Conference Call
Rate Settlement and Stipulation
August 25, 2005
(1)FPL Rate Stipulation and Settlement Conference Call
Jim von Riesemann
Thank you ______and good morning everyone. Thank you for joining us.
The purpose of our call today is to discuss the major elements of the base rate stipulation and settlement that was approved yesterday by the Florida Public Service Commission.
Joining me on today’s call are Lew Hay, FPL Group’s Chairman and Chief Executive Officer; Moray Dewhurst, FPL’s Chief Financial Officer, and Armando Olivera, President of Florida Power & Light. Armando will provide some prepared remarks and then we will take questions. However, we would ask you to restrict your questions to the subject at hand.
Before I turn the call over to Armando, let me remind you that….
(2)Safe Harbor Statement
Any statements made herein about future operating results or other future events are forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from such forward-looking statements. A discussion of factors that could cause actual results or events to vary is contained in our SEC filings and in the Appendix to this presentation which you can access on our website,
Armando…
(3)FPL Rate Stipulation and Settlement
Armando Olivera
Thanks Jim and good morning everyone. Yesterday, the Florida Public Service Commission voted to approve the Stipulation and Settlement Agreement that Florida Power & Light had negotiated with the Attorney General, the Office of Public Counsel, and all the other intervenors in our pending base rate proceeding, thus effectively concluding our rate case. By this settlement FPL agreed to hold base rates flat for 2006 and in exchange received certain benefits which I will describe in more detail later on. The settlement continues and extends the fundamental, incentive-based framework of our prior 1999 and 2002 agreements and is effective at least through the end of 2009.
While we did not obtain through this settlement everything we might have hoped for, we believe it represents an acceptable compromise and that FPL will be able to continue to deliver high quality, reasonably priced service to our customers while simultaneously providing a fair return to our shareholders. The settlement resolves a number of areas of significant disagreement between ourselves and intervenors and therefore should reduce regulatory uncertainty for investors.
(4)Rate Stipulation: Key Elements
Let me now describe the major elements of the settlement, which details how our base rates will be determined for the next four years and possibly beyond. Base rates, as you know, exclude fuel costs and certain other costs that are recovered through various clauses. The clauses will continue to operate normally.
First, as I indicated, the basic framework represents a continuation of the 1999 and 2002 agreements and is based on revenue sharing. Revenues above certain pre-defined thresholds are shared with customers, and revenue is ultimately capped by the agreement. In exchange for these limitations on revenue, FPL will continue to operate without any direct limits on ROE. The settlement expressly indicates that the revenue sharing mechanism is “the appropriate and exclusive mechanism to address earnings levels.” However, for all other regulatory purposes where an ROE is required, such as in computing certain clause amounts, a rate of 11.75% will be used.
This basic framework has been effective in offering FPL incentives for performance improvement, the benefits of which are shared with and ultimately passed through to customers.
Both the annual revenue thresholds, above which two-thirds of revenues are refunded to customers, and the revenue caps escalate by formula each year at the actual average growth rate experienced during the past ten years plus the Generation Base Rate Adjustment, which I will describe later. Thus, normal volume growth is accommodated within the framework. These thresholds are based only on normal base revenues, so any surcharges or other non-base recovery amounts do not affect revenue sharing.
Also continuing from the prior agreements is a modest downside protection mechanism. If FPL’s ROE were to drop below 10%, FPL would be able to petition for base rate relief. This provides protection against unanticipated external cost drivers, such as a resurgence in general inflation levels.
Another element that continues from the 2002 agreement is an annual credit to depreciation expense of up to $125 million. I will discuss this more later.
Finally, the agreement runs through the end of 2009; however, it effectively contains a mutual extension option.
(5)Rate Stipulation: New Elements
There are a number of things that are new in the current agreement.
First, the settlement provides for future adjustments to base rates to account for the addition of new generation projects through what is called a Generation Base Rate Adjustment. Specifically, for those projects that are placed in service during the term of the agreement that go through the Florida Power Plant Siting Act and are approved by the Commission, an adjustment to base rates is allowed that is calculated on the revenue requirements of that project. We expect to employ this provision when Turkey Point Unit 5 is completed in 2007, but it also applies to any other comparable additions that might occur later in the life of the agreement. We believe this is an important step forward, as it provides a clear framework for addressing an important issue. As you know, the need to support growth here in Florida was one of the key drivers of our decision to file a rate case.
Second, the settlement modifies somewhat our approach to storm restoration cost recovery but in return clarifies the regulatory framework and should avoid some of the disputes that characterized this year’s storm cost recovery proceedings. Specifically, the settlement explicitly acknowledges that prudently incurred restoration costs are recoverable without the application of any form of earnings test. As you know, this was an issue in the proceedings earlier this year, and we are pleased that the intervenors have all agreed to this provision. They have also agreed not to appeal the Commission’s final decision in this year’s storm docket.
FPL will no longer make annual accruals to the storm reserve through base rates. Instead, any funding of the storm reserve, and/or any recovery of prudently incurred costs, will be accomplished either through base rate surcharges or through the securitization mechanism provided by statute earlier this year. The Commission will determine which route is more appropriate given the facts and circumstances at the time.
A third element that is new is a suspension of the current nuclear decommissioning accrual. Effectively, we have agreed to a four year “holiday” on additional decommissioning accruals. Given the well-funded status of both the Turkey Point and the St. Lucie decommissioning trusts, we believe this presents no inappropriate risk, and it was an essential element in our being able to accede to the intervenors’ demand that base rates remain flat in 2006.
Fourth, FPL has agreed to withdraw its request for a rate increase to recover costs associated with Grid Florida. However, in return, the settlement provides for clause recovery of prudently incurred incremental costs associated with an independent transmission system.
Finally, the settlement incorporates a number of changes to our rate design that were offered in our rate case filings and that are responsive to some of the requests from key customer classes. These rate changes are designed to be revenue neutral; however, they should improve overall customer satisfaction.
(6)Rate Stipulation: Relationship to Base Rate Request
Before I turn to the implications of this settlement for future financial performance, it may be helpful to relate the key terms to the major drivers of our base rate increase request, as reflected in our rate case filings. As you will recall, the total rate increase requested was approximately $430 million, with an additional increment coming in 2007 with the introduction of Turkey Point Unit 5, which is obviously addressed by the Generation Base Rate Adjustment provision.
Of the $430 million, nearly half was driven by the costs of a RTO and the requested incremental accrual to the storm reserve. Clearly, these elements are directly covered by the settlement, and FPL’s right to recover prudently incurred costs in both cases is spelled out. The mechanisms of recovery have changed somewhat, but we feel comfortable that the fundamental drivers have been addressed.
You will recall that the incremental revenue requirements of the Martin and Manatee expansions, now both fully operational and saving customers fuel expenses every day, totalled nearly $200 million and were the other primary driver of the base rate increase request. These are roughly offset by the suspension of the nuclear decommissioning accrual and the continuation of the $125 million depreciation credit. A comment on depreciation may therefore be warranted.
Coincident with the rate case, FPL also filed comprehensive new depreciation studies. Owing to a number of factors, including license extension at the FPL nuclear sites, these studies showed a theoretical “surplus” of accumulated depreciation, which was appropriately incorporated into our rate case filings and which acts to reduce future depreciation expense over the remaining life of the respective assets. During the discovery period of the rate case, and evidenced in intervenor testimony, intervenors proposed accelerating the reflection of the theoretical surplus in base rates. The continuation of the $125 million depreciation credit allows us to achieve much the same effect. Because our historical depreciation has been appropriate, we are in a position to address the intervenors’ demands without incurring undue financial risk, and this element was an essential part of our ability to agree to holding base rates flat. It will have the effect of increasing future rate base relative to where it would otherwise have been.
(7)Financial Implication
You will of course be interested in the implications of this settlement for future financial performance. Given the timing of events we are not yet in a position to provide specific earnings guidance for the coming year, which we expect to do coincident with the third quarter call, consistent with past years. However, based upon the settlement terms and the extensive work that went into the rate case, we feel very comfortable that Florida Power & Light will be able to deliver earnings growth in 2006, on a weather-normalized basis, consistent with long-term trends of 3-4%. We will provide more detail on specific drivers in October.
To sum up, we believe this settlement represents a fair and reasonable outcome to the rate case. The extensive documentation provided in the minimum filing requirements and through the discovery process, and the time available for analysis and questioning, have given all interested parties the detail they need to be comfortable with the terms of the agreement. All parties negotiated hard and with good faith intent to reach an agreement. Looking forward, shareholders will see benefits from the continuation of the successful revenue sharing framework, the addition of the new Generation Base Rate Adjustment factor, and greater clarity regarding regulatory treatment of key items of concern. Customers will see immediate benefits through the elimination of the base rate increase for 2006 and the introduction of new rate structures and additional benefits from the continuation of the revenue sharing framework. While we have many operational challenges ahead of us, we will continue to be able to provide safe and reliable power for our customers and meet the needs of a growing Florida economy. We look forward to re-focusing our efforts on improving on our already superior performance.
With that, we will take your questions, but I ask you to limit them to issues concerning the interpretation and implications of this settlement. Thank you.
(8)Q&A Session
Jim von Riesemann
Operator, we’d be now happy to answer any questions today’s participants may have that are related to this rate agreement. As a courtesy, please limit yourself to one question and one follow-up as we will try to answer everyone’s questions.
Closing Remarks
Thank you for joining us today.
A taped replay of the conference call will be available at 12:00 p.m. ETThursday, August 25, 2005. To listen to the replay, dial (719) 457-0820, confirmation code 1862143. This replay will be available until 11:59 p.m. ET, September 1, 2005.
Good bye.