Citizens of the State of Florida v. Art Graham, etc.Citizens of the State of Florida v. Art Graham, etc.
Lead Opinion
This сase is before the Court on appeal from three orders of the Florida Public Service Commission (PSC).
I. BACKGROUND
Each year, the PSC creates a docket (fuel docket or fuel clause) to review and allow cost-recovery of fuel expenditures as well as to review hedging activities intended to minimize fuel price volatility by Florida’s investor-owned utilities. In 2014, FPL filed its petition seeking cost recovery for its fuel costs, and, in determining the proper amount for which FPL could receive cost recovery, the PSC approved FPL’s hedging activities.
In the 2014 fuel clause proceeding, FPL also filed a petition requesting approval and recovery of a specific gas reserves investment, the Woodford Project. This petition requested a determination that FPL would be eligible to recover, through the fuel clause, its “exploration expense, depletion expense, operating expenses, G & A, taxes, transрortation costs and a return on the unrecovered investment, including working capital” for investments in the exploration, drilling, and production of natural gas in the Woodford Shale Gas Region in Oklahoma. The Woodford Project is a joint venture agreement between FPL and PetroQuest, a publically traded independent oil and natural gas company. Pursuant to the agreement, FPL would invest directly in PetroQuest’s shale gas reserves in the Woodford Shale region and in return receive the rights to a share of the рhysical gas produced.
FPL alleged that it was looking for opportunities to acquire natural gas at production costs (as'an investor), rather than at market prices- (as a purchaser), in order to help insulate customers from the volatility of the gaS market. Specifically, FPL asserted that its ownership interest in the Woodford Project would operate as a long-term physical hedge against the market volatility of natural'gas prices used to provide electric service to FPL’s сustomers. FPL also asserted that the Woodford Project would benefit its customers by providing natural gas at a lower cost than market prices.
Citizens of the State of Florida, through the Office of Public Counsel, (Citizens), Florida Industrial Power Users Group (FIPUG), and Florida Retail. Federation (FRF) participated as intervenors in the proceedings. - Citizens and the Florida Industrial Power Users Group (FIPUG) .moved to dismiss the Woodford Petition, alleging that the PSC lacked the authority to consider and approve the project. The PSC deniеd the motion, concluding that it had jurisdiction under its statutory authority to set rates for public utilities.
Thereafter, the PSC heard FPL’s testimony that investment in the Woodford Project would provide fuel savings and price stability, effectively acting as a long-term hedge. The PSC also heard testimony from Appellants that the costs associated with the Woodford Project do not satisfy the criteria for fuel clause recovery and that these projected' costs went beyond PSC policy for dealing with fossil fuel-related cоsts normally recovered through base rates. Following the two-day eviden-tiary proceeding, the PSC approved the Woodford Project, concluding as follows:
We find the Woodford Project, in the manner described in the FPL petition and evidence on the record, is expected to produce customer benefits and is in the public interest. . We find its costs are recoverable through the Fuel*900 Clause. In order to provide additional protections for FPL customers, we find it necessary to add two сonditions for compliance with this Order. First, FPL shall add the appropriate subaccounts, under the FERC system of accounting, which will correspond on a one-on-one basis with the accounts used by the Gas Reserve Company (GRCO). Second, FPL shall utilize an independent auditor in performing the audits provided in the agreement and shall work with [PSC] staff to develop the scope of the audits.
II. ANALYSIS
Appellants argue that the PSC lacks the authority to allow FPL to recover the capital investment and operatiоns costs of its partnership in the Woodford gas reserves through the rates it charges consumers. We agree.
This Court has repeatedly stated that, although “orders of the Commission come before this Court clothed with the statutory presumption that they have been made within the Commission’s jurisdiction and powers, and that they are reasonable and just and such as ought to have been made,” “[s]uch deference ... cannot be accorded when the commission exceeds its authority. At the threshold, we must establish thе grant of legislative authority to act since the [Commission derives its power solely from the legislature.” United Tel. Co. of Fla. v. Pub. Serv. Comm’n,
Chapter 366, Florida Statutes (2014), provides the PSC with jurisdiction to regulate and supervise each public utility with respect to its rates and service and to prescribe a rate structure for all electric utilities. § 366,04(l)-(2), Fla. Stat. (2014); Pub. Serv. Comm’n v. Bryson,
Section 366,02(1), Florida Statutes (2014), defines a “public utility” as “every person, corporation, partnership, association, or other legal entity and their lessees, trustees, or receivers supplying electricity
It is undisputed that FPL is an electric utility. It is also undisputed that the PSC’s ratemaking authority encompasses the authority to examine fuel cost expenditures and approve cost recovery to compensate for utilities’ fuel expenses through the fuel clause. See Gulf Power Co. v. Fla. Publ. Serv. Comm’n,
However, the PSC does not have the statutory authority to approve cost recovery for FPL’s investment in the Woodford Project. As exрlained above, section 366.06(1) provides that the PSC has the authority to determine and fix fair, just, and reasonable rates for public utilities, and section 366.02(2) defines an electric utility as owning, maintaining, or operating an electric generation, transmission, or distribution system. Therefore, under the plain meaning of these two statutes, cost recovery is permissible only for costs arising from the “generation, transmission, or distribution” of electricity. The Woodford Project’s exploration, drilling, and production of natural gas fuel in Oklahoma do not constitute generating, transmitting, or distributing electricity in Florida as the meaning of those terms .are plainly understood. In other words, the exploration, drilling, and production of fuel falls outside the purview of an electric utility as defined by the Legislature.
Additionally, the PSC does not have the statutory authority necessary to approve cost recovery fojr the Woodford Project through the characterization of the project as “a long-term physical hedge.” While PSC’s ratemaking authоrity includes examining and approving cost recovery for public utilities’ hedging of fuel costs, see In re: Fuel and Purchased Power Cost Recovery Clause with Generating Performance Incentive Factor, Order No. PSC-08-0667-PAA-EI,
The fuel cost adjustment clause is a cash flow mechanism to allow utilities to recover costs for unanticipated changes in fuel costs between ratemaking proceedings. See Gulf Power Co.,
Specifically, hedging involves locking in a future price to avoid the adverse effects of price fluctuations, and utilities can hedge by entering into financial arrangements to secure natural gas at a future point in time at a fixed price. See Stephen Maloney, When the Price is Right, 145 No. 10 Pub. Util. Fort. 24, 25-26 (Oct.2007). ‘While comprising mostly options and swaps, financial hedging instruments cаn include futures, basis swaps, and fixed-price swaps involving natural gas.” Id. at 25. Moreover, “[i]n addition to financial instruments, weather derivatives and natu
Permitting advance recovery of FPL’s investment in the Woodford Project’s exploration and production of natural gas will not pay for the costs of actual fuel. It will provide recovery, insteаd, for investment, operation, and maintenance and operation of assets that will provide access to an unknown quantity of fuel in the future. It is impossible to know what the costs of the natural gas will be until it is actually produced. . There is more uncertainty from this investment rather than less. Therefore, it cannot be characterized as a physical hedge..
Additionally, under FPL’s proposal for the Woodford Project, ratepayers (not FPL) bear the risk of natural gas price volatility and all of the production risks. If the production cost of extracting natural gas from the Woodford wells, including profit , paid to FPL-on its capital investment, is less than the natural gas market price, the ratepayers will benefit. However, if the production costs of extracting natural gas from the Woodford wells is more than the natural gas market, the ratepayers do not benefit but will instead suffer a loss. The monies spent on the Woodford Project are not a mere pass-through, like other fuel expenses, because FPL will earn- a return on its capital • expenditures. Accordingly, the Woodford Project is a guaranteed capital investment for FPL; it is not a hedge to stabilize- fuel costs. ■ •
This may be a good idea, but Whether advance cost recovery of speculative capital investments in gas exploration and production by an electric' utility is in the public interest is a policy determination that must be made by the Legislature. For •example, in contrast to natural gas exploration and production, the Legislature has authorized the PSC to approve cost recovery for capital investments in nuclear power plants and energy efficient and renewable energy power sources. See §§ 366.8255; 366.92; 366.93, Fla. Stat. (2014).' Without statutory authorization from the. Legislature, the' recovery of FPL’s costs and capital investment in the Woodford Project through the fuel clause is overreach.-
III. CONCLUSION
Accordingly, because the PSC exceeded its statutory authority when approving recovery of FPL’s costs and investment in the Woodfоrd Project, we reverse.
It is so ordered.
Notes
. We have jurisdiction. ' See art. 'V, § 3(b)(2), - Fla. Const.
.' We reject, without further comment, all the other arguments raised in the briefs by the parties.
Dissenting Opinion
dissenting.
Because I conclude that the PSC acted within its statutory authority in approving cost recovery through the fuel clause for FPL’s Woodford Project and that competent, substantial evidence supports the PSC’s conclusion .that the Woodford Project acts as a long-term physical hedge, I dissent.
I disagree with the majority’s conclusion that under sections 366.06(1) and 366.02(2), Florida-Statutes (2014), “cost recovery is permissible only for costs arising from the ‘generation, transmission, or distribution’ of electricity.”'- Majority op. at 901. Section: 366.02(2) defines an “[ejlectric utility” as' “any municipal electric utility, investor-owned electric utility, or rural electric cooperative, whicfi owns, maintains, or operates an electric generation, ■ transmission, or distribution system within the state[,]” and section 366.06(1) provides that the PSC “shall have the authority to deter
“The [only] statutory standard imposed upon the Commission is to fix ‘fair, just and reasonable rates.’ ” Citizens of State v. Pub. Serv. Comm’n,
Under the broad discretion afforded to it in chapter 366, the PSC regularly allows utilities to recover costs through the fuel clause for non-fuel items as long as they are projected to result in fuel savings. See e.g., In re: Fuel & Purchased Power Cost Recovery Clause and Generating Performance Incentive Factor, Order No. PSC-01-2516-FOF-EI,
Even assuming that chapter 366 implicitly limits the PSC’s .authority to approve cost recovery to costs of generation, transmission, or distribution of electricity, I would still conclude that the PSC acted within its authority in approving cost recovery for the Woodford Project, The purpose of the Woodford Prоject is to acquire.natural gas, which is used to produce approximately 65% of the electricity FPL generates. Acquiring natural gas is therefore necessary for and integrally related to FPL’s primary function of generating electricity.
Until now, FPL has purchased natural gas on the wholesale market.' There is no dispute that acquiring fuel on the wholesale market is sufficiently related to the generation, of electricity for the PSC to authorize cost recovery through the fuel clause. The Woodfоrd Project would pro
I also disagree with the majority’s conclusion that the Woodford Project does not qualify as a long-term physical hedge because it does not involve “a certain quantity of fuel for a certain price.”. Majority op. at 901. The primary purpose of hedging programs is to reduce the variability or volatility in fuel costs paid by customers over time. E.g., In Re: Fuel & Purchased Power Cost Recovery Clause with Generating Performance Incentive Factor, Order No. PSC-06-1057-FOF-EI,
In concluding that the Woodford Project acts as a long-term' physical hedge, the PSC stated:
The objective of any hedging program is to minimize price volatility. We have found that minimizing price volatility produces customer benefits. Finаncial hedging programs have different terms, from several-weeks to up to two years. At the end of the yéar, the actual costs associated with the programs are passed on to customers. Because natural gas prices are uncertain and volatile, there will be periods when the companies have hedging gains and other periods where the companies will have hedging losses. We note that utilities are not expected to predict or speculate on whether markets wili ultimately rise or fall and actually settle higher or lower than thé price levels that existed at the time hedges were put into place. We have found that hedging maintains flexibility for a utility to create the type of risk management program for fuel procurement that it finds most appropriate while allowing us to retain the discretion to evaluate, and the parties the opportunity to address, the prudence of such programs at the appropriate time.
Any type of hedging is still going to be subjеct to market conditions. Historically, production costs have been less volatile than market prices. We find the Woodford Project will act as a hedge that is designed to decouple costs from market prices, [n.7] The Woodford Project costs are based solely on the operations and maintenance costs, and on the*905 investment that is required, and is essentially fixed. FPL purchases more natural gas than any .other electric utility in the country. The reality is that in this state, and nationally, we сontinue to grow the need for natural gas to provide electricity as we move away from coal. Although the Woodford Project is relatively small and will have a small effect on FPL’s overall cost of natural gas and on price hedging, it will act ás a long-term physical hedge (30 years or longer in duration) compared to financial hedges, which typically lock in prices for 12-24 months.
[N.7] We note that customers currently bear certain .drilling, production, and shale gas risks (earthquakes, environmental issues, еtc.) as these factors are embedded in the market price of gas.
In re: Fuel & Purchased Power Cost Recovery Clause with Generating Performance Incentive Factor, Order No. PSC-15-0038-FOF-EI,
The Woodford Project is a capital investment that is designed to decouple the cost of the gas obtained from the market price. The majority points out that if the production cost for the Woodford Project is less than the market price of natural gas, ratepayers will benefit, but if the production cost is higher than thе market price, ratepayers will suffer a loss. But ás the PSC recognized, such a risk is inherent with any type of hedging.
In characterizing the Woodford Project as “a speculative oil and gas. venture[,]” majority op., at 899, and concluding that it will result in “more uncertainty ... rather than less[,]” majority op. at 902, the majority is merely substituting its judgment for the PSC’s' judgment- and expressing disagreement with the PSC’s factual findings. But it is the PSC’s “prerogative to evaluate the testimony, of competing experts, and'accord whatever weight to the conflicting, opinions it deems necessary.” Gulf Power. Co. v. Fla. Pub. Serv. Comm’n,
Finally, I disagree with the majority’s conclusion that costs' for the- Woodford Project’cannot be recovered through the fuel clause because “regulated utilities through- the fuel clause do not earn a return on money spent to purchase fuel” or “on the cost-.of hedging .positions purchased.” Majority.op. at 901. The majority is correct that utilities do not earn a profit on fuel by marking up fuel purchased at market price, but the Woodford Project is not a purchase of fuel аt market price, it is a capital investment. It is well established that “a regulated public utility is entitled to ‘an opportunity to earn a fair or reasonable rate of return on its invested capital.’ ” Gulf Power Co. v. Wilson,
For these reasons, I would conclude that the PSC. acted within its authority in.approving cost- recovery through the fuel clause for the Woodford Project, and I would affirm the orders on review..
. Although the majority repeatedly mentions that the Woodford Project involves exploration for natural gas, there was evidence presented at the evidentiary hearing that exploration is not a component of the Woodford Project.