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<title>November 2000: Florida Public Service Commission Approves Buy-Outs of Two
Qualifying Facility Contracts</title>
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<p align="left"><strong><small><font face="Arial">About The Author:</font></small></strong></p>
<p align="left"><font face="Arial" style="font-size: 9pt">Robert A. Olson is a partner in the law firm of
Brown, Olson & Gould, P.C. which maintains a nationwide practice in energy law,
public utility law and related commercial transactions.</font></p>
<p><small><font face="Arial"><font style="font-size: 9pt">He can be reached at:</font><br>
<br>
<b><font color="#0000FF">Brown, Olson & Gould, PC</font></b><br>
2 Delta Drive<br>
Suite 301<br>
Concord, NH 03301<br>
<a href="mailto:[email protected]">[email protected]</a><br>
(603) 225-9716<br>
<a href="mailto:[email protected]"></a></font></small></p>
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<td width="69%" valign="top"><img src="../images/statelin.gif" alt="STATELINE by Robert Olson" border="0" WIDTH="375" HEIGHT="75"><p align="left"><b><u><br>
November 2000</u><br>
<font face="Arial" size="5" color="#000000">Florida Public
Service Commission Approves Buy-Outs of Two Qualifying Facility Contracts<br>
</font>
</b><strong>by Robert Olson -- Brown, Olson and Wilson, P.C.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
2000/</em>11)</font></p><center>
<p ALIGN="JUSTIFY"><font face="Arial">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).</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
<p ALIGN="JUSTIFY"><font face="Arial">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.</font></p>
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<blockquote>
<p align="left"><font face="Arial">
<small>Robert A. Olson is a partner in the law firm of Brown, Olson &
Gould P.C.
which maintains a nationwide practice in energy law, public utility law and related
commercial transactions. He can be reached at:</small></font><p align="center">
<font face="Arial"><small><font color="#0000FF"><b>Brown, Olson & Gould, PC</b></font><br>
2 Delta Drive, Suite 301<br>
Concord, NH 03301 <br>
<br>
<a href="mailto:[email protected]">[email protected]</a> | (603) 225-9716<a href="mailto:[email protected]"></a></small></font>
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