Thursday, January 14, 2010

MUST READ: UGLY energy fight in Florida, with big investment implications. (FPL)

And I mean Florida the state, not FLO-RIDA the singer-songwriter:

Anyway.  FPL Group (FPL), or Florida Power & Light, is in a MASSIVE battle with the state's Public Service Commission over its desire to increase base rates for consumers.  As a regulated utility, FPL must present an argument to this commission as to why it is necessary to raise rates.  The process has been complicated (to put it lightly) by FPL, who's employees have been wining and dining formers members of the PSC.  It got bad enough that Florida Governor Charlie Crist (R) removed several PSC commissioners.

The Florida PSC rejected most of the rate increases FPL was requesting, just a day after rejecting a similar request from Progress Energy (PGN).  Both companies' stocks have underperformed the major indexes this week on the news, but FPL is off more, down 3% today to trail the S&P500 by about 7% in only a few days.

Progress Energy announced disappointment in the commission's decision, but it was nothing compared to the press release issued by FPL.  You'll not find many $21billion market-cap companies willing to threaten the state, but FPL has done just that.  They threatened to cancel 10 BILLION DOLLARS in planned capital expenditures, at a potential net cost to Florida of 20,000 jobs.  Normally I would not paste such a large portion of the release, but the CEO's comments are a MUST READ for anyone interested in the delicate balance between providing clean reliable energy and the duty to earn a respectable return for shareholders:

JUNO BEACH, Fla.--(BUSINESS WIRE)--Citing a negative decision on its rate proposal by the Florida Public Service Commission (PSC) today as further evidence of a deteriorating regulatory and business environment, Florida Power & Light Company said it will immediately suspend activities on projects representing approximately $10 billion of investment over the next five years in Florida’s energy infrastructure.
The projects would have created an estimated 20,000 direct and indirect construction and related jobs over the next five years.FPL said it will immediately suspend activities on:
  • Development of two new nuclear reactors at Turkey Point beyond what is required to receive a license from the Nuclear Regulatory Commission;
  • Modernization of the Riviera Beach and Cape Canaveral plants;
  • The proposed Florida EnergySecure natural gas pipeline; and,
  • Numerous discretionary infrastructure projects targeting improvements in efficiency and reliability within FPL’s power generation, transmission and distribution units.
FPL will also assess the cost structure of its ongoing operations and review other capital investments for appropriate reductions. The company expects to make further decisions on all of these matters no later than the end of the second quarter.

L Group Chairman and CEO Lew Hay issued the following statement:
“We understand that there is never a good time to raise base rates. However, our proposal provided a unique opportunity to lower customers’ total bills while simultaneously investing billions of dollars in our state for upgraded and more efficient electrical infrastructure – all of which would have significant benefits for our customers. Needless to say, we are very disappointed for our customers and the state that this opportunity appears lost.
“This decision was about politics, not economics, and unfortunately it comes at a time when our state urgently needs jobs and investment. In addition, the decision will likely increase customer costs and diminish reliability over the long term because the commission failed to recognize the true cost of providing reliable service to customers.
“Historically, Florida has enjoyed a constructive regulatory environment, which has allowed us to invest billions of dollars to benefit FPL customers while having reasonable confidence that our investors would be allowed to earn fair returns.
“Our past investments have provided FPL customers with bills that are 10 percent lower than the national average and the lowest of the state’s 54 utilities, reliability that is 47 percent better than the national average, and a power generation fleet that is among the cleanest and most efficient in the country.
“Florida’s recent cold weather showed us the benefits of $10 billion in investments over the past five years in power generation and infrastructure, allowing us to reliably maintain service even while operating at near-maximum capacity over a period of days, but it also vividly illustrated the need to continue to invest in the electrical infrastructure.
“Unfortunately, today’s decision will simply reinforce investor perceptions that the regulatory climate in Florida continues to deteriorate and is increasingly hostile to investment. Investments have to be made in the expectation of fair regulatory treatment. By the time we ask for rate recovery, the money – in this case billions of dollars – already has been spent and sunk. Absent confidence in fair regulatory treatment, we believe providers of capital will be more reluctant to invest.
“However, the PSC has spoken. Likewise, so have our investors, who have unfortunately seen what we believe is more than $1 billion of value in their FPL Group stock destroyed over the course of the rate proceeding. As a result, we believe that they do not want us to continue investing capital in Florida unless and until the regulatory and business environment improves. Many of those investors are retirees living on fixed incomes right here in Florida.
“Our business is heavily dependent on the confidence of investors in both the quality of the company and the fairness of regulators. As a result of today’s decision, we believe that FPL will see an increased cost to attract capital, which in the end will lead to higher costs for our customers.”

It's unfortunate that base rates need to be raised.  However both FPL and Progress Energy would likely not be taking such an unpopular stance if they could avoid it.  FPL, by the way, is not kidding when they cite their clean energy portfolio.  From a September release, their reliance on "dirty" sources is very low compared to the national average:

FPL did itself no PR favors by hiring at least 18 former regulators and government officials over the past few years.  Even Republican Governor Charlie Crist has coma out against the rate increases.  It's an unfortunate situation here, especially when you have a utility commission deciding what is an "appropriate" profit margin for a company.  While many might side with the PSC on moral grounds, FPL had to make a decision.  Did it make sense for them to invest huge amounts of capital for a reduced expected return?  It would be interesting to have been a fly on the wall with the CEO's discussions with large shareholders over this deal, although the three largest appear to be passive index investors.

I'll tell you one thing, I would HATE to be someone lending money to FPL for 5years at 3.6%, which is what new owners of its 2015 bonds are doing, having bid them up to 122cents on the dollar!

I hope all sides reconvene to rectify this situation, because the LAST thing Florida (the state!) needs is to lose not only $10billion in planned capital investment, but in one of the country's greenest energy portfolio's no less!

Copyright 2010 AlphaNinja

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