In an October 17, 2000 meeting and an October 19, 2000 order, the Florida Public Service Commission (FPSC) approved a settlement agreement between Florida Power & Light (FP&L) and the successors of two qualifying facilities, Okeelanta Corporation and Osceola Farms, Co. (the QFs).
The settlement agreement involves the buy-out of the thirty-year FP&L contracts with the settles a contract dispute between the parties. The Okeelanta contract was for 70 megawatts of firm energy and capacity and the Osceola contract was for 55.9 megawatts of firm energy and capacity. The buy-out will make these the first renewable merchant plants in Florida.
The contracts in dispute arose from an order issued August 29, 1991 in which the FPSC required FP&L to issue a standard offer contract for up to 125 megawatts of capacity. The contract rates were to be based on an avoided cost for FP&L’s next avoided unit. This unit was the 1997 stage of an integrated coal gasification combined cycle unit. The QFs submitted signed standard offer contracts to FP&L, which were approved by the FPSC for cost recovery on March 11, 1992. Under the contracts, the QFs were to accomplish commercial operation by January 1, 1997, and operate through December 31, 2026.
FP&L disputed whether the QFs achieved commercial operation by January 1, 1997. On January 8, 1997, FP&L filed suit in state court seeking, among other things, a declaration from the court that it was excused from all further obligations under the contracts due to the failure to meet the commercial operation date requirement. The QFs filed petitions for bankruptcy in May, 1997, which automatically stayed the state court proceeding. The Bankruptcy Court, however, lifted the stay, and the state court proceedings commenced. The QFs filed counterclaims in the state court proceeding, claiming approximately $490 million in damages for breach of contract, treble damages and violations of the Federal Public Utility Regulatory Policies Act (PURPA). The court dismissed the claims for treble damages and for violations. This decision was affirmed by the state appellate court. The remainder of the state court action continued, however. The Bankruptcy Court authorized the holders of the bonds financing the construction of the QFs’ facilities to manage the state court action. FP&L and the bondholders then negotiated the settlement agreement ultimately approved by the FPSC. The settlement agreement will terminate the QFs’ contracts, the state court action, and the adversary proceeding in bankruptcy court.
Under the settlement, FP&L will make a lump sum payment to the QFs of $222.5 million. The present value of the contracts over the full thirty-year term is $1.1 billion.
In its July 28, 2000 petition seeking approval of the settlement agreement, FP&L asserted it could build, generate, and purchase energy and capacity at prices well below those set forth contracts and that the cost of replacement energy and capacity is $474.7 million.
In the October 19th order, the FPSC also permits FP&L to recover the cost of the $222.5 million settlement payment, 79% through the capacity clause, and 21% through the fuel adjustment clause, the same percentages as the costs for the QFs contracts were originally to be recovered, over a five year period, beginning January 1, 2002.
Seeking a reversal of the FPSC’s October 19, 2000 order and an evidentiary hearing, the customer, Michael Caldwell, argues that the settlement is not actually a buy-out of the QF contracts because the QF contracts were voluntarily terminated by FP&L. Mr. Caldwell further asserts that FP&L’s decision to terminate the contracts was a bad business decision, resulting in the QF’s counterclaim for damages. Therefore, Mr. Caldwell asserts the $222.5 million settling the damages claim arising from that decision is not a reasonable and prudent cost which may be passed on to the ratepayers. Mr. Caldwell states that FP&L should continue litigating and if the court orders performance of the contracts, FP&L could then petition the FPSC for buy-outs of the contracts on the basis that they are not cost-effective.
The settlement must also be approved by the Bankruptcy Court. In addition, FP&L has agreed to certain terms for the recovery of the costs which, in total, reduce the cost to be recovered by approximately $29 million. FP&L will treat the $222.5 million settlement payment as a base rate regulatory asset in the year 2001 which will reduce FP&L’s revenues by $23.6 million in the year 2001. Additionally, the recovery of the $222.5 million is spread over a five year period, and FP&L is authorized to collect interest on the unamortized balances. However, the interest earned on the sum will be at the commercial paper rate, which is a lower rate than FP&L’s overall rate of return. This amounts to a $5.4 million savings in the first year of recovery, which is reduced upon successive years of the recovery period.
On November 9, 2000, a petition was filed by an FP&L customer seeking a reversal of the Commission’s October 19, 2000 order and an evidentiary hearing. The customer, Michael Caldwell, argues that the settlement is not actually a buy-out of the QF contracts because the QF contracts were voluntarily terminated by FP&L. Mr. Caldwell further asserts that FP&L’s decision to terminate the contracts was a bad business decision, resulting in the counterclaim for damages. Therefore, Mr. Caldwell asserts the $222.5 million settling the damages claim arising from that decision is not a reasonable and prudent cost which may be passed on to the ratepayers. Mr. Caldwell states that FP&L should continue litigating and if the court orders performance of the contracts, FP&L could then petition the for buy-outs of the contracts on the basis that they are not cost-effective.
In September, 1997, operations at both QFs were shut down. The Okeelanta facility, however, was restarted in February, 1998, and FP&L is currently purchasing energy from the Okeelanta facility on an as-available basis.