Case Background
On
July 22, 2016, Florida City Gas (FCG or City Gas) filed a Petition for Review
and Determination on the “Project Construction and Gas Transportation Agreement
(GTA) between NUI Utilities, Inc. d/b/a City Gas Company of Florida and Florida
Crystals Corporation dated April 24, 2001” and Approval of an Interim Service Arrangement.
City Gas is an investor-owned natural gas utility subject to the Commission’s
jurisdiction per Section 366.02(1), Florida Statutes, (F.S.). Florida Crystals
Corporation (Florida Crystals or Crystals) is a national sugar manufacturer.
The
GTA was executed by City Gas and Florida Crystals on April 24, 2001, and has a
30-year term. However, City Gas never submitted the GTA for Commission review
and approval. The purpose of the GTA was for City Gas to construct, own, and
operate a lateral pipeline from its transmission network to the Okeelanta Plant
of Florida Crystals and provide natural gas transportation service to Florida Crystals.
Florida Crystals began taking transportation service pursuant to the GTA in
January 2002 and both parties have abided by the terms and negotiated rates of
the GTA since its execution. The GTA contains a Primary Term, a Make-Up Period,
and an Extended Term. The rates of the Extended Term differ from the rates
applicable during the prior two terms. City Gas states that the Extended Term
of the GTA will commence in January 2017 and its analysis shows that for the
next 15 years of the Extended Term the cost to serve Florida Crystals will substantially
exceed projected revenues, and therefore the revenue shortfall to City Gas will
be very significant.
City
Gas in its petition is requesting that the Commission take the following
actions: (1) determine that the GTA is not a legally effective and enforceable
special contract under Florida law because the GTA was never submitted to the
Commission for its review or approval and the terms of the Extended Term do not
meet the Commission’s rules and City Gas’s tariff requirements for a special
contract, (2) approve an interim service arrangement until the Commission
approves a new agreement that complies with Florida law, and (3) take no
further action with respect to City Gas’s past performance under the GTA unless
the Commission determines that such action is required, but in no event is a
fine or other penalty appropriate.
City
Gas further asserts in its petition that in the absence of an approved special
contract, beginning January 1, 2017, City Gas, as required by law, will have to
charge Crystals the applicable tariff rate (GS-1,250k rate schedule), which is
much higher than the negotiated GTA rate. Therefore, FCG is requesting an
interim service arrangement as presented in the petition which should remain in
effect until the Commission approves a successor GTA.
On
August 5, 2016, Florida Crystals filed a Motion to be Designated a Party, or in
the alternative, a Motion to Intervene. This motion is addressed in Issue 1.
On
August 29, 2016, Crystals filed a Motion to Dismiss City Gas’s petition. The
reasons asserted by Crystals are: (1) the GTA is a valid contract and did not
require filing because it was covered by and complied with City Gas’s
applicable tariffs, specifically the KTS rate schedule, (2) City Gas informed
the Commission of the GTA in its 2003 rate case and stated in expert testimony
that the negotiated rate with Crystals recovers its costs to provide service,
(3) any attempt to reverse the Commission’s approval of the GTA rates as
supported by City Gas’s expert witness is barred by the administrative
finality, (4) GTA provides for rates that are fully compliant with City Gas’s
tariff, specifically with the KDS rate schedule (the successor to the KTS rate
schedule), (5) only Florida courts can determine the validity of a contract and
the Commission lacks the jurisdiction to grant City Gas’s requested relief of
determining that the GTA is not legally effective, (6) City Gas violated it’s
own tariff and Rule 25-9.034, Florida Administrative Code (F.A.C.), and then
asks the Commission to allow City Gas’s own failures to enable City Gas to
escape its contractual obligation, and (7) City Gas’s claim that its other
customers could be harmed if City Gas does not recover higher amounts from
Crystals is not an issue in this proceeding as City Gas has not pleaded that it
requires relief to earn an adequate return. The Motion to Dismiss is addressed
in Issue 3.
On
August 29, 2016, Florida Crystals requested oral argument on its Motion to Dismiss
City Gas’s petition. Crystals’ request for oral argument is addressed in Issue
2.
On
August 31, 2016, City Gas filed a Motion for Approval of a Temporary Interim Service
Arrangement, including the rates presented in Confidential Exhibit No. 3. Such
temporary interim service arrangement would remain in effect until the
Commission issues a final order in this docket, or the Commission issues a
successor transportation arrangement. If the Commission does not approve the
interim service arrangement or approve a successor program, City Gas, as
required by law would charge Crystals the applicable tariff rate (rate schedule
GS 1,250k) effective January 1, 2017. The proposed Temporary Interim Service Arrangement
is addressed in Issue 5.
On
September 19, 2016, Crystals filed a Request for Oral Argument on its response
in opposition to the Motion for Approval of a Temporary Interim Service
Arrangement. Crystals’ request for oral argument is addressed in Issue 4.
On
September 19, 2016, City Gas filed a response in opposition to Crystals’ Motion
to Dismiss City Gas’s petition. City Gas requested the Commission deny Crystals’
Motion to Dismiss the petition because: (1) the GTA is a non-binding agreement
because it was not approved by the Commission, (2) the petition is well pled,
and (3) states a cause of action upon which the Commission may grant relief to
Crystals.
On
September 19, 2016, Crystals filed a response in opposition to the motion for
approval of a temporary interim service arrangement. Crystals states that City
Gas’s entire case is predicated on the basis that the GTA is invalid, City Gas is
trying to extract more money from Crystals which has paid in excess of the cost
to serve, and that City Gas is evading its obligations pursuant to the GTA.
On
October 10, 2016, staff issued its First Data Request to City Gas and to
Crystals. City Gas provided partial, non-confidential responses on October 28,
2016. Staff received complete responses from both parties on November 1, 2016.
On
October 18, 2016, staff issued a Notice of Apparent Violation to City Gas. City
Gas responded on November 1, 2016 and Florida Crystals filed Comments
concerning City Gas’s Response to Notice of Apparent Violation on November 17,
2016.
On
November 4, 2016, after review of City Gas’s newly filed, revised, confidential
data, staff issued an informal meeting notice. On November 15, 2016, staff held
a noticed meeting with City Gas and Crystals to discuss the discovery
responses. The Commission has jurisdiction over this matter pursuant to
Sections 366.04, 366.05, and 366.06, F.S.
Discussion
of Issues
Issue 1:
Should the Commission grant Florida Crystals’ Motion
to be Designated a Party or in the Alternative Motion to Intervene?
Recommendation:
No. The Commission should deny Florida Crystals’
Motion to be Designated a Party or in the Alternative Motion to Intervene
because intervention is premature and unnecessary at this time. (Leathers)
Staff Analysis:
On July 22, 2016, FCG filed
its Petition for Review and Determination and Approval of an Interim Service
Arrangement (Petition) asking the Commission to find that the GTA is not
legally effective or enforceable because its terms do not meet the Commission’s
rules and statutes or FCG’s tariff requirements for a special contract. FCG
also requested that the Commission approve FCG’s proposed interim service
arrangement set forth in the Petition until the Commission approves a new
service agreement as successor to the GTA. On August 5, 2016, Florida Crystals’
filed its Motion to be Designated a Party or in the Alternative Motion to
Intervene, pursuant to Chapters 120 and 366, F.S., and Rules 25-22.036,
25-22.039, 28-106.201, and 28-106.205, F.A.C. Florida Crystals states that as FCG’s
counterparty to the GTA and as the customer for whom FCG is attempting to
establish an interim service arrangement for future gas transportation
services, Florida Crystals is a necessary, indispensable party and its
substantial interests will be directly affected by the issues raised in this
docket. Florida Crystals requests party or intervenor status so that it may
file responsive pleadings and otherwise fully participate in Docket No.
160175-GU.
Section 120.57, F.S., sets forth
the provisions applicable to hearings involving disputed issues of material
fact. Determinations as to intervention or party status are appropriate for
proceedings conducted pursuant to Section 120.57, F.S. However, subsection (5)
of the statute does not apply to agency investigations preliminary to agency
action. This is precisely the posture this docket is currently in: a proceeding
preliminary to Commission action, for which intervention or determinations as
to party status are premature. Interested persons may participate at the Agenda
Conference on Issue 5, pursuant to Rule 25-22.0021(2), F.A.C. The Commission
invites broad participation in preliminary proceedings in order to better
inform itself of the scope and implications of its decisions.
Florida Crystals may participate fully in this proceeding, including filing its
motion to dismiss and other responses and having them considered by the
Commission, without intervening in this proceeding.
Further, substantially affected persons will have the
opportunity to request a hearing pursuant to Sections 120.569 and 120.57, F.S.,
once the Commission’s order is issued. For the reasons explained above, formal
intervention by Florida Crystals, pursuant to Chapter 120, F.S., is premature
and unnecessary at this time. Staff therefore recommends that the Commission
deny Florida Crystals’ Motion to be Designated a Party or in the Alternative
Motion to Intervene.
Issue 2:
Should the Commission grant Florida Crystals’
Request for Oral Argument on its Motion to Dismiss Petition?
Recommendation:
Yes. The Commission should grant Florida Crystals’
Request for Oral Argument on its Motion to Dismiss Petition. Staff recommends
allowing each side 10 minutes to address this matter. (Leathers)
Staff Analysis:
Rule 25-22.0022(7)(a),
F.A.C., provides that oral argument at an Agenda Conference will only be
entertained for recommended orders and dispositive motions (such as a motion to
dismiss). A request for oral argument must be filed concurrently with the
motion on which argument is requested, as has been done here. Rule
25-22.0022(1), F.A.C. In its Response in Opposition to Florida Crystals’ Motion
to Dismiss Petition, FCG stated that it did not object to the request if the
Commission finds that oral argument will assist with the Commission’s
understanding and evaluation of the issues related to the Motion to Dismiss
Petition.
Rule 25-22.0022(3), F.A.C.,
provides that granting or denying a request for oral argument is within the
sole discretion of the Commission. The Commission has traditionally granted
oral argument upon a finding that oral argument would aid the Commission in its
understanding and disposition of the underlying motion. Furthermore, the
Commission invites broad participation in PAA or preliminary proceedings in
order to better inform itself of the scope and implications of its decisions. Staff
believes that the Commissioners would benefit from oral argument on Florida
Crystals’ Motion to Dismiss the Petition. Accordingly, staff recommends that
the Commission grant Florida Crystals’ Request for Oral Argument with respect
to the Motion to Dismiss addressed in Issue 3. Staff further recommends that if
the Commission decides to hear oral argument, Florida Crystals and FCG should
each be allowed 10 minutes to address the Commission on this matter.
Issue 3:
Should the Commission grant Florida Crystals’ Motion
to Dismiss Petition?
Recommendation:
No. The Commission should deny Florida Crystals’
Motion to Dismiss Petition because the Petition states a cause of action upon
which relief may be granted. (Leathers)
Staff Analysis:
Standard of Review
A motion to dismiss challenges
the legal sufficiency of the facts alleged in a petition to state a cause of
action. In
order to sustain a motion to dismiss, the moving party must show that,
accepting all allegations as true, the petition fails to state a cause of
action for which relief may be granted.
The moving party must specify the grounds for the motion to dismiss, and all
material allegations must be construed against the moving party in determining
if the petitioner has stated the necessary allegations. A
sufficiency determination should be confined to the petition and documents
incorporated therein, and the grounds asserted in the motion to dismiss.
Thus, “the trial court may not look beyond the four corners of the complaint,
consider any affirmative defenses raised by the defendant, nor consider any
evidence likely to be produced by either side.”
Finally, all allegations in the petition must be viewed as true and in the
light most favorable to the petitioner in order to determine whether there is a
cause of action upon which relief may be granted.
FCG’s Petition
On July 22, 2016, FCG filed a
petition with the Commission requesting the review and determination of the
legal effectiveness and enforceability of the GTA, along with approval of an
interim service arrangement. FCG alleges that the GTA was negotiated and signed
by prior management and that key elements of the development and implementation
of the GTA remain unknown because the employees involved in the transaction are
no longer with the company. FCG acknowledges that the GTA was never submitted
to the Commission for approval, pursuant to Rule 25-9.034, F.A.C., but that FCG
and Florida Crystals have apparently followed the terms of the GTA for nearly
15 years.
While FCG asserts that its
management first became aware of the GTA in 2010-2011 during the course of
Docket No. 090539-GU (Miami-Dade docket), it did not fully understand when the
Extended Term of the GTA would begin until Florida Crystals exceeded its
transportation volume cap in 2015. As a result of the subsequent legal,
regulatory, and financial analyses and the lack of Commission approval, FCG
petitioned the Commission to determine that the GTA is not a legally effective
or enforceable special contract and approve FCG’s proposed interim service
arrangement for Florida Crystals in lieu of the Extended Term of the GTA until
the issuance of a final order by the Commission or the parties negotiate an
appropriate special contract to be submitted for Commission approval. FCG
supported its Petition by stating that the Extended Term of the GTA consists of
a rate that is substantially below FCG’s cost to serve, thereby making it
impossible to serve Florida Crystals under the GTA rates. Accordingly, FCG
maintains that the Commission has not only the authority, but the
responsibility to step in and prevent the Extended Term rates from going into
effect.
FCG further appears to assert
that the GTA should have been submitted to the Commission for approval,
pursuant to Rule 25-9.034, F.A.C., prior to its execution. FCG cited the
Commission’s finding in the Miami-Dade docket stated that: “[the Commission
has] exclusive, superior authority over the rates and charges of FCG, a
regulated public utility. Pursuant to Rule 25-9.034(1), F.A.C., all special
contracts and agreements entered into by a public utility that are not
specifically covered by its filed tariff must be approved by this Commission.”
Furthermore, FCG averred that, “another fundamental tenant of Florida law
establishes that utility contracts remain subject to PSC oversight throughout
their tenure and that the PSC has the authority to later terminate or amend a
contract that is no longer compliant with the law.”
FCG stated that its general body
of ratepayers has not been adversely impacted by service to Florida Crystals
and that FCG management has acted in good faith to remedy this situation in a
manner that will not adversely impact its general body of ratepayers or Florida
Crystals.
Florida Crystals’ Motion to Dismiss Petition
On August 29, 2016, Florida
Crystals filed its Motion to Dismiss Petition. Florida Crystals argues that
FCG’s Petition should be dismissed because:
·
No basis in law or fact exists for the
relief requested by FCG, as the rates set forth in the GTA were covered by and
consistent with FCG’s Rate Schedule KTS at the time the GTA was negotiated and,
therefore, FCG was not required to obtain Commission approval of the GTA
pursuant to Rule 25-9.034(1), F.A.C.;
·
FCG expressly represented to Florida
Crystals that the Commission’s approval was not required and that FCG communicated
that it would effectively waive regulatory approvals;
·
The Commission approved the rates paid
by Florida Crystals in FCG’s 2003 rate case when FCG induced the Commission to
approve its Rate Schedule KDS as the successor to Rate Schedule KTS and averred
in expert testimony that “[t]he
Company’s negotiated rate contract with Florida Crystals establishes a rate
that recovers its costs to provide service”;
·
The doctrine of administrative finality
bars FCG from overturning the Commission’s approval of its rates in its 2003
rate case;
·
FCG’s assertion that the GTA is
inconsistent with its tariff is false because it is impossible for Florida
Crystals to ever pay a rate less than 1 cent per therm for transportation
service as the average rate paid for the service under the GTA can never be less
than 1.2 cents per therm;
·
FCG fails to state a claim upon which
relief can be granted because the Commission lacks the jurisdiction to grant its
request as jurisdiction to interpret contracts between parties rests exclusively
with the judicial courts of Florida;
·
The Commission cannot allow FCG to
“bootstrap” its admitted violations of Commission rules to escape the
consequences of FCG’s prior representations to the Commission or deprive
Florida Crystals the benefit of its bargain;
·
FCG’s suggestion that its other
customers will be harmed if the Commission does not allow it to charge Florida
Crystals a higher rate is not at issue in this proceeding and any claims to an
entitlement to a rate increase would have to be established in an appropriate
general rate case proceeding.
Florida Crystals attached
Exhibits A, B, and C in support of its Motion to Dismiss Petition. Staff
believes that Exhibit C is evidentiary in nature because it provides facts not
included in FCG’s Petition and disputes FCG’s statements. Therefore, Florida
Crystals’ Exhibit C is not discussed or considered in staff’s analysis in this
recommendation.
FCG’s Response in Opposition to Florida
Crystals’ Motion to Dismiss Petition
On September 19, 2016, FCG filed
a response to Florida Crystals’ Motion to Dismiss Petition. In its response,
FCG asserts that its Petition properly states a cause of action upon which
relief may be granted and that Florida Crystals’ Motion to Dismiss Petition
should be denied as its arguments consist of affirmative defenses not pleading
deficiencies. Specifically, FCG maintains that Florida Crystals’ motion should
be denied because:
·
Florida Crystals’ argument that the
rates set forth in the GTA were covered by and consistent with FCG’s Rate
Schedule KTS at the time the GTA was negotiated reflects disputed issues of
fact and law and is, therefore, an affirmative defense. Further, that FCG is
obligated to request the Commission’s review of the GTA as each of the
respective rate periods are not consistent with Rate Schedule KDS;
·
Florida Crystals’ Exhibit C does not
meet the standards for a motion to dismiss and that “no public utility has the
unilateral power to waive its tariff, Rule 25-9.034, or this Commission’s
authority under Chapter 366”;
·
Florida Crystals’ argument that the GTA
is not a special contract requiring Commission approval pursuant to Rule
25-9.034(1), F.A.C., is an affirmative defense contrary to the language of the
rule and the Commission’s underlying statutory authority over public utility
rates;
·
Florida Crystals’ argument that FCG
obtained the Commission’s approval of the GTA rates through FCG’s 2003 rate
case is an affirmative defense, not a demonstration that the Petition fails to
state a cause of action, noting that nothing in that rate case directly or
indirectly meets the requirements of Rule 25-9.034(1), F.A.C., as the GTA was
never filed, reviewed, or approved, and that Florida Crystals cannot point to
any part of that order that contains any of the GTA rates. Further, that
Florida Crystals’ submission of testimony and evidence from the 2003 rate case
looks outside the four corners of FCG’s Petition;
·
Florida Crystals’ argument that the
doctrine of administrative finality bars FCG from overturning the Commission’s
approval of its rates in its 2003 rate case fails because there has been no
final order on the GTA rates, the doctrine of administrative finality permits
an agency to revisit a prior decision when there is a demonstration of changed
facts and circumstances, and it is an affirmative defense that reaches beyond
the four corners of the Petition;
·
Florida Crystals’ argument that the GTA
is subject to general contract law and not the Commission’s authority is an
affirmative defense and does not meet the requirements for dismissal;
·
The failure to previously obtain
approval of the GTA does not bar FCG’s Petition and that the statements made in
the 2003 rate case, or at any other prior time, were based upon whatever the
company’s then management thought appropriate are irrelevant and are perhaps
affirmative defenses;
·
Florida Crystals’ argument that FCG
should file a general rate case in order to change its rates is not a basis for
dismissal as the instant issue is whether the GTA recovers its cost per the
rule, not whether FCG is meeting its revenue requirements.
Analysis
When viewed within the “four corners of the complaint”
exclusive of all affirmative defenses/responses, assuming all alleged facts are
true, and in the light most favorable to FCG, staff believes that the Petition
states a cause of action that would invoke the Commission’s jurisdiction or
permit the Commission to grant the relief requested. Specifically, the Petition contains
sufficient allegations to allow the Commission to review the GTA and determine
whether it is subject to the Commission’s approval as prescribed by Rule
25-9.034(1), F.A.C. For these reasons, staff recommends that the Commission
deny Florida Crystals’ Motion to Dismiss Petition.
Issue 4:
Should the Commission grant Florida Crystals’
Request for Oral Argument on its Response in Opposition to Motion for Approval
of a Temporary Interim Service Arrangement?
Recommendation:
No. The Commission should not grant Florida
Crystals’ Request for Oral Argument on its Response in Opposition to Motion for
Approval of a Temporary Interim Service Arrangement. However, staff recommends that
the parties be permitted to participate informally on this issue. (Leathers)
Staff Analysis:
Rule 25-22.0022(3), F.A.C.,
provides that granting or denying a request for oral argument is within the
sole discretion of the Commission. Rule 25-22.0022(7)(a), F.A.C., provides that
oral argument at an Agenda Conference will only be entertained for recommended
orders and dispositive motions. Because Florida Crystals’ Response in
Opposition to Motion for Approval of a Temporary Service Arrangement does not
comport with any of the provisions of Rule 25-22.0022(7)(a), F.A.C., staff
believes that oral argument is inappropriate. However, the Commission invites
broad participation in PAA or preliminary proceedings in order to better inform
itself of the scope and implications of its decisions.
Therefore, pursuant to Rule 25-22.0021(2), F.A.C., staff believes Florida
Crystals should be permitted to participate informally with respect to Issue 5
of this recommendation.
Accordingly, staff recommends that the Commission deny
Florida Crystals’ Request for Oral Argument with respect its Response in
Opposition to Motion for Approval of a Temporary Interim Service Arrangement
addressed in Issue 5. However, staff recommends that the parties be permitted
to participate informally on this issue.
Issue 5:
Should the Commission approve City Gas's Motion for Approval
of the Temporary Interim Service Arrangement including the revised Interim
Rates filed on November 1, 2016 in Confidential Exhibit 3A?
Recommendation:
No. The Make-Up Period GTA rates should be in effect
for a transition period beginning on the date of the Commission vote on this
recommendation until a final Commission decision in this docket. If City Gas
and Crystals are able to negotiate within the transition period a mutually
agreeable operating agreement, it should be brought before the Commission for a
decision. If City Gas and Crystals are unable to negotiate a mutually agreeable
operating arrangement within the transition period, City Gas should be required
to file a limited proceeding by July 31, 2017, for the purpose of determining the
appropriate cost basis for contract rates. Revenues collected via the temporary
rates during the transition period should be subject to refund with interest
based on the Commission’s final order in this docket. (Rome, Draper, D. Buys)
Staff Analysis:
The following discussion is predicated on the
assumption that the Commission adopts staff’s recommendation on Crystals’
Motion to Dismiss in Issue 3. If the Commission approves Crystals’ Motion to Dismiss,
this issue is moot.
Background
As chronicled in the case background, the parties to the
GTA have filed pleadings in which numerous assertions were made pertaining to
factual circumstances and points of law regarding which the parties provided
differing interpretations. Staff does not attempt to adjudicate each point of
contention for purposes of this recommendation. As discussed below, staff
believes that the overarching objective at this time is to recommend an interim
solution under which the parties to the GTA can continue to operate and
collaborate on a permanent solution.
The term of the GTA
is divided into three basic intervals: Primary Term, Make-Up Period, and
Extended Term. City Gas represented that the Extended Term begins on January 1,
2017. Crystals provided documentation in its November 1, 2016 response to
staff’s first data request to support its representation of a November 15, 2016
start date for the GTA’s Extended Term. Staff believes that the documentation
provided by Crystals adequately supports the assertion regarding a November 15,
2016 start date for the Extended Term. The contract rates that Crystals would
pay under the Extended Term differ from the contract rates applicable during
the Primary Term and Make-Up Period. Staff’s analysis in this issue focuses on
whether the contract rates during the Extended Term would cover City Gas’s cost
to serve Crystals on a going-forward basis. The Extended Term has a 15-year
term ending in 2032. Therefore, the determination of appropriate prospective
contract rates is important due to the length of the remaining duration of the
GTA.
Prospective Coverage of Cost of Service
In conjunction with its petition filed on July 22, 2016,
City Gas provided information to support its assertion that the Extended Term
contract rates would not cover the cost to serve Crystals on a going-forward
basis. In its August 31, 2016 Motion for Approval of a Temporary Interim
Service Arrangement, City Gas provided temporary rates set forth in the
Company’s original petition in which City Gas stated that based upon its recent
experience, “transportation service for Florida Crystals can be net profitable
at rates below the tariff rate.”
However, in its November 1, 2016 response to staff’s first
data request, City Gas provided revised information which indicated that from
its inception in 2002, the GTA has not covered the cost to serve Crystals. City
Gas also provided revisions to the proposed temporary interim rates that it
avers would be necessary to cover the cost to serve (i.e., superseding the rates in the proposed Temporary Interim
Service Arrangement).
In its September 19, 2016 Response in Opposition to Motion
for Approval of a Temporary Interim Service Arrangement, Crystals asserted that
the Extended Term rates generate revenues that are significantly greater than
City Gas’s true incremental costs to serve. Crystals suggested that the true
incremental costs of serving the Okeelanta facility are at most City Gas’s
operation and maintenance (O&M) costs. Crystals stated that comparing City
Gas’s projected O&M costs to the revenues that City Gas expects to receive
under the Extended Term GTA rates shows that the projected revenues exceed the
true incremental costs of service.
When staff evaluates whether or not special contract rates
such as those contained in the GTA are sufficient to cover the cost of service,
staff reviews the support provided for all the costs associated with serving
the customer. These costs include the utility’s required return on investment
(rate base times rate of return), O&M expense, depreciation expense, state
income taxes, federal income taxes, and taxes other than income taxes
(primarily property taxes). Staff disagrees with Crystals’ assertion that the
consideration should be limited to the projected O&M costs.
At the noticed meeting with City Gas and Crystals on
November 15, 2016, staff discussed the differences between City Gas’s November
1, 2016 representation that the GTA has never covered the cost to serve and the
testimony of City Gas’s expert witness in City Gas’s 2003 rate case which
stated that “The Company’s negotiated rate contract with Florida Crystals
establishes a rate that recovers its cost to provide service.” City
Gas represented to staff that its current presentation on the cost to serve
Crystals is based on the best available information.
While the above mentioned inconsistency in historical
information is a concern to staff, staff focuses in this recommendation on
whether or not the rates in the GTA will cover City Gas’s cost to serve
Crystals on a going-forward basis. Based on the confidential information
provided by City Gas, staff believes that City Gas has made a reasonable
demonstration that the GTA contract rates under the Extended Term would not
cover the cost to serve. Staff suggests that Commission action is appropriate
at this time due to Crystals’ assertion that the Extended Term commences on
November 15, 2016. Staff has developed four potential options for
consideration; these options are discussed below.
Discussion of Potential Courses of Action
The four options discussed below are presented in the
order of least preferred to recommended option. All options are predicated on
the assumption that the Commission adopts staff’s recommendation in Issue 3.
Option 1 – Tariff Rate
If the Commission were to take no further action in this
docket prior to January 1, 2017, City Gas stated that pursuant to Section
366.06(1), F.S., and Rule 25-9.034, F.A.C., it would be required to begin
charging Crystals the applicable tariff rate as of January 1, 2017.
Staff does not recommend this option as it appears the applicable rate contained
in the GS-1,250k rate schedule would cause a significant adverse financial
impact to Crystals. City Gas also agreed that the application of the tariff
would impose a significant hardship to Crystals and the tariff does not
adequately address a customer like Crystals.
Therefore, staff does not recommend this option.
Option 2 – Revised Temporary Interim Rate (FCG
Proposal)
City Gas proposed interim rates in its Motion for Approval
of a Temporary Interim Service Arrangement (Confidential Exhibit No. 3) and
revised interim rates in its response to staff’s first data request
(Confidential Exhibit No. 3A). Based on the information in City Gas’s data
request response, staff believes that the proposed interim rates as revised
would cover the cost to serve Crystals. However, staff also believes that City
Gas potentially could recover its cost of service at rates that would be more
favorable to Crystals. Staff further recognizes that it appears that the
implementation of Option 2 would cause a significant adverse financial impact
to Crystals; although, the impact would be less severe than the impact that
would result from the implementation of Option 1. Furthermore, based on its
preliminary analysis of the revised interim rates, staff does not agree with a
key assumption regarding Crystals’ therm usage used by City Gas in the
calculation. Therefore, staff does not recommend this option.
Option 3 – Extended Term Contract Rate
(Crystals Proposal)
If the Commission were to deny City Gas’s Motion for
Approval of a Temporary Interim Service Arrangement including the revised
interim rates, the Commission has the option to allow the Extended Term
contract rates stated in the GTA to take effect. This option would enable
Crystals to receive the Extended Term rates as set forth in the GTA. However,
as stated above, staff believes that the Extended Term contract rates do not
cover City Gas’s cost to serve Crystals on a going-forward basis; therefore, staff does
not recommend this option.
Option 4 – Make-up Period GTA Rate (Staff Recommended)
If the Commission were to deny City Gas’s Motion for
Approval of a Temporary Interim Service Arrangement including the revised
interim rates, the Commission has the option to leave the Make-Up Period GTA
rates in effect beginning on the date of the Commission’s vote on this
recommendation until a final Commission decision on this matter. Although
Crystals would not realize the benefits of the Extended Term rates during the transition
period, it would continue to pay the same current Make-Up Period rates and
avoid the adverse financial impacts that would occur under Options 1 and 2.
Based on information provided by City Gas, staff believes that City Gas’s
under-recovery of the cost of service during the transition period under Option
4 would be less than the under-recovery that would occur under Option 3.
Possible Refunds
Staff reviewed the financial condition of City Gas
consistent with staff’s recommendation that any revenues collected by City Gas from
Florida Crystals during the transition period be held subject to refund pending
a final Commission decision on the appropriate contract rates in the docket. To
review City Gas’s financial condition, staff performed an analysis similar to a
corporate undertaking. The total corporate undertaking amount staff assumed in
its analysis is the difference between City Gas’s proposed Temporary Interim
Service Arrangement Rate as revised and the Extended Term Contract Rate for one
year. Staff notes that depending on the Commission vote on this issue (i.e.,
appropriate rates for transition period), the length of the transition period,
and the final outcome and associated contract rates in the docket, the amount
of a refund, if any, will likely vary.
City Gas is
an operating division of Pivotal Utility Holdings, Inc., (Pivotal) which is a
wholly-owned subsidiary of Southern Company Gas (formerly known as AGL
Resources, Inc.) which is a wholly-owned direct subsidiary of Southern Company.
Pivotal finances its on-going cash requirements through its participation in
Southern Company Gas’s Utility Money Pool currently in the amount of $800
million. City Gas’s available share of the Utility Money Pool is up to $250
million.
The criteria
for a corporate undertaking include sufficient liquidity, ownership equity,
profitability, and interest coverage to guarantee any potential refund. Staff
reviewed Pivotal’s 2013, 2014, and 2015 financial statements to determine if
the company can support a corporate undertaking in the amount required. In its
2013, 2014, and 2015 financial statements, Pivotal reported insufficient
liquidity based on staff’s criteria for a corporate undertaking. Pivotal
reported negative working capital, a current ratio of less than one, and an
interest coverage ratio less than two times. However, in the instant case,
Pivotal’s liquidity is not an issue due to its ability to access up to $250
million from Southern Company Gas’s Utility Money Pool to fund its on-going
cash requirements. Further, Pivotal achieved a three-year average net income
significantly greater the corporate undertaking amount indicating sufficient
profitability. In addition, Pivotal reported adequate ownership equity over the
entire 3-year review period.
Based on
staff’s review of Pivotal’s financial statements, staff believes the company
has adequate resources to guarantee any potential refund of revenues collected
by FCG under interim conditions.
Further, in
no instance should the maintenance and administrative costs associated with the
potential refund be borne by Crystals. These costs are the responsibility of,
and should be borne by City Gas. Irrespective of the form of security chosen by
City Gas, an account of all monies received as a result of the temporary rates
should be maintained by FCG. If a refund is ultimately required, it should be
paid with interest calculated pursuant to Rule 25-7.091(4), F.A.C.
Conclusion
Staff recommends Option 4 in an effort to provide a
balanced temporary solution to allow City Gas and Crystals additional time to
negotiate a mutually acceptable operating arrangement. If requested by the
parties, Commission staff would be willing to facilitate any negotiations.
Staff encourages City Gas and Florida Crystals to negotiate a mutually
acceptable operating arrangement. If the parties are not able to reach an
agreement during the transition period, the Commission then would render a
final decision on appropriate contract rates within the context of the limited
proceeding.
To conclude, the Commission should deny City Gas’s motion
for Approval of a Temporary Interim Service Arrangement including the revised
Interim Rates filed on November 1, 2016 in Confidential Exhibit 3A. The Make-Up
Period GTA rates should be in effect for a transition period beginning on the
date of the Commission’s vote on this recommendation until a final Commission
decision in this docket. If City Gas and Crystals are able to negotiate in the transition
period a mutually agreeable operating agreement, it should be brought before
the Commission for a decision. If City Gas and Crystals are unable to negotiate
a mutually agreeable operating arrangement within the transition period, City
Gas should be required to file a limited proceeding by July 31, 2017, for the
purpose of determining the appropriate cost basis for contract rates. Revenues
collected via the temporary rates during the transition period should be
subject to refund with interest based on the Commission’s final order in this
docket.
