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State of Florida
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Public Service Commission
Capital Circle Office Center ● 2540 Shumard
Oak Boulevard
Tallahassee, Florida 32399-0850
-M-E-M-O-R-A-N-D-U-M-
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DATE:
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January 25, 2018
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TO:
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Office of Commission Clerk (Stauffer)
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FROM:
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Division of Engineering (Thompson, Ellis,
King, Wright)
Division of Economics
(Higgins)
Office of the General
Counsel (Cuello)
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RE:
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Docket No. 20170248-EI – Petition for
approval of fuel cost proxy substitution to qualifying facility contract
between Duke Energy Florida, LLC and CFR/Biogen (n/k/a Orange Cogeneration
Limited Partners), Ridge Generating Station Limited Partnership, Mulberry
Energy Company, Inc. (n/k/a Polk Power Partners), and Orlando Cogen Limited,
L.P.
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AGENDA:
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02/06/18 – Regular Agenda – Proposed Agency Action - Interested
Persons May Participate
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COMMISSIONERS ASSIGNED:
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All Commissioners
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PREHEARING OFFICER:
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Administrative
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CRITICAL DATES:
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Duke is requesting a Consummating Order be filed by
April 2018 because they are retiring Crystal River 1 and 2, the Avoided Unit Fuel
Reference Plant for the contracts being modified, on this date.
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SPECIAL INSTRUCTIONS:
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None
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Case Background
On July 1, 1991,
the Florida Public Service Commission (Commission) approved a petition by
Florida Power Corporation n/k/a Duke Energy Florida, LLC (Duke or Utility)
requesting approval for cost recovery of negotiated contracts for purchase of
firm capacity and energy with the following qualifying facilities: Ridge
Generating Station Limited Partnership (Ridge), Mulberry Energy Company, Inc.
n/k/a Polk Power Partners (Polk), and Orlando CoGen Limited, L.P. (Orlando),
among others. Similarly, on March 31, 1992, the
Commission approved a joint petition by another qualifying facility, CFR-Biogen
Corp. n/k/a Orange Cogeneration Limited Partners (Orange), and Duke requesting
approval for cost recovery of a negotiated contract for purchase of firm
capacity and energy. (These contracts, as amended to date, are
collectively referred to as the “QF PPAs”)
Pursuant to the
QF PPAs, Duke’s coal-fired units Crystal River 1 and 2 (CR 1 and 2) comprise
the avoided unit fuel reference plant that is used to calculate the energy
payments for these qualifying facilities. This calculation includes the
delivered price of coal burned at CR 1 and 2. However, Duke plans to retire
these coal units in April 2018. Upon retirement of these units, the energy
payments for these QF PPAs can no longer be calculated as previously called
for.
Duke and the
owners of the qualifying facilities have negotiated respective amendments to
the QF PPAs to agree to substitute the delivered price of coal burned at CR 1
and 2 with a substitute index to act as a fuel cost proxy (Substitute Index),
designed to approximate the delivered price of coal burned at CR 1 and 2. Each
of the amendments utilizes the Substitute Index, with the index’s development
methodology being identical among all amendments. On November 17, 2017, Duke
filed a petition for approval of the amendments to the QF PPAs.
The Commission
has jurisdiction over this matter pursuant to Sections 366.04 and 366.051,
Florida Statutes (F.S.).
Discussion
of Issues
Issue 1:
Should the Commission approve Duke Energy Florida,
LLC’s petition for approval of the amendments to the negotiated contracts for
purchase of firm capacity and energy between Ridge Generating Station Limited
Partnership, Mulberry Energy Company, Inc. n/k/a Polk Power Partners, Orlando
CoGen Limited, L.P., and CFR-Biogen Corp. n/k/a Orange Cogeneration Limited
Partners?
Recommendation:
Yes. Duke currently plans to retire CR 1 and 2 in
April 2018, coal units comprising the avoided unit fuel reference plant as
defined in the QF PPAs. The amendments to the QF PPAs seek to substitute the
delivered price of coal burned at CR 1 and 2 with the Substitute Index, a fuel
cost proxy expected to approximate the delivered price of coal to CR 1 and 2. The
remaining total annual payments under the modified QF PPAs are expected to remain
approximately equivalent to those estimated prior to modification.
The amendments to the QF PPAs do not modify any other part
of the respective contracts. Thus, the core provisions of the QF PPAs,
including total energy delivery amounts, contract duration, reliability,
security, and risk allocation remain unchanged. Therefore, staff recommends
that the Commission approve Duke’s petition for approval of the amendments to
the QF PPAs. (Wright)
Staff Analysis:
Duke’s petition requests approval of modifications
to four existing contracts. The Utility has provided the information required
in accordance with Rule 25-17.0836(1), Florida Administrative Code (F.A.C.). As
required by Rule 25-17.0836(6), F.A.C., staff evaluated modifications and
concessions of the Utility and developer against both the existing contract and
the current value of the purchasing Utility’s avoided cost.
Three of the four negotiated contracts for the purchase of
firm capacity and energy under consideration in this docket were originally
approved for cost recovery in 1991, with the fourth contract receiving approval
in 1992. Since the original approvals, the Mulberry Energy Company, Inc.
contract has been assigned to Polk Power Partners, with the agreement of Duke. Likewise,
Duke agreed to the assignment of the contract originally with CFR-Biogen Corp.
to Orange Cogeneration Limited Partners. The Ridge and Orlando QF PPAs expire
in December 2023. The Polk QF PPA expires in August 2024, while the Orange QF
PPA expires in December 2025. For all of the contracts, CR 1 and 2 comprise the
avoided unit fuel reference plant. That is, the delivered price of coal burned
at CR 1 and 2 is used as a fuel proxy for energy payment calculation purposes
of the avoided unit. Duke plans to retire CR 1 and 2 in April 2018. Thus, after
this date energy payment calculations could not be calculated pursuant to the
terms of the contracts. Duke and the parties to each QF PPA have negotiated
respective amendments to the contracts, attached as Attachment A, that seek to
substitute the delivered price of coal burned at CR 1 and 2 with the Substitute
Index, an index designed to approximate the delivered price of coal burned at
CR 1 and 2. Each of the amendments utilizes the Substitute Index, with the
index’s development methodology being identical among all amendments.
The Substitute Index is designed as a composite index,
calculated as the sum of a coal price index and a transportation cost index,
unitized in $/MMBtu. The coal price index is the unweighted monthly average of
the weekly SNL Physical Market Survey Prompt Year price for NYMEX Big Sandy
River Barge coal in $/ton published by SNL and converted to $/MMBtu. This index
was chosen by Duke and the qualifying facilities because the characteristics of
the coal, including heat rate and sulfur content, best matched that of the coal
burned at CR 1 and 2 and because the index was public, transparent, and had
historic values that were readily available. Following selection, the historic
values of the coal price index were compared to the actual comprehensive fuel
costs of CR 1 and 2 found on Duke’s A4 Schedule, System Net Generation and Fuel
Cost Report. A variable, yet persistent, difference was identified over the eight
years of data reviewed and was calculated to be approximately $52/ton. This
difference was used as the foundation for the transportation cost index used in
the Substitute Index. To account for future transportation cost variability,
and to arrive at the final transportation cost index, the $52/ton rate is
multiplied by a Rail Cost Adjustment Factor index, which sensitizes the
transportation cost to the rate of inflation in railroad inputs such as labor
and fuel. Staff finds the Substitute Index is designed in a logical, fair, and
robust manner and recognizes its use in the amendments to the QF PPAs as a good
faith effort to maintain the cost-effectiveness of the QF PPAs as originally
approved by the Commission.
Three years of historic monthly energy prices used to
calculate payments to each of the qualifying facilities under current
contractual obligations were compared to prices calculated utilizing the
Substitute Index as a fuel cost proxy in order to evaluate the potential for
future payment deviations. After removal of outliers, payments calculated
utilizing the Substitute Index were on average 0.058 $/MMBtu higher than
as-paid fuel prices, representing an average 1.49 percent increase. Duke
determined that a 1 percent increase in the value of the Substitute Index would
result in a $0.03/1000 kWh increase to customer bills. In light of this
information, the use of the Substitute Index to approximate the delivered price
of coal to CR 1 and 2 over the remaining durations of the contracts is expected
to result in energy payments that would remain approximately equivalent to
those that would have been made had CR 1 and 2 remained in-service. Furthermore,
any potential payment deviations from use of the Substitute Index that ultimately
reach the customer through cost recovery mechanisms were determined to have minimal
impact to ratepayer’s bills. Therefore, staff recommends that the amendments to
the QF PPAs are cost effective.
While each amendment seeks to modify its respective QF PPA
and implement use of the Substitute Index, the language used in each amendment
naturally differs as a consequence of the differences in language used in each
individual QF PPA. As a result of this, the amendments were also evaluated for
their ability to accurately incorporate the Substitute Index as a fuel cost
proxy in their respective QF PPA. Those amendments modifying the Orange, Polk,
and Orlando contracts were determined to contain appropriate language. The
amendment modifying the Ridge contract was found to omit language necessary to
identify the use of the Substitute Index as a factor in the calculation of
energy payments while simultaneously replacing its predecessor. Duke was
notified of this omission and has filed a letter agreement between Duke and
Ridge detailing the necessary amendment modifications, attached as Attachment
B.
Conclusion
Duke currently plans to retire CR 1 and 2 in April 2018,
coal units comprising the avoided unit fuel reference plant as defined in the
QF PPAs. The amendments to the QF PPAs seek to substitute the delivered price
of coal burned at CR 1 and 2 with the Substitute Index, a fuel cost proxy
expected to approximate the delivered price of coal to CR 1 and 2. The
remaining total annual payments under the modified QF PPAs are expected to
remain approximately equivalent to those estimated prior to modification.
The amendments to the QF PPAs do not modify any other part
of their respective contracts. Thus, the core provisions of the QF PPAs,
including total energy delivery amounts, contract duration, reliability,
security, and risk allocation remain unchanged. Therefore, staff recommends
that the Commission approve Duke’s petition for approval of the amendments to
the QF PPAs.
Issue 2:
Should this docket be closed?
Recommendation:
Yes. If no person whose substantial interests are
affected by the proposed agency action (PAA) files a protest within 21 days of
the issuance of the PAA Order, a Consummating Order should be issued and the
docket should be closed. (Cuello)
Staff Analysis:
If no person whose substantial interests are
affected by the proposed agency action files a protest within 21 days of the
issuance of the PAA Order, a Consummating Order should be issued and the docket
should be closed.
