July Summary of Storm Surcharge Cases

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1 July 2006 PSC Nominations The Governor will be making 2 appointments to the PSC this fall. One seat is currently occupied by Commissioner Isilio Arriaga, who is seeking reappointment, and the other is currently occupied by Commissioner Terry Deason, who is not seeking reappointment. There were 38 applicants for the 2 positions. On July 11, the PSC Nominating Council interviewed 15 of these and, pursuant to the statutes that govern the nominating process, has nominated 12 for consideration by the PSC Oversight Committee. That Committee must, in turn, nominate 3 persons per position to the Governor, and the Governor must choose from those nominees. The 12 nominees to the PSC Oversight Committee are: Commissioner Isilio Arriaga, Aida Cabello- Colon, Michael Collins, Braden E. Cox, Cayce H. Hinton (who is presently Comm. Deason s senior aide), Rep. Kenneth W. Littlefield, Bruce P. McLeod, Phillip R. Nowicki, Benjamin Poitevent (a Tallahassee attorney), Nathan A. Skop, Jeremy L. Susac (an attorney who is presently Commissioner Katrina Tew s senior aide), and J. Paul Whitfield, Jr. The PSC Oversight Committee is scheduled to meet to interview these nominees and vote on its actual nominations to the Governor on August 11, 2006, at 10:00 a.m., at the Orlando International Airport (in the Airport Authority s Board Room on the 3rd level). The Governor has 30 days from receipt of the certified list of nominees to make his appointments; if he does not do so within that time, the authority to appoint reverts to the PSC Oversight Committee. Summary of Storm Surcharge Cases FPL The FRF intervened in FPL s storm surcharge case, in which FPL sought about $1.7 billion through securitized storm surcharges. The FRF actively participated in litigating the 88 issues in the case through three long days of hearings on April The PSC cut approximately $105MM from the restoration costs claimed by FPL and cut $450MM from FPL s requested storm damage reserve, largely adopting the reasoning advocated by the FRF and other consumer groups. The net effect was that FPL got approval to recover about $1.1 billion out of the $1.7 billion that it requested. On July 18, the PSC voted to clarify several issues in its storm cost financing order, but these are not expected to have a significant impact on rates; generally, they should make the bonds more favorable to investors, which should, other things being equal, hold down financing costs. Progress The FRF participated with the other consumer representatives the Public Counsel, AARP, the 1

2 Florida Industrial Power Users Group, and the Sugarmill Woods Civic Association (a homeowners association in Progress s service area) in negotiating an agreement whereby Progress will replenish its storm reserve by approximately $125 million, by extending its existing surcharges for 1 year following their expiration in the summer of Progress had advised us that they would seek approximately $275 million in charges to replenish its reserve, so all of the consumer representatives felt that we did well to reduce that likely request by 55 percent. Additionally, led by the FRF s insistence, we were able to get Progress to concede to giving us interest on the after-tax balance of the reserve, including whatever amount is booked to the reserve out of the $6 million a year that Progress contributes to the reserve out of its base rates, in accordance with last year s rate case settlement. The PSC Staff are scheduled to issue their recommendation regarding the proposed settlement on August 17. The PSC is scheduled to vote on the settlement at its agenda conference on August 29, and to issue its order on September 18. The PSC Staff are resisting the provision of the settlement that would allow Progress to automatically implement surcharges for up to 80% of claimed actual storm restoration costs, subject to full true-up in a subsequent hearing. Because of the Staff s resistance, the PSC s approval of the settlement is not certain. Gulf Power On February 22, Gulf Power petitioned the PSC for authority to issue bonds to raise $137.8 million for storm recovery and to replenish Gulf s storm reserve. This amount includes the remaining unrecovered costs from Gulf s restoration costs incurred following Hurricane Ivan, Gulf s costs from restoration following Hurricanes Dennis and Katrina, and a storm reserve of $70 million. The FRF intervened in Gulf s storm cost case and participated actively in negotiations that led to a settlement that saves Gulf customers approximately $72 million as compared to Gulf s request, and that, as part of the settlement, results in a 27-month extension of Gulf s existing surcharge (to recover Gulf s 2005 costs due to Dennis and Katrina, and to build a modest reserve of around $20-25 million, assuming no storms in the meantime) without the use of bonds under the Securitization Bill as opposed to Gulf s proposed 8-year surcharge using such bonds. The PSC voted unanimously to approve the settlement on June 20. Electric Undergrounding & Related Reliability Initiatives In Wilma s aftermath, FPL received extensive criticism of its hurricane preparedness and its pre-storm maintenance activities. In addition, the PSC has also opened several related dockets, which were reported in last month s report. The significant development this month is that the PSC voted on June 20 to adopt significant amendments and new rules that I believe will enhance overall distribution system reliability, especially by encouraging undergrounding of distribution facilities. 2 Infrastructure Hardening Rulemaking Docket Docket No EU & Undergrounding Rule Docket No EU. Following two workshops and two rounds of comments, on June 20, the PSC voted to propose significant changes to the PSC s rules affecting distribution reliability, including conversions of overhead to underground facilities. These included the following. 1. Requiring the utilities to adopt construction standards for distribution facilities guided by the National Electrical Safety Code s ( NESC ) extreme wind criteria, which exceed the construction standards currently employed by Florida utilities for distribution facilities. (The requirement is not mandatory on a system-wide basis; rather, it is that utilities are to be guided by the NESC extreme wind criteria, and the rule applies to new construction and to targeted relocations, reconstructions, etc. as determined by the utilities.)

3 3 2. Establish guidelines and procedures to deter damage to underground facilities from storm surges. 3. Adopt the 2002 edition of the National Electrical Safety Code ( NESC ) as minimum safety standards. 4. Including differential O&M costs for OH and UG facilities in computing UG CIACs. 5. Including differential storm restoration costs for OH and UG facilities in computing UG CIACs. 6. Giving utilities the opportunity to give extra credits or discounts against the cost of UG conversion projects where either (a) the utility decides to absorb the credit itself, without recovery from its general body of customers, or (b) the utility demonstrates that there are additional benefits, which may include overall social or total economic benefits to the general population, e.g., the value of lost goods and services and overall lost economic productivity due to prolonged outages. A hearing on the PSC s proposed rules has been requested by BellSouth, Embarq (formerly Sprint), and the Florida Cable Telecommunications Association. This hearing is scheduled for August 31. In a related move, the Cable Association has also filed a petition with the Division of Administrative Hearings seeking to have the rules declared invalid. In a related development, the PSC has spun off the rule provisions that would apply to municipal and cooperative utilities into a separate docket, Docket No EU. A hearing has been scheduled in that docket for October 4. Storm Preparedness Plans and Implementation Cost Estimates, Docket No EI. The PSC issued its Order No PAA-EI on April 25, 2006, requiring the IOUs to file plans and estimated implementation costs for a number of storm preparedness initiatives, including enhanced vegetation management, transmission structure inspections, hardening of transmission facilities, collection of detailed outage data, increased coordination with local governments, and additional research. Required Wood Pole Inspection Programs, Docket No EI. The PSC issued a Proposed Agency Action order requiring the Florida IOUs to inspect their wood poles on an 8-year cycle, which became final without being protested by any investor-owned utility; this docket is now closed. Progress Energy s Petition to Modify Premier Power Service Tariff and Contract In a filing that is somewhat related to service reliability, at the end of June, Progress petitioned the PSC for authority to modify its Premier Power Service ( PPS ) tariff and contract. Under this tariff and the contract that customers must sign to participate in the tariff offering, Progress will, for a charge, install back-up generation on the customer s premises. The customer must pay both capital costs, including Progress s current rate of return on equity, and operating costs. In return, in the event that Progress would otherwise interrupt the customer s service, Progress would activate the back-up generation equipment to maintain service to the customer. Progress would also be allowed to activate the generation during periods of critical capacity conditions, which is not otherwise

4 defined. This makes sense to use available generation when it will benefit the utility and all of its customers; one legitimate concern is that the customers participating in the PPS tariff should get credit against their charges for the value that this provides to Progress s general body of customers, but there s no indication that the charge would incorporate such a credit. Additionally several features of the tariff and contract would shift risk onto customers and away from Progress, including: (a) making the customer liable for any installation costs that are greater due to unforeseen difficulties than what Progress initially estimated; (b) making the customer liable to pay Progress for unanticipated delays in the installation or start-up of the facilities unless such delays are due to the fault and neglect of Progress; (c) making the customer responsible for getting any license or permit for the generation equipment in the name of the company; (d) making the customer warrant the suitability of its premises for the generation equipment; and (e) limiting Progress s liability, in any event whatsoever, to the amount of payments made by the customer to Progress under the tariff. Another interesting note is that the customer s only option is to at least own its backup generation facilities itself; under an 18-year-old Florida Supreme Court decision, PW Ventures v. Nichols, 533 So. 2d 281 (Fla. 1988), upholding a PSC order, if a commercial customer wanted to hire someone to provide this service, and assuming that a third-party vendor wanted to provide it, that third-party would be deemed a public utility subject to regulation by the PSC and, significantly, subject to territorial dispute litigation by the public utility. The PSC scheduled to vote on this proposal on August 15. New Power Plant Proposals & Utilities Ten-Year Site Plans ( TYSPs ) The following, summarized from previous reports, summarizes the larger utilities plans for new power plants. Tampa Electric Company s TYSP identifies about 1,500 MW of gas-fired peaking capacity and one 630 MW coal gasification unit. FPL s TYSP identifies about 4,500 MW of gas-fired combined cycle (intermediate-type) capacity, about 900 MW of gas-fired peaking capacity, and about 1,700 MW of baseload coal capacity. Although not in its TYSP, FPL has also recently announced that it intends to apply for a new nuclear plant license. Progress s TYSP identifies about 2,900 MW of gasfired intermediate capacity, about 380 MW of gas-fired peaking capacity, and 1,500 MW of baseload coal capacity. Progress has also been leading the charge in Florida to build a new nuclear power plant, pushing hard to get legislation enacted that would make it easier for them to build and get cost recovery for the plant. Gulf s TYSP identifies one 620 MW gas-fired combined cycle to be built at an unspecified site, with an in-service date of Seminole Electric Cooperative and the Orlando Utilities Commission are seeking permits for new coal-fired capacity. Of special note is how much of this proposed capacity is to be fueled by natural gas. FPL s Bid Rule Waiver Petition, Docket No EI FPL is planning to build additional coal-fired power plants. Its previous plan to build coal-fired capacity (two 850MW-class units) in St. Lucie County was defeated at the county level in November FPL now seeks to be exempted from the PSC s Bid Rule, which would require FPL to conduct a competitive solicitation process to attempt to identify the lowest-cost generating alternative available to meet its needs. It is doubtless true that coal capacity will provide fuel diversity to FPL and FPL s customers, which I believe would be beneficial in some respects, e.g., giving the utility the opportunity to use cheaper fuels if the price of one or another were to experience disproportionate increases, as happened over the past 2-3 years with natural gas. Beyond that, it is more difficult to say whether coal is the best choice, with uncertainties surrounding the future costs of compliance with various emissions laws and regulations, including those applicable to sulfur dioxide, nitrogen oxides, mercury, and potentially carbon dioxide. Key issues include that the PSC should ensure that FPL s proposal addresses all issues (e.g., present and future viability, costs, and pollution control compliance costs), that the PSC should 4

5 ensure that FPL s cost proposals truly represent the most cost-effective alternative available, and that the PSC should make FPL responsible for the risks associated with its cost projections. One way of accomplishing this is for the PSC to limit FPL to recovery of only the costs that FPL presents to the PSC to obtain its determination of need. Otherwise, customers, including all of the FRF s members who are FPL customers, will be exposed to the risk of cost overruns. The point of having a competitive selection (RFP) process is to determine if there s a free-market alternative where an independent provider would take some of those risks, rather than imposing them on the utility s retail customers. Proposed Rules on Nuclear Power Plant Cost Recovery, Docket No EI On July 24, the PSC opened a new rulemaking docket to consider rules relating to cost recovery for new nuclear power plants. There is essentially no information (no case schedule, no staff assignments) relating to this docket on the PSC s website as of this writing, but it appears that the purpose is to address the provisions in the recently enacted Senate Bill 888 that allow for easy and utility-friendly cost recovery for nuclear power plant costs. The PSC calendar shows that the PSC will hold a workshop regarding Nuclear Plant Construction Costs on August 30th. From the perspective of the FRF s members as major electricity consumers, one crucial issue is how to ensure that our members are protected against cost overruns that could (quite easily) result in a nuclear plant costing more than a coal plant. FPL s Proposed Modification to Curtailable Rates, Docket No EI FPL has proposed to modify its existing Curtailable Service rate schedules, CS-1, CST-1, CS-2, CST- 2, CS-3, and CST-3, by changing the minimum term of service from 1 year to 3 years. FPL would give current customers 120 days to either sign on to the proposed modified schedules, with the 3-year minimum term, or transfer to another rate schedule. The rebilling period under the amended tariff would be 36 months, such that if a customer did not curtail all the way down to its designated Firm Demand, FPL would recapture all credits paid over the previous 3 years as opposed to the previous 1 year under the current rates. The current Curtailable Service credit is $1.56 per kw per month for all demand above the customer s designated Firm Demand. FPL states that it wishes to be able to plan better for the potential return of Curtailable load to its system; by itself, this is a somewhat reasonable argument. The PSC voted to approve FPL s proposal on July 18, but the implementing order has not yet been issued. Fuel & Purchased Power Cost Recovery Clause, Docket No EI Each year, the PSC has proceedings in this general docket, which addresses the fuel and purchased power costs for all of Florida s investor-owned public utilities providing electric service ( IOUs ). These include Florida Power & Light Company ( FPL ), Progress Energy Florida ( Progress ), Tampa Electric Company ( TECO ), Gulf Power Company ( Gulf ), and Florida Public Utilities Company ( FPUC ). You are all probably painfully aware of the tremendous run-up in Florida electricity prices over the past year, driven largely by increases in the price of natural gas. For reference, the current U.S. Energy Information Administration near-term projections show natural gas prices generally stabilizing over the period. The FRF has intervened in this year s docket, which goes to hearing in November. We are monitoring the docket for now, and we will keep you posted. Environmental Cost Recovery Clause, Docket No EI Each year, the PSC also conducts proceedings regarding the IOUs environmental compliance costs, which are also eligible for recovery through a pass-through clause knows as the Environmental Cost Recovery Clause or ECRC. As reported in previous monthly reports, Progress filed a petition 5

6 for recovery of anticipated new, incremental environmental compliance costs pursuant to the Clean Air Interstate Rule ( CAIR ) and the Clean Air Mercury Rule ( CAMR ) promulgated by the EPA. The specific projects that Progress expects to implement to comply with these rules are projected to cost approximately $1.12 Billion in capital costs between now and 2014, which would translate into something like $ million per year in depreciation and return on investment, plus estimated O&M costs at the 3 plants of $34-35 million per year by 2012 and continuing at that level thereafter. Implementation issues, including actual costs, are expected to be taken up in the 2006 ECRC Docket, when the actual implementation status of the CAIR and CAMR Rules is known and when Progress is expected to conclude its more detailed studies of compliance options. Gulf Power submitted similar proposals, the ultimate resolution of which has also been deferred by a stipulation between Public Counsel and the utility to future ECRC Docket proceedings (also probably the 2006 docket). The FRF intervened in the ECRC docket to monitor and to support other consumer representatives and interests. We will continue to monitor developments on these issues and will keep you posted. Energy Conservation Cost Recovery Clause This is the annual docket in which the PSC reviews the IOUs conservation program expenditures and sets the rates for recovery of allowable costs. Like the Fuel Docket and the ECRC Docket, the hearings for the Conservation Cost Recovery Clause are held in the fall of each year. This past fall, the PSC approved the Energy Conservation surcharges for the 4 large IOUs (FPL, Progress, Gulf, and TECO). The approved surcharges are summarized below for the indicated representative rate classes. FPL (GSLD-1): $1.22/1,000 kwh Progress (GSD): $1.44/1,000 kwh Gulf Power (LP): $0.79/1,000 kwh TECO (GSLD: $0.56/1,000 kwh This year s docket also goes to hearing in November. Legislative The major electric-utility-related bill that passed this session was the comprehensive Senate Bill 888, which was commonly known as the Governor s Energy Bill. Governor Bush signed SB 888 into law on June 19. The law includes the following. 1. Various provisions to encourage the use of renewable energy technologies, including solar incentives and various tax credits. 2. Creation of the Florida Energy Commission, which will consist of 9 members (4 appointed by the House Speaker, 4 appointed by the Senate President, and the 9th member appointed jointly by those two). The Commission will be permanent, and must submit its initial report to the Senate President and the House Speaker by December 31, This report must cover a wide range of subjects, including: (a) greenhouse gas emissions and a state climate action plan; (b) electricity supply and reliability, including reliable delivery and prompt recovery from damage; (c) affordability of electric rates; (d) reliable supply of motor vehicle fuels; (e) in-state R&D on alternative energy technologies, including alternative motor fuels; and (f) consumer incentives to promote energy efficiency. 3. Amendment to the Ten-Year Site Plan and PSC need determination statutes to require the PSC to consider the impact of new projects on fuel diversity within Florida. This is designed to

7 address our vulnerability to fuel-specific price increases, such as the dramatic natural gas price increases that were experienced in the time period. 4. Allow the PSC to adopt distribution reliability standards that are more stringent than those prescribed by the National Electrical Safety Code. 5. Certain amendments to the Power Plant Siting Act, many of which are procedural. 6. Amendments that make it easier for utilities to site and get cost recovery for nuclear units, and that will shift much of the risk of constructing nuclear plants onto ratepayers, including (a) allowing the utility to put a new nuclear plant into rate base automatically upon its being placed in commercial service, and (b) recovery of the costs of abandoned nuclear projects with interest at the utility s weighted average cost of capital during such recovery period. I believe that these provisions are unwise, unsound, and unfair to consumers; the Legislature has spoken, however, and I believe that the consumers side of proceedings at the PSC can use this as further evidence that the utilities face essentially no risk in their business operations, such that their rates should be set based on allowed rates of return that fairly reflect their very low-risk business environment. 7. Amendments to the Transmission Line Siting Act, many of which are procedural. Proposals to make the PSC elected and to move the Public Counsel under the Attorney General both failed. Water & Wastewater Schef Wright, whom we have hired to monitor the PSC and related utility developments for the FRF, has developed a fair amount of water and wastewater utility expertise over his career and is available, for a fee, to assist members with issues relating to their water and wastewater service.