Case Background
On June 27, 2016, Gulf Power Company (Gulf
or Company) filed a petition requesting approval for cost recovery of a
negotiated Energy Purchase Agreement (Agreement) with Morgan Stanley Capital
Group Inc.[1] (Morgan Stanley). The Agreement obligates
Morgan Stanley to deliver to Gulf a fixed number of megawatt-hours (MWh) in
each hour, of each month, of each year, throughout the 20 year term of the
Agreement. The petition is similar to the previous Gulf Kingfisher Wind Farm
Agreement (“Kingfisher I”) that was approved by the Commission in 2015.
The Agreement contains a termination
provision for failure to obtain Commission approval of the Agreement through a
final non-appealable order within 240 days of filing. Based on the termination
provision contained in the Agreement, a final Commission decision must be
rendered by February 22, 2017.
The Commission
has jurisdiction over this matter pursuant to Sections 366.051, 366.91, and
366.92, Florida Statutes (F.S.).
Discussion
of Issues
Issue 1:
Should the Commission approve Gulf Power Company’s
petition requesting recovery of costs incurred under a negotiated Energy
Purchase Agreement with Morgan Stanley Capital Group Inc.?
Recommendation:
Yes. Gulf has reasonably demonstrated that the
Agreement will likely produce savings of $21 million and will encourage the
development of renewable energy. Therefore, staff recommends that the
Commission approve Gulf’s petition. (Wooten, McNulty)
Staff Analysis:
Gulf’s petition requests approval for the recovery,
through the Fuel and Purchased Power Cost Recovery Clause (Fuel Clause), of
costs associated with the Agreement between the Company and Morgan Stanley. Morgan
Stanley’s energy delivery commitment is shaped to match the projected hourly
and monthly output of a 94 megawatt portion of a wind electric generation
facility known as the Kingfisher Wind Farm in Oklahoma.[3]
On an annual basis, Morgan Stanley’s energy delivery commitment totals 356,843
MWh, beginning in 2016. On June 10,
2016, Morgan Stanley entered into an agreement with the owner of the Kingfisher
Wind Farm for Morgan Stanley to financially hedge the energy output of the
Kingfisher Wind Farm. Staff believes that Rule 25-17.0825(6), Florida
Administrative Code (F.A.C.), addresses non-firm purchased power agreements,
such as the Agreement between Gulf and Morgan Stanley. Rule 25-17.0825(6),
F.A.C., requires consideration of cost-effectiveness and any adverse impacts to
electric service that may be caused by a purchased power agreement.
Economic Evaluation
Staff reviewed Gulf’s fuel price forecasts, developed in
2015, as well as the process and methodology by which the forecasts were
developed. In response to a staff data request, the Company described the
methodology it employed in developing its natural gas and coal price forecasts
used in this docket, a methodology which is consistent with that used by the
Company to develop its 2016 Ten-Year Site Plan. Gulf’s natural gas and coal
price forecasts were lower in the budgets used to prepare the analysis in the
instant proceeding than those used to prepare the 2015 Ten Year Site Plan.
Staff has reviewed Gulf’s natural gas and coal price forecasts and believes
they are reasonable for evaluating the Agreement.
After evaluating the Agreement and the information
provided by Gulf, staff has concluded that the economic evaluation completed by
the company demonstrates reasonably that the Agreement is cost-effective. Under
the base fuel forecast, customers are anticipated to receive savings of $21
million in net present value (NPV) and an average customer should realize
savings within the first year of the Agreement.
By fixing energy payment rates, the rates are not allowed
to float with changes to the avoided unit’s fuel costs. This shifts all the
risk of fuel price fluctuations to Gulf’s ratepayers. Based on the fuel
forecasts provided, the low fuel price scenario results in a potential NPV loss
of approximately $6 million. In contrast, the high fuel price scenario resulted
in a savings of around $50 million. Regardless, Gulf would remain obligated to
pay the contracted rate and may seek to recover the costs from the ratepayers
through the fuel cost recovery clause. Because of the fixed price nature of the
Agreement, there are potential risks associated with fuel price variability,
but staff believes that the potential benefits from the renewable attributes
increases the benefit to the ratepayers that the Agreement will provide.
Under the
Agreement, Gulf is only required to pay for energy which is received from
Morgan Stanley on the Southern Companies Transmission System. Energy delivered
under the Agreement to the Southern Companies Transmission System will be
assigned to Gulf at the prices designated in the Agreement. Although the energy
received on the Southern Companies Transmission System may not come from
renewable generation, Gulf will be entitled to receive and retain all
environmental attributes, including renewable energy credits (RECs), associated
with the corresponding output of the Kingfisher Wind Farm. In this manner, the
Agreement is similar to the prior Kingfisher I agreement that was linked to 178
MW of the Kingfisher facilities wind generation. The addition of the Agreement
in this petition will secure the renewable attributes associated with the rest
of the wind generating capability of the Kingfisher facility.
Renewable Energy Credits
Gulf is
anticipating receiving approximately 360,000 RECs annually from the Agreement
over its lifetime. The Company states that RECs are currently selling for $0.33
per credit on the voluntary market. In its petition, Gulf stated that proceeds
from the sale of RECs would be returned to Gulf’s ratepayers in the form of
credits to the fuel clause. Should Gulf decide to sell its RECs, the Company’s
proposed treatment of RECs associated with the Agreement is appropriate because
the proceeds from any sale of the RECs will benefit ratepayers. The RECs also
have the potential to assist the Company in complying with Renewable Portfolio
Standards or similar compliance obligations should they arise in the future.
Staff recommends that Gulf’s proposed treatment of RECs associated with the
Agreement is appropriate, because the proceeds from any sale of the RECs will
benefit ratepayers in the form of credits to the fuel clause.
Security Evaluation
The Agreement includes several provisions to protect
Gulf’s ratepayers and ensure the adequacy and reliability of electric service.
These include protections for covering damages to Gulf if Morgan Stanley fails
to deliver energy, the ability for Gulf to curtail or cease energy deliveries
for emergency situations and requiring Morgan Stanley to utilize firm
transmission for all deliveries with limited exceptions. Staff believes that this provision
adequately ensures that the reliability of the Southern Companies
Transmission System as well as
Gulf’s electric service, will not be adversly impacted by the energy delivered
under the Agreement
The Agreement also provides that a failure to deliver hourly
energy, in amounts specified in the Agreement, will result in Morgan Stanley
paying cover costs to Gulf. Per the Agreement, if Morgan Stanley fails to pay
such cover costs, or the failure to deliver energy exceeds certain limits, Gulf
has the right to declare the contract in default and Morgan Stanley must pay a
termination payment. Staff believes this requirement, as well as the commercial
operation requirement discussed above, is favorable to Gulf and its ratepayers.
Conclusion
Gulf has reasonably demonstrated that the Agreement will
likely produce savings of $21 million and will encourage the development of
renewable energy. Therefore, staff recommends that the Commission approve
Gulf’s petition.
Issue 2:
Should this docket be closed?
Recommendation:
Yes. This docket should be closed upon issuance of a
Consummating Order unless a person whose substantial interests are affected by
the Commission’s decision files a protest within 21 days of the issuance of the
proposed agency action. (Corbari)
Staff Analysis:
This docket should be closed upon issuance of a
Consummating Order unless a person whose substantial interests are affected by
the Commission’s decision files a protest within 21 days of the issuance of the
proposed agency action.
