Electricity rates in Florida are about to go up...again
A little-noticed clause in deals struck by Florida Power & Light, Duke Energy and Tampa Electric allows them to raise electricity rates because of rising interest rates.
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It’s been a wild week for utility news in Florida.
On Friday, the Orlando Sentinel and Floodlight reported that electric giant Florida Power & Light was sent a strategy proposal to take out the most progressive Democrat in the Florida Senate — by spending nearly $4 million to run a corporate-backed Democratic candidate against him in a primary election.
What made the story so surprising was that this plan to oust an incumbent Democratic state senator was written by a top Democratic consultant — who then shared it with a couple of top Republican consultants, who then sent it to FPL. (The consultant told the Sentinel and Floodlight that he hoped to discourage the others from actually implementing the plan.)
And yesterday, the Miami Herald reported that FPL, working through some of these same consultants as intermediaries, financed and controlled a conservative news website in Tallahassee called The Capitolist.
The Herald story — and a similar piece published simultaneously by the Orlando Sentinel and Floodlight — reported that an ex-FPL executive was brought in to oversee the site and that FPL’s CEO personally dictated some coverage, right down to suggesting an unflattering photo illustration of a female news reporter who has aggressively covered the company. (FPL told the Herald that it didn’t own the Capitolist or have editorial control over it.)
If you haven’t already, read all of these stories. Each is packed with revelatory details and important context. They’re worth the price of subscriptions all by themselves.
And in the meantime, here’s an example of why a regulated company like Florida Power & Light spends so much time and money trying to influence state politics: It and the state’s other big private utilities are getting another opportunity to raise rates — again.
FPL, Duke Energy and Tampa Electric all got new deals approved last year allowing them to raise the prices they charge homeowners, small businesses and other customers. The first round of rate hikes in these new deals went into effect at the start of this year.
But each of these deals also included a little-discussed provision that allows them to raise rates even further if interest rates rise beyond a certain point. And all three utilities have already crossed that threshold.
Here’s how it works: One of the most important components in determining the prices that a utility company can charge for electricity is what’s known as its “return on equity.” This is usually referred to as “ROE,” and it’s basically the profit that the company’s shareholders are allowed to earn on the money spent building, expanding and improving the company’s power plants, transmission lines and other equipment.
As a very rough example: Say Florida regulators allow a company to build a $1 billion power plant in which 60 percent of the funding will come from money invested by shareholders (as opposed to money borrowed from lenders) at an ROE of 10 percent.
That means the company’s shareholders will earn a $60 million profit on the project — all of it paid by the company’s customers. ($1 billion x 60 percent x 10 percent = $60 million.)
Under the most recent rate agreements approved by the state’s Public Service Commission — where four of the five PSC commissioners were appointed by Gov. Ron DeSantis — Duke Energy is allowed to earn an ROE of up to 10.85 percent.
TECO is allowed to earn an ROE of up to 11 percent.
And FPL is allowed to earn an ROE of up to 11.7 percent.
(Why is FPL allowed to earn an ROE that is so much higher than the others? Great question — and one of the issues raised in a lawsuit challenging FPL’s rate agreement before the Florida Supreme Court....where five of the seven justices have been appointed by Gov. Ron DeSantis.)
But each of those deals also include something called an interest-rate “ROE trigger.” It’s one of the many subtle-but-significant provisions baked into these deals beyond the top line rate increases. And it allows FPL, TECO and Duke to get their ROEs increased if interest rates above a certain point.
Of course, not long after these deals were approved, the Federal Reserve began raising interest rates in an effort to suppress inflation. So FPL, TECO and Duke have already reached the trigger point.
Under the terms of their deals, both TECO and Duke can ask the PSC to increase their ROEs by one-quarter of one percentage point.
That means TECO’s maximum ROE would climb from 11 percent to 11.25 percent. Duke’s would rise from 10.85 percent to 11.1 percent.
This might sound like a tiny amount. But remember: These percentages are applied to billions of dollars in capital spending. On that hypothetical $1 billion power plant, it’s an extra $1.5 million in profit.
What’s more, if the PSC approves, TECO and Duke will also be allowed to increase the base rates they charge customers. TECO would be allowed to raise its rates by $10 million a year. Duke, which is larger and has more customers, would get to raise rates by as much as $27 million a year.
FPL’s deal is a bit different. It can ask the PSC to raise its maximum ROE from 11.7 percent to 11.8 percent. And FPL, which is the state’s biggest utility company, wouldn’t get to raise its base rates beyond what the PSC has already approved (which worked out to a $1.5 billion rate-hike over four years).
But FPL would be allowed to use the higher ROE in other areas. For instance, the company’s deal allows it to come back for further rate increases in 2024 and 2025 based on solar projects it plans to build. FPL would get to use the higher ROE in those rate calculations.
It’s not yet clear whether all three companies will take advantage of these trigger clauses.
But neither FPL nor Duke are tipping their hand yet. Representatives for both companies declined to say whether they intend to take advantage of these trigger clauses.
“FPL has not filed to increase our regulatory ROE,” said FPL spokesperson Chris McGrath.
“We are closely monitoring but still assessing when it comes to filling,” said Duke spokesperson Ana Gibbs.
It’s worth nothing, though: FPL and Duke can pull these triggers at any point now.
And once these ROEs go up, they won’t come back down — even if interest rates do.