Discussion
of Issues
Issue 1:
Should the Commission approve Gulf’s Petition for
Waiver of a portion of Rule 25-6.0436(7)(a), Florida Administrative
Code (F.A.C.)?
Recommendation:
Yes. The portion of Rule 25-6.0436(7)(a),
F.A.C., from which Gulf requests a waiver requires that a utility obtain
Commission approval for authority to make adjustments for unrecovered
investments associated with the retirement of major installations prior to the
date of such retirement. Staff recommends that Gulf has demonstrated that
applying the rule in this docket and making the Company’s Petition subject to
denial solely because of timing would impose a substantial hardship on the Company.
Gulf has also demonstrated that the purposes of the statutes underlying the
portion of the Rule being waived will be served by other means during the
upcoming base rate proceeding. (Stiller, J. Crawford)
Staff Analysis:
Gulf is seeking a waiver from the portion of Rule 25-6.0436(7)(a),
F.A.C., which requires Commission approval for
authority to address unrecovered investments related to the retirement of major
installations prior to the date of their retirement.
The Waiver
Request
In its Petition filed November 10, 2020, Gulf requested authority
to establish two regulatory assets (one in rate base and one in the Environmental
Cost Recovery Clause) related to the unrecovered investments associated with
the early retirement of the coal generation assets and capability at Plant
Crist Units 4-7, and to defer the recovery of such regulatory assets until base
rates are reset in a general base rate proceeding. Gulf also requested
Commission approval for a corresponding Mid-Course Correction to its 2021 Environmental
Cost Recovery Clause factors.
Because Gulf has requested Commission approval for this
authority after the proposed early retirement date of the major installations,[2] the
Company is seeking a waiver of the first clause of Rule 25-6.0436(7)(a), F.A.C.,
underscored below:
Prior to the date of retirement of major
installations, the Commission shall approve capital
recovery schedules to correct associated calculated deficiencies where a
utility demonstrates that (1) replacement of an installation or group of
installations is prudent and (2) the associated investment will not be
recovered by the time of retirement through the normal depreciation process.
Gulf has not requested a waiver of any other portion of
Rule 25-6.0436(7)(a),
F.A.C., or any other Commission rule.
The Company’s original request
for a waiver was contained in paragraph six of its Petition. However, the
request was unclear and failed to comply with the requirements of Section 120.542,
F.S. Accordingly, staff requested that if Gulf wished to waive a portion of the
Commission’s rules, it should file a petition consistent with the requirements
of Section 120.545, F.S., and Rule 28-104.002, F.A.C. Gulf subsequently
submitted a stand-alone Petition for Waiver, which was filed in this docket on
January 19, 2021. Pursuant to Section 120.542(6), F.S., notice of Gulf’s Waiver
Petition was published in the January 22, 2021 edition of the Florida
Administrative Register, Vol. 47, No. 14. No comments were submitted on the
Waiver Petition.
Legal
Standard for Rule Variances and Waivers
Section
120.542(1), F.S., states that the purpose of a rule variance or waiver[3] is to
provide relief to persons subject to regulation in cases where strict
application of rule requirements can lead to unreasonable, unfair, and
unintended results in particular circumstances. Section 120.542(2), F.S., sets
forth a two-prong test for granting variances or waivers to rules. If the
petitioner satisfies both prongs of the test, the agency must grant the
variance or waiver.
First, the
petitioner must show that “application of [the] rule would create a substantial
hardship or would violate principles of fairness.” A “substantial hardship” is
a “demonstrated economic, technological, legal, or other type of hardship.” Principles
of fairness are violated when “the literal application of a rule affects a
particular person in a manner significantly different from the way it affects
other similarly situated persons who are subject to the rule.” Second, the
petitioner must demonstrate that it will achieve the purpose of the underlying
statutes by other means.
Each
petitioner for rule variance or waiver has the burden of proving its
entitlement to a variance or waiver under its particular circumstances. Thus,
the Commission’s determination as to whether a petitioner should be granted a
variance or waiver is based on whether the legal test has been met under the
specific circumstances of each petitioner.
Substantial
Hardship
The 2020 Gulf and Florida Power & Light Company Ten-Year Site
Plan set forth the Company’s anticipated timeframes for the conversion of Plant
Crist Units 6 and 7 from coal-fired generation to natural-gas fired generation[4] as
well as for the corresponding retirement of coal generation assets and
capability at Plant Crist Units 4-7. The Site Plan slated the conversion of
Plant Crist Units 6 and 7 to natural gas for fourth quarter 2020 or first
quarter 2021. The coal assets associated with Plant Crist Units 4-7 were
scheduled to be retired December 31, 2021.
On September 26, 2020, Hurricane Sally damaged Plant
Crist. Gulf represents that this damage was significant, and that it caused the
Company to assess the benefits of converting Plant Crist Units 6 and 7 to
natural gas instead of making the repairs necessary to return these Units to
coal-burning generation. This comparison demonstrated greater cost benefits by
completing an early conversion of Plant Crist Units 6 and 7 to natural gas
instead of repairing and temporarilyreturning them to coal operations. This conclusion
lead Gulf to file the instant Petition for authority to address the unrecovered
investments associated with the coal operation assets and capability of Plant
Crist Units 4-7.
Gulf states that prior to Hurricane Sally, it had planned to file
with the Commission a request for approval of regulatory assets or capital
recovery schedules associated with the retirement of coal operations at Plant
Crist Units 4-7 in 2021 by separate petition or with its planned base rate case
filing. However, the timing of the proposed retirement was accelerated unforeseeably
by the damage caused by Hurricane Sally. Gulf asserts that the Petition,
though admittedly filed after the proposed date of retirement of Plant Crist
Units 4-7, was submitted as soon as practicable after completion of post-Hurricane
Sally assessments and analyses. The Company argues that because the timing and
extent of damage from Hurricane Sally were unforeseen, application of Rule 25-6.0436(7)(a),
F.A.C., to categorically prohibit it from reacting to this significant
change by accelerating planned conversions imposes a substantial hardship. Gulf
notes that the conversion of Plant Crist Units 6 and 7 was anticipated within
the next calendar year, and that the creation of the regulatory assets and Mid-Course
Correction will result in an estimated savings to ratepayers of $3.6 million.
Gulf projects the Mid-Course Correction will enable a decrease of $3.71/1,000
kWh on a monthly residential bill. The alternative, continues Gulf, was
to repair Plant Crist Units 6 and 7, operate on coal for the short-term, and
then complete the conversion to natural gas operations later in 2021, all while
foregoing these projected savings. Such an alternative would pose a substantial
hardship in terms of financial costs and operational inefficiencies.
Purpose of
the Underlying Statute
Rule
25-6.0436(7)(a), F.A.C., implements three statutes. The first is Section
350.115, F.S., which provides the Commission authority to “prescribe by rule
uniform systems and classifications of accounts for each type of regulated
company and approve or establish adequate, fair, and reasonable depreciation
rates and charges.” The second statute implemented is Section 366.04,(2)(f),
F.S., which grants the Commission authority to “prescribe and require the
filing of periodic reports and other data as may be reasonably available and as
necessary to exercise its jurisdiction hereunder.” The third statute
implemented by the Rule is Section 366.06(1), F.S., which requires, inter alia, that the Commission “keep a
current record of the net investment of each public utility company” and
establish adequate, fair, and reasonable depreciation rates and charges.
Gulf notes
that nothing in its waiver request alters its substantive reporting
requirements or affects Commission jurisdiction. Gulf asserts that the
Commission can fully address all issues related to establishing adequate, fair,
and reasonable depreciation rates and charges, and the appropriate treatment of
unrecovered investments during a general base rate proceeding.
Conclusion
Staff
believes Gulf has demonstrated that applying the Rule in this docket would
impose a substantial hardship on the Company. Gulf has also demonstrated that
the purposes of the statutes underlying the portion of the Rule being waived
will be served by other means. Staff notes that the Commission has previously
waived a separate time requirement in Rule 25-6.0436, F.A.C., on a request from
another utility that had experienced damage from a hurricane.[5] Staff
therefore recommends that the Commission approve Gulf’s Petition for Waiver of
a portion of Rule 25-6.0436(7)(a), F.A.C.
Issue 2:
Should the Commission approve Gulf’s request to
create two regulatory assets related to the retirement of Plant Crist Units 4,
5, 6 and 7 and defer the recovery of the regulatory assets to a future
proceeding?
Recommendation:
Yes. The Commission should approve Gulf’s request to
create two regulatory assets related to the early retirement of coal generation assets and capability at Plant
Crist Units 4, 5, 6 and 7 and defer the recovery of the regulatory assets to a
future proceeding. Further, the Commission should find that the approval to
record the regulatory assets for accounting purposes does not limit the
Commission’s ability to review the amounts and recovery period for
reasonableness in a future proceeding in which the regulatory assets are
included. (Snyder, P. Buys)
Staff Analysis:
On November 10, 2020, Gulf filed a petition seeking
approval to create two regulatory assets, representing an unrecovered $67.6
million in base rate capital investment and $394.5 million in ECRC capital
investments ($462.2 million in total), due to the early retirement of coal
generation assets and capability at Plant Crist Units 4, 5, 6 and 7. Gulf seeks
to defer base rate and ECRC recovery of the regulatory assets, and
determination of the associated amortization periods, until Gulf's base rates
are next reset in a general base rate proceeding. Gulf’s decision to retire the
Units early was based on significant damage caused to the Units by Hurricane
Sally. Gulf had originally planned to convert Crist Units 6 and 7 from coal to
natural gas generation in the fourth quarter 2020 to first quarter 2021
timeframe, maintain Crist Units 6 and 7 as available capacity during 2021, and
retire the coal generation assets and capability of Crist Units 4-7 on or about
December 31, 2021, upon the completion of other investments to provide power to
Gulf customers. As of retirement of Crist Units 4-7 on October 15, 2020, the
Net Book Value of the Units was approximately $462 million. The following table
contains the start of service year and previously scheduled retirement year for
each of the Units.
|
Unit #
|
Start of Service
Year
|
Previous
Retirement Year
|
|
4
|
1959
|
2024
|
|
5
|
1961
|
2026
|
|
6
|
1970
|
2035
|
|
7
|
1973
|
2038
|
In the last proceeding in which the Commission reviewed
the depreciation rates of Crist Units 4-7, the estimated retirement dates
ranged from 2024 through 2038. In February 2019, Gulf’s management approved
a plan to switch the primary fuel type from coal to natural gas, with the coal
generation assets remaining available until December 2021 to serve as a back-up
fuel option. In its filings in the 2020 Fuel Docket, Gulf had already ceased
using coal at Crist Units 4 and 5, and planned to use coal at Crist Units 6 and
7 until October 2020.
On September 16, 2020, Hurricane Sally caused significant
damage to the Plant Crist site. Due to the hurricane damage sustained at Crist
Units 4-7, Gulf decided to retire the coal generation assets and capability at
an even earlier date, October 15, 2020, instead of repairing the coal
generation assets of Crist Units 4-7. This left approximately 240,000 tons of
coal unburned and located either at Plant Crist or at the Alabama State Docks.
In its petition, Gulf supported its decision by providing a cumulative present
value of revenue requirements (CPVRR) analysis evaluating the cost
effectiveness of repairing the coal generation assets of the Crist Units and
retiring them in December 2021, versus the October 2020 retirement of the coal
generating assets. The CPVRR analysis provided three scenarios on the
disposition of the remaining 240,000 tons of unburned coal, which would either
be burned over a six month period or sold. The retirement option was more cost
effective in each scenario, producing an estimated savings of between $3.6
million and $4.9 million. In response to staff’s data request, Gulf provided an
analysis of a fourth scenario, in which the unburned coal would be burned over
a shorter three-month period. The estimated savings in this scenario was
reduced to $1.7 million. The primary driver of savings is the differential
between coal and natural gas fuel prices and the additional operational costs
of the coal generation assets.
Based on this preliminary analysis, shifting the early
retirement date from December 2021 to October 2020 appears to generate customer
savings. However, the Commission has not reviewed either the conversion to
natural gas, which allows the early retirement of the coal generation assets,
or the early retirement date of December 2021, against which the
cost-effectiveness analysis was conducted. Gulf has also provided no
information supporting either the conversion to natural gas or the December
2021 early retirement date used in the CPVRR analysis.
Based on these factors, staff recommends that the
Commission not make a final prudence determination of whether the October 2020
early retirement of the coal generating assets and capability is reasonable at
this time. The next opportunity to review the full record to determine the
prudency of the retirement of the coal generation assets and capability at
Plant Crist Units 4-7 would be Gulf’s next general base rate proceeding.
Because these Units are being retired early, certain
entries must be made to Gulf’s books and records. Rule 25-6.0436(6), Florida
Administrative Code (F.A.C.), requires a utility to compile an annual
depreciation status report showing changes to categories of depreciation that
will require a revision. In addition, Rule 25-6.0436(7)(a), F.A.C., provides
that:
Prior to the date of retirement of major installations,
the Commission shall approve capital recovery schedules to correct associated
calculated deficiencies where a utility demonstrates that (1) replacement of an
installation or group of installations is prudent and (2) the associated
investment will not be recovered by the time of retirement through the normal
depreciation process.
Gulf’s current depreciation rates are based on retirement
dates of 2024, 2026, 2035, and 2038 for these Units. Therefore, the investment
in these Units will not be recovered through the normal depreciation process
due to the early retirement of these Units.
The retirement and deferral of recovery for these Units
affects Gulf’s ECRC factors. In Attachment AE-1 of its petition, Gulf provides
capital recovery schedules for these Units for both base and clause recovery.
The NBV for the portion of Units 4-7 recovered through the ECRC is $394,547,432
and the accumulated depreciation is $204,005,124. With the retirement and
deferral of recovery of these Units, the resulting ECRC factors would reduce
Gulf’s revenue requirement by $30,051,492.
The concept of deferral accounting allows companies to
defer costs due to events beyond their control and seek recovery through rates
at a later time. If the subject costs are significant, the alternative would be
for a company to seek a rate proceeding each time it experiences an exogenous
event. In staff’s opinion, it is appropriate to create the requested regulatory
assets for the amounts associated with the early retirement of the coal
generation assets and capability at Plant Crist and defer recovery until the amounts
can be addressed in a future proceeding. Further, the Commission should find
that the approval to record the regulatory assets for accounting purposes does
not limit the Commission’s ability to review the amounts and recovery period
for reasonableness in a future proceeding in which the regulatory assets are
included. On January 11, 2021, FPL filed a request for approval of a base rate
proceeding. Gulf
formally merged into FPL in January 2021, with operational consolidation to be
essentially complete by January 2022.
Issue 3:
Should the Commission approve Gulf’s petition to
reduce its currently-approved 2021 Environmental Cost Recovery Clause (ECRC)
factors and tariff for the period March through December 2021 to reflect the
early retirement of the coal generation assets and capability at Plant Crist
Units 4-7?
Recommendation:
Yes. The Commission should approve Gulf’s petition
to revise the currently-approved 2021 ECRC factors and tariff for the period
March through December 2021, to reflect the early retirement of the coal
generation assets and capability at Plant Crist Units 4-7. The proposed tariff,
as shown in Attachment A to the recommendation, should go into effect March 2,
2021. (Forrest)
Staff Analysis:
Gulf stated in its petition that the early
retirement of the Plant Crist Units 4-7 will reduce the projected amount identified
for collection through the ECRC. As such, the Company has requested that the
2021 ECRC factors be reduced to reflect the retirement of the Plant Crist
assets. As discussed in Issue 2, Gulf stated that approval of the requested
Mid-Course Correction to the ECRC factors would reduce the Company’s annual
revenue requirement by $30,051,492.
The current residential ECRC factor is 1.992 cents per
kilowatt-hour (¢/kWh). The residential factor with the proposed ECRC revenue
reduction would be 1.621 ¢/kWh. This proposal would reduce a 1,000 kWh
residential bill by $3.71. Gulf stated the allocation method used to calculate
this reduction is consistent with the cost of service methodology approved in
the Company's last rate case.
Staff recommends that the Commission approve tariff sheet
No. 6.36 to revise the currently-approved 2021 ECRC factors and tariff for the
period March through December 2021 to reflect the early retirement of the coal
generation assets and capability at Plant Crist Units 4-7. The proposed tariff,
as shown in Attachment A to the recommendation, should go into effect March 2,
2021
Issue 4:
Should this docket be closed?
Recommendation:
If no person whose substantial interests are
affected by the proposed agency action files a protest within 21 days of the
issuance of the order, this docket should be closed upon the issuance of a
consummating order. (Stiller).
Staff Analysis:
At the conclusion of the protest period, if no protest
is filed this docket should be closed upon the issuance of a consummating
order.
