Regulators must decide: Is FPL rate increase a customer investment or a tax?

An FPL worker repairs a line in Hialeah.
An FPL worker repairs a line in Hialeah.

State regulators began the second week of testimony this week in Florida Power & Light’s quest to obtain a $1.3 billion rate increase and the focus remained: How much profit should the state’s largest electric utility be allowed to make from customer bills?

The company concluded the first phase of its rate case before the Public Service Commission, proposing that its rates should be increased over three years as the company is rewarded with $360 million in higher profits for its “superior performance.” The request includes giving FPL the ability to earn a bonus of $120 million, a so-called “incentive adder” that would be on top of the additional $240 million a year in allowed profit the company is asking regulators to approve over what is currently allowed.

As a regulated monopoly, FPL faces no natural competition for its giant fleet of nuclear, gas and solar energy production and most of its 9 million customers have nowhere else to go for electricity. So the Public Service Commission plays the role as surrogate, imposing financial limits and performance incentives that competition might naturally create.

But opponents argue that the company should not be allowed to make higher profits as a “reward” for good performance but instead should be required to give customers a refund in return for the favorable terms they have enjoyed since the last full rate hearing in 2009.

The opponents, which include the state’s Office of Public Counsel, which represents the public before the commission, as well as the South Florida Hospital and Healthcare Association, the Florida Retail Federation, Florida Industrial Power Users Group (FIPUG), the U.S. military, Wal-Mart stores, AARP and the Sierra Club , argued last week that FPL is able to keep its costs low because 70 percent of its fuel mix is dependent on low-cost natural gas.

Instead of a rate increase, they want regulators to order the company to give customers a refund of more than $800 million starting next year.

Jon Moyle, lawyer for FIPUG, argued that an increase in electric rates was like an increase in taxes, in his opening statement.

“Taxes are used to fund a monopoly, the government. FPL is a monopoly,” he said. “And the people who are imposed taxes and/or rates really don’t have a choice in paying them ... If you don’t pay your electric bill, you don’t have the lights on.”

FPL testified that its rate request should be approved because it performs better than comparable utility companies, keeps its costs down and its efficiency high because it hasn’t “done things in a conventional way,” said R. Wade Litchfield, FPL attorney.

“We have taken some innovative steps and worked hard to lead in areas of performance improvement,’’ Litchfield argued.

A stream of witnesses for FPL entered evidence about the fuel efficiency of its fleet of natural gas plants, its reliability and its low costs compared to other utilities, its record of low fuel emissions and its reliable service.

PSC Commissioner Ron Brisé on Friday asked FPL’s expert witness, Moray Dewhurst, what he would tell a customer “who values the service, agrees that it is excellent in quality but they’re not in a position to pay more for it?”

Dewhurst, who retired as chief financial officer of FPL’s parent company early this year, said he would “certainly concede there are a number of customers — hopefully a small number — who genuinely have true affordability issues and simply don’t have the resources.”

Brisé said he was “not primarily talking about those people” — who are eligible for some assistance programs — but other customers.

“This is the part where it’s the cold-hearted CFO,” Dewhurst joked. “How I personally can get comfortable and say we’re looking someone in the eye and say we’re asking for a rate increase, is that even with the rate increase ... we will continue to have one of — if not the most — affordable value propositions for an extraordinarily valuable service ...

“The value of the service that we deliver far, far, far exceeds the cost. Nobody likes to pay more ... but if that’s the price and if the price has been reasonably determined, then that’s what the cost of this service should be. My conscience is clear.”

FPL is the largest subsidiary owned by NextEra Energy. Dewhurst testified that he was “paid $1” to offer his expert testimony and agreed to the job because he had been intimately involved in the preparation for the rate case.

But Dewhurst is also one of the company’s largest individual shareholders. If the company succeeds in achieving its rate request, he would benefit from the added profits that could be dispersed in the form of dividends to shareholders. According to the NextEra’s 2016 proxy statement, Dewhurst holds 319,335 shares of NextEraEnergy stock — valued at about $39 million — and has an option to buy another $46 million in shares.

FPL spokesperson Sarah Gatewood noted that the executive incentive compensation which is provided in the form of NextEra Energy stock, is “not paid for by FPL customer rates.” Nonetheless, testimony before the commission focused on the need to continue the positive results for shareholders to allow the company to continue to make the investments the company says it needs to continue its strong service.

Eric Silagy, FPL’s chief executive officer, testified that if the PSC didn’t approve the full rate increase, he couldn’t promise the company wouldn’t be back soon asking for more money again. He said that without the increases, the company couldn’t keep rates as low as they have to invest in the technology needed to provide more efficient and updated service.

“The only way we can invest in these types of technologies is with the support of the commission and the revenue requirements that are required to do so,” he said.

Silagy also holds NextEra Energy stock: 34,737 in common shares, valued at about $4 million, with an option to buy another $6 million, according to the May 2016 proxy statement.

If FPL gets its full request, the monthly base rate in 2019 for a residential customers using 1,000 kilowatt hours of electricity would increase from $57 to $70 a month, about a 23 percent increase. For the average industrial and manufacturing customers and other large users, the increase would rise 83.4 percent.

When fuel costs and changes in other fees are included, the total bill for the residential customer using 1,000 kilowatt hours would rise from $91.73 to $107.29 a month, or 17 percent.

Moyle, of FIPUG, asked Silagy, who is a member of the board of directors at Enterprise Florida, the state’s public-private economic development corporation, what impact the large increase might have on large industrial companies.

“I would agree that generally higher bills wouldn’t be viewed positively,’’ Silagy responded. “However, I would say that, again, we have actually been able to lower their bills over the past four years, and that’s been positive for them.”

Through witnesses, the introduction of exhibits and cross examination, FPL revealed:

▪  Its non-union employees are paid more than twice the average income in Florida, $99,805, not including the $10,225 per employee spent on medical benefits. Employees receive annual wage increases of 3 percent a year. Of the 9,092 employees at the company, FPL executive Kathleen Slattery testified that 65 percent are non-union.

▪  FPL operates five separate call centers to handle customer questions and complaints, including one based in Texas.

▪  The company transferred ownership of its jets and helicopters to NextEra, earning ratepayers $6 million in revenue, and FPL executives now give a monetary contribution to NextEra Energy to continue using them.  

▪  FPL has used its eminent domain power to buy thousands of acres of property across the state for “future use,” and has held some parcels as much as 20 years. The property is intended for development of such things as cooling canals, buildings and solar installations. By holding the property now and charging it to the customer base rate, FPL earns a rate of return, or profit, on the land.

▪  The company is seeking $800 million to replace a gas-fired “peaker” power plant to be used during times of peak demand, but the request contradicts comments of NextEra CEO James Robo. He was quoted at an industry conference in September 2015 saying that energy storage technology had improved so much, he predicted that after the year 2020, “there may never be another peaker built in the United States — very likely you’ll be just building energy storage instead.”

Mary Ellen Klas can be reached at Follow her on Twitter @MaryEllenKlas