Case
Background
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 Duke Energy Florida, LLC (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.
On October 18, 2016, DEF filed a motion
requesting withdrawal of the tariffs for Phase 1 of the Hines Project approved
in Docket 160128-EI. The motion is addressed in Issue 3 of the recommendation. Phase
1 work on Hines Units 1-3 and the common equipment was expected to be completed
and placed into commercial service in October 2016, while Phase 2 work on Hines
Unit 4 was expected to be completed in January 2017. In its motion, DEF stated
that a portion of the common equipment required for both phases will not be
completed as previously expected. Therefore, DEF requests withdrawal of the approved
tariffs until it files another request for both phases of the Hines Project. On
October 19, 2016, DEF filed revised tariffs to reflect the withdrawal of Phase
2 of the Hines Project from the instant petition.
The
Hines 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). 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. By Order No. PSC-14-0590-FOF-EI, the Commission granted
DEF a determination of need for the Hines Project. By Order No. PSC-16-0362-TRF-EI, issued
August 29, 2016, the Commission determined DEF’s cost for the Hines Project to
be reasonable and approved the revenue requirement for Phase 1 of the Hines
Project. The order was not protested and the
consummating order was issued on September 29, 2016. On August 2, 2016, DEF
filed a petition for approval to include in base rates the revenue requirement associated
with the acquisition of the Osprey Plant and Phase 2 of the Hines Project.
The Osprey Plant
is an existing 599 MW natural gas fired combined cycle generation facility in
Auburndale, Florida, that was originally put in service in 2004. The plant has
been providing its capacity and energy to DEF under a power purchase agreement.
The Osprey Plant acquisition was granted by the Commission in a determination
of need by Order No. PSC-15-0312-AS-EI in Docket No. 150043-EI. The decision was based on a stipulation
reached by parties in that proceeding, including the Office of Public Counsel
(OPC), Florida Industrial Power Users Group (FIPUG), Osprey Energy Center, PCS
Phosphate-White Springs (PCS), and DEF. Based on information in the docket, the
acquisition cost for the Osprey Plant was $166 million, subject to certain
specified adjustments based on the asset purchase agreement. DEF also provided
estimates for additional cost after the acquisition including integration,
maintenance, and inventory. These costs and time frame for the work were taken
into account in the cumulative present value revenue requirements (CPVRR)
analysis, to show the cost effectiveness of acquiring the Osprey Plant in
comparison with the alternative of the construction of the Suwannee Simple
Cycle Project. The order approving the stipulation stated that the acquisition
of the Osprey Plant is the most cost effective way to meet DEF’s generation
need prior to 2018. The closing for the Osprey Plant acquisition is expected to
occur on January 3, 2017.
The Commission
has jurisdiction pursuant to Section 366.06, Florida Statutes (F.S.).
Discussion
of Issues
Issue 1:
Should the Commission approve DEF’s proposed revenue
requirement of $47,982,181 for Osprey Plant, along with the proposed
depreciation rate and methodology for the Osprey Plant?
Recommendation:
No. The revenue requirement for the Osprey Plant should
be $47,836,801. The proposed depreciation rate and methodology for the Osprey
Plant should be approved. In addition, DEF should be required to file annual
reports with the Commission, detailing the actual outage costs incurred and the
accounting treatment associated with the Osprey outage cost deferral, in its
year-end earnings surveillance reports for 2017 through 2019. (Lee, Slemkewicz,
Wu)
Staff Analysis:
DEF is seeking to recover the full, prudently
incurred revenue requirement for the asset purchase and additional cost
associated with the Osprey Plant acquisition, pursuant to Paragraph 16(a) of
the RRSSA. DEF requests that the revenue requirement of $47,982,181 for the Osprey
Plant acquisition be approved. DEF also requests that its proposed depreciation
rate and methodology for the Osprey Plant be approved.
Cost Estimates for the Osprey
Plant Acquisition
The acquisition of the 599 MW combined cycle Osprey Plant
was approved by the Commission in Docket No. 150043-EI as the most cost
effective way to meet DEF’s generation need prior to 2018. DEF’s testimony and
documents presented in that docket included the acquisition cost for the Osprey
Plant and estimates for additional cost after the acquisition, which were taken
into account in the CPVRR analysis to show the cost effectiveness of acquiring
the Osprey Plant.
In response to staff’s data request, DEF compared current cost
information estimates with those provided in Docket No. 150043-EI. DEF’s $198.2
million capital cost estimate in this docket is composed of $166 million for Osprey
Plant acquisition cost, $1.8 million for integration cost, and $30.4 million
for capital investment in 2017. The integration capital is necessary for the
continued operation of the Osprey Plant on DEF's system consistent with DEF's
standard policies and practices, such as costs to re-stock and maintain
equipment and material inventory for this purpose. The capital investment in
2017 consists of the capital work scheduled for the maintenance outage in 2017,
including work on the combustion turbines and steam turbines that will be
coming up on their major maintenance intervals. While the Osprey Plant
acquisition cost has not changed, the revised estimates for integration cost
and capital investment in 2017 have reduced by $3.1 million and $1.3 million
respectively.
In addition, DEF lowered its major capital cost estimate
in 2018 by approximately $3.6 million based on updated cost projection and
vendor estimates. On the
other hand, DEF increased its cost estimates for major Operation and
Maintenance (O&M) cost estimates for work scheduled for two major
maintenance outages in 2017 and 2018, which were anticipated and addressed in
Docket No. 150043-EI. In 2017, the outage O&M cost estimate is $4.3 million
higher in the instant docket than in Docket No. 150043-EI.
This increase is driven primarily by updated cost estimates and work scope resulting
from DEF’s ongoing due diligence and integration planning and analysis. The
updated cost estimates are driven by actual quotes from vendors and executed
contracts. DEF
provided a cost breakdown of these major outage O&M costs, projected at
approximately $14.3 million, $5.1 million, and $2.5 million for 2017, 2018, and
2019, respectively.
Staff asked DEF to demonstrate the net effect of the variance
in capital and operating costs using the same CPVRR analysis performed in
Docket No. 150043-EI. DEF’s response shows $72 million CPVRR savings in
comparison to the previous estimate of $61 million, an increase of $11 million.
While the cumulative effect is favorable to customers, there
is an immediate revenue requirement impact by the 2017 outage O&M cost of $14.3
million, which is $4.3 million higher than previously estimated. To mitigate
this adverse impact to customers, DEF proposed to defer a portion of the outage
cost with the creation of a regulatory asset. As further discussed in the next
section, this lowers the first year revenue requirement by approximately $6.5
million on a jurisdictional basis. Based on the above, staff recommends that
the cost estimate for the Osprey Plant acquisition be considered reasonable.
Osprey Plant Outage
O&M Cost Deferral
The average of the estimated outage O&M cost for 2017
through 2019 is $7,282,687, which is $7,011,732 lower than the estimated outage
O&M cost for 2017. Because rates are set based on the first-year revenue requirement,
including the 2017 major maintenance outage, DEF proposes to defer a portion of
the 2017 outage O&M costs and charge that amount to a regulatory asset.
Rather than using the $14.3 million amount to set rates, DEF proposes to use
the 3-year average of $7,282,687. In 2017, DEF would defer up to $7,011,732 and
debit that amount to a regulatory asset. DEF would amortize the regulatory
asset in 2018 and 2019, when outage costs are lower, fully amortizing the regulatory
asset balance by the end of 2019.
Staff agrees with DEF that this proposed regulatory asset treatment
reduces the impact to customers, while allowing DEF an opportunity to account
for its full cost of integrating the Osprey Plant into its system. The creation
of the regulatory asset lowers the first year revenue requirement by
approximately $6.5 million on a jurisdictional basis. Consistent with
Commission practice, staff recommends that DEF should file annual reports with
the Commission, detailing the actual outage O&M costs incurred and the
accounting treatment associated with the regulatory asset, in conjunction with
its year-end earnings surveillance reports during the three years. This ensures
that only the actual cost deferral, subject to a cap of $7,011,732, be
amortized with this proposed regulatory asset treatment.
Osprey Plant Depreciation
Rate and Methodology
In determining the revenue
requirements associated with acquisition of the Osprey Plant, DEF needs a
Commission-approved depreciation rate for the plant. By applying this rate, DEF
can calculate the annual depreciation expense and accumulated depreciation
reserve so that the operation expense and the net plant as of December 31,
2017, can be derived.
DEF witness Foster testified that
the Federal Energy Regulatory Commission (FERC) requires DEF to apply the
approved depreciation rate to the original cost of the Osprey Plant of $359
million, rather than the net acquisition cost of the plant of $168 million,
which is composed of acquisition cost and integration cost. To resolve this
unique problem of depreciation accounting, DEF proposed a method to calculate
the effective depreciation rate. On page 4, Item 10, of its petition, DEF
requested specific approval of the rate and methodology from the Commission.
DEF has assumed a 26-year
remaining life (or until 2042) for the generating unit at Osprey.[10] Staff
believes this assumption is reasonable based on its review of the reasons and
justifications provided by the Company.[11]
Based on this assumed plant remaining life, a remaining life depreciation rate
of 3.85 percent results in accordance with Rule 25-60436(1)(e), F.A.C. Applying
this rate to the net acquisition cost of $168 million, the actually required
annual depreciation expense of $6.456 million is derived for recovering the
plant investment of the Osprey unit within its service life.
To satisfy FERC’s accounting and
book keeping requirement, DEF must determine a rate to be applied to the
original plant cost of $359 million. Using this original plant cost, divided by
the actual annual depreciation expense of $6.456 million, an effective
depreciation rate of 1.80 percent is derived. This is the methodology DEF
proposed. Detailed step-by-step calculations are reflected in Attachment A.
Staff believes that DEF’s
proposed method for deriving the effective depreciation rate is appropriate.
Using the resulting rate of 1.80% to apply to the original costs of the Osprey
Plant, the actual acquisition cost will be recovered within the plant’s service
life in accordance with the aforementioned depreciation rule. Staff notes that
the Osprey Plant will be included in DEF’s next depreciation study, to be filed
on or before March 31, 2019, in accordance with the same rule. At that time, the Company’s proposed
remaining life and depreciation rate associated with the Osprey Plant will be
further reviewed by the Commission.
Based on the above, staff
recommends approval of DEF’s proposed depreciation methodology and rate.
Osprey Plant Revenue Requirement
Based on the
estimated cost of the Osprey Plant acquisition, DEF calculated a revenue
requirement of $47,982,181.[12] In
accordance with paragraph 16(a) of the RRSSA, DEF utilized the capital
structure from its most recent actual Earnings Surveillance Report (ESR) available
at the time of its filing and a 10.50 percent return on equity to calculate the
revenue requirement.[13] The
revenue requirement calculation also includes the recovery of O&M expenses,
depreciation expense, property insurance, property tax, and income tax.
Subsequent to the filing of its petition using the May 2016 ESR, DEF has
submitted more current ESRs with the most recent being for August 2016. Staff
has calculated a revised revenue requirement of $47,836,801 based on the capital
structure provided in the August 2016 ESR. This represents a $145,380 revenue
requirement reduction. Staff recommends that the $47,836,801 revenue
requirement based on the most recently available ESR is the appropriate amount
as shown on Attachment B.
Conclusion
The revenue requirement for the Osprey Plant should be
$47,836,801. The proposed depreciation rate and methodology for the Osprey
Plant should be approved. In addition, DEF should be required to file annual
reports with the Commission, detailing the actual outage costs incurred and the
accounting treatment associated with the Osprey outage cost deferral, in its
year-end earnings surveillance reports for 2017 through 2019.
Issue 2:
Should the Commission approve DEF’s proposed tariffs
and associated charges?
Recommendation:
Yes. If the Commission approves Issue 1, the
Commission should give staff administrative authority to approve tariffs and
associated charges that implement the Commission vote regarding the Osprey
Plant. The charges should go into effect with the first billing cycle in
February 2017. If the acquisition of the Osprey Plant is delayed, then the
tariffs should become effective at the time the Osprey Plant is acquired.
(Guffey)
Staff Analysis:
As discussed in Issue 1, staff is recommending a
reduction in the revenue requirement for the Osprey Plant. DEF provided work
papers showing the allocation of the DEF proposed revenue requirements to all
its rate classes at a uniform percentage (2.84 percent) as shown in revised
Exhibit D filed on October 19, 2016. Under DEF’s proposal, a residential
customer who uses 1,000 kilowatt-hours will see a $1.41 increase on the monthly
bill (excluding Gross Receipt Tax). The DEF proposed base rates are shown in
revised Exhibit E of the revised filing and DEF’s proposed tariffs are shown in
revised Exhibits F and G. DEF requested that the tariffs become effective with
the first billing cycle of February 2017.
Conclusion
If the Commission approves the staff recommendation in
Issue 1 to reduce the revenue requirement for the Osprey Plant, DEF should
recalculate the rates, and file revised tariff sheets (if DEF’s proposed rates
are affected by the decrease in the revenue requirements approved in Issue 1)
for administrative approval by staff. The charges should go into effect with
the first billing cycle in February 2017. If the acquisition of the Osprey
Plant is delayed, then the tariffs should become effective at the time the
Osprey Plant is acquired.
Issue 3:
Should DEF’s motion requesting withdrawal of the
tariffs for Phase 1 of the Hines Project approved in Docket 160128-EI be
approved?
Recommendation:
Yes, DEF’s motion requesting withdrawal of the
tariffs for Phase 1 of the Hines Project approved in Docket 160128-EI should be
approved. (Guffey)
Staff Analysis:
Phase 1 work on Hines Units 1-3 and the common
equipment was expected to be completed and placed into commercial service in
October 2016. Therefore, in Order No. PSC-16-0362-TRF-EI, the Commission
approved that the tariffs for Phase 1 of the Hines project and associated charges shall go into effect
with the first billing cycle in November 2016.
As stated in the
case background, DEF stated in its motion requesting withdrawal of the tariffs
that a portion of the common equipment required for both phases will not be
completed as previously expected. Therefore, DEF requests withdrawal of the
approved tariffs until it files another request for both phases of the Hines
Project. DEF will continue billing customers consistent with the tariffs that are
currently in effect and not the tariffs approved in Docket 160128-EI. This is
consistent with provision under Paragraph 16(a) of the RRSSA, which
contemplates that customers would not be charged for the project cost until
such project is placed into service.
Therefore, staff
recommends that DEF’s motion requesting withdrawal of the tariffs for Phase 1
of the Hines Project approved in Docket 160128-EI should be approved.
Issue 4:
Should these dockets be closed?
Recommendation:
Yes. If Issues 1 and 2 are approved, the tariff related
to the Osprey acquisition should go into effect with the first billing cycle in
February 2017. 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, Docket No.
160178-EI should be closed upon the issuance of a consummating order. If Issue
3 is approved, Docket No. 160128-EI should be closed. (Janjic)
Staff Analysis:
If Issues 1 and 2 are approved, the tariff related
to the Osprey acquisition should go into effect with the first billing cycle in
February 2017. 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, these dockets
should be closed upon the issuance of a consummating order. If Issue 3 is
approved, Docket No. 160128-EI should be closed.
Duke Energy Florida, LLC
Estimated First Year Revenue Requirements –
Osprey Plant
Proposed
Acquisition Journal Entries ($ in 000s):
1
Original Plant cost (101)
358,787
2
Accumulated Depreciation (108) (108,900)
3
Negative acquisition Adjustment (114-108) (83,887)
4 Net
purchase price (Line 1 + 2 + 3) 166,000
Equivalent
Depreciation Rate Calculation:
5 Net
purchase price (Line 4) 166,000
6
Integration Capital & Transaction Costs 1,845
7 Net
Acquisition Cost (Line 5 + 6) 167,845
8 Expected
Life (26 years) 3.85%
9
Annual Depreciation Expense (Line 7 x 8) 6,456
10
Original Plant cost (101) (Line 1) 358,787
11
Effective Depreciation Expense (Line 9) 6,456
12 Equivalent Depreciation Rate (Line 11 / 10) 1.80%
Depreciation
Expense in Revenue Requirement:
13
Original Plant cost (101) (Line 1) 358,787
14
2017 Capital Investment 30,379
15
Ending Balance (Line 13 + Line 14) 389,166
16
Average Balance (Line 13 + 15) / 2 373,977
17
Equivalent Depreciation Rate (Line 12) 1.80% (Note 1)
18
Annual Depreciation Expense (Line 16 x 17) 6,729
Note 1: The depreciation rate recovers the book cost of the
Osprey asset only, and does not include cost of removal & dismantlement
costs. Cost of Removal & Dismantlement will be addressed in DEF's next
depreciation and dismantlement study to be filed on or before March 31, 2019,
per RRSSA paragraph 20.
