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Supreme Court rejects Florida Power & Light's attempt to make customers pay for fracking

In a rebuke to Florida Power & Light, the Florida Supreme Court on Thursday ruled that state regulators exceeded their authority when they allowed the company to charge customers for its speculative investment into an Oklahoma-based fracking company.

In June of last year, the Public Service Commission rejected its staff recommendation and unanimously approved guidelines that gave FPL the right to charge its customers up to $500 million a year for speculative natural gas fracking activities without oversight from regulators for the next five years.

In a 6-1 opinion, written by Justice Ricky Polston, the court concluded that the PSC did not have statutory authority to authorize the charge and called its decision "overreach."

"Treating these activities as a hedge requires FPL’s end-user consumers to guarantee the capital investment and operations of a speculative oil and gas venture without the Florida Legislature’s authority," Polston wrote. Justice Charles Canady dissented with an opinion, arguing that the PSC did have the authority to allow the costs of the investment to be recovered under the FPL fuel clause.

Here's the ruling: Download SCOFLA Woodford case

The proposal, called the Woodford Gas Reserves Project, is a joint venture between FPL with Oklahoma-based PetroQuest Energy, Inc. which develops and operates the natural-gas wells. FPL has earned profit off the investment -- about 11.3 percent -- and claimed that it would provide a long-term hedge against volatile fuel costs and should therefore be charged to customers under its fuel cost-recovery clause. 

Update: As of April 30, 2016, FPL has recovered $21.9 million through the Fuel Clause related to the Woodford Project, the PSC said Friday. 

The court disagreed with FPL and ruled that the investment was a risk that should be charged to shareholders, not ratepayers. It said PSC's ability to allow FPL to recover costs "is permissible only for costs arising from the 'generation, transmission, or distribution' of electricity','' while "the exploration, drilling, and production of fuel falls outside the purview of an electric utility as defined by the Legislature."

"It is undisputed that FPL is an electric utility,'' Polston wrote. "It is also undisputed that the PSC’s ratemaking authority encompasses the authority to examine fuel cost expenditures and approve cost recovery to compensate for utilities’ fuel expenses through the fuel clause...However, the PSC does not have the statutory authority to approve cost recovery for FPL’s investment in the Woodford Project."

The court's ruling was hailed by the Office of Public Counsel, which represents the public before the PSC, the Florida Retail Federation, and the Florida Industrial Power Users Group, which opposed the PSC's decision because it gave FPL unprecedented permission to use ratepayer dollars to finance an energy exploration and production business.

"This is a great victory for ratepayers and will prevent them from having to bear the cost of some very speculative risk,'' said JR Kelly, the head of the Office of Public Counsel. 

FPL, a regulated monopoly and Florida's largest utility, entered into the $191 million joint venture with PetroQuest Energy of Oklahoma to explore for natural gas, including using a process known as hydraulic fracking. The process involves injecting large volumes of water, sand and chemicals at high pressures to release oil and natural gas from rock caverns deep underground.

FPL used the investment as a guaranteed new source of revenue that allowed it to increase its rate base in the face of increasing competition from solar and other alternative energy sources. As an investor-owned utility, the PSC allows FPL to earn a guaranteed profit -- return on investment -- of up to 11.5 percent of its rate base. By allowing the company to increase that by $750 million a year, FPL and its parent company, NextEra, were guaranteed higher profits.

The return on investment for customers, however. At its hearing on its fuel costs last year, FPL revealed that the Woodford project had customers about $5 million, rather than save them in fuel costs. 

According to an analysis by the PSC’s staff, FPL was the first utility in the nation to be allowed to use ratepayer money for such an “non-regulated risk.” 

The court called out that strategy as an inappropriate use of the fuel cost-recovery clause which is intended to be used to hedge against price swings.

"Permitting advance recovery of FPL’s investment in the Woodford Project’s exploration and production of natural gas will not pay for the costs of actual fuel,'' Polston wrote. "It will provide recovery, instead, for investment, operation, and maintenance and operation of assets that will provide access to an unknown quantity of fuel in the future."

The court said that because it "is impossible to know what the costs of the natural gas will be until it is actually produced. There is more uncertainty from this investment rather than less" and therefore the investment " cannot be characterized as a physical hedge."

Polston said that the Woodford Project "is a guaranteed capital investment for FPL; it is not a hedge to stabilize fuel costs."

Polston added that while the speculative capital investments in gas exploration and production by an electric utility "may be a good idea,'' whether it is in the public interest "is a policy determination that must be made by the Legislature."

Last year, the PSC staff drew a similar conclusion, which the PSC rejected, saying the project was untested, a risky investment in a volatile energy market, and had the potential to benefit FPL’s shareholders more than its customers.

Canady, however, disagreed, scolding the court's majority for overturning the PSC. 

"...the majority is merely substituting its judgment for the PSC’s judgment and expressing disagreement with the PSC’s factual findings,'' he wrote. "The testimony and exhibits presented at the evidentiary hearing provide competent, substantial evidence to support the PSC’s conclusion that the Woodford Project acts as a long-term physical hedge.

Kelly, the public counsel, said the next step will be “to go back and figure out how to undo the portion of the commission's order than the court has now overruled,’’ he said. “It will certainly come in the form of some refund to the FPL ratepayers.”

Bev DeMello, PSC spokeswoman, said Friday that "as with all costs recovered through the Fuel Clause, the final amount is subject to true-up.  The actual amount, if any, that FPL will be permitted to recover related to the Woodford Project will be the subject of an evidentiary hearing held in November."