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FPL Upstream NatGas Venture Shot Down by State Supreme Court

Florida’s highest court has overturned a decision by state regulators to allow Florida Power & Light Co. (FPL) to charge ratepayers for costs related to its investment in upstream development in Oklahoma’s Woodford Shale.

In a series of decisions dating back to 2014, the Florida Public Service Commission (PSC) signaled its approval for FPL, the state’s largest regulated electric utility, to invest in upstream natural gas development and recover the costs through rates as part of its fuel expenses (see Daily GPI, June 18, 2015; Dec. 19, 2014).

But in an order Thursday, the Florida Supreme Court sided 5-1 with the state’s industrial power users and others who had challenged a joint venture (JV) of FPL and Lafayette, LA-based PetroQuest Energy Inc. to develop wells in the Woodford in southeastern Oklahoma (see Daily GPI, June 25, 2014). Under the terms of the JV, dubbed the Woodford Project, PetroQuest would operate the wells while FPL would receive a portion of the gas produced from each well for its use.

The court concluded that the PSC did not have the authority under state law to approve cost recovery for the JV as part of FPL’s rates. Though FPL and the PSC had viewed the JV as equivalent to a hedge on fuel costs, the court ruled that the cost of investing in upstream development would not arise from “generation, transmission or distribution” of electricity and thus would not qualify for cost recovery under state law.

The court also dismissed the characterization of the Woodford Project as a form of hedging to protect customers from swings in commodity prices. “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. 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.

“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. Therefore, it cannot be characterized as a physical hedge.”

The court further concluded that ratepayers would bear all of the risk related to the investment and that cost of investing in the JV would not, unlike regular adjustments for fuel prices, constitute “a mere pass-through” since “FPL will earn a return on its capital expenditures.”

In his dissenting opinion, Justice Charles T. Canady argued “that competent, substantial evidence supports the PSC’s conclusion that the Woodford Project acts as a long-term physical hedge.”

The PSC has routinely allowed “utilities to recover costs through the fuel clause for non-fuel items as long as they are projected to result in fuel savings,” Canady wrote, adding that the Woodford Project was projected to save $51.9 million in fuel costs.

FPL is not the only electric utility to venture into the natural gas shale patch in recent years. Washington Gas Light Co. had proposed a similar arrangement to acquire interest in Pennsylvania wells and pass on the cost through rates, but that plan was shot down late last year by Virginia regulators (see Daily GPI, Nov. 16, 2015).

FPL, which serves 4.8 million customer accounts across Florida, has been growing its gas-fired generation portfolio. The utility recently commissioned its 1,250 MW Port Everglades Next Generation Clean Energy Center in Broward County, FL (see Daily GPI, April 12). And it received regulatory approval this year for its 1,600 MW Okeechobee Clean Energy Center, which it plans to bring online in 2019 (see Daily GPI, Jan. 6).

FPL parent company NextEra Energy has investments in a number of pipeline projects designed to supply more gas to Florida and the Southeast (see Daily GPI, April 20).

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