Gulf Power Co. v. Florida Public Service Com'n

• Citation: 453 So.2d 799
• Decision Date: 12 July 1984
• Docket Number: No. 63729,63729
• Parties: GULF POWER COMPANY, Appellant, v. FLORIDA PUBLIC SERVICE COMMISSION, and Citizens of the State of Florida, Appellees.
• Court: United States State Supreme Court of Florida

Page 799

453 So.2d 799

GULF POWER COMPANY, Appellant, v. FLORIDA PUBLIC SERVICE COMMISSION, and Citizens of the State of Florida, Appellees.

No. 63729.

Supreme Court of Florida.

July 12, 1984.

C. Roger Vinson and G. Edison Holland, Jr. of Beggs & Lane, Pensacola, for appellant.

William S. Bilenky, Gen. Counsel, Roger Howe, Legal Director and Kathleen Villacorta, Associate Gen. Counsel, Florida Public Service Com'n, Tallahassee, and Jack Shreve, Public Counsel and Suzanne S. Brownless, Associate Public Counsel, Tallahassee, for appellees.

ADKINS, Justice.

We have for review the Florida Public Service Commission's order no. 11498, issued January 11, 1983, in which the Public Service Commission (hereinafter the PSC) authorized a rate increase sought by Gulf Power Company (hereinafter Gulf). We have jurisdiction pursuant to article V, section 3(b)(2), Florida Constitution.

In June, 1982, Gulf filed its petition for a rate increase that would provide $36,944,000 additional annual revenue. In January, 1983, the PSC, in order no. 11498, authorized an increase in gross revenues of $3,366,000 annually. Gulf then filed a petition for reconsideration which was denied by the PSC in order no. 11936. This review involves only two aspects of the PSC's order no. 11498: first, the downward adjustment made by the PSC based on Gulf's unused capacity, which exists as a result of Gulf's 50% ownership in two units at Plant Daniel located in Mississippi; and, second, the PSC's adjustment to the coal inventory levels used in Gulf's determination of working capital.

Gulf has petitioned for rate relief seven times in the last twelve years. Each case required the Commission to deal with Gulf's status as a wholly-owned subsidiary of the Southern Company. Southern is a holding company which wholly owns four electric utilities and a service company. Southern can be viewed as a single utility company with generating plants situated in four states.

Each subsidiary company plans for construction to serve its own load but the plans are coordinated centrally through Southern. Units are added according to an agreed upon plan. All sales to non-affiliated companies are made by Southern, not the individual subsidiaries. The Intercompany Interchange Contract (hereinafter, IIC), is a contract which Gulf entered into and which guides its interactions with other Southern subsidiaries. Gulf contributes its electrical generation to a pool to meet the needs of all four companies' customers.

Gulf raises the following arguments in its appeal: 1) that the adjustment of $5,391,931 for "unused capacity" is arbitrary and unsupported by competent substantial evidence; 2) that Gulf Power Company has no "unused capacity" and no excess generating reserves, and therefore, the penalty imposed by the commission is unjustified and improper; 3) that the coal inventory adjustment to the working capital component of rate base made by the commission was erroneous and contrary to the evidence; and 4) that the commission's denial of rates that will produce a reasonable rate of return for Gulf Power Company constitutes confiscation in violation of the fifth and fourteenth amendments of the Constitution of the United States, articles I and X of the Constitution of the State of Florida, section 366.041, Florida Statutes (1981), and exceeds its authority. We disagree with the appellant's assertions and affirm the order of the PSC.

Plant Daniel is an electric generating facility comprised of two coal-fired generating units, each rated at approximately 500 megawatts. Plant Daniel was originally designed to satisfy the generating needs of Gulf's sister company, Mississippi Power Company, which was responsible for the plant's design, construction and fuel supply. Mississippi Power's generation needs were not as great as first anticipated and Gulf was offered a joint ownership. In 1975, Gulf agreed to purchase an undivided one-half interest in the two units to be constructed. Demand did not increase as expected and, in 1976, Gulf and Mississippi agreed to defer the in-service date of Unit 2 from 1979 to 1980. Mississippi Power would complete and own Unit 1 when it became operational in 1977. Thereafter, when Unit 2 was completed, Gulf and Mississippi would transfer assets as necessary to effectuate a joint 50% ownership in each unit. Unit 2 was again deferred and began commercial operation in June 1981.

Gulf's purchase of the one-half interest in Plant Daniel increased its generating capacity by 511 megawatts. Gulf sold 238 megawatts to Florida Power and Light Company and Jacksonville Electric Authority through a unit sales contract. Another 186 megawatts were sold to Gulf's sister companies through the ICC. This left 87 megawatts to serve Gulf's customers.

Under the IIC, the capacity of the Southern system is equalized among the four operating companies. If, at the time of the peak demand on the system, the excess of generating capacity over the actual demand on the system was 23%, those companies whose reserve margins were below 23% would be required to purchase from those utilities whose reserve margins were above 23%, sufficient additional capacity to raise their reserve margin to that level. Each company supports the system-average reserve margin. These purchases and sales of capacity are made at average embedded cost. In Gulf's case, the addition of Plant Daniel in 1981 changed Gulf from a net purchaser to a net seller of capacity under the ICC.

In the PSC's order no. 11498 it determined, among other things, that due to faulty load forecasting, Gulf had failed to recognize the extent of the excess capacity which would be generated as a result of the purchase of Plant Daniel. The PSC found that this failure resulted in the sale of 186 megawatts to Gulf's sister companies at a price below the cost of generation of that capacity. It further found that Gulf's retail customers should not be required to make up the difference in the form of increased rates. As a result of these conclusions the PSC adjusted Gulf's net income upward by the amount of $5,391,931, which, in turn, reduced its allowable rate increase.

Gulf asserts that the PSC's adjustment of $5,391,931 for unused capacity is arbitrary and unsupported by competent substantial evidence. It claims that IIC capacity payments are calculated at 16% on equity on embedded costs while retail rates authorized by the PSC are 15.85% on equity on embedded costs; therefore, the PSC is criticizing Gulf for selling capacity too cheaply when, in actuality, it is priced higher under the IIC than under the retail rates set by the PSC. Gulf states that the PSC has also attempted to justify its action by determining that there was an absence of proof that incremental-cost sales from Plant Daniel could not have been made, and that there is no evidence to support either of the PSC's justifications for its action.

Gulf relies on Madison Gas & Electric Co. v. Public Service Commission, 109 Wis.2d 127, 325 N.W.2d 339 (1982), to support its argument. That court found that the adjustment made by the Wisconsin PSC was not supported by substantial evidence and that the shifting of a part of the cost of maintaining the utility's excess capacity from the ratepayers to the shareholders was arbitrary and outside the PSC's discretionary authority. However, the Wisconsin court further stated that it based its decision on the two-step test enunciated in Milwaukee Suburban Transport Corp. v. Public Service Commission, 13 Wis.2d 384, 108 N.W.2d 729 (1961). The court held in that case that the PSC has the authority to shift some of the cost of excess capacity to the transportation company's shareholders where (1) the excess generating capacity was imprudently acquired, or (2) the excess capacity was not used or useful in serving the public. 13 Wis.2d at 393, 108 N.W.2d at 734. In Madison Gas the court found that there had been no examination based on either of those two requirements. Because of the absence of a reasoned determination of who shall bear the burden of paying for all or part of excess capacity, the court found the PSC's adjustment to be arbitrary.

We find that Gulf's reliance on Madison Gas in the instant case is misplaced. Here, the PSC has undertaken a reasoned determination and we find that its conclusions are not arbitrary. The PSC stated in its order no. 11936 denying Gulf's petition for rehearing of order no. 11498:

As we said in Order No. 11498, we do believe that Gulf's purchase of a portion of Plant Daniel will benefit the rate payers in the long run. However, the issue in this case is whether Gulf carried its burden of proof as to whether it took every reasonably available prudent action to minimize the adverse short-term consequences of purchasing a portion of Plant Daniel. For the reasons set forth below, we do not believe Gulf carried its burden of proof on this issue.

In short, Gulf failed to prove that, if it had made a timely effort to sell an additional 186 MW off-system at marginal cost, it would have been unable to do so. While Mr. Parsons testified extensively concerning the Company's efforts to make off-system sales, his testimony missed the point because he assumed that Gulf's marketing efforts commenced in a timely fashion. This assumption was contradicted by the information elicited during the cross-examination of Mr. Oerting. During Mr. Oerting's cross-examination, it was shown that Gulf was repeatedly advised by the Commission that its forecasts of future load growth contained in its 1975, 1976 and 1977 Ten Year Site Plans were too high for planning purposes.

.... The consequences of Gulf's reliance on overstated load forecasts is clearly demonstrated by the record.

Our point is that, had Gulf heeded the advice of the Commission in 1977, they would have realized much earlier than late 1979 that not all the capacity from Plant Daniel would be needed in 1981. The Company could then have been in a...