Case Background
Florida Power &
Light Company (FPL) is an investor-owned electric utility operating under the
jurisdiction of this Commission pursuant to the provisions of Chapter 366,
Florida Statutes, (F.S.). FPL provides generation, transmission, and
distribution service to approximately 4.9 million retail customer accounts or
an estimated 10 million people.
The City of Vero
Beach’s (COVB or City) electric utility is a municipally-owned electric utility
providing service to customers through approximately 35,000 customer accounts
using the COVB transmission and distribution facilities. The boundaries of the
COVB service area are set pursuant to four Commission territorial orders that
approved territorial agreements between COVB and FPL (Territorial Orders). Approximately 60 percent of COVB’s utility
customers reside outside the City’s municipal borders including customers
residing in portions of unincorporated Indian River County (County), and
portions of the Town of Indian River Shores (Town or Indian River Shores). In
addition to the Commission-approved Territorial Orders, COVB operated in Indian
River County and Indian River Shores under franchise agreements, which have
since expired. For
many years, there has been controversy because customers living outside the
City have wanted to be served by FPL because it has lower rates than COVB. The customers who live outside the City have
argued that they have no ability to vote for the members of the COVB City
Council and thus have no voice concerning the operation or management of the
City’s electric utility and no redress to any governmental authority.
Legislation
was passed in 2008 that required a municipal electric utility meeting certain
criteria to conduct a referendum of its customers on the question of whether a
separate electric utility authority should be created to operate the business
of the city’s electric utility. Section 366.04(7), F.S. COVB did not conduct such a referendum
because it alleged that it did not meet the criteria that would require it to
conduct such a referendum. Further attempts to pass Legislation to address the
concerns of COVB electric customers living outside the City failed in 2010 (HB
725 Mayfield/SB 2632 Negron; HB 1397 Mayfield); 2011 (HB 899 Mayfield); 2013
(HB 733 Mayfield/SB 1620 Garcia); 2014 (HB 813 Mayfield/SB 1248 Latvala; HB 861
Mayfield/SB 1294 Altman); 2015 (HB 773 Mayfield; HB 337 Mayfield/SB 442
Altman); and 2016 (HB 5790 Mayfield/SB 840 Simpson).
In
2009, a complaint was filed with the Commission by two COVB customers asking
for a hearing to address Commission enforcement of Section 366.04, F.S., and
review the territorial agreement between COVB and FPL. The complaint alleged concerns about
COVB’s proposed changes to rates significantly higher than FPL’s rates. The
complaint also alleged that the City Council had entered into a series of
ill-fated electric utility agreements and decisions that led to a small,
outmoded and costly utility, that the City siphoned utility revenue for city
budget purposes rather than utility operations or reserves, that over 60
percent of customers living outside the City had no voice with city elected
officials, and that the City offered no conservation incentives such as rebates
for installing more energy efficient appliances. The complaint was voluntarily
dismissed in 2014 because of then on-going negotiations between FPL and COVB
concerning the possible purchase and sale of COVB’s electric system. However, these
negotiations did not result in a sale.
By
letter dated July 18, 2014, Indian River Shores advised COVB that it was taking
several actions to achieve rate relief for its citizens who received electric
service from the City. The Town filed a complaint against COVB in Indian River
County Circuit Court Case No. 31-2014-CA-000748, one count of which asked the circuit
court to declare that COVB was subject to and must comply with the requirement
of Section 366.04(7)(a), F.S., to have a referendum. The lawsuit also challenged
COVB’s electric rates as unreasonable, oppressive, and inequitable, and raised “a Constitutional challenge regarding
the denial of rights” to COVB electric customers living in Indian River Shores.
Following
unsuccessful mediation between Indian River Shores and COVB pursuant to the
Florida Governmental Conflict Resolution Act, Chapter 164, F.S., Indian River Shores filed an amended
complaint asking the circuit court, in part, to declare that upon expiration of
the franchise agreement giving COVB permission to provide electric service in
Indian River Shores, COVB had no legal right to provide electric service in
Indian River Shores. In its amended complaint, Indian River Shores alleged that
COVB sought to exert extra-territorial monopoly powers and extract monopoly
profits within the corporate limits of the Town of Indian River Shores without
the Town’s consent. The Town alleged
that even though COVB’s electric utility paid no corporate income taxes, no
property taxes, had access to low cost financing subsidized by tax-free bonds,
and was not subject to the costs of complying with state mandated energy
efficiency and conservation requirements, COVB’s electric rates had been some
of the highest in Florida over the previous ten years, and were substantially
higher that FPL’s rates.
Indian
River Shores further alleged that although FPL’s electric rates were regulated
by the Commission, COVB’s rates were not regulated by the Commission but were
managed by the COVB City Council. The amended complaint alleged that
approximately 65 percent of COVB’s
electric customers were located outside of the City and thus had no voice in
electing the official that managed the City’s electric utility system and set
their electric rates. The Town alleged
that COVB’s high electric rates were due to factors within the City’s control,
including (1) abdicating its operational and managerial responsibilities to
entities with which it had entered into expensive long-term power supply
arrangements without appropriate oversight and due diligence; (2) the City was
bound to above-market power prices under the long-term power supply
arrangements agreed to by the City; (3) the City administered its electric
utility power supply without appropriate hedging, interest-rate swaps, and
other risk management protocols needed to mitigate fuel price volatility and
keep electric power costs as low as reasonably possible; and (4) electric
utility revenues were diverted to COVB’s general revenue fund as a means to
keep ad valorem taxes on property within the City artificially low and to cover
costs that had nothing to do with operation of the City’s electric
utility. Indian River Shores alleged
that COVB had not operated its electric utility and furnished electric services
in accordance with normally accepted electric utility standards, but rather had
acted imprudently in its utility management.
COVB
filed a motion to dismiss the circuit court franchise agreement claim, which the
Commission supported in court as amicus curiae. On November 11, 2015, the circuit
court granted the motion to dismiss, finding that the question of whether COVB
had the authority to continue to provide electric service within Indian River
Shores upon expiration of the franchise agreement was squarely within the
Commission’s jurisdiction to decide. The circuit court did not dismiss the
count that COVB’s electric rates were unreasonable. However, Indian River
Shores subsequently voluntarily dismissed its lawsuit with prejudice.
In
2014, Indian River County filed a petition for declaratory statement with the
Commission asking for a declaration that upon expiration of its franchise
agreement with COVB in February, 2017, the County would have the right to
choose its electricity provider. In its petition, Indian River County alleged
that more than half of COVB’s electric customers were outside the City limits
in the unincorporated parts of the County, and that while the exemption from
Commission jurisdiction for municipal utilities was understandable where the
customers are all or mostly all city residents, the majority of COVB’s
customers had no political or regulatory recourse regarding COVB as their
electric service provider. The County
further alleged that the situation was especially egregious since COVB refused
to hold a referendum under Section 366.04(7), F.S., or to otherwise create an
electric utility authority that would include representation of non-city
customers. The petition alleged that
COVB’s electric service to customers who lived outside the City in
unincorporated Indian River County had become increasingly more contentious and
controversial, that the non-city COVB electric customers who receive no city
services were contributing two-thirds as much revenue to general government as
is generated by the City’s property taxes, and that COVB’s rates were
approximately one-third higher than FPL’s rates. The Commission denied this
petition for failing to meet the statutory requirements necessary to obtain a
declaratory statement.
Also
in 2014, COVB filed a petition with the Commission asking for a declaration
that upon expiration of its franchise agreement with the County, it would have
the right and obligation to continue providing electric service in
unincorporated Indian River County under the Commission-approved Territorial Orders.
The Commission issued an order declaring that COVB has the right and obligation
to continue to provide retail electric service in the territory described in
its Territorial Orders upon expiration of its franchise agreement with the
County. The County appealed both orders, and both
Commission orders were affirmed by the Florida Supreme Court.
On
January 5, 2016, Indian River Shores filed a petition for declaratory statement
with the Commission, asking for a declaration that the Commission lacks
jurisdiction to interpret Article VIII, Section 2(c), Florida Constitution, for
purposes of determining whether Indian River Shores has a constitutional right
to be protected from COVB providing electric service within Indian River Shores
without Indian River Shores’ consent. In response, the Commission issued an
order declaring that it had the jurisdiction under Section 366.04, F.S., to
determine whether COVB had the authority to continue to provide electric
service within the corporate limits of Indian River Shores upon expiration of
the franchise agreement and that in a proper proceeding, the Commission has the
authority to interpret the phrase “as provided by general or special law” as
used in Article VIII, Section 2(c), Florida Constitution.
On
March 4, 2016, pursuant to Sections 120.57 and 366.04, F.S., Indian River
Shores filed a Petition for Modification of Territorial Order Based on Changed
Legal Circumstances Emanating from Article VIII, Section 2(c) of the Florida
Constitution. Indian River Shores asked the Commission to modify the
Territorial Orders between FPL and COVB by moving the entire Town of Indian
River Shores out of COVB’s service area and placing it within the electric
service area of FPL. In its Petition, based on essentially the same specific
allegations made in the Circuit Court Amended Complaint as detailed above, the
Town argued that the Commission should modify the Territorial Orders because
COVB was operating as an unregulated monopoly within the Town and subjected
captive customers in the Town to excessive rates, inferior quality of services,
and other monopoly abuses contrary to the public interest. The Town alleged
that some of its citizens were served by FPL and some by COVB, and that, as a
consequence, the Town’s residents received vastly different service, at vastly
different rates, with vastly different regulation and oversight, and that the
current territory boundary pitted neighbor against neighbor and caused discord
and confusion among Town residents.
Indian
River Shores also alleged that having FPL as the single electric provider would
allow all Town residents access to the energy conservation programs offered by
FPL, give access to FPL’s deployment of solar generation and smart meters,
which were not offered by COVB and would dramatically reduce the utility costs
to the Town’s residents, and would provide the Town with the benefits of FPL’s
highly regarded management expertise and high customer satisfaction ratings. The petition alleged that the Town’s
residents were overwhelmingly in favor of having FPL as the single electric
provider within the Town. The Commission issued a proposed agency action (PAA) order
denying the petition for modification. The Town of Indian River Shores filed a
petition for administrative hearing on the PAA order and COVB filed a
cross-petition. Upon joint motion of Indian River Shores and the City, the
hearing proceeding is being held in abeyance pending closing on the purchase
and sale of the COVB electric utility to FPL.
Procedural
Background
On November 3,
2017, FPL filed a petition in Docket No. 20170235-EI for authority to charge
FPL’s rates and charges to COVB customers and for approval of FPL’s requested
accounting treatment. As part of its petition, FPL filed testimony and exhibits
of six witnesses. FPL’s petition states that on May 16, 2017, FPL presented a letter of intent to COVB for
the potential purchase of the City’s electric utility system, which was
subsequently executed by both parties. FPL states that, thereafter, FPL and the
City negotiated an agreement for the sale of the COVB’s electric utility assets.
Negotiations were also held with the Florida Municipal Power Agency (FMPA) and the
Orlando Utilities Commission (OUC) to resolve COVB’s contractual obligations
with those entities that would be necessary in order to close the transaction.
On October 24, 2017, FPL and COVB entered into an Asset Purchase and Sale
Agreement (the PSA). The PSA reflects COVB’s and FPL’s agreement to sell and to
purchase the COVB electric utility system. Pursuant to the PSA, FPL will
acquire assets of the COVB electric utility system for a cash payment of
approximately $185.0 million as well as other consideration.
The petition
states that in connection with the PSA, COVB needs to address power contracts
to which it is a party, including (1) a 20-year wholesale services agreement
with OUC to provide supplementary power to COVB, due to expire in 2023 (Wholesale
Services Agreement); and (2) a series of three contracts for the City’s share
of the FMPA generation entitlements from certain power plants, namely St. Lucie
Unit 2 and Stanton Units 1 and 2 (collectively “FMPA Entitlements”). The
petition further states that, pursuant to the provisions of the PSA, COVB’s
Wholesale Services Agreement with OUC and COVB’s obligations to FMPA for the
FMPA Entitlements would terminate upon the closing of the PSA. FPL states that,
as part of the PSA and to enable the COVB to terminate its obligations with
OUC, FPL negotiated a short-term power purchase agreement (PPA) with OUC for
capacity and energy, commencing at the close of the PSA and extending through
2020.
FPL states in
its petition that in order to implement the PSA, it is requesting that the
Commission: (1) grant FPL approval to charge its approved rates and charges to the
COVB customers; (2) approve the establishment and base rate recovery of a
positive acquisition adjustment of approximately $116.2 million with respect to
the City’s electric utility system acquired by FPL; and (3) approve recovery of
costs associated with the short-term PPA with OUC. An acquisition adjustment is
the difference between the purchase price paid to acquire a utility asset or
group of assets and the depreciated original cost, or net book value, of those
assets. A positive acquisition adjustment exists when the purchase price is
greater than the net book value. With respect to the OUC PPA, FPL requests that
the Commission: (1) approve recovery of
the energy portion of charges through FPL’s Fuel and Purchased Power Cost
Recovery Clause; and (2) approve recovery of the capacity charges component
through the Capacity Cost Recovery Clause.
In addition, on November 3, 2017, FPL and COVB filed a
joint petition in Docket No. 20170236-EU for approval to terminate their Commission-approved
territorial agreement. The joint petition alleges that termination of the
territorial agreement is sought in connection with FPL’s acquisition of the COVB
electric utility and FPL’s petition to charge FPL’s approved rates and charges
and for the approval of its requested accounting treatment.
Intervention of the Office of Public Counsel (OPC) in both
dockets was acknowledged by Order Nos. PSC-2018-0145-PCO-EI (Docket No.
20170235-EI) and PSC-2018-0163-PCO-EU (Docket No. 20170236-EU).
Commission Jurisdiction
The Commission has jurisdiction
over the matters raised in the petitions filed in Docket Nos. 20170235-EI and
20170236-EU pursuant to Sections 366.06 and 366.076, F.S. To be clear, FPL is
not requesting and the Commission does not have jurisdiction over approval of the
transfer of the City’s electric utility assets to FPL. In the 1974 Grid Bill,[11]
as part of the Legislature’s regulatory regime over electric utilities, the
Commission was given limited regulatory jurisdiction over municipal electric
utilities. See 366.04(2), F.S. The
Legislature gave the Commission authority over municipalities to
prescribe uniform systems and classifications of accounts; to prescribe a rate
structure for all electric utilities; to require electric power conservation
and reliability within a coordinated grid, for operational as well as emergency
purposes; to approve territorial agreements; to resolve territorial disputes;
and to prescribe and require the filing of periodic reports and other data. The
purchase and sale agreement between COVB and FPL is not subject to approval by
the Commission.
Further, the Legislature did not give the Commission jurisdiction over municipal
rates. Lewis v. Public Service Commission,
463 So. 2d 227 (Fla. 1985)(stating that the Commission’s jurisdiction over rate
structure does not include jurisdiction over the actual rates charged by a
municipal electric utility). Because the Commission lacks this jurisdiction, it
does not have authority to determine what COVB’s electric rates should be or
whether they are “too high” compared to FPL’s current rates. The Florida
Supreme Court has stated that as part of Florida’s legislatively constructed
regulatory regime, if customers of municipal electric utilities have complaints
of “excessive rates or inadequate service their appeal under Florida law is to
the courts or the municipal council.” Story
v. Mayo, 217 So. 2d 304, 308 (Fla. 1968), cert. denied, 395 U.S. 909 (1969).
Discussion
of Issues
Issue 1:
Should the
Commission grant FPL the authority to charge FPL's rates and charges to COVB’s
customers upon the closing date of the PSA?
Recommendation:
Yes, the Commission should grant FPL the authority
to charge FPL’s approved rates and charges to COVB’s customers effective upon
the closing date of the PSA because they would become FPL customers. FPL should
notify COVB’s customers of the new rates and charges with the first bill
containing the new rates. (Draper)
Staff Analysis:
This issue addresses the
request in the petition filed by FPL in Docket No. 20170235-EI to grant FPL the
authority to charge its rates and charges to COVB’s customers. The PSA provides
for the COVB customers to become FPL electric customers and receive service at
the applicable FPL rates and charges upon the closing of the PSA. Specifically,
the PSA states that FPL has the responsibility for securing approval from the
Commission for authority under Rule 25-9.044, F.A.C., to charge FPL’s existing
rates to the COVB customers.
Rule 25-9.044(1), F.A.C., states
that in the case of a change of ownership or control of a utility that places
the operation under a different or new utility, the company which will
thereafter operate the utility must adopt and use the rates, classifications,
and regulations of the former operating company unless authorized to change by
the Commission.
In response to staff’s first data
request, FPL provided bill comparisons between FPL and COVB customers. A COVB residential
customer who becomes an FPL customer who uses 1,000 kilowatt hours (kWh) would
see a bill decrease from $126.10 to $99.37, a decrease of $26.73 or
approximately 21.2 percent, based on rates effective March 2018. COVB
commercial and industrial customers would also see bill decreases based on
usage.
Regarding customer notification,
FPL explains that FPL’s proposal to acquire the COVB electric utility has been the
subject of public debate and discussion for nearly a decade up to the time when
the City Council voted in favor of the sale in October 2017. FPL further states
that the proposed sale of the COVB electric utility to FPL was addressed in two
public referendums and during numerous publicly noticed City Council meetings.
In addition, FPL states that it plans to hold two open houses before the
transaction closes in order to address all customer questions and concerns.
Staff recommends that the
Commission authorize FPL to charge FPL’s approved rates and charges to the COVB
customers effective upon the closing date of the PSA because they would become
FPL customers. FPL should notify the COVB customers of the new rates and
charges with the first bill containing the new rates. Staff believes, given the lengthy
public debate regarding the proposed FPL/COVB transaction and the fact that
FPL’s current rates and charges are lower than the City’s rates, customer
notification with the first bill containing the new rates is sufficient.
Issue 2:
Should the Commission approve the joint petitioners’
request to terminate the existing territorial agreement between FPL and the
City of Vero Beach upon the closing date of the PSA?
Recommendation:
Yes, the Commission should approve the joint
petitioners’ request to terminate the existing territorial agreement between
FPL and the City of Vero Beach effective upon the closing date of the PSA. Upon
closing of the PSA, FPL should file revised tariff sheets Nos. 3.020, 3.010,
and 7.020 to reflect the addition of the COVB service area to the description
of territory and communities served. Commission staff should be given authority
to administratively approve these tariff sheets consistent with the
Commission’s decision. (Guffey, Draper)
Staff Analysis:
This issue addresses the joint
petition of FPL and the City in Docket No. 20170236-EU to terminate their
territorial agreement. The joint petition involves the transfer of
customers from COVB to FPL. Section 366.04(2), F.S., gives the Commission the
power to approve territorial agreements between municipal electric utilities
and investor-owned electric utilities. Any modification or termination of a Commission-approved
territorial order must be made by the Commission pursuant to its exclusive
jurisdiction. See Public Service
Commission v. Fuller, 551 So. 2d 1210, 1212 (Fla. 1989). The Commission has
the responsibility to ensure that the termination of the territorial agreement
and concomitant transfer of customers to FPL results in no harm or detriment to
the public interest. See AmeriSteel Corp.
v. Clark, 691 So. 2d 473, 478 (Fla. 1997), Utilities Commission of the City of New Smyrna Beach v. Florida Public
Service Commission, 469 So. 2d 731, 732-33 (Fla. 1985). The public
interest is the ultimate measuring stick to guide the Commission’s decision. Gulf Coast Electric Cooperative v. Johnson,
727 So. 2d 259, 264 (Fla. 1999). Utility ratemaking is viewed as a matter of
fairness. GTE Florida Inc. v. Clark,
668 So. 2d 971, 972 (Fla. 1996). The Commission should base its decision on the
effect termination of the territorial agreement will have on all affected
customers, both those transferred and those not transferred. See New Smyrna Beach, 469 So. 2d at 732.
The joint petition states that
the petitioners seek termination of their existing territorial agreement in
connection with FPL’s acquisition of the COVB electric utility that is
addressed in Docket No. 20170235-EU. The joint petition states that
the termination of the territorial agreement will be effective if all
conditions precedent to the PSA are satisfied and the transaction closes. If
the territorial agreement is terminated, FPL will be serving all of Indian
River County. If the PSA does not close, the joint petitioners will continue to
operate pursuant to the Territorial Orders.
Currently, COVB serves 29,258 residential, 5,721
commercial, and 144 street light customers for a total of 35,123 customers. As
discussed in Issue 1, FPL will provide electric service to COVB’s customers at
FPL’s approved rates and charges upon the closing date of the PSA.
The joint petitioners state that FPL’s purchase of COVB’s
electric system is projected to result in more economical service to both COVB’s
customers and FPL’s current customers and, therefore, termination of the
territorial agreement is in the public interest. COVB’s existing service
territory is surrounded by FPL’s service territory. The joint petitioners state
that the geographic configuration will allow FPL to make efficient use of
resources in providing electric service to COVB’s customers. The joint
petitioners further state that termination of the territorial agreement will
result in excellent service reliability for COVB’s customers. Additionally, the
joint petitioners state COVB’s residential and commercial customers will be
eligible to participate in FPL’s energy conservation programs and commercial
customers will have the opportunity to enroll in economic development rates.
Regarding customer notification of the proposed
termination of the territorial agreement, the joint petitioners explain that
FPL’s proposal to acquire the COVB electric utility has been the subject of
public debate and discussion for nearly a decade. In addition, the joint
petitioners state that FPL plans to hold two open houses before the transaction
closes in order to address all customer questions and concerns, including
termination of the territorial agreement.
Conclusion
Staff recommends approval of the joint petitioners’
request to terminate the existing territorial agreement between FPL and COVB
effective upon the closing date of the PSA. Staff believes that
termination of the territorial agreement results in no harm or detriment to the
public interest. Upon closing of the PSA, FPL should file revised tariff sheets
Nos. 3.020, 3.010, and 7.020 to reflect the addition of the COVB service area
to the description of territory and communities served. Commission staff should
be given authority to administratively approve the tariff sheets consistent
with the Commission’s decision.
Issue 3:
Should the Commission authorize FPL to recognize a positive
acquisition adjustment on its books associated with the purchase of the COVB electric
utility system?
Recommendation:
Yes. The extraordinary circumstances demonstrated in
this case support approval for FPL to record a positive acquisition adjustment in
the amount of $21.3 million on its books in Federal Energy Regulatory
Commission (FERC) Account 114 - Electric Plant Acquisition Adjustments and to amortize
this amount over the requested period of 30 years. (D. Smith, Cowdery)
Staff
Analysis: As explained in
the Case Background, the Commission does not have jurisdiction over the
transfer of the COVB’s electric utility assets to FPL. The narrow question
before the Commission is whether FPL’s proposed accounting treatment should be
approved.
Legal Standard
The Commission’s policy with
respect to acquisition adjustments has been to evaluate the specific facts and
circumstances on an individual case by case basis and to determine whether
there are extraordinary circumstances that warrant the approval of a positive
acquisition adjustment. This policy as applied to electric investor-owned
utilities is explained in Order No. PSC-92-1468-FOF–EU, where the Commission
analyzed the issue of allowing a positive acquisition adjustment in the case of
the acquisition of the Sebring Utilities Commission (Sebring) electric system
by Florida Power Corporation (FPC). In that case, FPC purchased the Sebring
electric system for $54.0 million, paying a premium of approximately $36.5
million over the net book value (NBV) of $17.5 million.
As described in the 1992
FPC/Sebring Order, Sebring was in serious financial distress, with debt service
bringing it to the verge of bankruptcy. Sebring was in default of its bond
covenants and its rates were not sufficient to cover the debt service and
maintain required reserve margins. Sebring’s rates were the highest in the
state, and to comply with its bond covenants would require an estimated
thirty-seven percent rate increase, raising the typical residential electric
bill to $151 per 1,000 kWh. The Commission determined that extraordinary
circumstances existed for allowing a positive acquisition adjustment because
the acquisition of the Sebring electric system represented the most reasonable
resolution of Sebring’s financial problems.
The Commission approved a going
concern value of $5.7 million as the value above NBV which reasonably could be
approved as benefitting the general body of FPC’s existing customers. In its
decision, the Commission quoted the Florida Supreme Court in C.F. Industries, Inc. v. Nichols, 536
So. 2d 234, 238-39 (Fla. 1988), in which the Court affirmed the Commission’s
approval of standby rates to be charged cogenerators:
In setting rates, the PSC has a two-pronged responsibility:
rates must not only be fair and reasonable
to the parties before the PSC, they must also be fair and reasonable to other
utility customers who are not directly involved in the proceedings at hand.
Standby rates which did not properly recover the cost-of-service would unfairly
discriminate against other customers by requiring them to subsidize the standby
service.
The Commission applied this standard in the FPC/Sebring
case. The cost of the debt attached to the Sebring electric system was not
recovered from the existing general body of FPC customers through an
acquisition adjustment. Instead, the Commission stated that the debt that the
Sebring electric system had accrued was a “cost of service” attached to that
system, and that attaching that cost of service to a different existing general
body of customers was against the principles of ratemaking. Apart from the
recovery of the NBV and the going concern value, the Commission found all other
recovery to be the responsibility of Sebring to be specifically recovered from
the existing and future customers in the Sebring service area.
The record of this proceeding makes it perfectly
clear, despite many Sebring customers’ wish that it be otherwise, that the cost
of the Sebring debt is a cost to serve the Sebring customers. . . .
We find that the Sebring rider rate appropriately identifies the
additional cost to serve Sebring customers, appropriately allocates that cost
to those customers, and appropriately insulates Florida Power Corporation’s
general body of ratepayers from the costs that were not incurred for their
benefit.
The public interest is the
ultimate measuring stick to guide the Commission’s decisions. Gulf Coast Electric Cooperative v. Johnson,
727 So. 2d 259, 264 (Fla. 1999). Utility ratemaking is viewed as a matter of
fairness. GTE Florida Inc. v. Clark, 668 So. 2d 971, 972 (Fla. 1996).
FPL’s Request for a Positive Acquisition
Adjustment
In its petition filed on November 3, 2017, FPL requested approval to
record and recover through base rates a positive acquisition adjustment of
$116.2 million and for approval to recover the costs associated with a
short-term power purchase agreement (PPA) with OUC through the applicable cost
recovery clause factors. The instant issue deals with FPL’s request for base
rate recovery of the positive acquisition adjustment. FPL’s request for
recovery of costs associated with the PPA with OUC is addressed in Issue 4.
FPL states that the acquisition of the COVB system will
benefit the existing general body of FPL customers because FPL projects that
the incremental costs to serve the COVB customers will be less than the incremental
revenues received from those same customers. FPL also states that the addition
of the COVB customers will reduce the shared amount of fixed cost spread across
FPL’s existing general body of customers. FPL provided a cumulative present
value revenue requirements (CPVRR) analysis that shows potential 30-year present
value savings of $105.3 million to the existing general body of FPL customers.
FPL identifies three cases involving natural gas utilities
where the Commission addressed positive acquisition adjustments. These cases
involved the acquisition of Florida City Gas by AGL Resources, Inc. (AGLR), the
acquisition of Florida Public Utilities Company (FPUC) by the Florida Division
of Chesapeake Utilities Corporation (Chesapeake), and the acquisition of
Indiantown Gas Company by FPUC. FPL
alleges that in these cases, the Commission identified five factors that have
been considered in determining whether an acquisition and any resulting
positive acquisition adjustment are in the public interest. FPL states that these
five factors are: (1) increased quality of service; (2) lowered operating
costs; (3) increased ability to attract capital for improvements; (4) a lower
overall cost of capital; and (5) more professional and experienced managerial,
financial, technical, and operational resources. FPL states that due to its
size and expertise in the electric utility industry, all five of these factors
will be met for the benefit of the COVB customers if the transaction is
consummated.
FPL also cites the case of the acquisition of Sebring by
FPC.
FPL states that the FPC/Sebring case is a good example of the Commission
approving a positive acquisition adjustment.
Positive Acquisition Adjustment Analysis
Extraordinary Circumstances
The Florida Commission, as well as almost every other
state commission, practices original cost ratemaking. Under original cost
ratemaking, the value of a utility’s rate base is determined by the depreciated
original cost of the property devoted to public service. An acquisition
adjustment is the difference between the purchase price paid to acquire a
utility asset or group of assets, and the depreciated original cost, or net
book value (NBV), of those assets. A positive acquisition adjustment exists
when the purchase price is greater than the NBV.
As noted earlier, the Commission’s policy concerning consideration
of acquisition adjustments for electric utilities has been that, for ratemaking
purposes, absent a clear demonstration of extraordinary circumstances, the
purchase of a utility system at a premium does not affect the determination of
rate base. In other words, if the purchase price of a utility is greater than
the NBV, the difference between the purchase price and NBV is not passed on to
the general body of customers vis-a-vis an increase in rate base absent a
demonstration of extraordinary circumstances. Such a policy protects customers
from utilities “swapping assets” and inappropriately increasing costs to
customers. For example, if a utility paid $2 million for a $1 million piece of
equipment, the Commission would appropriately deny the unjustified $1 million
additional cost. Similarly, when one utility purchases another utility at above
depreciated original cost, any cost above the depreciated original cost should
be disallowed unless extraordinary circumstances indicate it would be in the best
interests of customers to allow an acquisition adjustment. The premium paid
above the depreciated original cost does not represent a contribution of
capital to public service.
FPL cites to Rule 25-30.0371, F.A.C., in support of its
request. Rule 25-30.0371, F.A.C.,
addresses acquisition adjustments for water and wastewater utilities. The rule
states the Commission’s policy that applies to all industries: A positive acquisition adjustment shall not
be included in rate base absent proof of extraordinary circumstances. However,
the circumstances that may be considered extraordinary circumstances for
allowing a positive acquisition adjustment when a larger water or wastewater
utility purchases a small, troubled utility do not apply to the facts of FPL’s
purchase of the COVB electric utility.
FPL also cites to five factors that have been considered
in determining whether extraordinary circumstances exist for allowing a
positive acquisition adjustment for a gas utility purchase: (1) increased
quality of service; (2) lowered operating costs; (3) increased ability to
attract capital for improvements; (4) a lower overall cost of capital; and (5)
more professional and experienced managerial, financial, technical, and
operational resources. The facts do not
demonstrate any extraordinary circumstances related to COVB’s electric utility
concerning these factors that would support a positive acquisition
adjustment.
The FPC/Sebring Order is the only similar case where the
Commission approved a positive acquisition adjustment in the electric industry.
This case provides guidance in addressing FPL’s petition. The difficulty
associated with addressing the question of whether a positive acquisition
adjustment should be allowed in the electric industry and applied to the
general body of customers was expressed in the Commission’s decision in the
FPC/Sebring case.
From our regulatory
perspective the case has been a difficult one.
As a general rule, we do not preapprove the prudence of rate base
acquisitions outside of a rate case, nor do we usually permit acquisition
adjustments, particularly outside of a rate case. … To those who would view our
decision here as precedent, we categorically state that this decision has no
precedential value. It is limited to the
unique set of facts in this case.
However, there are differences between the facts
surrounding FPL’s request for a positive acquisition adjustment and the facts
in the FPC/Sebring case. First and foremost, COVB is not on the verge of
bankruptcy. In addition, the relative rate disparity in the FPL/COVB
transaction is far less than the rate disparity present in the FPC/Sebring
case. FPL’s petition states that for a typical residential customer on a 1,000
kWh basis, FPL’s rates were approximately $16 per month less than COVB’s rates.
Due to a subsequent rate increase implemented by COVB and a rate decrease for
FPL due to the removal of the Hurricane Matthew surcharge, the rate disparity
is now approximately $27 per month. In contrast, at the time of the FPC/Sebring
transaction, the incremental difference for a typical residential customer on a
1,000 kWh basis between FPC’s rates and Sebring’s rates was approximately $39
per month. Moreover, it was noted that in order for Sebring to produce
sufficient revenues to meet its bond covenants on a stand-alone basis, the
resulting rate differential would have doubled to $80 per month.
It is important to note that a
disparity in rates alone does not constitute an extraordinary circumstance that
can support a positive acquisition adjustment. Electric utility customers cannot choose between electricity providers
based on which provider has the lower rates. A significant price differential
in electric rates between two electricity providers does not give a customer a
substantial interest in the outcome of a proceeding on a proposed territorial
agreement. AmeriSteel Corp. v. Clark,
691 So. 2d 473, 477 (Fla 1997). It is established law that “[a]n individual has
no organic, economic or political right to service by a particular utility
merely because he deems it advantageous to himself.” Story v. Mayo, 217 So. 2d
304, 307 (Fla. 1968), cert. denied,
395 U.S. 909 (1969). In the Commission’s exercise of jurisdiction over
territorial agreements, larger policies are at stake than one customer’s
self-interest. Lee County Electric Co-op
v. Marks, 501 So. 2d 585, 587 (Fla. 1987). If a customer is
permitted to allege extraordinary circumstances simply because they pay higher
rates than the rates charged by another electricity provider, then every person
or entity in Florida would have grounds to argue they too are entitled to be
served by a different electricity provider with lower rates.
Another difference between the
facts in FPL’s request for approval of a positive acquisition adjustment and
what was approved in the FPC/Sebring case relates to how the premium paid over
NBV was handled. FPL requests that the entire premium over the NBV of $116.2
million ($185.0 million purchase price less the NBV of $68.8 million) be
recovered through base rates from its general body of customers. As noted
earlier, in the FPC/Sebring case, the net premium of approximately $30.8
million (the purchase price of $54.0 million less the NBV of $17.5 million and
the going concern value of $5.7 million) was not included in the amount of the
positive acquisition adjustment FPC was authorized to record on its books.
As described in the Case
Background, approximately 60 percent of COVB’s customers reside outside the
City’s municipal borders. For many years, these customers have been frustrated
by their inability to have a voice in the operation of the City’s electric
utility or in rate setting decisions. These customers have wanted to be served
by FPL because of its lower rates. This
dissatisfaction has resulted in years of controversy, repeated efforts to
address issues through legislation, multiple filings with the Commission, and
litigation between the City of Vero Beach and the Town of Indian River Shores
and Indian River County. Staff has
received no objections in either Docket Nos. 20170235-EI or 20170236-EU from
any COVB or FPL customers. The legal
system favors settlement of utility territorial disputes by mutual agreement
between contending parties. AmeriSteel
Corp. v. Clark, 691 So. 2d 473, 478 (Fla. 1997). The sale of the COVB electric utility to FPL
and attendant transfer of customers from COVB to FPL will resolve the ongoing
contention between the COVB and Indian River County and the Town of Indian
River Shores. For these reasons, staff
believes that FPL has demonstrated extraordinary circumstances that justify the
Commission approving a positive acquisition adjustment.
Positive Acquisition Adjustment Amount
Analysis of FPL’s Requested Accounting Treatment
While staff acknowledges there are extraordinary
circumstances due to the unique nature of the territorial issues in this case that
may merit the Commission granting approval of some amount of a positive
acquisition adjustment, staff disagrees with the basis suggested by FPL for
consideration of a positive acquisition adjustment. Staff believes that,
consistent with the Commission’s order in the FPC/Sebring case, the amount of
the acquisition adjustment should be reasonably related to the ensuing benefit
to the general body of FPL customers.
FPL’s request for a positive acquisition adjustment
associated with the acquisition of the COVB electric utility system can be
distinguished from the acquisition adjustments addressed in the natural gas cases
cited by FPL in several significant respects. In each of these cases, the positive
acquisition adjustment is recorded on the books of the natural gas company that
was acquired. This means that the recovery of the acquisition adjustment is borne
solely by the customers that were acquired. For example, because the portion of
the positive acquisition adjustment associated with the acquisition of Florida
City Gas is recorded on the books of Florida City Gas rather than the books of
AGLR, recovery of this cost is through the rates charged by Florida City Gas to
its customers, not the rates charged by AGLR to its general body of customers.
The same holds true for the other two acquisitions. Because FPL is proposing to
integrate COVB customers into its customer base and to record the positive acquisition
adjustment on its own books, the 4.9 million current FPL customers, and not the
approximately 35,000 COVB customers, will be the customer base that will pay the
vast majority of the acquisition adjustment. In addition, while a positive
acquisition adjustment was recorded on the books of the FPUC Gas Division
following the acquisition by Chesapeake, there was no positive acquisition
adjustment requested or recorded on the books of the FPUC Electric Division,
which was also acquired in the same transaction.
Another distinction between the acquisition adjustments
approved for the natural gas transactions and the acquisition adjustment
requested by FPL concerns the issue of future review. In each of these
approvals, the orders specifically required that the permanence of the cost
savings supporting the request for a positive acquisition adjustment would be
subject to continuing review. If it were to be determined that the cost savings
no longer exist, the acquisition adjustment may be partially or totally removed
as deemed appropriate by the Commission. FPL’s petition has specifically
requested that once approved, there would be no further review of the positive
acquisition adjustment. In other words, unlike these prior cases, under FPL’s
request there would be no requirement for FPL to demonstrate that the projected
savings, supporting its requested positive acquisition adjustment, actually ever
materialize.
As noted earlier, FPL claims that its CPVRR analysis
demonstrates that there will be no harm to its existing customers if its
proposed accounting treatment is approved as filed. However, there are certain
assumptions in the CPVRR analysis that draw this conclusion into question. The
first concern deals with the central assumption that FPL will receive an ever
increasing revenue stream above the cost to serve the COVB customers. In year
2019, the analysis assumes it will cost $1.1 million more to serve the COVB
customers than FPL will receive in revenue from this group. However, in each of
the successive years, this differential between the revenues received and the
cost to serve is assumed to reverse and grow such that by 2032, FPL is
receiving $22.1 million more in annual revenue than its cost to serve the COVB
customers. Over the first 14 years, the analysis assumes FPL will receive $209
million more in revenue directly from the COVB customers than its incremental
cost to serve these same customers over this period. Under a cost of service
regulatory paradigm, it is not reasonable to assume revenues will continuously
increase while costs decline or remain relatively flat.
Another concern with the CPVRR analysis is the assumption
regarding the incremental fixed costs and capital for generation needed to
serve the COVB customers. The analysis assumes $0 will be invested during the
first 14 years. However, beginning in year 2033, the analysis assumes $20.6 to
$31.0 million will be invested each and every year thereafter. In other words,
the analysis assumes $0 investment in incremental generation to serve the COVB
customers over the first 14 years but $434 million will be spent over the final
16 years. It is not reasonable to assume that all incremental generation costs
will be incurred in the outer years. For example, FPL’s Ten Year Site Plan
identifies generation additions during the 2018 – 2027 planning period.
Because present value calculations assign the most weight
to values in the early years and the least weight to values in the outer years,
by assuming $209 million of incremental revenues in excess of costs in the
early years and the entire $434 million of incremental generation costs in the
outer years, the CPVRR analysis will produce a positive outcome compared to the
result expected if the revenues and costs were spread more evenly across the
time period in question. For example, if this one assumption regarding
incremental fixed costs and capital for generation is reversed, meaning the
annual projected amounts that total $434 million are incurred during 2019 –
2034 instead of the last 16 years (2033 – 2048), the CPVRR result flips from a
positive $105 million to a negative $22 million. Therefore, if the costs are assumed to have
all occurred in either the later years or the early years, the CPVRR results
become skewed.
Under FPL’s requested accounting treatment, only the
general body of FPL’s existing customers are exposed to risk. If the requested
accounting treatment is approved as filed, FPL will receive base rate recovery
of the acquisition adjustment whether the assumed savings materialize or not.
Specifically, FPL projects it will earn an equity return on the $116.2 million
acquisition adjustment of $92.5 million on a nominal basis and $50.3 million on
a net present value basis. The approximately 35,000 customers of COVB will
immediately receive a rate reduction of approximately $27 per month: a rate reduction that would only be possible if
another, unrelated group of customers would be responsible for paying off $150
million in debt and contractual obligations on COVB’s behalf. Under the request
as filed, the benefits to FPL and the COVB customers will be known when the
transaction closes. Finally, these benefits will inure to FPL and the customers
of COVB whether the projected savings occur or not. In contrast, the purported
benefits of the transaction to FPL’s current customers are entirely dependent
upon whether the projected savings assumed in the CPVRR analysis come to
fruition. In addition, any benefit to the 4.9 million current FPL customers
will not be known until years in the future, and that will only be if FPL is
required to track the savings over time, something FPL has specifically
requested not be part of the approval process.
Going Concern Value
In the FPC/Sebring case, the Commission approved a
positive acquisition adjustment by determining a going concern value based on
the Sebring electric system’s value as a mature system with an established
customer base.Similarly, COVB is a mature system with an
established customer base. Due to the unique circumstances in this case, it is
reasonable to attach a going concern value to the COVB customer base.
The 1992 FPC/Sebring Order was used as a basis for
evaluating and calculating the value of the acquired COVB customer base. In the
FPC/Sebring Order, the Commission recognized a going concern value of $4,491,000
for the value of Sebring’s approximately 13,000 customers. Based
on those figures, staff calculated an average value of $345 per customer for
the Sebring customers. This was assumed
as an appropriate estimation of the value of an acquired electric customer in
1992. In the current case, staff adjusted the $345 average amount per customer to
account for inflation from 1992 to 2018 using the Consumer Price Index for All
Urban Customers. Staff
believes that accounting for inflation is appropriate and reasonable. The
resulting calculation provides a 2018 average value of $608 per acquired
customer. The COVB electric utility system represents approximately 35,000
customers to which staff applied the $608 average value per customer. This
results in a total of approximately $21.3 million for the value of COVB’s
customer base. In the absence of a more specific cost estimate, staff believes
this is a reasonable proxy for estimating the value of a mature system with an
established customer base of COVB’s size.
Staff believes the remaining amount above the NBV and
going concern value represents obligations inherent to the COVB system,
including the debt and the contracted payment amounts to FMPA and OUC. Similar
to the Sebring case, this debt and these contractual obligations represent the
cost of serving the customers of the COVB electric utility system. In the
FPC/Sebring case, the gross premium of approximately $36.5 million was related
to the debt obligation of Sebring. In the FPL/COVB transaction, the majority of
the $185.0 million purchase price is for the following: (1) to pay off $20.4
million of debt of COVB; (2) to buy out $108.0 million of contractual
obligations with FMPA; and (3) to buy out $20.0 million of contractual
obligations with OUC. As with the case with Sebring, this debt and these
contractual obligations were incurred solely for the benefit of the COVB
customers and cannot be construed as providing any benefit to FPL’s existing
customers. It is not reasonable nor proper ratemaking policy to expect FPL’s existing
customers, who see no direct benefit from these contractual obligations, to be
responsible for the fulfillment of these contracted amounts.
Staff notes that, while FPL and COVB have not proposed a surcharge
in their PSA similar to the rider used in the Sebring case, the circumstances
surrounding the PSA and similarities to the Sebring case lead staff to believe
that such a rider or another similar mechanism could potentially be an
appropriate mechanism for recovery of costs associated with serving the COVB
customers. Such a rider
could be tailored by the parties to the PSA, as it was in the FPC/Sebring transaction,
to provide COVB customers with immediate rate relief while allowing FPL recovery
of the costs associated with serving the newly acquired customers. In addition,
COVB customers would immediately receive the benefits from becoming FPL
customers as well as resolution of the ongoing territorial dispute, and at the
same time insulating FPL’s 4.9 million existing customers from any costs not
incurred for their benefit.
Conclusion
The extraordinary circumstances demonstrated in this case
support approval for FPL to record a positive acquisition adjustment in the
amount of $21.3 million on its books in Federal Energy Regulatory Commission
(FERC) Account 114 - Electric Plant Acquisition Adjustments and to amortize
this amount over the requested period of 30 years.
Issue
4:
Should the Commission approve recovery of costs
associated with the short-term power purchase agreement with OUC?
Recommendation:
Consistent with staff’s
recommendation in Issue 3, staff recommends that the recovery of payments to
OUC should be limited to actual annual savings and should be recovered through
the Fuel and Purchased Power Cost Recovery Clause. (Graves, P. Buys)
Staff Analysis:
FPL
states that obtaining COVB’s release from an existing wholesale contract with
OUC, due to expire in 2023, is a necessary step to proceed with the acquisition
of the City’s utility. FPL additionally states that OUC would not grant COVB a
release from the wholesale contract without additional compensation beyond the
$20 million that COVB committed to pay from the proceeds of the sale. As such,
FPL negotiated a power purchase agreement (PPA) with OUC effective upon the closing
of the PSA through December 2020. FPL asserts that the PPA will bring value to
OUC and will unlock the savings that FPL’s existing customers are projected to
realize from consummating the overall acquisition.
Under the terms of the PPA, FPL is
obligated to purchase a specified amount of capacity at a specified price from
OUC. The purchase of energy is optional and is based on FPL anticipating an
economic benefit of calling on the energy. Monthly energy costs are based on
heat rate, duration of the purchase, and the daily price of natural gas. Energy
costs also contain a defined operation and maintenance component. FPL states
that the PPA would effectively be exercised as a peaking option to cover load
during periods of high demand. However, FPL has made no assertion or
demonstration that the PPA is needed for reliability purposes.
FPL requests
that the payments associated with the PPA be recovered through the Fuel and
Purchased Power Cost Recovery Clause (Fuel Clause). In this respect, FPL’s
requested method of recovery is like that of other power purchase agreements.
Staff believes that negotiated power
purchase agreements should be considered prudent for cost recovery purposes if
it is demonstrated that the agreement can reasonably be expected to be at a
cost which does not exceed full avoided cost. Plainly stated, a power purchase
agreement should not have a negative economic impact on a utility’s customers.
FPL states
that, from an avoided cost perspective, FPL customers will receive a total of
approximately $6.9 million in net energy savings, compared to total fixed costs
of $23.5 million. Therefore, based on FPL’s estimates at this time, the PPA is
approximately $16.6 million above avoided cost. Table 4-1 summarizes the
estimated costs and savings associated with the PPA over the estimated term of
the agreement.
Table
4-1
Summary of Estimated Costs and
Savings from OUC PPA
|
|
a
|
b
|
c=a-b
|
|
|
Fixed Payments to OUC
|
Net Fuel Savings
|
Net Savings
|
|
2018
|
$2,466,000
|
$585,963
|
($1,880,037)
|
|
2019
|
$9,899,100
|
$3,250,640
|
($6,648,460)
|
|
2020
|
$11,167,980
|
$3,060,082
|
($8,107,898)
|
|
Total
|
$23,533,080
|
$6,896,685
|
($16,636,395)
|
Source: FPL response to
Request No. 2 of Staff’s Third Data Request
When considering FPL’s economic
analysis of the PPA, the agreement should not be considered prudent for full
cost-recovery. Additionally, as previously discussed, FPL has negotiated the
PPA as a means to effectuate its acquisition of COVB. Similar to staff’s
analysis in Issue 3, it is not reasonable nor proper to expect FPL’s existing
general body of customers, who see no direct benefit from the PPA, to be
responsible for the fulfillment of the PPA. Based on the above, staff believes
that costs above actual savings should not be recovered from FPL’s existing
customers. As discussed in staff’s analysis for Issue 3, a rider paid by COVB
customers or another similar mechanism may be appropriate to recover costs
above actual savings.
Conclusion
Consistent with staff’s
recommendation in Issue 3, staff recommends that the recovery of payments to
OUC should be limited to actual annual savings and should be recovered through
the Fuel Clause.
Issue 5:
Should this docket be closed?
Recommendation:
If no protest is filed by a person whose substantial
interests are affected within 21 days of the issuance of the Order, this docket
should be closed upon the issuance of a Consummating Order. (Cowdery)
Staff Analysis:
If no protest is filed by a person whose substantial
interests are affected within 21 days of the issuance of the Order, this docket
should be closed upon the issuance of a Consummating Order.
