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Update: PSC staff recommends FPL gets a fraction of its rate request

   State regulators should allow Florida Power & Light to raise its base rates $357 million starting next year, less than two-thirds lof what the company said it needed to operate without layoffs, the staff of the Public Service Commission recommended Wednesday.

   In a 518-page report, the staff of the regulatory agency disagreed with the company's argument that it needs the $1.3 billion in cash to pay for operations and invest in new plants. Instead, it said the company should tap $314 million in surplus and make dozens of other modifications to its operating budget.

    The staff proposal will be one of several factors the PSC takes into consideration when it votes on the rate case, scheduled for Jan. 13. The commission conducted more than two weeks of hearings, heard dozens of witnesses and collected thousands of pages of documents from FPL and the consumer advocates and business groups who opposed the rate increase.

   Based on that record, the PSC staff also recommended whittling back FPL's request for how much it may charge customers in advance for storm repairs -- from $150 million a year to $50 million a year. It recommended the commission force the company to either reduce its executive salary packages by $33 million, or charge shareholders for the expense.

The staff also identified a handful of expenses it considered out of line: it recommended FPL also use shareholder money to pay for $3.7 million in corporate jet expenses and told the company to stop using $45,000 in customer cash to operate an historical museum to preserve company archives and artifacts.

   "It would appear that the FPL Museum was designed more for the enhancement of FPL's corporate image than for mere storage," the staff recommendation said.

    The staff recommendation, while just one element in the decision, traditionally carries a lot of weight and commissioners rarely give utility companies more favorable terms than the staff recommends.

    FPL, which for the last month has mounted an aggressive media campaign to explain why it was deserving of the full $1.3 billion rate increase, did not respond to the staff proposal.

   "All we ask is that the commissioners evaluate our request on the merits and the facts that were presented, which clearly showed that our proposal will help keep our service reliability high and our bills low over the long term," said FPL spokesman Mayco Villafana.

   If the PSC approves the full 30 percent rate increase the company is seeking, the average customer base rate would rise from $42 a month for 1,000 kilowatt hours of electricity to $50.85. In 2010, the ompany says the $8.85 increase will be offset by a $14 reduction in fuel prices, leaving average customers who use 1,000 kilowatt hours a net decrease of $6 a month.

   The staff proposal gives FPL less of its rate request than the staff recommended for Progress Energy Florida, the Tampa-based utility that is seeking a $500 million annual increase in its base rates starting next year.

   In that recommendation, the PSC staff agreed to allow the company to raise rates enough to guarantee a profit to Progress Energy's investors of 11.25 percent. But for the first time, the PSC staff offered FPL a lower return on equity investment of 10.75 percent than its sister utility.

   In both cases, the staff recommends the utilities be allowed a return on equity of one percentage point up or down above or below its recommendation.

    The votes on the two rate cases will be a crucial test for the revamped PSC, a five-member board with two new members appointed by Gov. Charlie Crist in an effort to give the panel a "fresh face."

   In the past five months, the PSC has been buffeted by allegations that its staff and
commissioners have become too close to the utilities they regulate. Crist, who opposes any increase in utility base rates, appointed the new members in October, saying it was time to "clean house."

   While the staff agreed with some of FPL's requests, it rejected others. Among them:

   • The PSC staff agreed with FPL that the company should be allowed to keep the same
ratio of debt to equity as it currently has. FPL now has 59 percent of its revenues
coming from investor dollars, or equity, and the rest from debt. It is one of the lowest
debt to equity ratios in the nation for comparable utilities.

    FPL's only investor is FPL Group, a publicly traded company, and experts for the
Office of Public Counsel, which represents consumers in the rate case, and for the
Florida Industrial Power Users Group, argue that such a high reliance on investor
dollars results in higher rates than necessary for customers. They say the PSC should
lower the equity ratio to at least 54 percent.

   An expert for the power users's group testified during the rate hearings that the
more FPL pays in profits to FPL Group, the more FPL Group can invest in its unregulated
subsidiaries -- allowing customers rates to subsidize the unregulated side of FPL's

   •  The staff recommended that the commission set the return on equity -- the
percentage of profit the company will use to compensate its investors -- at 10.75
percent, with a range of 1 percentage point allowed before it must come back to the
commission for another rate case. The number is about one or two percentage points less
than what the PSC believes the company has made for the past 10 years.

    A company with high equity and low debt is considered a lower risk for investors and
generally offers a lower return on equity. FPL asked for a 12.5 percent return on
equity, saying that it needed to compensate its parent company more because of the
unusual factors such as its geography, its fuel-supply mix and Florida's economy make it
more of a risky investment. But the PSC rejected that argument and instead recommended a
return on investment of 10.75 percent, which is lower than the 11.25 percent recommended
for Florida Energy and Tampa Electric.

   But the number is still higher than the 9.5 percent recommended by the Office of
Public Counsel, the attorney general and the business groups that joined in the case.

   * The PSC rejected FPL's argument that it not be required to give customers credit
for $1.2 billion in surplus depreciation expense, paid for when the company used an
accounting mechanism that charged customers to pay off the cost of building power plants
more quickly than it should have.

   Under the staff recommendation, FPL would be required to reduce what it charge
customers in its base rates by $314 million, reduce another $500 million over the next
four years, and the remaining $400 million would be credited to customers over the life
of the plants.

   * The PSC staff also rejected FPL's request that it be allowed to raise rates in
2011, when it bring new power plants into operation but it suggested the commission
consider the option of approving $310 million rate increase to take effect that year.

   The state utility board will weigh the staff proposal and decide on Jan. 13 how much
in new revenue to collect from FPL's 4.5 million customers. A second step comes on Jan.
29, when the PSC will set the rates and decide how to divide the burden between FPL's
residential and commercial customers.

   Regulators must rule by March 18, when the new rates must take effect.

Mary Ellen Klas can be reached at