Florida Power & Light Company has proposed a plan to the Florida Public Service Commission that would eliminate the deficit in the utility's storm reserve and build a new reserve to deal with future hurricanes that might strike the state. Under the plan, a storm surcharge now included in customer bills would be replaced with a slightly smaller amount under a process called "securitization" signed into law by Gov. Bush in 2005.
Unprecedented back-to-back hurricane seasons have depleted FPL's storm reserve, left more than US$1 billion in storm restoration costs outstanding and have heightened the need to quickly rebuild the storm reserve since weather experts are forecasting the potential for very active hurricane seasons in the years ahead.
"With seven hurricanes in less than 15 months, we know how difficult the past two hurricane seasons have been for our customers," said Armando Olivera, FPL president. As a result of the hurricanes, the cost of goods and services, such as insurance premiums are on the rise. And, rising fuel costs have contributed to higher prices as well. Securitization provides a way for us to ease the burden of overall rising prices on our customers while rebuilding the storm reserve so we can respond to future hurricane seasons."
No Insurance Available
Since Hurricane Andrew in 1992, FPL and other Florida utilities have been unable to get insurance coverage on their transmission and distribution systems. FPL is also ineligible for government funding. Utilities, such as FPL, have no alternative than to include storm restoration expenses as a cost of providing service. FPL makes no profit on storm charges, but seeks only to recover the direct costs that are necessary to restore power to its customers.
"Our goal is to restore power after a hurricane as quickly and safely as possible," Olivera said. "That does come at a cost, but the alternative to the communities we serve would be far more costly. We know our customers want us to be prepared for what is predicted by weather forecasters to be a heightened occurrence of hurricanes."
In the 2005 legislative session, lawmakers passed legislation that grants the PSC the authority to approve requests by Florida utilities to issue bonds as an option to pay for costs prudently incurred in hurricane restoration. This process is called securitization. Under a securitization plan, FPL would issue bonds in the financial markets and use the proceeds to pay off restoration costs prudently incurred and rebuild its storm reserve.
FPL's plan would: (1) pay off the remaining $213 million deficit from 2004, for which a storm surcharge currently is being collected, (2) recover more than $800 million incurred in 2005, and (3) rebuild the reserve to approximately $650 million for future use. FPL expects to replace the current $1.65 storm surcharge on a typical 1,000 kilowatt-hour residential monthly bill (covering the 2004 storm costs and being collected over a three-year period) with a slightly smaller surcharge of approximately $1.58 (to cover 2004, 2005 and future storm costs and be collected over a 12-year period). The actual surcharge will be based on market conditions at the time the bonds are issued.
An alternative to securitization is an additional surcharge similar to the one now on customer bills. In this case, an additional surcharge to cover 2005 restoration costs and to rebuild the storm reserve (approximately $650 million) could add more than $5 to a typical residential monthly bill over a three-year period. If a surcharge is approved there will be a period of time when both surcharges would be reflected on customers' bills. The choice of which mechanism to use will be made by the PSC.
FPL has had a storm reserve for many years. The PSC permits utilities to put aside an amount of money into a storm reserve, since commercial insurance on transmission and distribution poles and wires is unavailable. The storm reserve served customers well until the 2004 hurricane season when three back-to-back hurricanes depleted the $354 million that had been accumulated in the reserve and resulted in a deficit. In February 2005, the PSC allowed FPL to implement a surcharge on customer bills to eliminate the deficit created in 2004.
The PSC has set FPL's rates based on the premise and practice that storm costs would be recoverable should such an act of nature occur. FPL cannot cover hurricane restoration costs and be able to continue to invest the billions of dollars that are required to build new power plants and other infrastructure to meet the continued dynamic growth occurring in Florida. In each of the last three years, FPL has invested approximately $1.4 billion in its infrastructure.
International Engineering Firm Report
In its filing with the PSC today, FPL included a copy of a report on an assessment of its electrical infrastructure and how it performed during Hurricane Wilma. The report was prepared by KEMA, a third party international engineering firm specializing in electrical system engineering analysis.
KEMA's investigation of FPL's system concluded that "the transmission, substation and distribution systems of FPL are designed to meet or exceed all required safety standards and, during Wilma, performed as expected and in accordance with FPL standards." KEMA studied construction standards, quality processes and maintenance efforts of the utility. It also considered weather assessments from other parties to evaluate the impact of wind conditions on the FPL system during Wilma, and it benchmarked FPL's practices and system performance against other utilities.
FPL will review KEMA's findings and, with their assistance, will continue to explore opportunities to improve and "harden" its system, especially in light of predictions that Florida has entered the beginning of a long cycle of increased hurricane activity.