Discussion
of Issues
Issue 1:
Should the Commission approve FPL's request to
create regulatory assets related to the retirement of Lauderdale Units 4 and 5
and Martin Units 1 and 2?
Recommendation:
Yes, the Commission should
approve FPL’s request to create regulatory assets related to the retirement of
Lauderdale Units 4 and 5 and Martin Units 1 and 2. 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 future
proceedings in which the regulatory assets are included for recovery. (M.
Andrews, Thompson, Higgins)
Staff Analysis:
On August 17, 2018, FPL filed the instant Petition
seeking approval to create regulatory assets for the amounts representing the
remaining net book value, at retirement, of Lauderdale Units 4 and 5 and Martin
Units 1 and 2.
FPL has an ongoing program to
modernize its fossil fuel generating units based on cost-effectiveness. By Order
No. PSC-2018-0150-FOF-EI, the Commission approved the need for the Dania Beach
Clean Energy Center (DBEC). The
DBEC is essentially a modernization/re-powering of FPL’s existing Lauderdale
Plant. Specifically, the Company is planning to retire Units 4 and 5 at the end
of the fourth quarter of 2018 and bring into service Unit 7 in mid-2022. The
DBEC Unit 7 modernization project, which includes the retirement of Lauderdale
Units 4 and 5, is projected to save FPL customers an estimated $300 million in
cumulative present value of revenue requirements (CPVRR). The CPVRR savings are
expected to begin accumulating in 2021.
The retirement of Martin Units 1
and 2 in the fourth quarter of 2018 was included in FPL’s 2018 Ten-Year Site
Plan provided to the Commission in April 2018. Both units have been in operation
for approximately 38 years and are inefficient as compared to the rest of FPL’s
generating fleet. For example, Martin Units 1 and 2 have average net heat rates
of 11,943 and 11,488 British thermal units/kilowatt-hour (BTU/kWh), respectively;
whereas, FPL’s newest combined cycle (CC) unit has an average net heat rate of
6,699 BTU/kWh. FPL considered whether retiring the units early versus
continuing to operate the units through their originally planned retirement date
was more economic. The alternatives considered to replace Martin Units 1 and 2
were upgrading the combustion turbine (CT) components of some of FPL’s existing
CC units, or repowering Martin Units 1 and 2. FPL ultimately determined that
upgrading the CT components of some of its existing CC units was the most cost-effective
option.
The combined capacity of Martin
Units 1 and 2 is 1,626 MW, and FPL expects 1,526 MW of additional capacity from
the upgrades to other units. FPL’s current resource plan, including the early retirement
of Martin Units 1 and 2, upgrades to the CT components of existing CC units, and
a short-term purchased power agreement in 2028 is expected to allow FPL to
continue to maintain its twenty percent planning reserve margin criteria. FPL
would still be capable of maintaining its reserve margin if it were to continue
to operate Martin Units 1 and 2; however, FPL states its customers would not
benefit from the economic savings associated with retiring the units. The
retirement of Martin Units 1 and 2 is expected to result in approximately $491
million in CPVRR savings to FPL’s customers as compared to continuing to
operate the units and the savings are expected to begin accumulating in 2019.
In its Petition, FPL estimated a retirement
date for Lauderdale Units 4 and 5 of October 1, 2018, and a retirement date for
Martin Units 1 and 2 of December 1, 2018. In response to staff’s third data
request, FPL now estimates that the Lauderdale and Martin Units will be retired
on or about December 31, 2018.
According to Revised Attachment KF-1, in its response to staff’s fourth data
request, FPL states that the unrecovered net book values for the Lauderdale and
Martin Units at the time of retirement are estimated to be approximately $287
million and $372 million, respectively.
Staff notes that per the Company’s most-recent depreciation study filed in 2016,
in Docket No. 160062-EI (later consolidated with Docket No. 160021-EI), the expected
retirement year for Lauderdale Units 4 and 5 is 2033 and the expected retirement
year for Martin Units 1 and 2 is 2031.
Table 1-1 below reflects the estimated plant in service,
reserve, and remaining net book value amounts associated with the relevant
Lauderdale and Martin Units at the specified dates.
|
Table 1-1
|
|
Net Book Values Associated with Lauderdale Units 4 and 5
and Martin Units 1 and 2
|
|
Plant
|
Plant in
Service
|
Reserve
|
Net Book Value
|
|
Plant Lauderdale
(as of 12/31/2018)
|
$479,165,675
|
$192,128,935
|
$287,036,741
|
|
Plant Martin
(as of 12/31/2018)
|
$778,405,489
|
$406,856,880
|
$371,548,609
|
|
|
|
|
|
|
|
Total*
|
$1,257,571,164
|
$598,985,815
|
$658,585,350
|
|
Source: In Response to Staff’s
Fourth Data Request.
FPL’s Revised Attachment KF-1.
* Differences due to rounding
|
|
|
|
|
|
|
Due to the early retirement of the Lauderdale and Martin Units,
certain entries must be made to FPL’s books and records. Rule 25-6.0436(6),
Florida Administrative Code (F.A.C.), requires the compilation of an annual
depreciation status report showing changes to categories of depreciation that
will require revision. In addition, Rule 25-6.0436(7)(a), F.A.C., provides
that:
Prior to the 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.
FPL’s current depreciation rates authorized in Order No.
PSC-2016-0560-AS-EI (2016 Settlement Agreement) are based on retirement years
of 2033 for Lauderdale and 2031 for Martin. Therefore, the investment in the
Lauderdale and Martin Units will not be fully recovered through the existing
depreciation process due to the early retirement of the Units. Thus, staff recommends
it is appropriate to create regulatory assets for the amounts representing the
remaining net book value of Lauderdale Units 4 and 5 and Martin Units 1 and 2
at retirement. In addition, staff notes 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 future
proceedings in which the regulatory assets are included for recovery.
Issue 2:
Should the Commission allow FPL to defer recovery of
the Lauderdale and Martin regulatory assets until FPL's base rates are next reset
in a future rate proceeding?
Recommendation:
No, the Commission should not approve FPL’s request
to defer recovery of the Lauderdale and Martin regulatory assets to a future
general base rate proceeding. FPL should be required to begin amortizing the
regulatory assets associated with Lauderdale Units 4 and 5 and Martin Units 1
and 2 upon retirement. The annual amortization amounts should be $21.5 million
for the Lauderdale Units and $31.9 million for the Martin Units, for both base
rate and clause recovery combined. (M. Andrews, Mouring)
Staff Analysis:
According to Revised Attachment KF-1, the estimated unrecovered
net book value associated with the retirement of Lauderdale Units 4 and 5 is approximately
$287 million. For Martin, in addition to the retirement of Units 1 and 2, the
Company is also proposing to retire certain associated transmission facilities.
The estimated unrecovered net book value related to the Martin retirement is
approximately $372 million.
In its Petition, FPL states that pursuant to Paragraph 14 of
the 2016 Settlement Agreement, the Company is prohibited from requesting an
amortization rate during the term of the Agreement, thus the early retirement
of these units will require that future revisions be made to the depreciation
rates, amortization, and capital recovery schedules. Moreover, because of the
specific terms of 2016 Settlement Agreement related to continuing depreciation
and amortization rates until base rates are next reset in a general base rate
proceeding, FPL argues the creation of a regulatory asset in this instance does
not involve deferral of costs that would otherwise be recovered, in part,
during the term of the Agreement. Therefore, FPL concludes that creation of
regulatory assets and deferral of cost recovery are appropriate in this
instance.
FPL cites to Order No. PSC-2016-0361-PAA-EI which
approved Gulf Power Company’s (Gulf) request to create a regulatory asset associated
with the early retirement of Smith Units 1 and 2 (Smith) and to defer costs and
seek recovery through rates at a later time as support for its request. Gulf’s
request to defer amortization of the Smith regulatory asset related to the
early retirement of the Smith Units was approved to begin on January 1, 2018,
as part of a settlement agreement approved by Order No. PSC-17-0178-S-EI.
On November 8, 2018, OPC filed a letter in this docket in
which it identifies certain issues it has with the proposed treatment of the
early retirement of Lauderdale Units 4 and 5 and Martin Units 1 and 2 as
proposed by FPL in its Petition. OPC states that it does not object to the
early retirement of the facilities nor the creation of the regulatory assets.
However, OPC asserts that FPL’s proposed treatment violates the terms and
conditions of the 2016 Settlement Agreement.
OPC states that it recognizes that the early retirement of
the Lauderdale and Martin Units will trigger the need to establish capital
recovery schedules to correct for the associated deficiencies. However, OPC
disagrees with FPL that a conflict is created between Paragraph 14 of the 2016
Settlement Agreement and Rule 25-6.0436(7)(a), F.A.C., such that it would
require that the recovery of the regulatory assets and determination of
amortization be deferred.
OPC argues that FPL should be required to establish
capital recovery schedules and begin amortization upon the early retirement
dates of Lauderdale Units 4 and 5 and Martin Units 1 and 2. To avoid a
violation of the 2016 Settlement Agreement, OPC further asserts that FPL should
be required to amortize the regulatory assets associated with Lauderdale Units
4 and 5 and Martin Units 1 and 2 in an amount no less than the amount of
depreciation collected annually for these units used to set rates for the 2016
Settlement Agreement.
In this matter, the Commission has the discretion to defer
recovery of the regulatory assets as requested by FPL or to order the
amortization of the regulatory assets to begin following retirement as proposed
by OPC. Rule 25-6.0436(7)(a), F.A.C.,
specifies that prior to the retirement of major installations, such as power
plants, the Commission shall approve capital recovery schedules to correct
associated deficiencies if the retirement of the unit is prudent and the
investment will not be recovered through the normal depreciation process. Both
FPL and OPC are in agreement that the decision to retire the Lauderdale and
Martin Units is prudent and that the investment will not be recovered through
the normal depreciation process. Their point of disagreement is when the
recovery of the unrecovered net investment should begin.
The language in Paragraph 14 of the FPL 2016 Settlement
Agreement and Paragraph 7
of the Gulf 2013 Settlement Agreement are almost identical with respect to the
discussion of depreciation and amortization accrual rates.
However, while the language in the settlement agreements is very similar, there
are certain nuances that OPC argues distinguish Gulf’s request for deferral of
recovery associated with the regulatory asset created for the early retirement
of the Smith Units from FPL’s request for deferral of recovery associated with
the regulatory assets created for the early retirement of the Lauderdale and
Martin Units.
While FPL asserts that the decision in the Gulf case
supports its request in the instant docket, the Gulf Order states there were
extenuating circumstances in the Gulf case that makes its reliance as precedent
in the instant case problematic. For
example, representatives of both Gulf and OPC spoke in agreement during the discussion
of the Plant Smith item during the Commission Conference held on August 9,
2016. Specifically, both parties agreed that the relief sought by Gulf was unique
to the specific circumstances regarding Plant Smith as it relates to
obligations under Gulf’s 2013 Settlement Agreement. Most notably, the parties
shared an understanding that “the early retirement of Plant Smith was
contemplated as a possibility during the discussions around the stipulation and
is consistent with and contemplated by the stipulation.” In
effect, the parties came to an understanding on the terms of their shared
settlement agreement. Staff is not aware of any such understanding between FPL
and OPC that the early retirements of the Lauderdale and Martin Units in the
fourth quarter of 2018 were contemplated as possibilities during the
discussions that preceded FPL’s 2016 Settlement Agreement.
Another concern regarding FPL’s assertion that it cannot
begin the amortization of the Lauderdale and Martin regulatory assets until
base rates are reset in the Company’s next base rate proceeding is the fact
that FPL is currently amortizing a regulatory asset associated with the early
retirement of another power plant that was newly created during the term of this
same 2016 Settlement Agreement. The Commission approved a separate settlement
agreement between FPL and OPC which allowed FPL to establish a regulatory asset
for the remaining net book value of FPL’s share of the St. Johns River Power
Park (SJRPP) and to commence amortization of the associated base rate portion
of the regulatory asset at a date earlier than the next base rate adjustment. Instead
of commencing amortization of the base rate portion of the SJRPP regulatory
asset at the time FPL’s base rates are next reset in a general rate case and
continuing thereafter for ten years as proposed by FPL, the parties agreed, and
the Commission approved, amortization to begin six months after retirement of
the SJRPP facility and continue over a 15-year period.
The important point is the amortization of a newly created regulatory asset is
not only permitted during the term of the 2016 Settlement Agreement, it is
currently occurring for a separate regulatory asset associated with the early
retirement of another power plant.
The final point to address concerns the recovery of costs.
As both FPL and OPC assert, the goal of Paragraph 14 of the 2016 Settlement
Agreement was to hold depreciation and amortization expenses level except for
growth during the term of the Agreement. Once the Lauderdale and Martin Units
are retired, FPL must cease recording depreciation expense for these assets.
The 2017 depreciation expense associated with these assets is approximately $53.4
million. OPC
asserts that if expenses are reduced as proposed by FPL, the amount of the
expense reduction will inure to the benefit of FPL. As
such, deferring the recovery of the Lauderdale and Martin regulatory assets in
this instance would allow the Company to effectively recover some of the plant
costs twice, first through base rates during the period of deferral and again through
the amortization of the regulatory assets when the base rates are next reset. In
addition, if the regulatory assets are established, FPL will also earn a return
on the balances recorded in the regulatory assets. Because there is no
requirement to file a general base rate proceeding at the expiration of the
minimum term, or December 31, 2020, in the 2016 Settlement Agreement, this extra
recovery would go on indefinitely if FPL’s Petition is approved as proposed.
Both FPL and OPC are signatories to the 2016 Settlement
Agreement. Having had no role in the negotiation of this Agreement, staff is unable
to discern the intent of the parties beyond what was memorialized in the Agreement.
There is nothing in the 2016 Settlement Agreement that specifically states FPL
must defer the amortization of the newly created regulatory assets until the
next time base rates are reset. There is also nothing in the Agreement that
specifically states that FPL must begin the amortization immediately following the
retirement of the units that gave rise to the newly created regulatory assets.
Prior to retirement, the net book value of the Lauderdale
and Martin Units of approximately $659 million is recorded in rate base in the
form of net plant and the associated annual depreciation expense of approximately
$53.4 million (based on the 2017 annual amount of depreciation) is recorded on
the income statement. Under FPL’s proposal, following the retirement of the
Units, the net book value of the Lauderdale and Martin Units of approximately
$659 million will continue to be recorded in rate base in the form of regulatory
assets but the annual depreciation expense associated with these assets will
cease to be recorded on the income statement. Under OPC’s proposal, following
retirement of the Units, the net book value of the Lauderdale and Martin Units
of approximately $659 million will be recorded in rate base in the form of regulatory
assets and approximately $53.4 million will continue to be recorded on the
income statement as annual amortization expense. Under all three scenarios,
approximately $659 million will be recorded in rate base but in only two of the
scenarios will the net expense level be left unaffected.
Based on the above, staff recommends that FPL be required
to begin amortization of the regulatory assets upon the early retirement dates
of Lauderdale Units 4 and 5 and Martin Units 1 and 2. In addition, the annual
amortization amounts should be $21.5 million for the Lauderdale Units and $31.9
million for the Martin Units, for both base rate and clause recovery combined.
These amounts are based on the 2017 actual level of depreciation expense
associated with these assets in base rates and clause recovery combined. The
2016 Settlement Agreement requires that, “at such time as FPL shall next file a
general base rate proceeding, it shall simultaneously file new depreciation and
dismantlement studies and propose to reset depreciation rates and dismantlement
accrual rates in accordance with the results of those studies.” Thus,
at the time FPL files its next depreciation study, in conjunction with its next
rate proceeding, this matter can be brought before the Commission to determine
if the amortization of these regulatory assets should be adjusted going
forward.
Issue 3:
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. (Schrader)
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.
