Discussion
of Issues
Issue 1:
Should DEF’s petition for approval to terminate its
power purchase agreement with Florida Power Development, LLC and requested
regulatory treatment be approved?
Recommendation:
Yes. Staff has reviewed the Termination Agreement
and recommends that terminating the existing PPA is estimated to save customers
between $38 million and $59 million in net present value (NPV). Staff recommends
the establishment of a regulatory asset to be amortized over the remaining
contract term through May 2034. (Wooten, Stratis, Vogel)
Staff Analysis:
At the time of the
PPA approval, the PPA was cost-effective and did not exceed DEF’s then current
avoided costs. Since
that time, DEF’s avoided costs have decreased, and now payments under the PPA
exceed DEF’s current avoided costs. As discussed later, the PPA is at a fixed
contractual energy rate, therefore any changes in fuel prices are borne by
customers. Staff evaluated the forecasting, costs assumptions, and effect on
reliability of the proposed Termination Agreement in order to verify
suitableness of the proposed Termination Agreement. As discussed below, there
are projected benefits of the Termination Agreement that would produce savings
for DEF’s customers, with benefits accruing immediately.
DEF’s Proposal
Under the proposed Termination Agreement, DEF would pay a
total of $105 million to FPD in exchange for FPD’s agreement to terminate its
qualifying facility status, permanently shut down the FPD facility and terminate
any interconnection agreements for the FPD facility by December 31, 2018. DEF
requests and requires as a term, the Commission’s approval of the consummation
of the Termination Agreement which would establish a regulatory asset for the
FPD termination payment. The FPD termination payment would be recovered through
the Fuel and Purchase Power Cost Recovery Clause (Fuel Clause) by amortizing
the FPD regulatory asset at a rate of approximately $7 million per year through
May 2034, the original expiration date of the PPA.
The avoided PPA payment reflects the systems savings to
customers by terminating the existing PPA and avoiding the energy and capacity
payments. Unlike a traditional PPA, DEF’s PPA with FPD was a combined
contractual energy rate ($/MWh) for both energy and capacity. These are
calculated by multiplying the energy provided by FPD in megawatt-hours (MWh)
times the contractual energy rate ($/MWh). The energy and capacity payments
would occur over the rest of the term of the existing PPA, for the period of May
2018 through May 2034. By terminating the PPA, customers would benefit through
lower projected fuel prices. Terminating the PPA without acquiring the facility
allows DEF to avoid additional risks associated with the cleanup and dismantlement
of the FPD facility.
DEF calculated its Cumulative Present Value Revenue
Requirement (CPVRR), including its base case and sensitivities, for DEF’s
proposed contract using base, high, and low fuel price forecasts as well as,
“Base Case CO2” and “No CO2” carbon emission price
forecasts for the period of May 2018 through May 2034. DEF performed its base
case analyses and sensitivities under two generation assumptions: (1) 421 gigawatt-hours
(GWhs) (Upper Band) and (2) 378 GWhs (Lower Band). In this way, 12 base case
and sensitivities to the base case were derived. Staff also reviewed the
Company’s fuel price and CO2 emissions price forecasts.
Fuel Price Forecast
DEF’s base case fuel price forecast used in the CPVRR
analysis was prepared in the Fall of 2016 and was previously provided by DEF
for purposes of the Commission’s consideration of the 2017 DEF Ten-Year Site
Plan (TYSP), DEF’s 2017 Standard Offer Contract (Docket No. 20170072-EQ), and
DEF’s QF Coal Proxy Substitution (Docket No. 20170248-EI). DEF’s natural gas
fuel price forecasts include both its short term fuel forecast, based on NYMEX
futures price contracts, and its long term forecast, based on a collaborative
approach between the Company and its industry consultant, Energy Ventures
Analysis. The same short term and long term approach is used by the Company to
forecast coal and oil prices.
DEF’s fuel price forecast sensitivities are based on its
recent past fuel forecasts which encompass differing assumptions about elements
that affect the price of natural gas, and to a lesser extent coal. DEF relied
upon its natural gas price forecast used to prepare its 2016 TYSP for its high
fuel price forecast sensitivity. DEF relied upon its Spring 2017 fuel price
forecast for its low fuel price case. The high and low fuel price forecasts
vary from the base case forecast by approximately 20 percent.
As discussed above, DEF’s base case natural gas fuel price
forecast, prepared in the Fall of 2016, is higher than its most recent fuel price
forecast prepared in the Spring of 2017. Therefore, staff believes DEF’s use of
its slightly older fuel price forecast (Fall 2016) as its base case forecast
can be viewed as a conservative assumption for purposes of DEF’s CPVRR
analysis. Staff further notes that, while natural gas prices have been trending
downward for several years, DEF’s upward trending base case natural gas fuel
price forecast appears to be contained within the range of similar vintage
forecasts from industry recognized third parties. Staff has reviewed DEF’s fuel
price forecasts and believes they are reasonable.
Emission Reductions and CO2 Price
Forecasts
A portion of the expected net
benefits of the Termination Agreement takes the form of savings attributable to
reduced CO2 emissions. DEF expects that the proposed retirement of
the FPD facility will result in a reduction of 2.3 to 2.6 million tons of CO2
emissions over the 16-year period.
DEF’s estimates of the cost savings from the Termination Agreement are based on
reductions of CO2 emissions that would have been required by the
EPA’s 2015 Clean Power Plan.
DEF notes that the status of the EPA’s Clean Power Plan and related litigation
remain ‘on hold,’ with any change in regulation unlikely under the current
administration.
DEF’s analysis of cost savings
under various fuel price and carbon cost scenarios considered ‘base-case’ (low-cost) scenarios, featuring cost-savings
generated by reductions in carbon emissions from 2025 to the end of the term in
2034, as well as ‘No CO2’ (zero-cost) scenarios which extend from
2018 through 2034. DEF
considers ‘No CO2’ scenarios, which would produce no CO2
cost savings for DEF customers, to be conservative.
DEF’s CO2 price
forecast for its base case scenario was prepared in 2016 for its 2017 TYSP.
The Company’s base case analysis assumes an emission price equal to the per-ton
cost of reduction, and DEF used that estimate of cost as a proxy for emission
price.
DEF forecasts nominal savings from avoided CO2 reductions to go from
$14.50 per ton in 2025 to $14.10 per ton in 2034.
In its responses to staff’s data request, DEF noted that
no national CO2 emissions market currently exists, and that DEF has
never incurred direct costs related to CO2 emissions.
DEF does not foresee significant federal or state legislation on CO2
emissions under the current administration.
Given the current uncertainty of potential legislative changes, staff believes
DEF’s approach to providing base and an alternative view of CO2
pricing is reasonable.
Cost/Benefit Analysis
The
avoided PPA payment reflects the systems savings to customers by terminating
the existing PPA and avoiding the energy and capacity payments. These are
calculated by multiplying the energy provided by FPD in megawatt-hours (MWh)
times the contractual energy rate ($/MWh). The payments to FPD would occur over
the rest of the term of the existing PPA (May 2018 through May 2034). By terminating
the PPA, customers would benefit through lower projected fuel prices.
Terminating the PPA without acquiring the facility allows DEF to avoid
additional risks associated with the cleanup and dismantlement of the FPD facility.
As previously discussed, DEF evaluated two scenarios of a Lower Band of 378 GWh
of annual output and Upper Band of 421 GWh of annual output. Each scenario
assumes a base case fuel scenario and a carbon emission cost which begins in
2025. Additionally DEF performed low and high fuel sensitivities, along with a no
carbon cost sensitivity for each, for a total of 12 CPVRR analyses. The results
of the 12 sensitivities can be seen below in Table 1-1.
Table 1-1
CPVRR Net Cost / (Savings)
of FPD Termination Agreement
$ Millions (2018)
|
|
|
Low Fuel
|
Base Case Fuel
|
High Fuel
|
|
Upper Band
(421 GWh)
|
Base Case
|
(91)
|
(59)
|
(20)
|
|
No CO2
|
(85)
|
(47)
|
(9)
|
|
|
|
Lower Band
(378 GWh)
|
Base Case
|
(67)
|
(38)
|
(3)
|
|
No CO2
|
(61)
|
(28)
|
7
|
When evaluating Table 1-1, 11 of the 12 sensitivities
produce savings with the termination of the PPA, excluding the No CO2/High
Fuel sensitivity. The presence of CO2 pricing made a minor
difference in the amount of projected savings that would be expected with the Termination
Agreement. This minor difference applied to both the Upper Band and Lower Band
for all considered fuel sensitivities. To further evaluate the Termination
Agreement, staff inquired about a GWh amount that would provide a breakeven
amount for customers. In response to a staff data request, DEF determined that the
breakeven GWh amount for both a fuel base case with CO2 and without
CO2, the Annualized GWhs delivered would be approximately 300 GWhs.
When comparing this amount to the historical performance of the FPD provided in
the petition, this would be an unlikely amount as the GWh delivered has
historically increased and according to DEF is likely to continue increasing.
The continued increase in annualized GWh delivered by FPD was estimated to be
as high as 540 GWh, which would cause customers to incur more costs if the PPA
continued. Taking these facts into consideration, staff recommends that, on an
economic basis, the Termination Agreement is beneficial for customers.
Non-Economic Evaluation
DEF does not currently have a need for the firm capacity
and energy associated with the PPA generated from the FPD facility. The loss of
the 54 MW of peak firm capacity provided by FPD will affect DEF’s reliability
reserve margin, but does not cause it to fall below DEF’s planning metrics. The
impact of the loss of the PPA is approximately 0.7 percent of the Summer
Reserve Margin in 2018. This would result in a 2018 Summer Reserve Margin of
22.7 percent, which would keep DEF above the 20 percent reserve margin approved
by the Commission. Upon
further review of the DEF’s 2017 TYSP, staff determined that this contract
termination should not accelerate the need for any future units. Furthermore,
of the 511 MW Firm Renewable and Cogeneration Contracts that DEF has the FPD
only comprises 11.7 percent of the total amount of renewable generation.
Recovery of Regulatory Asset
Consistent with the Stipulation and Settlement Agreement
issued in August 2012, DEF
utilized the May 2017 Earnings Surveillance Report (ESR) capital structure and
cost rates, as filed in DEF’s Actual/Estimated filing in Docket No. 20170001-EI
on July 27, 2017. The May 2017 ESR reported an overall rate of return of 6.71
percent.
As mentioned previously, the existing PPA was approved by
the Commission and the recovery of the asset occurred through the Fuel Clause.
DEF proposes to recover the regulatory asset to be established for the
termination payment through the Fuel Clause as well, over the remaining PPA
period which ends in May 2034. DEF requested a recovery of approximately $7
million per year. DEF also proposes to amortize the regulatory asset over the
remaining PPA period and to earn a return, at DEF’s Retail Weighted Average
Cost of Capital on the unrecovered FPD regulatory asset balance through the
Fuel Clause. Staff recommends that the establishment of this regulatory asset,
the recovery of this regulatory asset through the Fuel Clause, and the return
terms are appropriate.
Conclusion
Staff has reviewed
the Termination Agreement and recommends that terminating the existing PPA is
estimated to save customers between $38 million and $59 million in NPV. Staff
recommends the establishment of a regulatory asset to be amortized over the
remaining contract term through May 2034.
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. (Murphy, Dziechciarz)
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.
