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NextEra Rate Increase Opposed

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The consumer advocate of Florida Power & Light Co. (“FPL”), a unit of NextEra Energy Inc. (NEE - Free Report) , plans to oppose the rate increase agreement filed with the Florida Public Service Commission (“FPSC”). The FPL and representatives of the Florida Industrial Power Users Group (“FIPUG”), the South Florida Hospital and Healthcare Association and the Federal Executive Agencies were behind the filing of this rate increase.

The parties have filed a joint motion with FPSC for approval of a stipulation and settlement that would resolve all matters in FPL's pending base rate proceeding. Subsequently, these parties have also filed a request to defer the base rate proceeding, temporarily on the pending proposed 2012 rate agreement. The hearing was expected to begin from August 20, 2012.

Key elements of the 2012 rate agreement are: new retail base rates and charges would be brought in resulting in an increase in retail base revenues of $378 million on an annualized basis, FPL's allowed regulatory return on common equity (“ROE”) would be 10.70%, bounded between plus-minus 100 basis points. If FPL's earned regulatory ROE falls below 9.70%, FPL could seek retail base rate relief and if it rises above 11.70%, then any party to the proposed 2012 rate agreement other than FPL could seek a review of FPL's retail base rates.

Per the agreement, retail base rates would be increased by the annualized base revenue requirements for FPL's three modernization projects as each of them get operational. Cape Canaveral, Riviera and Port Everglades are expected to come online in 2013, 2014 and 2016, respectively.

Over the term of the proposed 2012 rate agreement, FPL could amortize any surplus depreciation reserve remaining at the end of 2012 along with a portion of FPL's fossil dismantlement reserve, which in total will not be more than $400 million, subject to certain conditions. However, FPL must consider amortizing enough reserve to maintain a 9.70% earned regulatory ROE but would not amortize any reserve that would earn regulatory ROE in excess of 11.70%.
Finally, per the agreement, future storm restoration costs on an interim basis would be recoverable within a period of 60 days from the filing of a cost recovery petition, but restricted at an amount that could produce a surcharge of not more than $4 for every 1,000 kwh of usage on residential bills during the first 12 months of cost recovery. Any additional costs would be eligible for recovery in the subsequent years. If storm restoration costs exceed $800 million in any given calendar year, FPL could request an increase to the $4 surcharge to recover the amount above $800 million.

The parties stated that at least at the initial stage much of the base rate increase would be offset by a reduction in fuel adjustment fees. However, they expect these charges to rise in the future. Taking into account the overall adjustment, there would be a net monthly increase of 93 cents for a residential customer using 1,000 kilowatt hours. When a new power plant will go on line in June 2013, the rate will likely go up 1.3% or 28 cents to $1.21 per month. Currently, the company did not provide estimates of rate changes for the two plants that are expected to come online in 2014 and 2016.

The agreement will result in a cost shift from high end users to residential and small business customers. Per the agencies, residential bills will rise, rates for most commercial customers will remain flat or decline 3%. All these conditions and requests would be effective from January 2013 through December 2016 if approved by FPSC.

Juno Beach, Florida-based NextEra Energy Inc. is a public utility holding company engaged in the generation, transmission, distribution, and sale of electric energy. The company also operates one of the largest fleet of nuclear power stations. NextEra Energy is a frontrunner in the U.S utility industry providing efficient power and energy services across various states. The company continues to expand and diversify its electric and energy business through extensive investment. We believe continued investments in its power and renewable business would act as positive factors for the company’s profitability.

However, volatile demand due to ongoing extreme weather variations and the uncertainty associated with rate case filed by Florida Power is a matter of concern. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Some of its main competitors are American Electric Power Co. Inc. (AEP - Free Report) and PG&E Corporation (PCG - Free Report) .

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