Case Background
On August 3,
2018, Duke Energy Florida, LLC (DEF or Company) filed a petition for approval
of a Termination Agreement (Termination Agreement) and for approval of the
regulatory treatment of the termination payment of $34.5 million to Ridge Generating
Station, L.P. (Ridge). DEF and Ridge entered into the Termination Agreement to
terminate a power purchase agreement (PPA) between DEF and Ridge on August 1,
2018.
The PPA was
approved by the Florida Public Service Commission (Commission) in 1991.[1] The Ridge facility, located in Auburndale,
Florida, is a qualifying facility converting waste, such as scrap tires, into electric
power. Since the facility came online in May 1994, DEF has been purchasing firm
energy and capacity from Ridge pursuant to the PPA, with a 39.6 megawatt (MW)
committed capacity expiring in December 2023.
DEF’s proposed
regulatory treatment is to establish a regulatory asset for the $34.5 million
termination payment that DEF will recover through the Capacity Cost Recovery Clause
(Capacity Clause) by amortizing the regulatory asset through the expiration of
the original PPA term. The Termination Agreement has a requirement that the
transaction be approved by the Commission as one of the conditions to be
satisfied prior to the expected closing date of December 31, 2018.
On August 27,
2018, the Office of Public Counsel (OPC) filed a notice of intervention. Order No.
PSC-2018-0436-PCO-EQ acknowledged the intervention by OPC on August 28, 2018.
The Commission
has jurisdiction over this matter pursuant to Sections 366.051, 366.81, and
366.91, Florida Statutes (F.S.).
Discussion
of Issues
Issue 1:
Should the Commission approve the Termination
Agreement and the requested regulatory treatment of the termination payment?
Recommendation:
Yes. Based on staff’s review, the Termination
Agreement is expected to save DEF and its customers between $30 and $35 million
in net present value (NPV) and should be approved. Recovery of the termination
payment as a regulatory asset through the Capacity Clause should also be approved.
(Lee, Andrews, Higgins)
Staff Analysis:
DEF is obligated to purchase firm energy and
capacity from Ridge until the expiration of the PPA in December 2023. While the
PPA was cost-effective based on the avoided generating unit at the time of
approval, it is no longer cost-effective compared to the avoided costs under
current and projected market conditions.
DEF negotiated a $34.5 million payment to Ridge to
terminate the PPA. Pursuant to the Termination Agreement, Ridge will terminate
its qualifying facility status, permanently shut down the Ridge facility and
terminate any interconnection agreements for the facility. By terminating the
PPA without acquiring the facility, DEF believes its customers will benefit
from lower projected fuel prices and avoid risks associated with the cleanup
and dismantlement of the Ridge facility.
DEF argued that the $34.5 million termination payment is a
prudent investment that will result in a reduction of CO2 emissions
as well as economic benefits. Below is a summary of DEF’s analysis of the economic
benefits, followed by staff’s review of key factors underlying the analysis,
including the Ridge energy output scenarios, fuel forecasts, production cost comparison,
and the regulatory treatment of the termination payment.
Summary of DEF’s Analysis
DEF witness Borsch assessed the economic impact of the
Termination Agreement based on his Cumulative Present Value Revenue Requirement
(CPVRR) analysis. This is conducted by comparing the revenue requirements under
the current PPA structure to those under the Termination Agreement. The
analysis is over the remaining five-year term from January 2019 through
December 2023 based on the expected closing date of December 31, 2018.
Using the 2018 Ten-Year Site Plan fuel price forecast as
the base case for fuel prices, DEF witness Borsch provided a demonstration of
projected net benefits. The cost of the Termination Agreement was calculated
based on the proposed regulatory treatment of the termination payment as a
regulatory asset. The revenue requirements totaled $41.3 million over the five-year
term, with a NPV of $34 million. This
cost is compared with the benefit of a lower production cost without the PPA, estimated
to be between $64 and $69 million in NPV. The
benefit over cost is between $30 and $35 million of net savings in NPV.
In addition, DEF used a high fuel case scenario to test
the sensitivity of the estimated savings to fuel prices. Estimated savings under
this high fuel case scenario are between $23 and $27 million in NPV,
demonstrating the robustness of the economic benefits of the Termination
Agreement. DEF assigned no savings attributable to reduced CO2 emissions.
Therefore, no test for carbon pricing sensitivity is needed. Table 1-1 shows
the estimated savings under the base case in comparison with those under the
high fuel case for three energy output scenarios discussed below.
Table 1-1
Estimated Net DEF System Savings
$ Millions NPV (2019)
|
|
Base Case Fuel
|
High Fuel
|
|
Upper Energy Output Band (260 GWh)
|
35
|
27
|
|
Middle Energy Output Band (246 GWh)
|
34
|
25
|
|
Lower Energy Output Band (222 GWh)
|
30
|
23
|
Ridge Energy Output Scenarios
DEF estimated the system impact to fuel cost for three
energy output scenarios of the future energy output of the Ridge facility. The
three energy output scenarios are based on review of Ridge’s performance over
the last 24 years with an emphasis on recent generation performance trends. In
the lower band scenario, DEF assumed approximately 222 gigawatt hours (GWh) of
annual output based on an average 64 percent capacity factor performance. In
the middle band scenario, DEF assumed approximately 246 GWh of annual output,
or 71 percent capacity factor. In the upper band scenario, DEF assumed
approximately 260 GWh of annual output, or 75 percent capacity factor.
To evaluate whether these output assumptions are too high and
may result in unrealistic estimated savings, staff reviewed the underlying data
for Ridge’s capacity factor performance and payment under the PPA. That
information appears to support Ridge’s ability to meet the minimum requirement
of a 12-month rolling average on-peak capacity factor of 85 percent for full
capacity payment. In
comparison, DEF’s energy output assumptions using an average capacity factor
range between 64 percent and 75 percent are reasonable considering factors such
as planned outages that reduce output. Based on staff’s review, this data set
supports DEF’s energy output assumptions.
Production Cost Comparison
As discussed earlier, DEF’s estimated savings due to a
lower production cost without the PPA are between $64 and $69 million in NPV,
depending on the energy output. These lower production costs can be attributed
to the PPA energy and capacity payment that can be avoided after terminating the
PPA.
Pursuant to the Ridge PPA, the energy payment rate is
currently based on the delivered price of coal to DEF’s Crystal River Units 1
and 2 until those units are retired later this year; then, the energy payment
rate is based on a coal price proxy index and a 1991 avoided coal unit variable
operation and maintenance charge. Under the forecasted base fuel price
scenario, the PPA energy payment is unfavorable to DEF and its customers,
compared with DEF’s energy production cost without the PPA. The energy savings without
the PPA are estimated to be between $25 million to $30 million in NPV, depending
on the energy output.
In addition, staff reviewed the data underlying DEF’s
assumption for full capacity payment of $9.6 million per year. The 12-month
rolling average on-peak capacity factor used to set the monthly capacity
payment showed an improving performance in 2017 and 2018. The performance has
exceeded the minimum requirement of 85 percent for full capacity payment since
March 2018. Based on
staff’s review, DEF’s assumption for full capacity payment is reasonable. The
avoided capacity payment totals $48.1 million over the five-year term, with a
NPV of approximately $39 million. Adding this to the $25 million to $30 million
in energy savings, the total estimated production cost savings are between $64
and $69 million in NPV.
Fuel Forecast
DEF’s CPVRR evaluations included assumptions related to
forecasted fuel prices. However, since the remaining term of DEF’s contract
with Ridge is relatively limited, running through December 2023, much of the
information used to value future fuel costs is observable. Specifically, DEF
relied primarily on New York Mercantile Exchange contract pricing to prepare
its short term natural gas and oil price forecasts appearing in its base case
fuel price scenario. Similarly, DEF relied upon its existing coal contracts to
project its coal prices for the early years of its base case fuel price
scenario. Further, DEF performed a high (price) case sensitivity analysis
around its base forecast. The high case sensitivity analysis reflects
forecasted fuel prices approximately 33 percent greater than the base case
forecast. DEF stated it did not perform a low case fuel price sensitivity because
both base and high case forecasted price levels resulted in positive customer
savings, and because a low case fuel price sensitivity would only increase the
customer savings.
Staff considers the relevant forecast period (2018-2023)
to be on the shorter end of forecast durations that the Commission is generally
tasked with reviewing. Typically, a shorter forecast period will result in a
greater degree of reliability concerning accuracy. In addition, much of the
near-term pricing is based on actual executed contracts. For these reasons,
staff believes the forecasted fuel prices used in DEF’s economic evaluations of
the Termination Agreement are reasonable.
Reliability Impact (Reserve Margin)
If the loss of the Ridge capacity causes a need to replace
the capacity or accelerate any generating units, then the cost to replace the
Ridge capacity must be evaluated. DEF argued that the 39.6 MW capacity from
Ridge is not a material contributor to DEF’s reliability reserve margin. In
response to Staff’s First Data Request, DEF provided an update of its Ten-Year
Site Plan schedules for reliability reserve margin. The updated schedules
reflect both the termination of the Ridge capacity and the capacity from the
termination of the Florida Power Development, LLC (FPD) contract approved by
the Commission in May 2018.
The impact of the loss of the Ridge capacity is less than 1 percent, resulting
in a projected range of summer reserve margin during 2019-2023 that is still 8
to 11 percent above the 20 percent reserve margin approved by the Commission. Based
on staff’s review, the provided information supports a finding that reliability
considerations will not cause a need to replace the Ridge capacity or
accelerate any generating units.
Regulatory Asset Treatment
Staff has reviewed DEF’s proposed
regulatory treatment to establish a regulatory asset for the $34.5 million termination
payment and to amortize it over the remaining five-year term for recovery through
December 2023. The regulatory asset treatment is consistent with the Commission’s
decision on a similar regulatory treatment for the termination of the FPD contract
in Order No. PSC-2018-0240-PAA-EQ. Staff
has calculated the revenue requirement based on the projected capital structure
provided by DEF. Based on DEF’s projected capital structure and rate of return,
staff recommends no adjustments to the proposed revenue requirement for the
regulatory asset.
Conclusion
Based on staff’s review, the Termination Agreement is
expected to save DEF and its customers between $30 and $35 million in NPV and
should be approved. Recovery of the termination payment as a regulatory asset
through the Capacity Clause should also be approved.
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. (DuVal)
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.
