FPL Will Suspend Capital Projects, Layoffs Possible
The Florida Public Service Commission rejected on Wednesday the profit margin requested by the state's largest power company as part of its $1.25 billion rate increase proposal.
Florida Power & Light, which provides electricity to South Florida and most of the Atlantic Coast, had asked for a return on equity - the minimum profit margin the company is guaranteed - of 12.5 percent, but the PSC unanimously ignored not only that, but also a staff recommendation of a 10.75 percent margin and approved a far lower ratio of 10 percent. The lowered profit rate would only increase FPL's operational revenue by $261 million.
The immediate result is likely to be suspension of capital projects such as a new nuclear generator, and maybe even layoffs, FPL’s president said.
If the staff recommended return on equity for FPL had been followed, FPL's operating revenue would have increased by $357 million, still far below the amount requested by the company.
Even before the PSC slashed the company's proposed profit margin, the commission appeared skeptical about the FPL rate increase. One commissioner, Nathan Skop, said the company had failed to make the case that the increase was necessary.
"This rate case seems to be more about improving cash flow from operations and discretionary expenditures rather than substance," Skop said. "That's clearly illustrated by the substantial adjustments that the staff has made…from the company's request. Before the commission has made any cuts, staff has substantially cut a majority of (FPL's request)."
The PSC, which was reshuffled last fall by Gov. Charlie Crist after a conflict-of-interest scandal rocked the panel, also voted down a separate rate increase request from Progress Energy Florida earlier this week. With that decision as a backdrop, the panel had been widely expected to be tough on FPL's request. The PSC obliged, also rejecting a staff recommendation to allow FPL a $50 million storm reserve on a 3-2 vote. Commissioners debated lowering the reserve amount to $25 million before settling on rejecting the measure.
The changing regulatory climate at the PSC was not lost on FPL president Armando Olivera, who said as the PSC’s meeting winded down that the panel’s decision Wednesday was politically motivated.
“What the net result of all of this is the commission is coming up with rates that don’t adequately cover the cost of service,” he told reporters. “I think if you summarized it, you would say that today politics trumped economics because there’s no economic case for the decisions this commission has made. And it’s unfortunate because it came at a time when we would have created a lot of jobs for the state at time when they are badly needed.”
Both FPL and Progress Energy had argued that denying their rate increases could harm their ability to apply for credit and after the Progress “no” vote, a global financial market watchdog group agreed. New York-based credit rating agency Fitch Ratings put FPL’s credit-worthiness on a downgrade watch before the PSC even weighed in Wednesday, saying that the commission’s decision to essentially deny Progress Energy a $499 million rate increase meant the panel was likely to make a similar decision for FPL.
"The action is taken in response to the adverse decision by the Florida Public Service Commission on Jan. 11 in the Progress Energy Florida rate case and the greater possibility of a poor outcome of the pending FP&L rate case," the ratings agency said in a statement announcing FPL had been listed "Rating Watch Negative." "The change in status affects approximately $11 billion of securities."
FPL president Olivera agreed, saying that the company would indefinitely suspend all of its capital projects, including a new nuclear generator at its Turkey Point facility and a $1.6 billion natural gas pipeline the company proposed to build, because it would be unable to qualify for enough credit.
He also raised the possibility of the company laying-off employees.
“We’re going to look at every aspect of our operations,” Olivera said. “All options are on the table. This sends a chilling effect to investors. All the stuff that we had planned to do is based on having the confidence of investors that Florida is a good place to invest, that there investments are going to be treated right.”
“The kind of returns that this commission has approved today quite frankly do not make this a very attractive state to make investments in,” he continued. “Investors have already been voting by selling our shares and seeing the…value of their investments go down.”
Although the Progress Energy and FPL rate increases were separate cases before the PSC, prior to the vote Wednesday consumer groups echoed Fitch's prediction that the Progress decision foreshadowed a rejection for FPL, though those groups framed that possibility positively. FPL and Progress Energy have both long raised the credit risk of adverse PSC decisions, but the commission was not swayed.
“FPL today is a strong company, and I don’t have any doubt it will be strong tomorrow,” said Skop, expressing doubt about the company’s doomsday assessment. “Given FPL’s high equity ratio and relatively strong financial position, it should be able to have no problem going to the capital markets to borrow.”
New PSC Commissioner Benjamin Stevens appeared to agree, saying that his preference was for FPL’s return on equity to be set even lower than the final number of 10 percent.