Florida Power & Light’s proposal to increase customer rates $1.3 billion over three years will be on trial starting Monday as the state’s largest electric company asks permission to raise customer bills and be rewarded for “superior service” with the ability to earn higher profits.
But more than rates will be challenged as a long list of opponents ask state regulators to reject the rate increase and order FPL to refund at least $800 million a year, arguing that the company has earned excessive profits and should be returning cash to customers.
The opponents — from the AARP and the Sierra Club to the military, industry groups and the office that represents the public in rate cases — also want the Public Service Commission to stop allowing FPL to have customers pay for pipeline purchases, natural gas deals and other business decisions that they say investors should finance. And they want regulators to order the company to diversify its fuel mix to be more climate-friendly and less dependent on natural gas.
FPL is “asking for too much money,” said J.R. Kelly, head of the Office of Public Counsel, which represents the public in rate cases. “The bottom line is, they are asking to increase their profits at the expense of ratepayers.”
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If FPL gets its full request, the monthly base rate in 2019 for “typical” residential customers — 1,000 kilowatt hours — would increase from $57 to $70 a month, about a 23 percent increase.
When fuel costs and changes in other fees are included, the total bill for the customer using 1,000 kilowatt hours would rise from $91.73 to $107.29 a month, or 17 percent.
FPL argues that it needs to start charging customers more so that it can make enough profit to keep attracting investors to finance its growing fleet of power plants and provide reliable and affordable electricity to 4.8 million Florida customers.
“FPL’s financial policies are an integral part of its overall strategy to deliver value to customers — a strategy that is working,” said Sarah Gatewood, FPL spokesperson. “… Even with the base rate increase we have proposed, our typical customer will still pay less for power through 2020 than they did back in 2006.”
FPL argues in its prehearing statement that it achieved its efficient operations by keeping a typical customer’s bill “14 percent lower than it was 10 years ago,” and because expenses were lower than an “average” utility, customers saved about $17 per month, or more than $200 a year.
FPL also commends the five-member utility board that will decide the rate case. It says regulators have created a “constructive regulatory environment” that has fostered “exceptional value for customers.”
But the opponents argue that customer value is not a good enough reason to force users to pay the company more and, while shareholders get dividends because of FPL’s performance, customers should get refunds.
“I commend them for having low rates and making some very good, prudent decisions,” Kelly said. “But you shouldn’t be given more money just because your rates are low.”
The PSC is scheduled to have a preliminary vote on the rate case by Oct. 27 and a final vote on Nov. 29.
Not on the agenda is the impact of the company’s troubled cooling canal system at its Turkey Point power plant.
The Florida Industrial Power Users Group wanted the PSC to consider the problem of the saltwater plume and whether the company has “appropriately managed the cooling canal system” when it decides whether to award FPL a bonus for “good performance.”
PSC Commissioner Lisa Edgar, the prehearing officer, sided with FPL and rejected the argument, saying it will be taken up in another hearing.
The groups opposing the rate increase include some of the largest electricity users in Florida: the South Florida Hospital and Healthcare Association, the Florida Retail Federation, the Florida Industrial Power Users Group, the U.S. military and Wal-Mart stores.
They argue that the favorable regulatory environment has allowed FPL to invest in natural gas pipelines and other assets, even if they are not needed, unnecessarily increasing customer costs.
The PSC, for example, approved a plan to allow FPL to invest in gas fracking operations in Oklahoma in an attempt to save money on fuel. But Kelly’s office challenged it as a speculative business that should be financed by shareholders, not customers. The Florida Supreme Court overruled the PSC and ordered FPL to send customers a refund.
At the heart of FPL’s request is its assumption that it should rely on customers to finance its operations more than it relies on shareholders. That is also at the heart of the opposition.
Like the other electric utilities in the state, FPL is protected from competition but, in return for those monopoly privileges, it agrees to have its profits regulated. Opponents argue that projects like the fracking investment, its move into selling natural gas, and its investments in natural gas pipelines unfairly shift the company’s investment risk from shareholders to customers.
The current agreement, negotiated with the PSC staff and other parties in 2012, allows FPL to earn a return on equity (ROE) — or shareholder profits — within a range.
If the amount of revenues the company has to return to shareholders dips below 9.5 percent, stock dividends could drop and investors could stop buying stock, so the law allows FPL to ask for a new rate case to charge customers more money. If the shareholder profits are above 11.5 percent, the PSC can ask for the rate case to order the company to lower its profit structure.
In June, FPL reported to regulators that it was earning an 11.5 percent ROE. The rate request asks to increase the allowed range of profit to no lower than 10.5 percent ROE and no higher than 12.5 percent ROE, including an incentive bonus that rewards the company for “good performance.”
Each percentage point increase FPL is allowed to have in ROE represents about $240 million a year in profit, which it can deliver to shareholders in the form of dividends.
The opponents want regulators to authorize a lower range — starting at 9.25 percent — and return the remainder back to customers in the form of refunds.
“Utilities can either raise capital by selling stock and paying dividends, or borrow it,” said Kelly, the public counsel. “But right now, to borrow money is dirt cheap. Equity costs more than debt.”
Another key issue relates to the equity ratio — what percentage of FPL’s operations is financed by money from the sale of stock, and what percentage is financed by ratepayers. Kelly and the other parties opposing the rate hike say that FPL’s proposal to finance 59.6 percent of its assets using stock is excessive and designed to benefit shareholders over customers.
They note that the industry average for the equity ratio is closer to 50 percent, and even FPL’s parent company, Juno Beach-based NextEra Energy, has an equity ratio of just 44 percent.
Opponents say FPL could save customers $330 million a year if it sought low-interest bonds instead of selling stock to finance its projects. FPL argues that it should be allowed to continue the 59.6 percent equity ratio because it “appropriately reflects FPL’s business risk profile and FPL’s strategy of maintaining a ‘stronger than average’ financial position, which has served customers well.”
FPL’s current profit levels were set in 2012, when FPL negotiated a four-year deal in secret with the hospitals, industrial users and the military. They excluded the public counsel. The PSC approved it.
The deal raised base rates by $350 million a year plus another $615 million over three years, and allowed the company to charge customers for a host of projects without having to return for an expensive rate case.
The agreement has been profitable for FPL. Since the August 2012 settlement, stock in NextEra has been up more than 75 percent, and FPL has ended the year with profits between 10.95 percent and 11.5 percent, each year — the top of the ROE range.
The 2012 agreement ends this year. FPL proposes a new rate increase that would be phased in over three years: $866 million added to customers’ bills in 2017, an additional $262 million in 2018 and a mid-year increase in 2019 of $209 million.
FPL says it will use the new revenue to invest in several projects: three solar plants totaling 224 megawatts of energy, new smart grid technology “to prevent outages and reduce restoration time,” $1.25 billion for 26 new and expanded natural gas combustion turbines, and open a new gas-burning plant in Okeechobee County in 2018.
Meanwhile, the regulatory environment has shifted dramatically since the company held its last rate case hearings in 2009. Then, former Gov. Charlie Crist accused commissioners of being “too cozy with the utilities they regulate” and bristled at their routine approval of utility industry requests.
He appointed four members he considered more consumer-friendly and, in 2009, the board unanimously rejected FPL’s rate hike, giving the company only $75 million of the nearly $1.5 billion it sought, plus another $225 million over three years.
FPL revolted. It used its political clout to successfully persuade legislators to replace Crist’s appointees to the utility board. And, when Gov. Rick Scott came into office in 2011, he continued the job of filling the commission with members who were less inclined to challenge FPL’s proposals.
Now, opponents argue, the governor-appointed regulatory board has allowed FPL to earn higher profits in ways they claim harm customers. In thousands of pages of documents, expert witness testimony and reports, the opponents provide numerous examples to backup their claims.
FPL’s Gatewood says the witnesses for the opponents “conveniently ignore key factors in their own recommendations — many of which are, as usual, extreme.”
Among the examples:
▪ FPL is the only utility in the state that is allowed to pay itself incentive payments when it buys the cheapest fuel on the market.
FPL counters in its rate filings that each of these programs has resulted in benefits to the consumer. It says that the $3 million in incentive payments paid to FPL saved customers $22 million over the past three years.
▪ FPL shifts the risk from shareholders to consumers by relying on financing its operations using the more expensive equity markets for its capital than from low-cost loans.
They note that borrowing costs are low, and 47 percent of the company’s total operating expenses are paid by customers in pass-through clauses that are not part of the base rate. As a result, FPL has effectively lowered the risk that it won’t pay dividends to shareholders.
▪ FPL understates its sales to justify a “significantly overstated revenue increase request.”
▪ By FPL’s investing in the Sabal Trail pipeline, which benefits NextEra, the company is using FPL customers to shoulder a cost that should be borne by the parent company.
FPL counters that it is not asking for money related to the pipeline in the rate case but instead it is part of the fuel clause, which will be decided later by the PSC.
▪ FPL has been allowed to build $1.25 billion in natural gas units used to supply energy during times of peak demand. Sierra Club and the other opponents argue that these so-called “peaker units” were never authorized by regulators and never received the required approval by the governor and Cabinet who serve as the Power Plant Siting Board.
FPL counters that it replaced old gas turbines with new combustion turbines at its Fort Myers and Fort Lauderdale sites and the construction should be charged to customers.
FPL’s rate case history
▪ 2009 request: $1.47 billion
2009 agreement: $75 million plus $59 million clause adjustment and $166 million for West County Unit 3
▪ 2012 request: $690.4 million
2012 settlement: $350 million, plus $165 million in 2013 for Cape Canaveral Clean Energy Center, $234 million in 2014 for Riviera Beach Clean Energy Center, and $216 million in 2016 for Port Everglades Clean Energy Center
▪ 2016 request: $1.3 billion over three years: $866 million in 2017, $262 million in 2018 and $209 million in 2019
Source: Florida Power & Light