating order. (Janjic)
Staff Analysis: If Issues 1 and 2 are approved, the tariff should go into effect with
the first billing cycle in November 2016. If a protest is filed within 21 days
of the issuance of the order, the tariff should remain in effect, with any
revenues held subject to refund, pending resolution of the protest. If no
timely protest is filed, this docket should be closed upon the issuance of a
consummating order
.
