Opinion ID: 2721724
Heading Depth: 3
Heading Rank: 2

Heading: Order Establishing Procedure

Text: Shortly thereafter on March 26, 2012, the Commission issued an order establishing the procedure for the rate-making proceedings. The deadline for discovery was set for August 13, 2012, the prehearing conference was scheduled - 26 - for August 14, 2012, and the evidentiary hearing on the petition was scheduled for a two-week period beginning August 20, 2012. Thus, in regard to the evidentiary hearing for the petition, Citizens received adequate notice of the hearing pursuant to section 120.569(2)(b). From March to mid-August 2012, Citizens served fourteen sets of interrogatories and thirteen requests to produce documents on FPL and participated in numerous depositions. On July 2, 2012, Citizens filed the testimony of seven expert witnesses, who addressed various aspects of FPL’s March filing, and argued that FPL should actually reduce its existing rates. FPL presented Citizens with a completed and signed settlement agreement in the middle of July. 3. Evidentiary Hearing and Joint Motions to Approve Settlement and Suspend Procedural Schedule On August 15, 2012, the signatories to the negotiated settlement agreement filed a joint motion to approve settlement agreement and a joint motion to suspend procedural schedule. Anticipating that there would not be a need for a hearing if the Commission granted their motion, the signatories requested the Commission to suspend all remaining portions of the procedural schedule. Citizens opposed the joint motion to approve the settlement agreement, but not the joint motion to suspend the procedural schedule, arguing that the hearing could not proceed without the Commission conducting a full analysis of the settlement agreement. The joint motion to suspend the procedural schedule was denied in part based on - 27 - the difficulty of rescheduling a complex hearing if the settlement agreement was not approved. The hearing commenced as scheduled on August 20, 2012. At the start of the hearing, Citizens orally moved for reconsideration of the order denying the joint motion to suspend the procedural schedule and requested that the procedural schedule be suspended because Citizens wished to “rid the process of the undue influence of the FPL document . . . on the scheduled hearing.”8 Argument was heard on the motion from all parties, and the motion was denied. Citizens then moved to dismiss the proposed settlement agreement, set the motion to approve it for expedited oral argument in advance of the rate case hearing, or dismiss the petition for rate increase.9 The Commission denied the motion and voted to proceed with the rate case hearing. Evidence was thus taken in the rate case over the course of ten days. On August 27, 2012, the Commission revised the order establishing procedure to set the procedural schedule for the Commission’s consideration of the proposed settlement agreement. Although the order did not provide a specific date 8. The arguments raised here on appeal were also raised in this oral motion. 9. Citizens specifically argued, “If the Commission denies Citizens’ Motion to Dismiss the purported FPL settlement agreement, then Citizens request[s] that it be allowed to be heard on the merits of the purported FPL settlement agreement prior to the hearing. Citizens intend[s] to file their substantive response to the Motion to Approve the Settlement on Tuesday, August 21, 2012, and will be prepared to be heard on oral arguments on Wednesday, August 22, 2012.” - 28 - and time to consider the joint motion to approve the settlement agreement, the order provided that at the conclusion of the evidentiary portion of the rate case hearing, the Commission would recess until the date and time announced to reconvene the hearing to consider the motion to approve the settlement agreement. In short, the hearing to consider the settlement agreement was considered part of the hearing on the petition. The order stressed that the hearing to consider the joint motion to approve the settlement agreement was not an evidentiary proceeding and that no evidence would be taken, but thirty minutes for comments per side would be provided. The order also permitted the parties and Commission staff to submit up to 100 data requests each, with responses due within five days from the requests. Various data requests were propounded by the parties and Commission staff in advance of the hearing on the proposed settlement agreement. On August 30, 2012, during the rate case hearing, the Commission announced on the record that the hearing would reconvene on September 27, 2012, to take up the proposed settlement agreement. Post-hearing briefs for the evidentiary hearing were filed on September 21, 2012. Upon reconvening the hearing, oral argument commenced and the Commission determined that the proposed settlement agreement raised five new disputed issues of material fact. Therefore, the Commission voted to take additional testimony limited to those - 29 - specific issues that were supplemental to the issues in the initial MFRs in an expedited manner that would comport with due process and all statutory requirements. 4. Evidentiary Hearing on Settlement Agreement On October 3, 2012, the Chairman of the Commission issued a third order revising the order establishing procedure, continuing the hearing until November 19-21, 2012, to take evidence on the specific issues contained in the proposed settlement agreement that were supplemental to the issues of the rate case. Prior to the hearing, the parties filed the direct and rebuttal testimony of all witnesses on the settlement issues and the exhibits each witness would sponsor. The parties also engaged in discovery. The parties filed their prehearing statements, and a prehearing conference was held on November 15, 2012. The formal hearing reconvened on November 19, 2012, and concluded on November 20, 2012. Posthearing briefs on the settlement issues were filed on November 30, 2012. On December 13, 2012, pursuant to a notice issued on November 21, 2012, the Commission held a special agenda conference to rule upon the merits of the proposed settlement agreement. The Commission voiced public interest concerns about specific terms of the settlement agreement. The Commission then recessed to give all the parties an opportunity to engage in further settlement negotiations on areas of concern identified by the Commission. After some negotiation, the parties - 30 - presented the modified settlement to the Commission, which was ultimately approved. C. Application of Law to the Procedures Followed Below 1. Whether the Inclusion of the Riviera Beach and Port Everglades GBRA Provisions Should Have Resulted in the Filing of a New Application for a Change in Rates Citizens argues that the GBRA provisions in the settlement agreement exceeded the scope of FPL’s initial petition and affect rates, which should have required a new application for changes in rates under rules 25-6.140 and 25-6.043 of the Florida Administrative Code. First, as emphasized above, these rules apply to petitions for changes in rates, not proposed settlement agreements; FPL complied with those rules with its initial filing petition. Although it may be the better practice to require a new application for changes in rates, there is no such requirement. Second, the GBRAs for the Riviera Beach and Port Everglades modernization projects will be tied to the 10.5% midpoint of FPL’s authorized ROE and calculated using the capital structure reflected in the MFRs filed for the Cape Canaveral project; and the revenue requirements will be based on the “cumulative present value of revenue requirement reflected in the respective need determinations.” And third, as discussed more fully below, the Commission provided ample opportunities for discovery and held hearings to consider the settlement agreement well after the - 31 - joint motion for approval of the settlement was filed by FPL and the intervenor signatories, and well after Citizens claimed it was prepared to argue the joint motion for approval of the settlement agreement. Citizens, however, correctly notes that the Commission has not been consistent with its treatment of GBRAs in the past. In 2005, the Commission approved a settlement agreement that contained a provision allowing FPL to receive GBRAs for “any power plant that is approved pursuant to the Florida Power Plant Siting Act (PPSA) and achieves commercial operation within the term of this Stipulation and Settlement.” In re Fla. Power & Light Co., Docket Nos. 050045-EI, 050188-EI, Order No. PSC-05-0902-S-EI, 2005 WL 2276715,  (F.P.S.C. Sep. 14, 2005). The term was for four years with rates going into effect until new rates became effective by order of the Commission. Id. at . Notably, FPL’s application for a change in rates only included MFRs for a GBRA for Turkey Point Unit 5. Id. In 2010, in the rate case immediately following the 2005 rate case, the Commission rejected a similar request from FPL to receive GBRAs for revenue requirements associated with new generating additions at the time they enter commercial service. In re: Petition for Increase in Rates by Fla. Power & Light Co., Docket Nos. 080677-EI, 090130-EI, Order No. PSC-10-0153-FOF-EI, 2010 - 32 - WL 1005321,  (F.P.S.C. Mar. 17, 2010). Instead, the Commission elected to allow the previous GBRAs to expire. The Commission specifically reasoned that: [t]he existing ratemaking procedure provided by Florida Statutes and our rules provides for a more rigorous and thorough review of the costs and earnings associated with new generating units. Section 366.06(2), F.S., provides that when approved rates charged by a utility do not provide reasonable compensation for electrical service, the utility may request that we hold a public hearing and determine reasonable rates to be charged by the utility. Section 366.071, F.S., provides expedited approval of interim rates until issuance of a final order for a rate change. Rule 25-0243, F.A.C., establishes the minimum filing requirements for utilities in a rate case. These procedures have been sufficient in the past for FPL and other regulated utilities wishing to recover capital expenditures when a new generating facility begins commercial service. Id. Further, the Commission noted that “[i]t is not possible for us or interested parties to examine projected costs at the same level of detail during a need determination proceeding as we would be able to do in a traditional rate case proceeding. A need determination . . . does not allow for a review of the full scope of costs and earnings, as a rate case does.” Id. at . Thus, based on the 2010 case, it would appear that the Commission believes that GBRA requests should entail the same requirements associated with an initial petition for a change in rates. The Commission, however, explained why the GBRAs sought in the 2010 case merited treatment distinct from the GBRAs in the 2005 case. In a section titled “Differences From the 2005 Stipulation,” the Commission noted that FPL’s - 33 - 2010 request was to permanently establish GBRAs intended to cover the costs of all future power plants that receive need determination approval. Id. at . In the 2005 request, the GBRAs were also intended to cover the costs of all power plants, but the term of the agreement was for a minimum of four years and would remain in effect until new base rates and charges became effective by order of the Commission. Thus, the 2005 request was an interim measure and not a permanent measure. Further, acceptance of the 2005 GBRA provision of the settlement agreement was a result of the “give-and-take” in negotiating the agreement. Id. For instance, in the 2005 request, FPL’s base rates could not change during the term of the settlement agreement whereas FPL’s 2010 request to continue the GBRA specified no restriction on changes to base rates. The 2005 request also contained a revenue sharing plan between shareholders and customers whereas no such plan existed in the 2010 request. Id. Here, the settlement contains terms that are similar or more proscriptive than the rate request of 2005. First, the GBRAs here are part of a settlement agreement with a fixed four-year term. In the 2005 rate case, the settlement had a term of a minimum of four years and the rates would remain in effect until the necessary steps were taken to adjust the established rates. Second, the disputed GBRAs in this case are intended to cover the costs of the Riviera Beach and Port Everglades projects, whereas the GBRA mechanism approved as part of the 2005 settlement - 34 - was intended to cover the costs of any and all power plants that received need determination approval during the settlement term. Third, both the 2005 agreement and the agreement approved here contained provisions prohibiting FPL from changing its base rates during the term of the settlement. And fourth, the 2005 request contained a revenue sharing plan between shareholders and customers; here, the settlement agreement contains an incentive mechanism where revenues are shared on an incremental basis. Thus, this current case is most similar to the 2005 case, in which the Commission found that the GBRA mechanism was appropriate and did not require the filing of MFRs and test year notifications for each plant approved pursuant to the PPSA. Accordingly, despite the Commission’s inconsistent approach and due to the deferential standard of review given to the Commission’s decisions, we hold that FPL’s request for GBRAs for the modernization projects did not necessitate the filing of a new petition. 2. Whether the Procedures Followed by the Commission in Consideration of the Proposed Settlement Violated Citizens’ Due Process Rights Based on the above, the Commission did not violate Citizens’ due process rights. On March 26, 2012, the Commission provided notice of a hearing on August 20 that fully complied with section 120.569, which requires fourteen days’ advance notice. On August 15, 2012, the Commission was presented with a joint motion to approve the settlement agreement. Although Florida Administrative - 35 - Code rule 28-106.204(1) provides that “[w]ritten motions will normally be disposed of after the [seven day] response period has expired,”—Citizens indicated this would be a sufficient amount of time to prepare a response and oral argument on the merits—the Commission issued a second order revising the order establishing procedure indicating that it would schedule a hearing at the conclusion of the evidentiary hearing to discuss the settlement agreement. On August 31, 2012, the Commission announced on the record that it would reconvene on September 27, 2012, to discuss the settlement issues. Notably, section 120.569(2)(b) does not require that notice be given in writing, although the rule dictates that notice be reasonable. Thus, the September 27, 2012, hearing was properly noticed and provided Citizens with more time than required pursuant to section 120.569(2)(b) and Florida Administrative Code rule 28-106.204(1). Then, on October 3, 2012, after the Commission determined there were supplemental issues of disputed fact and more than fourteen days before the next hearing, the Commission issued a written order providing notice and the procedures for the submission of evidence on November 19-21. Citizens and all other parties were able to request data and present evidence during these hearings. On November 21, 2012, more than fourteen days before the next conference, the Commission provided notice of an agenda conference on December 13, 2012, to reach a - 36 - decision on the settlement agreement. Thus, Citizens’ due process rights were not violated because it received proper notice and was fully represented in all hearings. Moreover, two cases from this Court are instructive on this issue. In Jaber, as noted earlier, this Court held that the Commission’s decision to approve a nonunanimous negotiated settlement without an evidentiary hearing did not violate due process or the statutory rights of SFHHA in a rate review proceeding initiated by the Commission. Jaber, 887 So. 2d at 1212. In Jaber, the settlement at issue on appeal resulted from a proceeding initiated by the Commission in August 2000 to consider the effect on FPL’s retail rates of the formation of Florida’s regional transmission organization and FPL’s then-planned merger with Entergy Corporation. The Commission then expanded the scope of the proceeding to provide for a more thorough rate review, and ordered FPL to submit MFRs pursuant to rule 25-6.043. Id. at 1211. The parties participated in discovery and submitted witness testimony regarding the appropriateness of FPL’s retail rates. Id. In October 2001, the Commission issued an order setting the matter for a hearing in April 2002. Id. In January 2002, the parties entered into settlement negotiations and a non-unanimous agreement was approved by each of the parties, excluding the SFHHA, in March 2002. Id. The Commission’s staff reviewed the settlement and submitted it for approval at an agenda conference held on March 22, 2002. Id. at 1212. The Commission granted - 37 - each of the parties to the settlement five minutes to present their views in support of the agreement and provided SFHHA thirty minutes to respond in opposition. Id. Prior to holding an evidentiary hearing, the Commission issued the order approving the settlement agreement, which provided for a $250 million rate base reduction. On appeal to this Court, SFHHA argued that the Commission’s order approving the settlement in the absence of an evidentiary hearing violated its due process and statutory rights. Id. According to SFHHA, Florida law required the Commission to hold an evidentiary hearing because determining a reasonable level for FPL’s rates involved numerous disputed issues of material fact. Id. SFHHA further asserted that the Commission erred in approving a non-unanimous settlement agreement absent a hearing. Id. This Court rejected those arguments. This Court held in Jaber that the Commission’s decision to expand the scope of its review did not require it to conduct an evidentiary hearing. The Court reasoned that the Commission properly initiated the proceeding, expressly recognized the possibility of a negotiated settlement, and acted in accordance with the authority granted under section 366.076(1) of the Florida Statutes in broadening its review. Further, the record showed that “[SFHHA] presented arguments in opposition to the settlement during the agenda conference held on May 22, 2002 . . . [and] [t]he assertions presented at that time tracked those - 38 - expounded by SFHHA throughout the course of the proceeding below.”10 Id. at 1213. Here, there is no dispute that an evidentiary hearing was held more than fourteen days after notice was provided and after additional discovery was provided and sought. Further, like Jaber, Citizens presented arguments in opposition to the settlement and its assertions presented at the settlement agreement were similar to the assertions presented throughout the course of the proceedings below. Thus, although in a distinct procedural posture, this Court has found that there was no due process violation when the Commission approved a non-unanimous settlement agreement without conducting an evidentiary hearing. In AmeriSteel Corp. v. Clark, this Court held that AmeriSteel’s due process rights were not violated by the Commission’s failure to require the Jacksonville Electric Authority (JEA) and FPL to provide public notice that its settlement discussions would encompass matters beyond the scope of JEA’s initial complaint against FPL regarding a territorial dispute over service to certain customers. 691 So. 2d 473, 479 (Fla. 1997). Although AmeriSteel is distinct factually and 10. The Court also noted in its reasoning that SFHHA did not contend that it was denied notice or was precluded from participating in the negotiation. Jaber, 887 So. 2d at 1213. Here, Citizens does not contend it was denied notice or was precluded from participating in the negotiation, but does assert that it was not invited to participate. Even if Citizens’ assertion is true, the lack of an invitation does not dissuade this Court from applying the reasoning of Jaber to the instant case because of this Court’s holding in AmeriSteel, which is discussed above. - 39 - procedurally, this Court’s reasoning and analysis is instructive on the issue presented here. In AmeriSteel, the appellant was a customer of FPL, but the Commission did not allow it to intervene because it did not have requisite standing. However, AmeriSteel received notice of the Commission’s proposed agency action order approving the territorial agreement and exercised its rights to file a protest in response. In concluding that AmeriSteel’s due process rights had not been violated, this Court noted that there “is no requirement in chapter 366, the Administrative Procedure Act, or Florida’s Administrative Code that two negotiating utilities publish notice of the substance and scope of their ongoing negotiations and invite the participation of interested persons such as AmeriSteel.” Id. This Court also reasoned “AmeriSteel was in no way precluded from exercising any of its procedural rights by the process followed by the Commission in approving the agreement.” Id. Further, this Court stated, “If AmeriSteel had demonstrated standing, it would have been able to obtain a hearing, conduct discovery and present evidence challenging any aspect of the agreement pursuant to section 120.57.” Id. Thus, this Court’s holding and reasoning in AmeriSteel demonstrates that chapter 366, the APA, and the Florida Administrative Code provide due process requirements in a situation where settlement discussions encompass matters beyond the scope of the initial filing by a utility. Moreover, in the present - 40 - case, the process followed by the Commission did not preclude Citizens from exercising any of its procedural rights and Citizens participated in two different hearings spanning multiple days, conducted discovery, and presented evidence challenging FPL’s initial petition and the terms of the settlement agreement. D. Conclusion Accordingly, we affirm the Commission’s final order because the Commission complied with all of the procedural requirements listed in chapter 366, the APA, and the Florida Administrative Code; and analogous cases support the conclusion that the process followed by the Commission in this case was sufficient. We now turn to Citizens’ final argument on appeal. III. Whether the Elements of the Settlement Agreement are Supported by Competent, Substantial Evidence and Whether the Commission Exceeded the Limits of its Discretion in Approving the Settlement Agreement As stated above, this Court will affirm the Commission’s “findings and conclusions if they are based upon competent, substantial evidence and are not clearly erroneous.” S. Alliance for Clean Energy, 113 So. 3d at 752. Further, this Court “ ‘will not overturn an order of the [Commission] because we would have arrived at a different result had we made the initial decision and we will not reweigh the evidence.’ ” Id. at 753. For the following reasons, the Commission’s findings and conclusions that the settlement agreement established rates that were - 41 - just, reasonable, and fair, and that the agreement is in the public interest are supported by competent, substantial evidence. A. Findings in Final Order The Commission’s final order contains an extensive procedural background of the case explaining how the settlement agreement was considered and ultimately approved. The order also describes the major elements of the proposed agreements and how those terms were modified in the settlement agreement that was incorporated into the final order. Further, the order describes the basis for each revenue increase and how the incentive mechanism is intended to function, including that the Commission can terminate the program after two years. Regarding its findings, first, the Commission found that the GBRA is in the public interest because: “[I]t provides a benefit to both FPL’s customers and FPL. We already approved the need for the Canaveral, Riviera, and Port Everglades Modernization Projects when we considered FPL’s need determination petitions. The GBRA provides the mechanism for FPL to recover the costs to modernize these plants and bring them into commercial service.” The Commission then found that the pilot incentive mechanism is in the public interest, stating, “The pilot incentive mechanism program is beneficial to both FPL’s customers and FPL. We note that this is a four-year pilot program and we have the option to review it after two years. . . . If we determine the pilot program is otherwise unsatisfactory, - 42 - we may terminate the program.” The Commission then shifted its findings to the settlement, stating that “as a whole the settlement is in the public interest” because it “provides a reasonable resolution of all the issues in this proceeding regarding FPL’s rates and charges.” Further, FPL’s customers receive rates that are stable and predictable while FPL maintains the financial strength to make investments necessary to provide customers with safe and reliable power. Finally, the Commission found that the settlement “establishes rates that are fair, just, and reasonable in the public interest.”11 Accordingly, this Court must determine whether these findings and conclusions are supported by competent, substantial evidence. We now turn to each of Citizens’ arguments sequentially. As noted below, we affirm the Commission’s final order because its findings are supported by competent, substantial evidence. 11. When a settlement addresses rate levels and structures, section 366.041, Florida Statutes (2012), provides that the Commission may “give consideration, among other things, to the efficiency, sufficiency, and adequacy of the facilities provided and the services rendered; the cost of providing such service and the value of such service to the public; the ability of the utility to improve such service and facilities; and energy conservation and the efficient use of alternative energy resources; provided that no public utility shall be denied a reasonable rate of return upon its rate base in any order entered pursuant to such proceedings.” - 43 - B. The Settlement Agreement Benefits Only Narrow Customer Interests12 Citizens argues that the settlement only benefits narrow interests and that its “opposition to the proposed disposition disprove[s] the conclusion at page [seven] of the Final Order that the settlement reasonably resolves all issues.” This argument appears to invite the Court to reweigh competing evidence considered by the Commission, which, as stated above, is not this Court’s function on review. Even if this argument is not an invitation to reweigh the evidence, Citizens fails to demonstrate that the Commission’s conclusion that the settlement agreement benefits “FPL’s customers” is not supported by competent, substantial evidence. Witnesses Renae Deaton and Moray Dewhurst testified that FPL’s residential customer bills will remain the lowest in Florida, bills for commercial and industrial customers will be more competitive with other, similar utilities in the region, and small business customers will not receive an increase. Specifically, witness Deaton testified that the revenue requirements of $378 million under the proposed agreement, which later became $350 million with $18 million of the reductions going specifically to the residential customer class under the modified agreement, would impact a June 2013 residential bill by increasing rates by $1.54 a 12. Although Citizens repeatedly asserted that residential customers represent 99% of FPL’s customer base, 48% of FPL’s sales of electricity are provided to customers who are served under the same rate schedules as the signatories to the agreement. - 44 - month or five cents per day, which represents less than a 2% increase from current rates. Deaton also testified that parity—the extent to which the revenues of a rate class cover the cost of service to that rate class—is improved under the proposed settlement agreement, with all rate classes being either within the range of 90% to 110% of parity, or being moved toward that objective. The rates for residential customers would remain very close to the ideal of 100% under the proposed settlement agreement. Florida Industrial Power Users Group (FIPUG) witness Pollock then testified that the settlement agreement significantly reduces the base rate revenues for the vast majority of rate classes relative to the company’s proposal without shifting costs. Witness Dewhurst also testified that customers would continue to enjoy good reliability and excellent customer service over a four-year period. Dewhurst further testified that “[t]he proposed settlement agreement provides for a roughly 25% reduction in FPL’s January 2013 base rate increase request, from $517 million to $378 million.” The final approved revenue increase was reduced further to $350 million. Witness Terry Deason, a former commissioner of the Commission, testified regarding the benefits of the settlement and how they served the public interest. He testified that FPL “significantly reduc[ed] the amount of their request”; the agreement is for a four-year term, which provides a great deal of certainty and - 45 - predictability; and the settlement “reduces uncertainty in the process,” which positions FPL to “continue to have the financial integrity to go forward with their construction program, which benefits customers, and to be able to maintain a high degree of service.” Further, the four-year term eliminates the unnecessary expenditure of taxpayer funds to consider FPL’s rates in another proceeding. Accordingly, Citizens cannot demonstrate that the Commission’s conclusion that the settlement agreement benefits “FPL’s customers” is not supported by competent, substantial evidence. C. The Commission’s Conclusion That the Settlement is a Fair and Reasonable Resolution is not Supported by Competent, Substantial Evidence Citizens argues that the settlement consists of concessions to FPL for which non-signatories of the settlement agreement receive no concomitant benefits in return. Thus, Citizens argues that the Commission’s conclusion that the settlement is a reasonable disposition of all issues is not supported by competent, substantial evidence, and is clearly erroneous. According to Citizens, the following six provisions of the settlement agreement are evidence that the settlement was not a reasonable compromise. 1. The 10.5% ROE Results in Unfair and Unreasonable Rates Citizens argues that FPL’s original request for a ROE midpoint of 11.25%, and a performance adder of .25%, was not supported by competent, substantial evidence. Citizens recognizes that many FPL witnesses and other signatory - 46 - witnesses testified that the ROE was warranted or that a 10.5% ROE was reasonable given the other elements of the settlement agreement, but Citizens nevertheless argues that its experts’ testimony demonstrated that the ROE was too high. In United Telephone Co. v. Mayo, this Court recognized that the Commission had the difficult task of determining a reasonable rate of return for a utility, but that it was the Commission’s “prerogative to evaluate the testimony of competing experts and accord whatever weight to the conflicting opinions it deems appropriate.” 345 So. 2d 648, 654 (Fla. 1977). Thus, as discussed below, although there was competing expert testimony offered by Citizens, competent, substantial evidence supports the Commission’s conclusion. Citizens argues that FPL’s ROE should have been reduced, not increased, from the 10% approved in 2010 primarily because interest rates are low and cost of capital has declined. FPL’s witnesses and other witnesses, however, supported the increase in ROE. Witness William Avera, a principal of Financial Concepts and Applications, Inc.,13 testified that there is significant financial literature stating that an inverse relationship between equity risk premiums and interest rates exists. Thus, when interest rates are low, equity risk premiums are higher. Further, FPL President Eric Silagy testified that the previous ROE of 10% was the “lowest of all Florida investor-owned utilities (‘IOUs’) and among the lowest nationally, based 13. A firm engaged in financial, economic, and policy consulting to businesses and government. - 47 - on decisions rendered since our last base rate proceeding.” Witness Dewhurst testified that the intervenors’ recommendations would weaken FPL’s financial strength, resulting in further degradation of credit and downgrades to ratings, and would revive investor perceptions of regulatory risk, which would increase the cost of capital and decrease the availability of such capital. Citizens argues that witness Jeffry Pollock’s testimony regarding the ROE ignored the impact of FPL’s extremely high 59.62% equity ratio. Witness Avera, however, testified that the ROE is not a function of a single financial statistic because it does not account for other factors considered by investors, “including the impact of purchased power commitments and the other exposures unique to FPL.” Further, he testified that the ROE requested was reasonable because “the availability of capital is particularly important to FPL’s customers because of the need for financial strength inherent in FPL’s location and characteristics.” Also notable is that FPL requested a midpoint ROE of 11.25%, negotiated a 10.7% midpoint, and ultimately agreed to a 10.5% midpoint ROE, which was only slightly higher than the minimum range of ROE requested. Finally, witness Pollock testified that the 10.7% ROE provided a competitive ROE that was above average relative to returns authorized by other commissions for investor-owned electric utilities, but stated that it would enable FPL to maintain an A credit rating and that it was not a sufficient ground to reject the settlement. Pollock also - 48 - observed that other utilities in this comparison (southeastern utilities) currently had authorized ROEs higher than 10.7%, including a Florida investor-owned utility earning a ROE of 11.25%. All of the testimony referenced above supports a ROE figure higher than the 10.5% sum contained within the settlement agreement. Accordingly, the Commission’s conclusion that a 10.5% ROE as part of a settlement agreement is a reasonable resolution of the issue is supported by competent, substantial evidence. 2. The $350 Million Rate Base Increase Results in Unfair and Unreasonable Rates Citizens argues that its litigation position was that FPL’s $516.5 million request was $140 million above what it should have been. Thus, according to Citizens, any effort to characterize this reduction from $516.5 million to $350 million as a “compromise” is untenable and “[n]o reasonable mind would regard a term that reflects the surrendering of practically all litigated rate base adjustments as offsetting an unduly high ROE, or otherwise providing substantial evidence reasonably tending to support the conclusion that the final order approves a fair and reasonable compromise settlement.” In short, Citizens argues that FPL did not compromise at all on this position because it lowered its requested revenue requirements. However, competent, substantial evidence supports the Commission’s conclusion. - 49 - The rate base filing, which requested $516.5 million, is supported by many witnesses. Marlene Santos, Vice President of Customer Service at FPL, testified regarding customer-service related costs. She noted that process management and leveraging of technology resulted in a cost per customer of $7.58; FPL’s cost per customer for billing expenses is $4.84; and FPL’s cost per customer for payment service expenses is $0.61. Manuel Miranda, Vice President of the Transmission and Substation Business Unit, testified regarding transmission costs. He testified that compliance with federal regulations increases operations and management expenditures, and that the Transmission and Substation Business Unit’s capital expenditures were projected to be $183 million.14 George K. Hardy, Vice President of Distribution at FPL, testified regarding distribution costs. He stated that capital expenditures were projected to be $430 million for the test year.15 14. According to Miranda, the expenditures were as follows: (1) $53 million for replacement, refurbishment, and reliability of infrastructure; (2) $35 million for projects to meet transmission system requirements; (3) $31 million for Commission-mandated programs; (4) $23 million for projects to meet distribution system requirements; (5) $19 million for projects resulting from revision to federal regulations; (6) $8 million for technology upgrades; (7) $8 million for the Transmission 500kV System Program; and (8) $6 million for non-reimbursable relocations. 15. He attributed the expenditures to: (1) $112 million for customer and system growth; (2) $106 million for hardening/strengthening activities such as the pole inspection program; (3) $92 million for restoration such as repairing and restoring facilities that have failed; (4) $58 million for reliability such as underground feeder and lateral cable rehabilitation; and (5) $62 million for customer response and field support such as non-reimbursable facility relocation - 50 - Kim Ousdahl, Vice President, Controller, and Chief Accounting Officer of FPL, also testified. Her testimony was in reference to methodologies employed to account for FPL’s costs. She testified that FPL’s adjusted ROE was estimated to be 8.2% absent rate relief. Roxane Kennedy, Vice President of Power Generation Operations at FPL, testified regarding costs related to FPL’s fossil plant fleet. She testified that FPL’s annual fossil base capital expenditures were projected to increase $164.8 million from $206.6 million in 2010 to $371.4 million in 2013. Further, she testified that the primary drivers of the increase are investments in combustion turbine (CT) hot end component upgrades ($95.6 million), CT planned maintenance overhauls ($41.1 million), work being done on Martin Unit 1 ($12.7 million) while the Electrostatic Precipitator outage is performed, and maintenance work at West County 3 ($11.3 million) and Canaveral Modernization Project ($2.7 million), units which were not in operation in 2010. Kathleen Slattery, Senior Director of Executive Services and Compensation at FPL, testified regarding costs related to human resources. She testified that FPL’s gross total compensation and benefits cost was projected to be $1.261 billion for 2013, and FPL’s gross total compensation and benefits cost was projected to be $1.049 billion for 2013.16 costs resulting from road construction projects, and the purchase of vehicles and equipment to support construction activities. 16. She also noted that FPL excluded from its expense request the portions of executive and non-executive incentive compensation that were excluded from - 51 - Finally, Robert Barrett, Jr., Vice President of Finance at FPL, testified regarding the necessity of a base rate increase. Barrett testified that the rate base increase was determined as the difference between FPL’s projected net operating income of $1.156 billion and FPL’s required net operating income of $1.473 billion multiplied by the revenue expansion factor of 1.63188. He further testified that: (1) FPL was able to earn 11.0% ROE in 2010 and 2011 largely because of extreme weather that resulted in exceptionally high sales and revenues; (2) FPL projected it would be able to offset the increased revenue requirements in 2012 only by amortizing $526 million of depreciation surplus; (3) there is projected to be only $191 million of depreciation surplus left to amortize in 2013; (4) the difference between what was needed in 2012 and what is left for 2013, together with the impact of the increase to rate base resulting from the amortization, creates a need for $367 million in additional revenues; (5) revenue requirements associated with allowing FPL an opportunity to earn a ROE of 11.5% is $80 million; and (6) other net revenue requirements are expected to grow about $70 million from 2012 to 2013. He also testified the primary drivers of the change in revenue requirements were: (1) $162 million due to inflation; (2) $122 million due to a difference in the weighted cost of capital due the 2010 rate order, and that for the period from 2009 to 2013, FPL’s total compensation or gross payroll expense was forecasted to increase from about $973 million to about $1.049 billion. - 52 - to the necessary increase in the authorized ROE partially offset by other decreases in other elements; (3) $116 million due to investments in infrastructure that provide long-term economic and/or reliability benefits to customers; (4) $104 million due to the cumulative impact of the accelerated depreciation surplus amortization required by a 2010 Rate Order and effected through a 2010 Rate Settlement; (5) $65 million due to system growth; (6) $56 million due to increased expenditures required for regulatory compliance; (7) ($76 million) due to productivity gains that have mitigated some of these increases; and (8) ($32 million) due to revenue growth that partially offsets the growth in revenue requirements. Moreover, pursuant to the agreement, FPL foregoes its right to seek rate increases over the four-year term, regardless of FPL’s increased expenses, lost revenues, or new non-generation capital projects during that period.17 Accordingly, the Commission’s conclusion that a $350 million rate base increase would result in reasonable and fair rates is supported by competent, substantial evidence. 3. Competent, Substantial Evidence Does Not Support the Commission’s Conclusion That the GBRAs for Riviera Beach and Port Everglades are Part of a Reasonable Compromise Citizens argues that the GBRAs for the Riviera Beach and Port Everglades modernization projects would ensure that FPL receives more revenues under the 17. FPL’s last rate case was in 2010. - 53 - compromise than it would have earned under the original petition, even if the 11.5% ROE had been authorized. Further, Citizens argues that in the past FPL has absorbed several power plants without the necessity of any increases and that the GBRAs agreed to here would relieve FPL from the burden of demonstrating that it requires an increase in base rates given the totality of its operations. As shown below, however, the Commission’s conclusion that the GBRAs are part of a reasonable compromise and in the public interest is supported by competent, substantial evidence. Witness Barrett testified that additional base rate increases would be necessary during the four-year term of the settlement to provide FPL an opportunity to recover the revenue requirements for these projects. He also testified that there were several reasons why it was unlikely to avoid rate base increases for these modernization projects: (1) absent rate adjustments, FPL will experience declines in earned ROE of 148 and 136 basis points when the projects go into service; (2) due to modest customer growth, increase in revenues from growth will not offset the cost of these modernizations; (3) it is highly unlikely that FPL can produce gains in productivity to offset the need for a rate base increase; and (4) FPL is investing in substantial infrastructure and the settlement does not have provisions to allow recovery of those investments. - 54 - Further, the GBRA mechanism is reasonable and inures to everyone’s benefit. The GBRA mechanism safeguards customers—absent special circumstances, the costs recovered through the GBRA cannot exceed the estimated construction costs approved in the need determination proceedings, which the Commission has already determined is the most cost-effective alternative. Further, witness Barrett testified that if actual costs upon completion are lower than projected, customer rates are automatically lowered. Customers also experience an additional reduction in fuel charges at the time the plants come into service. Regarding Citizens’ argument that FPL did not demonstrate a need for the rate base adjustments, the costs associated with these units were thoroughly reviewed and approved by the Commission in prior need determination proceedings. Witness Deason testified that “the rigors of cost review and operational scrutiny was as great or greater in the need determinations as the level of review and scrutiny when those plants were placed in rate base in a rate case.” Need determination proceedings involve an extensive analysis of the costs of generation projects, and FPL effectively proved that the projects would improve customer bill affordability. Finally, when implemented, the GBRAs will not increase FPL’s ROE above 10.5%. Accordingly, competent, substantial evidence supports the Commission’s conclusion that the GBRAs are in the public interest and are part of a reasonable compromise of all the issues. - 55 - 4. Amortization of Dismantlement Reserves Results in Unfair Rates Citizens also argues that the proper purpose of amortization of a reserve is to eliminate intergenerational inequity, not enhance earnings as done here. Thus, Citizens argues that this provision is not a reasonable resolution of the disputed issues and results in unfair rates. As demonstrated below, there is competent, substantial evidence supporting the reasonableness of the amortization of the dismantlement reserve. Witness Dewhurst testified that the “ability to flexibly amortize certain noncash expense credits or debits over the period of an agreement has been used on multiple occasions,” and that “this flexibility is motivated in part by the economic life extension of the three major generation sites that FPL is currently modernizing, effectively deferring much further into the future the need to utilize a portion of the dismantlement reserve.” Witness Barrett testified: FPL’s dismantlement reserve for the Modernization Project sites contains amounts collected for dismantlement costs that have now been deferred substantially beyond the timeframe assumed in the currently authorized accruals. Thus, it does not violate the matching principle to provide an accelerated return of a portion of the dismantlement reserve to the customers who have been funding it. That is, in fact, precisely the effect of the dismantlement reserve amortization in the Proposed Settlement Agreement. He also noted that the use of an accelerated amortization coupled with a reserve surplus position was advocated by Citizens in FPL’s last rate case proceeding. It was also advocated by Citizens in FPL’s 2002 proceeding. Further, he stated that - 56 - the dismantlement amortization cannot realistically be characterized as leading to significant intergenerational differences. Barrett also stated that the dismantlement amortization provision is needed to keep the size of the rate increase modest and to keep a four-year term. Otherwise, rates could be higher and the term could be shorter. Thus, according to Barrett, this benefits customers. Witness Kollen also testified regarding this provision. Kollen testified that the provision was in the public interest because: (1) the settlement avoids future rate base increases over the next four years by allowing FPL to amortize the remainder of the depreciation surplus and a portion of the dismantlement reserve previously recovered from customers to maintain its ROE within the range established in these proceedings subject to an amortization limit of $400 million; (2) it ensures that customers retain the full amount of the excess depreciation reserve that actually existed on December 31, 2012, if it is greater than the amount projected by FPL and, if the actual amount is less than FPL projected, FPL bears the risk; and (3) continued amortization of the excess depreciation reserve returns the excess amounts collected in prior years to customers over a shorter period of time than if the excess depreciation reserve were returned to customers over the remaining lives of the underlying assets as reflected in FPL’s approved depreciation rates. Accordingly, there is competent, substantial evidence supporting the reasonableness of the amortization of the dismantlement reserve. - 57 - 5. Postponement of Depreciation and Fossil Dismantlement Studies is not Part of a Reasonable Compromise and Results in Unfair Rates Although fossil dismantlement studies were not a major component of the settlement agreement noted in the final order, there is competent, substantial evidence supporting the conclusion that this provision contributes to a reasonable resolution of all the issues, is in the public interest, and does not result in unfair rates. Witness Barrett testified that this provision was in the public interest because rate stability and predictability were important in this settlement and FPL has agreed to manage currently unknown and unanticipated cost and revenue changes during the next four years without the ability to file an application for a change in rates. Thus, according to Barrett, FPL could not commit to a settlement with fixed base rates, while assuming the risk of depreciation or dismantlement accrual increases during the settlement term. Barrett also explained that it would be unreasonable to expect customers to have fixed base rates if FPL’s depreciation accruals were reduced. Witness Kollen also testified that this provision was in the public interest because “it is essential to ensure that [FPL] and its customers both obtain the benefit of the settlement bargain and the relationship between base revenues and the expenses used to support the base revenue requirement. . . .” Further, Kollen testified that “[because the settlement precludes a change in base rates to reflect - 58 - changes in depreciation expense] there should be no change in depreciation rates during the next four years. . . .” Kollen also reiterated Barrett’s testimony that it would be unfair for either customers or FPL to commit to fixed rates and then have dismantlement accrual increases or decreases that normally would be accompanied with a change in rates. Accordingly, competent, substantial evidence supports the Commission’s conclusion that this provision is part of a reasonable resolution of all the issues resulting in fair, just, and reasonable rates that are in the public interest. 6. The Asset Optimization and Gains Sharing Provision is not Part of a Reasonable Resolution of All the Issues Citizens argues that this provision authorizes FPL to exact “bonuses” from customers for fundamental service activities that FPL already provides. Further, Citizens argues that FPL’s customers would have paid FPL $47 million for economy power purchases between 2001 and the present if FPL’s proposal had been in place during those years. Thus, according to Citizens, no reasonable mind would regard this provision as competent, substantial evidence supporting the conclusion that the settlement is a reasonable compromise of counterbalancing provisions. As demonstrated below, competent, substantial evidence demonstrates that this provision is part of a reasonable resolution of all the issues, is in the public interest, and does not result in unfair rates. - 59 - Witness Sam Forrest, Vice President of Energy Marketing and Trading at FPL, testified that the asset optimization provision in the settlement agreement overhauls an incentive program that was created in 2000. He also testified that from 2001 to 2011, FPL delivered approximately $158 million in benefits to customers while sharing in just under $2 million, but has not shared any benefits since 2006. He testified that the mechanism seeks to enhance the existing one by expanding the focus of the incentives to encourage FPL to pursue a wider range of gains for the benefit of customers. Further, it would update the sharing threshold to provide a more meaningful opportunity for FPL to share in the benefits that it delivers to customers, but only if FPL is successful in delivering additional value to customers. Specifically, under the terms of the agreement, customers will receive 100% of the gain on wholesale power purchases and sales up to $46 million annually, and gains above the $46 million will be shared between FPL and customers. Witness Dewhurst testified that “this term will encourage FPL to seek greater value for customers.” Witness Forrest also testified that the five years chosen by Citizens’ witness at the hearing show that FPL only received 0.38% of the total benefits in incentives under the current mechanism, which was insufficient to provide incentives to FPL. Under the new agreement during those same five years, customers would have received approximately 84% of the total benefits. Further, - 60 - over the full eleven years in which the current incentive mechanism has been in place, FPL customers would have received more than 90% of the total benefits. Thus, according to witness Forrest, this proposed incentive mechanism does not unreasonably favor FPL. Customers stand to make almost $11 million more in optimization benefits than they would otherwise receive without the new incentive mechanism. Additionally, witness Kollen testified that the provision is in the public interest because as the three modernization projects are completed, FPL should be able to reduce wholesale power purchases and increase sales. Thus, these gains will partially offset the GBRAs. Moreover, this is a four-year pilot program, which the Commission has the option to review after two years. If the Commission determines at that time that the program is unsatisfactory, it may terminate the program. Accordingly, the Commission’s conclusion that the asset optimization incentive program is in the public interest and part of a reasonable resolution of disputed issues is supported by competent, substantial evidence. D. Unfair and Unreasonable Rates are not in the Public Interest and the Commission’s Approval of Them Exceeded the Limits of its Discretion The determination of what is in the public interest rests exclusively with the Commission. See § 366.01, Fla. Stat. (2012) (declaring the regulation of public utilities to be in the public interest, and deeming Chapter 366 “to be an exercise of the police power of the state for the protection of the public welfare and all the - 61 - provisions [thereof] shall be liberally construed for the accomplishment of that purpose”). Thus, having concluded above that the Commission’s conclusions and findings on each provision of the settlement agreement are supported by competent, substantial evidence, the Commission’s determination that the settlement as a whole is in the public interest and that it results in rates that are just, fair, and reasonable is supported by competent, substantial evidence.