Florida Power & Light pocketed $1 billion in tax cuts for itself. But now it can pass tax increases on to its customers
When critics call Florida’s Public Service Commission a lapdog rather than a watchdog, this is what they’re talking about.
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President Joe Biden’s new “Inflation Reduction Act” contains a sweeping package of changes aimed at easing inflation, lowering prescription drug prices and combatting global climate change. And to pay for it all, Biden’s bill will raise taxes on some of the world’s biggest corporations by roughly $300 billion over the next 10 years.
But Florida’s biggest power company doesn’t need to worry.
That’s because Florida Power & Light’s new record-setting rate increase — which was approved last year by Gov. Ron DeSantis’ Public Service Commission — allows the company to raise rates even higher if its corporate tax bill goes up.
In other words, FPL’s rate deal lets the company make its customers pay for any tax increase — instead of making FPL’s stockholders pay for it.
Florida’s other big power companies — Duke Energy and Tampa Electric — have similar tax pass-through provisions built into their new rate deals, too.
But this stands out with Florida Power & Light in particular. Because it comes just three years after DeSantis’ Public Service Commission allowed FPL to pocket more than $1 billion in savings from corporate tax cuts — instead of passing those savings on to customers.
FPL’s 2019 tax deal was one of the most controversial decisions made in recent years by the PSC, a five-member panel comprised of four DeSantis appointees and one remaining holdover from former Gov. Rick Scott.
Virtually everyone opposed this. The Office of Public Counsel, which is supposed to represent utility customers. Big-business lobbying groups like the Florida Retail Federation. Even the PSC’s own staff. All of them urged commissioners to make FPL pass the tax savings on to its customers — just like Duke and TECO had done.
The PSC ignored them all and sided with FPL.
You often hear critics say that Florida’s Public Service Commission has become an industry lapdog — instead of the watchdog that it’s supposed to be. This was the sort of thing they’re talking about.
A hurricane, a tax cut and a shell game
So let’s walk through exactly what happened. We need to start by turning the calendar back to 2017, when three important things took place:
In January 2017, FPL implemented a new, four-year rate agreement that had just been approved by the PSC. That deal set FPL’s base rates for 2017, 2018, 2019 and 2020. Those rates had been determined, in large part, by FPL’s projected expenses over that four-year window. And the rates included both a minimum profit level that FPL was guaranteed to earn — but also a maximum profit cap that FPL could not exceed.
Then, in September 2017, Hurricane Irma struck the state, knocking out electricity to more than 4 million FPL customers and forcing the company to spend roughly $1.3 billion on storm-related repairs.
And then, in December 2017, former President Donald Trump signed an enormous corporate tax cut that slashed FPL’s annual income tax bill by roughly $770 million starting in 2018.
So within a span of 12 months, FPL locked in new rates for the next four years based on its anticipated expenses; got hit with a $1.3 billion hurricane-repair bill it had to pay in 2017; and got handed a giant tax cut that lowered its annual tax payments by $770 million in 2018, 2019 and 2020 (which works out to a three-year savings of $2.3 billion.)
Now, there are also two key provisions in FPL’s rate agreement that we need to understand.
First, FPL’s rate deal included financial protection from hurricanes. Basically, it allowed FPL to impose an extra charge on its customers’ monthly bills to cover hurricane-repair costs following a big storm.
Second, the deal also included an unusual “reserve account,” in which FPL could stash extra cash without violating the cap on its profits. The details here are complex — and very controversial. But the net effect is that, in any month where FPL’s earnings fall below that profit ceiling, the company can take extra money for itself out of the reserve account. And in any month where FPL’s profits might exceed the cap, FPL could deposit the extra cash into the reserve account. The only catch is that FPL could never have more than $1.25 billion in that account.
This reserve account is especially important. Because it is unique to FPL.
For instance, Duke and TECO can also impose hurricane-recovery charges after a big storm. But only FPL has an extra bank account in which it can park excess profits.
And here’s why it mattered:
The normal course of action after Hurricane Irma and the Trump tax cuts would have been for FPL to add a hurricane-recovery charge to its customers’ bills in 2017 and then to lower its base rates in 2018, 2019 and 2020 to reflect its smaller tax bill.
This would have saved FPL customers roughly $1 billion. Customers would have paid $1.3 billion more in hurricane-recovery charges but $2.3 billion less in base rates.
But FPL found a way to keep that $1 billion for itself.
Instead of imposing the hurricane-recovery charge, FPL used all the money sitting in its reserve account to pay the Hurricane Irma tab. And then, instead of lowering its rates to offset its tax savings, FPL used the tax savings to replenish its reserve account.
So FPL didn’t make its customers pay the $1.3 billion hurricane charge. But the company didn’t lower its base rates by $2.3 billion, either.
(By the way, FPL’s new rate agreement, which will be in place until at least the end of 2025, continues this reserve account. FPL remains the only one of Florida’s big three electric companies to have a reserve account baked into its rate deal.)
Enabled by the governor and senators
Now, FPL argues that this accounting two-step also benefited its customers a second way.
The company’s rate deal was supposed to expire at the end of 2020. That means FPL could have asked the PSC for a rate increase in 2021. But in exchange for keeping the tax savings, FPL agreed to keep its rates flat for an extra year.
Then again, FPL didn’t really need to raise its rates in 2021. Just keeping rates the same amounted to overcharging customers by $770 million — since FPL was using rates that had been calculated before the Trump tax cuts came along.
You can see how much of a windfall this was for FPL in monthly earning reports the company must submit to the state in order to ensure its profits are staying within the permitted range.
This range is based on a metric known as “return on equity” or ROE. And under the rate agreement in place from 2017 to 2021, FPL’s ROE was supposed to fall somewhere between 9.6 percent and 11.6 percent every month.
In July 2018, just a few months after the Trump tax cuts went into effect, FPL reported an ROE of exactly 11.6 percent — the absolute maximum it was allowed to earn.
And the company continued to report an 11.6 percent ROE each month for the next 41 consecutive months. That’s three-and-half-years of profits at the very top of the allowable range.
It’s worth noting again that the PSC’s own staff urged the five Public Service Commissioners to reject FPL’s approach.
The PSC’s staff said FPL should have been allowed to keep $1.3 billion in tax savings — enough to recover its Hurricane Irma costs — but that the remaining tax savings should have been passed on to FPL’s customers in the form of lower rates. That’s what they made Duke and TECO do.
But PSC commissioners — who are appointed by the governor and confirmed by the state Senate — voted unanimously to let FPL keep it all.