Florida Public Service Commission slams on the brakes over rate increases

The two major nuclear utilities in Florida, Progress Energy (NYSE:PGN) and Florida Power & Light (FPL) (NYSE:FPL), came away Jan 13 from a meeting with the Public Service Commission (PSC) with a lot less than they asked for in rate increases.  According to the CEOs of both utilities, the rejection will affect their plans to build four new nuclear power plants.

After a 10-month regulatory review, FPL got just $75 million out of a request of $1.3 billion for base rate increase. The utility has plans to develop two 1,150 MW Westinghouse AP1000 nuclear reactors at Turkey Point near Miami. PSC also rejected the recommendation of its staff for a $357 million rate increase for FPL, denied the utility's requests of $49 million for executive compensation and squashed a request to set aside $150 million for future storm damage. Finally, the PSC slammed on the brakes for FPL's regulated rate-of-return dropping it from 12.5% to 10%.

Progress Energy fared much worse getting none of the $500 million it requested in rate increases. Like FPL, it has plans for two similar reactors at Levy County on the state's west coast.

Both utilities reacted by threatening to stop work on a combined total of 4.6 GWe of new nuclear powered electricity generation capacity. The PSC's decision threatens to take the sunshine state from being one of the brightest spots in the nuclear renaissance to one of the darkest.

Florida's nuclear renaissance shifts into reverse

Until this sudden shift in the regulatgory environment, Florida was one of the most pro-nuclear state in the country matching the development profile in Texas. Both Florida utilities entered 2009 with strong support by the PSC for the four new reactors. Florida's state legislature also supported the projects with a model law that allowed the utilities to request rate increases to pay for construction of the plants rather than waiting for them to enter revenue service. The measure, called "construction-while-in progress, or CWIP, is designed to save billions in interest charges. So what went wrong and what does it mean for the future of nuclear energy in Florida?

A combination of factors drove what appears to be a political decision by the PSC. The state's high percentage of retirees on fixed incomes and record high unemployment clearly were on the mind of the agency. According to the U.S. Census Bureau, the percentage of the population over the age of 65 in 2008 was 17.4% compared to a U.S. national average of 12.8%. Unemployment in Florida in December 2009 was 11.8%, up 0.3% from November, the highest number since May 1975. If you add in people who have exhausted their unemployment benefits, the statewide rate is estmated to be 13.4%. The U.S. official average unemployment rate is 10%. Some counties in Florida, where construction has been at a standstill for many months, have unemployment rates approaching 15%.

PSC's nine-hour hearing in Tallahassee Jan 13 highlighted both issues. AARP filled the meeting room with its members from across the state complaining about the impact of the rate increases on retirees of which Florida has plenty. Some said FPL's $1.3 billion rate increase statewide could have added as much as $100/month to some electric bills. PSC commissioners took note. PSC member Nathan Skop said, "in difficult times you have to look at what is fair."

Business groups also weighed in with similar arguments. Jon Moyle, an attorney for a statewide power users group, told the news media, "the commission clearly recognized the tough economic times. We would rather save dollars today and weather this storm and keep businesses running and people in jobs."

There were warning signs the two rate increases were in trouble. With unemployment skyrocketing in 2008, several state legislators warned that they would consider pulling support for CWIP unless Progress backed off of its request for a much larger rate increase than the one it asked for in this round.

FPL ran afoul of conflict-of-interest issues when members and staff of the PSC were found to be too close to the utility. Two PSC commissioners and four PSC employees were investigated, but no charges were filed. One commissioner attended a party centered around horse racing at a utility lobbyist's home and another exchanged cell phone instant messages with FPL executives about commission matters .

As a result of these issues, Florida Governor Charles Crisp appointed two new members to the PSC last October. It changed the political climate. Commissioner Nancy Argenziano, the most vocal critic of the PSC's historically close ties to utilities, now chairs the agency. During her ten years as a state legislator, she promoted the role of a public counsel to represent rate payers before the PSC. It put her agency and the utilities at loggerheads with dire predictions over the outcome.

Utilities have strong reactions to PSC decision

Reactions from the two utilities to the PSC rejection of their requests went far beyond the usual complaints about fairness in regulated rates of return. FPL CEO Lew Hay said "The decision was about politics, not economics." He added that the utility was abandoning its plans to build two new reactors.

For good measure, he threw in an estimate job losses that would be associated with the action and added to it job losses from the utility's supplier network in Florida. One of them told the Miami Herald Jan 14 PSC's decision to cut funds for the natural gas pipeline would cost 250 jobs. Additionally, CEO Hay predicted the PSC's decision would result in layoffs at FPL. By the time Hay was done, the damage to the state's already battered economy was on the order of 20,000 jobs lost.

And Hay wasn't done just raising the specter of lost jobs. He said the PSC's decision, ". . . will simply reinforce investor perceptions that the regulatory climate in Florida continues to deteriorate and is increasingly hostile to investment."

Progress Energy CEO Vincent Dolan was a bit more restrained, but he also put his finger on one of the key points of the impact of the decision. He said the PSC ". . . fails to recognize the true costs associated with providing a secure, reliable electricity systems."

Like FPL's Hay, Dolan also raised the prospect of cancelling its dual-reactor project. However, the utility later backed off of that threat when State Senate leader Mike Fasano then demanded that the utility return all the money it had collected so far to build the plants.

Dolan got one more at bat in this inning. He said that the PSC's decision "will mean a more expensive and less reliable system for Florida's customers."

Security analysts have dour outlook on future of FPL and Progress

Securities analysts agreed with both utility CEOs. Ryan McLean, of Morningstar, told Dow Jones Newswires, "the upheaval [by PSC] will not favor investors." He added, "The commission's ruling exceeded our most pessimistic expectations."

McLean summed it up by telling the Miami Herald Jan 14, the PSC had "hit the reset button" in terms of reversing the previously friendly regulatory environment in Florida.

Fitch Ratings placed FPL on a "Rating Watch-negative" which impacts the utility's $11 billion in debt. Fitch wrote in their notice, "regulatory risk in Florida has been heightened," and the service complained that it represented a reversal from a policy that was once "particularly supportive of financially sound utilities and strong credit ratings."

Credit Suisse analyst Dan Eggers told Reuters Jan 14, "the outcome represents a schism in the history of constructive regulatory relations key to supporting growth in Florida."

S&P utility analyst Justin McLean told Reuters Jan 14 he expected FPL to get the PSC staff recommended $357 million of the $1.3 billion request. When it only got $75 million, he downgraded the company rating to "hold."

Consumer groups dispute utility views

The rate increases requested by FPL and Progress were opposed by the PSC's Public Counsel. J.R. Kelly, who heads the office, said the claims by both utilities that they will now scrap the four new nuclear reactors are bogus. Indeed, both utilities are continuing to support the review by the NRC of their license applications.

Cindy Muir, a spokesperson for the PSC, said that the main focus of the hearings were for base rate increases and that a separate hearing is held each year (in the Fall) under the "cost recovery" rule for the development of the reactors.

Also, Kelly told the Miami Herald Jan 13 that the PSC had previously approved reimbursement of the costs of FPL's planned twin AP1000s and that the real issue were the costs of an unrelated natural gas pipeline and upgrades to other non-nuclear projects. He said the pipeline project was "simply too expensive."

PSC Member Nathan Skop. who once worked for FPL, was also critical of non-nuclear elements of the rate increase. He focused on issues that included compensation, public affairs costs, use of executive aircraft, and other operational expenses. The PSC agreed with Skop ordering FPL to cut $300,000 from its marketing and communications budget. The reason appears to be you don't need to promote electricity when people are cutting back due to a steep downturn in the economy.

FPL could have come out much worse. Two commissioners, including chair Argenziano, pushed for profit levels below 10%. Two others supported FPL's request of 12.5%. In the end the PSC split the difference at 10%.

What does it mean?

The key result coming out of the PSC's decision this month is that Florida's political leadership appears not to care about the future cost of electricity or long-term issues like swapping out aging coal-fired power plants for nuclear reactors to reduce greenhouse gas emissions. Arguments that carbon taxes will over the long-term raise electricity rates, and that nuclear energy will keep them lower, carried no weight with the PSC or consumer groups.

Political leaders seem to care about just one thing and that is the impact of utility rate increases on the ballot box in terrible economic times. The worst recession since the depression era of the 1930s has hit Florida harder than most other states With its higher than the national average of retirees living on fixed incomes, any rate increase comes at a bad time.

In 2009, a perfect storm of these factors slammed into FPL and Progress like a category 5 hurricane. It will take some time to recover and start over. Both utilities said they would appeal the PSC's decision. The four planned reactors may yet be built, but not without a lot more support from the public in terms of being willing to pay for them.

Did everyone miss the boat here?

Did the PSC go too far in slamming on the brakes with FPL and Progress Energy? Wall Street analysts, who felt the staff recommendation on FPL’s rate request was justified, raised this question and reacted swiftly with strong critical comments to the PSC's clean sweep of a combined total of $1.8 billion in utility requests.

Did the utilities make the best case for rate increases in troubled economic times? Why was FPL talking to a PSC commission member at a Kentucky Derby BBQ instead of working the grass roots with broad-based organizations like AARP and business utility customers? Was Progress Energy reading the tea leaves correctly last year when the legislature threatened to pull the plug on CWIP?

There appear to be mis-steps on both sides. Now that everyone has made their political points in the news media, the question remains whether the utilities and the PSC can get their heads wrapped around a rational rate increase and sell it to the legislature and the public?