Discussion
of Issues
Issue 1:
What statutory provisions or other legal authority,
if any, grant the Commission the authority and jurisdiction to approve the
acquisition adjustment requested by FPL in this case?
Recommendation:
The Commission has broad ratemaking authority under
Sections 366.04(1), 366.041, 366.05, and 366.06, F.S., to decide whether to
approve the acquisition adjustment requested by FPL. (Cowdery)
Position
of the Parties:
FPL: The
Commission has ample rate-setting and public interest authority pursuant to
Sections 366.01, 366.04, 366.041, and 366.05, 366.06, F.S. There
is also long-held precedent that supports such an approval,
including the Commission’s decisions in Docket Nos. 920949-EU, 120311-GU,
110133-GU, 060657-GU.
COVB: The
COVB joins FPL’s position on Issue 1.
Indian River County: The
County joins FPL’s position on Issue 1.
Town of Indian River Shores:
The Town joins FPL’s position on Issue 1.
OPC: The
Commission has jurisdiction over the rates of electric utilities such as FPL,
pursuant to Fla. Stat. § 366.04.
CAIRC: None. The law does
not allow goodwill expenses to be added to rates. Speculative, opinion
testimony does not replace legal standards found in statute and case law, nor
any change in policy. Setting a precedent of such practice would have momentous
impact on ratepayers in the future.
Staff Analysis:
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. (TR 345) A positive acquisition adjustment exists when the purchase
price is greater than the net book value (purchase price premium). (TR 275) The
approval of a positive acquisition adjustment for rate-making purposes means
that a utility can recover the purchase price premium from all of its customers
in rates. (TR 331) A positive acquisition adjustment is considered goodwill or
going-concern value for accounting purposes. (TR 247-48)
Because an acquisition adjustment
affects customer rates, the Commission has jurisdiction under several
sections of Chapter 366, F.S. Section 366.04(1), F.S., grants the Commission
exclusive jurisdiction to regulate and supervise each public utility with
respect to its rates and service. In addition, Section 366.041, F.S.,
authorizes the Commission to consider, among other things in fixing rates, the
cost of providing service and the value of such service to the public. Section
366.06(1), F.S., provides that, in setting rates, the Commission shall
investigate and determine the actual legitimate costs of the property of each
utility company actually used and useful in the public service. Section 366.05,
F.S., gives the Commission the power to prescribe fair and reasonable rates and
charges. The Legislature declared in Section 366.01, F.S., that Chapter 366,
F.S., is an exercise of the police power of the state for the protection of the
public welfare, and all the provisions of Chapter 366, F.S., shall be liberally
construed for the accomplishment of that purpose.
Section 366.06, F.S., states that the
net investment of each public utility used for ratemaking “shall not include
any goodwill or going-concern value or franchise value in excess of payment
made therefor.” CAIRC argues that the Commission does not have jurisdiction to
approve positive acquisition adjustments because Section 366.06, F.S.,
prohibits the Commission from approving an acquisition adjustment. (CAIRC BR
4) FPL witness Deason testified
that Section 366.06, F.S., only prohibits the inclusion of goodwill or going
concern value to the extent it exceeds payments made by the acquiring
utility. He further testified that
Section 366.06, F.S., does not prohibit the Commission from exercising
jurisdiction to approve the acquisition adjustment based on the purchase
price. In this case, the acquisition
adjustment is part of the total purchase price. (TR 248, 253) Staff agrees with witness Deason that Section
366.06, F.S., does not prohibit the Commission from approving the acquisition
adjustment requested by FPL in this case. 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. Staff recommends that the Commission
find that the Commission has jurisdiction under its broad ratemaking authority
pursuant to Sections 366.04(1), 366.041, 366.05, and 366.06, F.S., to decide
whether to approve the acquisition adjustment requested by FPL.
Issue 5:
Should the Commission grant FPL the authority to
charge FPL’s rates and charges to City of Vero Beach’s customers upon the
closing date of the Asset Purchase and Sale Agreement?
Recommendation:
Yes. If the Commission approves staff’s
recommendation on Issue 6, the Commission should grant FPL the authority to
charge FPL’s approved rates and charges to COVB customers upon termination of
the territorial agreement, effective on the closing date of the PSA. FPL must
notify the former COVB customers of the new rates and charges with the first
bill containing the new rates. (Guffey, Draper, Cowdery)
Position of the Parties
FPL: Yes.
Approval will generate the following savings for COVB customers: (i) a typical
residential customer will save $330 annually; (ii) a typical small store front
will save $410 annually; a typical office building or school will save $7,600
annually; and (iv) a typical large retailer or hospital will save nearly
$80,000 annually.
COVB: Yes.
The COVB joins FPL’s position on Issue 5.
Authorizing FPL to charge COVB customers FPL rates advances the public
interest by allowing COVB customers to enjoy significantly lower electric
bills, which is an indispensable component of the COVB Transaction. Without this approval, the COVB Transaction
will not close.
Indian River County: Yes,
County joins FPL’s position on Issue 5.
Town of Indian River Shores: Yes. The Town joins FPL’s position on Issue
5.
OPC: Yes.
CAIRC: Yes,
as long, as they do not improperly add fees and costs to those rates and bills
to hide the recoupment of the transaction, thereby eliminating any savings
promised to the customers.
Staff Analysis:
All parties agree that the
Commission should grant FPL the authority to charge FPL’s rates and charges to
COVB customers upon the closing date of the PSA. FPL witness Cohen testified
that FPL and COVB customers will immediately benefit from FPL’s residential and
commercial rates once the COVB customers are transitioned to receive service
from FPL. (TR 53-56) OPC Witness Kollen
testified that OPC supports charging FPL rates to former City of Vero
Beach customers. (TR 89, 91) FPL witness Deason explained that for COVB to be
willing to sell the utility to FPL, it was a requirement that COVB’s customers
would receive FPL rates. (TR 334) COVB witness O’Conner testified that
Commission approval of FPL’s request to charge COVB electric customers FPL’s
rates, is a condition precedent to closing on the PSA. (TR 370-371)
As part of its petition in Docket
No. 20170235-EI, FPL asked the Commission to grant it the authority to charge
its rates and charges to COVB’s customers. Witness Deason testified that in
order for FPL to charge its rates to former COVB customers, the Commission must
approve the joint petition to terminate the COVB/FPL territorial agreement. (TR
279) 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 the Commission’s approval for authority under Rule 25-9.044, F.A.C.,
to charge FPL’s existing rates to the COVB customers. (EXH 2)
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 that will
thereafter operate the utility must adopt and use the rates, classifications,
and regulations of the former operating company unless the Commission authorizes
a change.
In this case, because all parties
agree that FPL rates and charges should be imposed, staff recommends that if
the Commission approves staff’s recommendation on Issue 6, the Commission
should grant FPL the authority to charge its approved rates and charges to the
former COVB customers upon termination of the territorial agreement effective
upon the closing date of the PSA. The Commission should require FPL to notify
the former COVB customers of the new rates and charges with the first bill
containing the new rates.
Issue 6:
Should the Commission approve the joint petitioners’
request to terminate the existing territorial agreement between FPL and COVB
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 COVB upon the closing date of the PSA. Upon closing of the PSA, FPL shall
file revised tariff sheets Nos. 3.020, 3.010, and 7.020 to reflect the addition
of the COVB service area to its description of territory and communities
served. (Cowdery, Guffey, Draper)
Position of the Parties
FPL: Yes.
Termination of the territorial agreement is an essential component of the COVB
Transaction. Approval of the agreement’s
termination is in the public interest, as it enables approximately $135 million
in CPVRR savings for FPL’s customers and significant immediate savings for COVB
customers.
COVB: Yes. The COVB joins FPL’s position on Issue
6. Both the COVB and FPL petitioned the
Commission to terminate the territorial agreement because termination is an
essential component of the COVB Transaction.
Indian River County: Yes,
County joins FPL’s position on Issue 6.
Town of Indian River
Shores: Yes. The existing territorial agreement
splits the Town causing residents to be served by two different utilities with
vastly disparate rates and consumer protection safeguards. These disparities
have spawned various lawsuits. Terminating the territorial agreement would
unify electric service within the Town, eliminate the disparities, and settle
protracted litigation.
OPC: No position at this
time.
CAIRC: No.
Petitioners have failed to prove that this transaction will be of benefit to
the consumers, and therefore the existing territorial agreements should remain.
Staff Analysis:
Section 366.04(2), F.S.,
gives the Commission the authority 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’s responsibility in
evaluating modifications of territorial agreements, and the applicable standard
used, is 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) (finding that the territorial agreement as a
whole contained no detriment to the public and should have been approved by the
Commission). 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). The
Commission’s decision must be based 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.
In Docket No. 20170236-EU, FPL
and COVB jointly ask the Commission to terminate their territorial
agreement. The joint petition involves the transfer of customers from COVB
to FPL. FPL and COVB’s joint petition states that they are requesting
termination of their existing territorial agreement in connection with FPL’s
acquisition of the COVB electric utility as addressed in Docket No. 20170235-EI.
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. The joint petition states that 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 petition states that if the
territorial agreement is terminated, FPL will serve all of Indian River County,
but if the PSA does not close, the joint petitioners will continue to operate
pursuant to the Territorial Orders.
Witness O’Connor, the City
Manager of the COVB, testified that the COVB City Counsel, duly elected by and
representing the citizens of the COVB, directed the negotiations for the sale
of the COVB electric utility with FPL, and that the customers of COVB living in
the city support the sale. (TR 361, 363,
368-71) COVB customers testified at hearing in support of becoming FPL
customers. (TR public hearing, October
18, 2018, pp. 30-47)
The record shows that for many
years, COVB customers living outside the municipal boundaries of the city wanted
to be served by FPL instead of by the COVB.
There were multiple attempts to address COVB customer dissatisfaction
through legislation. (TR public hearing, October 18, 2018, pp.7-8; EXH 53) In
addition, two voter referenda were held that showed that COVB customers
supported the sale of the COVB electric utility to FPL. (TR 366-68, 371, EXH 31
and 32) Multiple petitions for relief were filed with the Commission as far
back as 2009, some of which resulted in court appeals. (TR 296-97;
EXH 53)[9] Litigation filed by the Town of Indian River
Shores challenging the Commission’s order denying the Town’s petition to modify
the COVB/FPL territorial agreement[10]
is pending at the Commission. Upon joint motion of Indian River Shores and
COVB, the hearing to address the Town’s modification request is being held in
abeyance pending closing on the PSA and termination of the COVB/FPL territorial
agreement. (EXH 53)
The record shows that termination
of the territorial agreement and transfer of COVB customers to FPL would not
result in harm or detriment to the public interest. Witness Deason provided unrefuted testimony that
the transfer from COVB to FPL would not result in degradation of the COVB
customers’ quality of service or reliability. (TR 333) The record further shows
that the $114 million positive acquisition adjustment equates to an estimated
impact of $0.11 per 1,000 kilowatt-hours (kWh) on a monthly residential bill if
the requested acquisition adjustment is approved and FPL includes amortization
of the positive acquisition adjustment in rates in its next rate proceeding.
(EXH 59, BSP 00112). Staff believes this to be a de minimis rate impact that would not result in harm or detriment
to the public interest. Further, as explained in Issue 15, Commission approval
of FPL recovering costs associated with the short-term power purchase agreement
with OUC will not result in harm or detriment to the public interest.
The Commission’s approval of
termination of the COVB/FPL territorial agreement and attendant transfer of
customers from COVB to FPL would resolve the issues between COVB and Indian
River Shores in the dispute over their territorial agreement that is pending
before the Commission. The general
rule that the legal system favors settlement of disputes by mutual agreement
applies equally in utility service agreements between municipal electric
utilities and other electric utilities under the Commission’s jurisdiction. AmeriSteel Corp. v. Clark, 691 So. 2d
473, 478 (Fla. 1997)(noting that the Commission’s charge in proceedings
concerning territorial agreements is to approve those agreements that work no
detriment to the public interest). The termination of the territorial agreement
as part of the PSA would resolve controversy over the COVB/FPL territorial
agreement and is in the public interest.
Based on the foregoing, staff
recommends that the Commission approve the joint petitioners’ request to
terminate the existing territorial agreement between FPL and COVB effective
upon the closing date of the PSA. Upon closing of the PSA, FPL shall 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.
Issue 7:
What extraordinary circumstances, if any, exist to
support the Commission’s consideration of authorizing a positive acquisition
adjustment in this case?
Recommendation:
The combination
of factors that support the Commission’s consideration of a positive
acquisition adjustment in this case are that (1) approximately 60 percent of
COVB’s electric customers live outside COVB’s municipal boundaries; (2) there
have been years of complex litigation between these customers and the COVB
attempting to transfer these customers from COVB to FPL, including pending
Commission Docket No. 160049-EU (presently in abeyance) concerning Indian River
Shores’ petition for modification of the COVB/FPL territorial agreement; (3)
the customers living outside the municipal boundaries have tried for many years
to seek legislative redress for their complaints; and (4) the COVB has had two
voter referenda that show that the majority of COVB customers support a sale of
the COVB electric utility to FPL.
Based
upon the totality of the unique and unusual facts listed above, staff
recommends that the Commission should find that extraordinary circumstances
exist that warrant the Commission’s consideration of authorizing a positive
acquisition adjustment. (Cowdery,
D. Smith)
Position
of the Parties:
FPL: The
following extraordinary circumstances exist:
1. Lower
rates for COVB customers
2. Reduced
revenue requirements for existing FPL customers
3. Resolution
to years of litigation
4. End
of disenfranchisement
5. Improved
service quality
6. Improvements
and modernization for COVB’s grid
7. Greater
access to capital
8. More
experienced management
9. The
availability of OPC to provide representation to COVB customers
10. Diverse
transaction beneficiaries
COVB: The COVB joins FPL’s
position on Issue 7.
Indian River County: The
County joins FPL’s position on Issue 7.
Town of Indian River
Shores: COVB customers will receive
lower rates. FPL’s other customers will receive net present value savings of
$135 million from economies of scale. COVB’s non-resident customers will
receive regulatory protection from the Commission and OPC. COVB will receive
millions of dollars in sale proceeds. Protracted territorial disputes will be
resolved.
OPC: The evidence does not establish that extraordinary
circumstances exist, as a matter of law.
CAIRC: None. No evidence
has been presented, other than non-evidence hearsay and non-expert self-serving
opinion, that would support such a finding. Customers living outside the
municipal boundaries is commonplace, and a switch to FPL would have no effect
on an ability to vote for your decision-makers regarding rates.
Staff Analysis:
As discussed in Issue 9,
the Commission must first determine if extraordinary circumstances exist that
may warrant the consideration of a positive acquisition adjustment. Such logic
was also recognized by witness Deason. (TR 269) In addition, OPC witness Kollen
contends that this policy protects customers from utilities acquiring assets at
inflated prices. (TR 93)
FPL witness
Deason testified that there were nine customer benefits of FPL’s purchase of
the COVB electric utility that could be considered extraordinary circumstances
supporting an acquisition adjustment. (TR 273-74) Although staff believes that
extraordinary circumstances exist that support consideration of a positive
acquisition adjustment, it disagrees in part with FPL’s position on what
circumstances in this case are extraordinary, as explained below.
FPL provided a 30-year cumulative present value of revenue
requirements (CPVRR) analysis to demonstrate extraordinary circumstances in the
form of reduced revenue requirements for FPL customers. (EXH 32, 267) FPL
witness Deason testified that a CPVRR analysis is a tool to measure and weigh
the revenue requirement impacts of competing alternatives. (TR 264) Witness
Deason indicated CPVRR analyses have previously been used in need determination
proceedings and proceedings related to the buyouts of power purchase
agreements. (TR 265-266)
Staff acknowledges that CPVRR analyses are often used as a
forward-looking decision making tool to evaluate options in power plant and
transmission line need determination and other proceedings. However, the record
does not show that this Commission has ever approved a positive acquisition
adjustment based on a CPVRR analysis. Further, witness Deason acknowledged that
it is within the Commission’s discretion to find in a particular case that
customer savings alone may not be sufficient to demonstrate extraordinary
circumstances. (TR 267) In this case, the CPVRR analysis estimated the revenue
requirement impact of FPL acquiring the COVB assets as well as the proposed
acquisition adjustment and PPA with OUC. Staff recommends that projected
reduced revenue requirements for FPL customers, which is the limited scope of a
CPVRR analysis, is not an extraordinary circumstance that can support
consideration of an acquisition adjustment.
Likewise, the
rate disparity between COVB and FPL does not constitute an extraordinary
circumstance that can support consideration of a positive acquisition
adjustment. Unlike the FPC/Sebring case, where the acquired utility was
in serious financial distress resulting in the highest electric rates in the
state that were in jeopardy of becoming even higher,[11]
the evidence shows that the COVB utility is financially sound. (TR 298, 327)
Electric
utility customers cannot choose between electricity providers based on which
provider has the lower rates. AmeriSteel
Corp. v. Clark, 691 So. 2d 473, 477 (Fla 1997) (Even 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). 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 exercise of the Commission’s 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 customers are
permitted to allege extraordinary circumstances because they pay higher rates
than the rates charged by another electricity provider, then every other 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.
Witness Deason testified that
approximately 60 percent of COVB’s customers reside outside the City’s
municipal borders. (TR 153, 296; EXH 53) This is the largest such percentage in
the state of Florida (EXH 58). He testified that these customers feel that they
do not have adequate recourse to address or challenge decisions concerning the
operations and rates of the COVB utility as currently constituted and have
sought recourse through both their local and state-level elected officials as
well as through the courts and the Commission. (TR 296-97) He further testified
that these initiatives have taken place over a long period of time. (TR 296)
There were multiple attempts to
address COVB customer dissatisfaction through legislation. (TR public hearing,
October 18, 2018, p. 8; EXH 53) 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. (TR public hearing, October
18, 2018, pp.7-8) Further attempts to pass legislation to address the concerns
of COVB electric customers living outside the City failed in 2010 (HB 725/SB
2632; HB 1397); 2011 (HB 899); 2013 (HB 733/SB 1620); 2014 (HB 813/SB 1248; HB
861/SB 1294); 2015 (HB 773; HB 337/SB 442); and 2016 (HB 5790/SB 840). In addition, two voter referenda were held
that showed that COVB customers supported the sale of the COVB electric utility
to FPL. (TR 366-68, 371, EXH 31 and 32)
In addition to proposed
legislation, multiple petitions were filed with the Commission as far back as
2009, some of which resulted in court appeals. (TR 296-97; EXH 53)[12] More
recently, on January 5, 2016, the Town of Indian River Shores filed a petition
for declaratory statement with the Commission that asked for a declaration that
the Commission lacks jurisdiction to interpret Article VIII, Section 2(c),
Florida Constitution for purposes of determining whether the Town has a
constitutional right to be protected from COVB providing electric service
within the Town without the Town’s consent. In response, the Commission issued
an order declaring that it has the jurisdiction under Section 366.04, F.S., to
determine whether COVB has 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.[13]
On March 4, 2016, 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, requesting the Commission to move the entire Town of Indian River
Shores out of COVB’s service area and put it in FPL’s service area. The
Commission denied Indian River Shores’ petition by a proposed agency action
(PAA) order.[14] The Town
of Indian River Shores filed a petition for administrative hearing on the PAA
order and COVB filed a cross-petition. However, because FPL and COVB had
entered into negotiations for the purchase and sale of the COVB electric
utility, Indian River Shores and COVB jointly requested that the Commission
hold the proceeding in abeyance pending negotiations and sale of the utility.
(EXH 53) The docket is currently being held in abeyance for this reason.
Settlement of disputes by mutual agreement between
contending parties is in the public interest. See AmeriSteel
Corp. v. Clark, 691 So. 2d 473, 478 (Fla. 1997). If the PSA closes, including the required
approval of the requested acquisition adjustment, the dispute about the
territorial agreement between COVB and Indian River Shores that is pending
before the Commission would be resolved.
Resolution of this dispute is in the public interest.
The combination
of factors that support the Commission’s consideration of a positive
acquisition adjustment in this case are that (1) approximately 60 percent of
COVB’s electric customers live outside COVB’s municipal boundaries; (2) there
have been years of complex litigation between these customers and the COVB
attempting to transfer these customers from COVB to FPL, including pending
Commission Docket No. 160049-EU (presently in abeyance) concerning Indian River
Shores’ petition for modification of the COVB/FPL territorial agreement; (3)
the customers living outside the municipal boundaries have tried for many years
to seek legislative redress for their complaints; and (4) the COVB has had two
voter referenda that show that the majority of COVB customers support a sale of
the COVB electric utility to FPL.
Based
upon the totality of the unique and unusual facts listed above, staff
recommends that the Commission should find that extraordinary circumstances
exist that warrant the Commission’s consideration of authorizing a positive
acquisition adjustment.
Issue 8:
Should the Commission consider alternatives other
than what has been proposed by FPL with respect to the acquisition adjustment?
Recommendation:
This issue concerns the amount of the acquisition adjustment,
if any, and is addressed in Issue 11. (D. Smith, Cowdery)
Position of the Parties
FPL: No. The
approvals that are before the Commission are the approvals required for the PSA
to close. FPL has evaluated alternatives and methods of accomplishing the
transaction, and having done so, has placed before the Commission the proposal
that will satisfy the needs of both FPL and COVB.
COVB: No. The COVB joins FPL’s position on Issue 8.
Indian
River County: No. County joins FPL’s position on Issue 8.
Town of Indian River Shores: No. The Town joins FPL’s position on Issue 8.
OPC: The
Commission has the ultimate discretion to consider all competent substantial
evidence, weigh the several available options, and determine an outcome in the
public interest.
CAIRC: The law would not
seem to support any “alternatives” to a yes-or-no situation, even if many
alternatives are available to the COVB which have not yet been pursued or were
ignored.
Staff Analysis:
The Commission has great discretion in determining
what action to take with respect to the requested acquisition adjustment, and
may take any action supported by law and evidence on record, including
alternatives to the requested acquisition adjustment. Staff recommends that
this issue concerns the amount of the acquisition adjustment, if any, and is
addressed in Issue 11.
Issue 9:
Should the Commission approve a positive acquisition
adjustment associated with the purchase of the COVB electric utility system?
Recommendation:
Yes, the Commission should approve a positive
acquisition adjustment. (D. Smith, Cowdery)
Position of the Parties
FPL: Yes. The
public interest is furthered by the COVB Transaction and there are
extraordinary circumstances present such that the Commission should properly
authorize FPL a positive acquisition adjustment.
COVB: Yes. The COVB joins FPL’s
position on Issue 9.
Indian River County: Yes.
The County joins FPL’s position on Issue 9.
Town of Indian River Shores: Yes.
The Town joins FPL’s position on Issue
9.
OPC: No. No Commission approval is necessary to
record an acquisition premium in Account 114.
FPL is required to record the acquisition premium as “goodwill” under
generally accepted accounting principles (“GAAP”) and, more specifically, is
required to record the acquisition premium in account 114 under the Federal
Energy Regulatory Commission (“FERC”) Uniform System of Accounts (“USOA”). However, the Commission must determine
whether FPL is allowed recovery of the acquisition adjustment either in this
proceeding or in the Company's next base rate case.
CAIRC: No. There is no
legal precedent for such action, as Sebring is specifically exempted as being
such and is factually distinct in most respects. Water and gas cases, purposely
and reasonably, are in a separate category. The statute says no, specifically,
and must be given the most logical reading.
Staff Analysis:
The only previous order in
which the Commission approved a positive acquisition adjustment in the electric
industry was in the FPC/Sebring case. (TR 258) In that case, when deciding
whether to allow a positive acquisition adjustment for an electric utility
purchase, the Commission first evaluated the specific facts and circumstances
to determine whether there were extraordinary circumstances that warranted
consideration of a positive acquisition adjustment.[15]
(TR 260) As explained in the FPC/Sebring Order, and as recognized by FPL
witness Deason in this instant case, when one utility purchases another
utility, a purchase price premium should be disallowed unless it is shown that
extraordinary circumstances exist such that consideration of an acquisition
adjustment would be appropriate.[16] (TR
269) Staff agrees with OPC witness
Kollen that this policy protects customers from utilities acquiring assets at
inflated prices and provides incentive for utilities to minimize any
acquisition costs in excess of the net book value of the acquired assets. (TR
93)
In the FPC/Sebring Order, after
finding that extraordinary circumstances existed, the Commission next
considered approval of a positive acquisition adjustment. In doing so, the Commission stated:
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.[17]
Staff recommends that the basic analytical framework used
in the FPC/Sebring Order should be applied in this case. That is, the
Commission should first determine whether extraordinary circumstances exist
that would support consideration of an acquisition adjustment. If the
Commission finds that such extraordinary circumstances do exist, it then would
determine the appropriateness of such a positive acquisition adjustment. As
discussed in Issue 7, the record shows that extraordinary circumstances exist
that would support consideration of the appropriateness of a positive
acquisition adjustment.
The Commission’s decision on whether to approve the
requested acquisition adjustment must be in the public interest and must not
harm either COVB or FPL electric customers. See
Gulf Coast Elec. Coop. v. Johnson,
727 So. 2d 259, 264 (Fla. 1999) (noting that in approving territorial
agreements, the Commission must ensure that the agreement works no detriment to
the public interest), Utilities Com’n of
City of New Smyrna Beach v. Fla. Pub. Serv. Com’n, 469 So. 2d 731, 732-33
(Fla 1985) (stating that any customer transfer in a proposed territorial
agreement must not harm the public, and the Commission should base its approval
decision on the effect the agreement will have on all affected customers).
The record shows
that upon the closing of the PSA, including the termination of the
territorial agreement and transfer of COVB customers to FPL, there would be no harm
or detriment to the acquired COVB customers. For example, witness Deason
provided unrefuted testimony that transfer from COVB to FPL would not result in
degradation of COVB customers’ quality of service or reliability. (TR 333) Furthermore,
bill comparisons between FPL and COVB customers show that a COVB residential
customer who becomes an FPL customer who uses 1,000 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. (EXH 52)
The record also shows that there would be no harm or
detriment to the existing FPL customers. The $114 million positive acquisition
adjustment equates to an estimated impact of $0.11 per 1,000 kWh on a monthly
residential bill if the requested acquisition adjustment is approved and FPL includes
amortization of the positive acquisition adjustment in rates in its next rate
proceeding. (EXH 59, BSP 00112) Staff believes this to be a de minimis rate impact. Furthermore, staff
believes that neither this de minimis
rate impact nor the Commission’s approval of FPL recovering costs associated
with the short-term PPA with OUC will result in harm or detriment to the public
interest.
Staff recommends that, if the Commission finds there to be extraordinary
circumstances that support consideration of a positive acquisition adjustment
and that the positive acquisition adjustment would not result in harm or
detriment to the public interest, the Commission should approve a positive
acquisition adjustment associated with FPL’s purchase of the COVB electric
utility system.
Issue 11:
What is the appropriate amount, if any, of a
positive acquisition adjustment to be recorded on FPL’s books for the purchase
of the COVB electric utility system?
Recommendation:
As discussed in Issues 7 and 9, the existence of extraordinary
circumstances and the demonstration of a de
minimis rate impact support a positive acquisition adjustment. Thus, a
positive acquisition adjustment in the amount of $114 million should be
recorded by FPL. (D. Smith, Cowdery)
Position of the Parties
FPL: FPL
estimates an acquisition adjustment of approximately $114 million, which
reflects the amount FPL paid to COVB over the net value of the assets
purchased. FPL witness Herr conducted a fair value evaluation of the COVB
electric utility. This evaluation confirms the purchase price of the COVB
Transaction was reasonable.
COVB: The COVB joins FPL’s
position on Issue 11.
Indian River County: The
County joins FPL’s position on Issue 11.
Town of Indian River Shores: The
Town joins FPL’s position on Issue 11.
OPC: FPL is
required to record the actual acquisition premium as “goodwill” under generally
accepted accounting principles (“GAAP”) and, more specifically, is required to
record the acquisition premium in account 114 under the Federal Energy
Regulatory Commission (“FERC”) Uniform System of Accounts (“USOA”).
CAIRC: FPL is required to
record the actual acquisition premium as “goodwill” under generally accepted
accounting principles (“GAAP”) and, more specifically, is required to record
the acquisition premium in account 114 under the Federal Energy Regulatory
Commission (“FERC”) Uniform System of Accounts (“USOA”).
Staff Analysis:
As discussed in Issues 7 and 9, the existence of
extraordinary circumstances and the demonstration of a de minimis rate impact support a positive acquisition adjustment.
Thus, staff recommends that a positive acquisition adjustment in the amount of $114
million should be recorded by FPL. This amount is the difference between the
negotiated purchase price between FPL and COVB of $185 million and the net book
value of the acquired utility assets of approximately $71 million. (TR 248, 275)
Issue 12:
If a positive acquisition adjustment is permitted,
what is the appropriate accounting treatment for FPL to utilize for recovery
and amortization of the acquisition adjustment?
Recommendation:
If the Commission approves a positive acquisition
adjustment, FPL should be authorized to record the positive acquisition
adjustment in FERC Account 114 – Electric Plant Acquisition Adjustments and
record the amortization expense in FERC Account 406 – Amortization of Electric
Plant Acquisition Adjustments over a 30-year period. (D. Smith)
Position of the Parties
FPL: The
Company should be authorized to record the approximately $114 million positive
acquisition adjustment in FERC Account 114 – Electric Plant Acquisition Adjustments.
It is appropriate to record the amortization expense in FERC Account 406 –
Amortization of Electric Plant Acquisition Adjustments over a 30 year period.
COVB: The COVB joins FPL’s
position on Issue 12.
Indian River County: The
County joins FPL’s position on Issue 12.
Town of Indian River Shores: The
Town joins FPL’s position on Issue 12.
OPC: If
recovery is permitted, then FPL is required pursuant to the FERC USOA to record
the amortization in account 406 Amortization
of Electric Plant Acquisition Adjustments.
If recovery is not permitted, then there is no amortization recorded in
account 406.
CAIRC: If recovery is
permitted, then FPL is required pursuant to the FERC USOA to record the
amortization in account 406 Amortization of Electric Plant Acquisition
Adjustments. If recovery is not
permitted, then there is no amortization recorded in account 406.
Staff Analysis:
The FERC Uniform System of Accounts (USOA) for
Account 114 – Electric Plant Acquisition Adjustments (18 C.F.R. 101), requires
a positive acquisition adjustment if the cost of the acquired system is greater
than original cost less accumulated depreciation (i.e., net book value). (TR
90) Consistent with Accounting Standard Codification 980, FPL should record
amortization expense associated with an acquisition adjustment in Account 406 over
a 30-year period if the Commission approves recovery of the expense in rates
pursuant to the requirements of both GAAP and the FERC USOA. (TR 90)
Issue 13:
Should the projected cost savings supporting FPL’s
request for a positive acquisition adjustment be subject to review in future
FPL rate cases?
Recommendation:
No, future review of the positive acquisition
adjustment is unnecessary and is not required in this particular case.
(D. Smith, Cowdery)
Position of the Parties
FPL: No. The
benefits to customers from the COVB Transaction are measured by a CPVRR
calculation, which takes a holistic view and is derived by spreading fixed costs
over a larger base. The calculation is not predicated on any specific set of future
management actions that would need to be monitored.
COVB: No. The COVB joins FPL’s
position on Issue 13.
Indian River County: No.
The County joins FPL’s position on Issue 13.
Town of Indian River Shores: The
Town joins FPL’s position on Issue 13.
OPC: Yes, but
only if the Commission approves recovery of the acquisition premium. If so,
then the Commission should specifically reserve the right to determine how the
savings are measured in the subsequent proceeding and decline to affirm FPL’s
methodology, including its errors, in this proceeding. Alternatively, the
Commission could determine in this proceeding that OPC’s criticisms are correct
and reflect the correction of those errors [re: FPL’s CPVRR analysis] in its subsequent
review of any savings.
CAIRC: Yes. Future impacts
need to be seen and addressed if such a deviation from prior law is accepted.
Staff Analysis:
Historically, the Commission has used
a future review to evaluate the cost savings relied upon to support approval of
positive acquisition adjustments and to ensure that the cost savings remain
beyond the closing of the case. As
discussed in Issues 7 and 9, projected cost savings are not used as the basis
to approve a positive acquisition adjustment in this case. Therefore, staff
recommends that the Commission find that future review of the positive
acquisition adjustment is unnecessary and is not required in this particular
case.
Issue 15:
Should the Commission approve recovery of costs
associated with the short-term power purchase agreement with Orlando Utilities
Commission?
Recommendation:
Yes. FPL should be allowed to seek cost recovery of
the payments associated with the PPA through the Fuel and Purchased Power Cost
Recovery Clause (Fuel Clause). The energy payments
should be recovered through the fuel portion of the Fuel
Clause and the capacity payments should be recovered through the
capacity portion of the Fuel Clause. (Graves, P. Buys)
Position of the Parties
FPL: Yes. It is appropriate
for FPL recover the energy portion related to the OUC PPA through FPL’s FCR
Clause and the capacity component through the CCR Clause. FPL’s requested
method of recovery is like that of other power purchase agreements.
COVB:
Yes. The
COVB joins FPL’s position on Issue 15.
Indian River County: Yes. The County joins FPL’s
position on Issue 15.
Town
of Indian River Shores: Yes. The Town joins FPL’s position on Issue
15.
OPC:
OPC has no position at this
time, although it notes that this agreement will increase the cost of service
for the general body of FPL ratepayers, all else equal.
CAIRC: No, this agreement
will increase the cost of service for the general body of FPL ratepayers and
set a precedent contrary to PSC policy.
Staff Analysis:
FPL witness Forrest testified 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 COVB’s
utility. He additionally testified 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 PPA with OUC effective upon the closing of the PSA through
December 2020. (TR 152 and 158)
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. (TR 158 and 159, EXH 3) FPL is requesting that the payments associated with the PPA
be recovered through the Fuel Clause. (TR 159; EXH 39, BSP 00043) In this respect, FPL’s requested method
of recovery is like that of other power purchase agreements. In addition, FPL
indicated that the PPA is approximately $14.1 million above avoided cost. (EXH
39, BSP 00038) Giving consideration to FPL’s 2018 approved Fuel Clause recovery
amount of $3.2 billion,
the estimated net costs associated with the OUC PPA (approximately $6 million
in 2019 and $8 million in 2020) would have a de minimis impact on FPL’s fuel clause cost recovery factors and,
therefore, customer rates.
Typically, the
Commission considers a negotiated power purchase agreement prudent for cost
recovery purposes if it is demonstrated that the agreement will not result in
costs above avoided cost. However, the joint petition to terminate the COVB/FPL
territorial agreement states that the termination of the territorial agreement
will be effective if all conditions precedent to the PSA are satisfied, which
includes approval of cost recovery for the PPA. As discussed in Issue 6, the
termination of the territorial agreement as part of the PSA would resolve
controversy over the COVB/FPL territorial agreement and is in the public interest.
Based on the foregoing, staff recommends that FPL should be allowed cost
recovery of the payments associated with the PPA through the Fuel Clause. The energy payments should be recovered
through the fuel portion of the Fuel Clause
and the capacity payments should be recovered through the capacity recovery
portion of the Fuel Clause.
Issue 16:
Is granting the relief requested by the applicants
in the public interest?
Recommendation:
Yes. If
the Commission approves staff’s recommendation on Issues 1, 5-9, 11-13, and 15,
staff recommends that the Commission find that it is in the public interest to
grant the relief requested. (Cowdery, D. Smith)
Position
of the Parties:
FPL: Yes. A transaction
providing COVB customers significant bill savings while simultaneously saving
FPL customers approximately $135 million is within the public interest. The
resolution of a nearly decade-long struggle of COVB customers, businesses, and
elected officials to receive FPL’s lower rates is also in the public interest.
COVB: Yes.
The COVB joins FPL’s position on Issue 16.
Indian River County: Yes. The County joins FPL’s
position on Issue 16.
Town of Indian River Shores: Yes. The Town joins FPL’s
position on Issue 16
OPC: Granting FPL’s rates and service to COVB customers may
be in the public interest; however granting recovery of the acquisition premium
as proposed will harm the general body of FPL customers.
CAIRC: No. Current evidence shows the public has been kept in
the dark, purposely misled, about how “lower rates” would be accomplished.
Granting FPL’s rates to COVB customers will include undisclosed fees and costs
negating any alleged savings. Sets a poor precedent for future rates.
Staff Analysis:
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).
Determination of what is in the public interest rests exclusively with
the Commission. Citizens of State v. Fla.
Pub. Serv. Com’n, 146 So. 3d 1143, 1173 (Fla. 2014).
In support of its contention that
the relief requested by FPL is not in the public interest, CAIRC argues: (1) COVB residents were not properly informed
about the effect of the sale of the COVB electric utility to FPL; (2) the sale
will have an adverse effect on taxes and city revenues; and (3) the sale
negotiations were insufficient. (CAIRC
BR 1-4, 8, 13-15, 17-22) These matters are not within the Commission’s
jurisdiction. Again, it is important to
reiterate that the PSA is not subject to Commission approval. See 366.04(2), F.S.
OPC supports the proposed
acquisition of the COVB electric utility by FPL and the authorization for FPL
to charge its approved rates to former COVB customers. (OPC BR 1, 3) OPC
concedes that granting FPL’s rates and service to the COVB customers may be in
the public interest. (OPC BR 8) OPC did not take a position on whether the
Commission should approve recovery of costs associated with the short-term PPA
or termination of the COVB/FPL territorial agreement. (OPC BR 3, 8) However, OPC argues that the
acquisition adjustment will harm the general body of FPL ratepayers. (OPC BR 5;
TR 91)
As discussed in Issue 6, staff
recommends that the Commission should find that termination of the existing
territorial agreement between FPL and COVB is in the public interest because it
would resolve the dispute about the territorial agreement that is pending at
the Commission between COVB and Indian River Shores. As discussed in Issues 7
and 9, staff recommends that the Commission should find that extraordinary
circumstances exist and that approving a positive acquisition adjustment that
would allow the PSA to close and the COVB/FPL territorial agreement to be
terminated will be in the public interest. Such action would end years of
litigation and legislative efforts by COVB electric customers who want to be
transferred to FPL’s service area. As discussed in Issue 15, approval of
recovery of costs associated with the short-term PPA agreement with OUC is one
of the conditions precedent for the PSA to close, which will allow for
termination of the COVB/FPL territorial agreement. Based on the foregoing, the
Commission should find that granting the relief requested by the applicants is
in the public interest.
Issue 20:
Should these dockets be closed?
Recommendation:
Yes, these dockets should be closed after the time
for filing an appeal has run. (Cowdery)
Position of the Parties
FPL: This issue was not
addressed in FPL’s post-hearing brief.
COVB: Yes. The COVB joins FPL’s position on Issue
20. Upon issuance of an Order approving FPL and COVB’s petition to terminate
their territorial agreement and approving FPL’s requested accounting treatment
with regard to the COVB Transaction, these dockets should be closed.
Indian River County: This
issue was not addressed in the County’s post-hearing brief.
Town of Indian River
Shores: Yes. Upon issuance of an Order approving FPL’s and COVB’s
petition to terminate their territorial agreement and approving FPL’s requested
accounting treatment with regard to the COVB transaction, these dockets should
be closed.
OPC: No.
CAIRC: Not
until CAIRC is given the opportunity to complete depositions and discovery.
Staff
Analysis:
In its post-hearing brief, CAIRC states that
the docket should not be closed until it is given the opportunity to complete
depositions and discovery, citing to its Motion for Reconsideration of Order Granting
Protective Order to the COVB. CAIRC’s motion for reconsideration was considered
and denied by the full Commission at the hearing on October 18, 2018. (TR
114-25) The hearing record is closed and
no additional information may be added. Thus, these dockets should be
closed after the time for filing an appeal has run.
