Case Background
The cost
recovery clause dockets, Fuel and Purchased Power Cost Recovery Clause (Fuel
Clause), the Energy Conservation Cost Recovery Clause (ECCR), and the Environmental
Cost Recovery Clause (ECRC) are continuing dockets that handle issues
pertaining to Florida’s Investor-Owned electric Utilities (IOUs). These IOUs
are Duke Energy Florida, LLC (DEF), Florida Power & Light Company (FPL),
Gulf Power Company (Gulf), Tampa Electric Company (TECO), and Florida Public
Utilities Company (FPUC) (collectively, the IOUs). Intervenors for all three
cost recovery clauses include the Office of Public Counsel (OPC), Florida
Industrial Power Users Group (FIPUG), and White Springs Agricultural Chemicals,
Inc., d/b/a PCS Phosphate – White Springs (PCS Phosphate).
The Commission,
when appropriate, allows recovery of a return on capital investments through
the Fuel Clause, the ECCR and the ECRC. Historically, the Commission relied on
the jurisdictional capital structure and cost rates for each component of the
capital structure approved in each utility’s last base rate case to determine
the appropriate weighted average cost of capital (WACC).
On August 16,
2012, the Commission issued Order No. PSC-2012-0425-PAA-EU approving a
stipulation and settlement agreement entered into by the IOUs, OPC, and FIPUG
to specify the methodology for calculating the WACC applicable to
clause-recoverable investments. This methodology relied on the historical
May Earnings Surveillance Report (ESR) WACC for the calendar year in which the
filing is made for all three clause filings: the Projected Filing, the
Actual/Estimated True-up Filing, and the Final True-up Filing.
The Internal
Revenue Service (IRS) issued Private Letter Rulings (PLRs) on October 3, 2017,
and August 11, 2017, regarding the IRS Normalization Rules. These PLRs state that IRC Treasury
Regulation Section §1.167(1)-1(h)(6)(ii) requires public utilities to apply the
Normalization Rules by utilizing a consistency adjustment and proration formula
to compute the depreciation-related accumulated deferred income tax (ADIT)
balance to be included for ratemaking purposes when a forecasted test period is
utilized to set rates unless, as described in Issue 1, the Limitation Provision
is met or exceeded.
On
August 21, 2019, DEF filed an Unopposed Joint Motion to Modify Order No.
PSC-2012-0425-PAA-EU, (attached to this recommendation) regarding the WACC
methodology on behalf of the IOUs as it pertains to the clause-recovery
dockets. In the Unopposed Joint Motion the IOUs
proposed to change the methodology to comply with the Internal Revenue Code
(IRC) Treasury Regulation.
On
February 6 2020, the Commission staff held a noticed workshop regarding the
IOUs’ proposed methodology to calculate the WACC as it pertains to
depreciation-related accumulated deferred federal income taxes in
clause-recovery dockets. In response to the February 6, 2020
workshop, the IOUs filed Joint Comments on March 13, 2020, in which the IOUs
collectively agreed with Commission staff’s position as outlined at the
workshop.
On
March 26, 2020, the IOUs filed an Amended Unopposed Joint Motion to Modify
Order No. PSC-2012-0425-PAA-EU regarding the methodology used to calculate the
WACC in accordance with the February 6, 2020 workshop and the March 13, 2020
Joint Comments.
The
Commission has jurisdiction over this matter pursuant to Chapter 120 and
several provisions of Chapter 366, including Sections 366.04 and 366.06,
Florida Statutes (F.S.).
Discussion
of Issues
Issue 1:
Should the Commission approve the attached Amended
Unopposed Joint Motion filed on March 26, 2020, to modify the methodology
approved by Order No. PSC-2012-0425-PAA-EU to calculate the weighted average
cost of capital on clause-approved investments in Docket Nos. 20200001-EI, 20200002-EG,
and 20200007-EI, respectively, the Fuel and Purchased Power Cost Recovery
Clause, the Energy Conservation Cost Recovery Clause, the Environmental Cost
Recovery Clause, and any future cost recovery clauses that involve the recovery
of a rate of return on investment?
Recommendation:
Yes. The Commission should approve the Amended
Unopposed Joint Motion addressing the methodology for calculating the allowable
rate of return on clause-approved investments. (Hightower, D. Buys, Cicchetti)
Staff Analysis:
On August 16, 2012, the Commission issued Order No.
PSC-2012-0425-PAA-EU approving a stipulation and settlement agreement entered
into by the IOUs, OPC, and FIPUG to specify the methodology for calculating the
WACC applicable to clause-recoverable investments. The 2012 methodology uses a
historical WACC to calculate the rate of return in a projected future clause
recovery period. However, the 2012 methodology no longer comports with the IRS
Normalization Rules regarding the calculation of the ADIT balance in the
capital structure.
Treasury Regulation Section §1.167(1)-1(h)(6)(ii) provides
that if a future period is solely used for such determination, the limit on the
amount of depreciation-related ADITs for the period is the amount at the
beginning of the future period with a pro rata adjustment for any increases or
decreases during that period. There is a specific proration formula that must
be applied to project changes in depreciation-related ADITs if the Limitation
Provision is not met.
The IRS issued PLRs on October 3, 2017, and August 11,
2017, regarding IRS Normalization Rules. These PLRs state that IRC Treasury Regulation
Section §1.167(1)-1(h)(6)(ii) requires public utilities to apply normalization
by utilizing a consistency adjustment and proration formula to compute the
depreciation-related ADIT balance to be included for ratemaking purposes when a
forecasted test period is utilized to set rates unless the Limitation Provision
is met or exceeded. The Limitation Provision in Treasury Regulation Section
§1.167(1)-1(h)(6)(i) states that as long as the amount of depreciation-related
ADIT used in ratemaking is lower than the amount that would have been used
under the Consistency Rule, then there is no violation of normalization.
The purpose of the IRS Normalization Rules is to preserve for regulated
utilities the benefits of accelerated depreciation as a source of cost-free
capital. Further, the purpose of the consistency rule and the proration formula
is to prevent the immediate flow-through of the benefits of accelerated depreciation
to ratepayers.
On March 26, 2020, the IOUs submitted their Amended
Unopposed Joint Motion, revising the original, August 21, 2019 Joint Motion as
it relates to the methodology proposed to comply with the IRC Treasury Regulation
Section §1.167(1)-1(h)(6). The IOUs maintain that the modifications proposed
herein are in the public interest because the modified methodology will
accurately align current costs with cost recovery while enabling compliance
with IRC Treasury Regulation Section §1.167(1)-1(h)(6). The IOUs would apply
the new methodology starting with the 2021 clause filing cycle, which would
begin with the 2021 Projection Filings to be filed in 2020, and then carried
through to the 2021 Actual/Estimated Filings to be filed in 2021 and the 2021
Final True-Up Filings to be filed in 2022. The IOUs further propose that the
Final True-Up Filing date for all clauses be no earlier than April 1 of each
year in order to allow the IOUs enough time to incorporate the WACC from the
December ESR, which is completed and filed with the Commission on or about
February 15 each year.
Staff agrees with the IOUs that the WACC calculation
methodology approved in Order No. PSC-2012-0425-PAA-EU no longer comports with
the requirements of IRC §1.167(l)-1(h)(6). Further, staff believes the
methodology for calculating the allowable rate of return on clause-approved
investments described in the Amended Unopposed Joint Motion is in the public
interest because the methodology more accurately reflects expected costs.
Therefore, staff recommends that the Commission approve the Amended Unopposed
Joint Motion, attached to this recommendation, and that the filing date for the
Final True-Up Filings for all related clauses be no earlier than April 1 of
each year to give time for filing of the December ESR.
Issue 2:
Should this docket be closed?
Recommendation:
If no person whose substantial interests are
affected by this proposed agency action files a timely protest within 21 days of
the issuance of the order, a consummating order should be issued and this
docket should be closed. If a timely protest is filed, this docket should
remain open to address the evidentiary issues presented. (Brownless, Lherisson)
Staff Analysis:
If no person whose substantial interests are
affected by this proposed agency action files a timely protest within 21 days of
the issuance of the order, a consummating order should be issued and this
docket should be closed. If a timely protest is filed, this docket should
remain open to address the evidentiary issues presented.
