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DATE:

December 4, 2014

TO:

Office of Commission Clerk (Stauffer)

FROM:

Division of Engineering (Matthews, Mtenga)

Division of Economics (Garl)

Office of the General Counsel (Corbari)

RE:

Docket No. 140185-EQ Ė Petition for approval of negotiated power purchase contract with Eight Flags Energy, LLC, by Florida Public Utilities Company.

AGENDA:

12/18/14 Ė Regular Agenda Ė Proposed Agency Action - Interested Persons May Participate

COMMISSIONERS ASSIGNED:

All Commissioners

PREHEARING OFFICER:

Brown

CRITICAL DATES:

None

SPECIAL INSTRUCTIONS:

Consider recommendations for Docket Nos. 140180-EQ and 140185-EQ simultaneously

 

Case Background

On September 26, 2014, Florida Public Utilities Company (FPUC or Company) filed a petition for the approval of its negotiated purchased power agreement with Eight Flags Energy, LLC (Eight Flags).† Eight Flags is a separate corporate affiliate of Chesapeake Utilities Corporation and is the owner of the planned cogeneration facility to be located in Fernandina Beach Florida, on a site to be leased from Rayonier Performance Fibers, LLC (Rayonier). †According to the petition, Eight Flags will operate as a Qualifying Facility (QF) in accordance with federal rules, as well as the rules and regulations applicable to such facilities under Florida law. †The Eight Flags facility will consist of a turbine generator that will be fueled by natural gas and will provide steam to Rayonier and electricity to FPUC. †The Commission has jurisdiction over this matter pursuant to Sections 366.051, 366.91 and 366.92, Florida Statutes (F.S.)


Discussion of Issues

Issue 1:† Should the Commission approve Florida Public Utilities Companyís (FPUCís) request for cost recovery of the negotiated purchased power agreement (Agreement) with Eight Flags Energy, LLC (Eight Flags)?

Recommendation: †Yes. †The Eight Flags facility will have the capability to serve a significant portion of FPUCís base load needs on Amelia Island and should reduce the potential impact of severe weather on critical services.† Payments for capacity and energy pursuant to the Agreement are expected to yield $28 million in net present value (NPV) savings to FPUCís ratepayers over the 20 year term of the Agreement. †The performance security requirements of the Agreement sufficiently protect ratepayers in the event of default. (Mtenga, Matthews)

 

Staff Analysis: †Pursuant to terms of the Agreement, Eight Flags will sell firm capacity and energy to FPUC. †The Agreement is for a 20 year term with an expected start date of September 30, 2016. (See Attachment A)

 

Rule 25-17.0832(3), Florida Administrative Code (F.A.C.), provides that in reviewing a negotiated firm capacity and energy contract for the purpose of cost recovery, the Commission shall consider factors relating to the contract that would affect the utilityís general body of retail and wholesale customer, including: need for power, cost-effectiveness of the contract, security provisions for early capacity payments, and performance guarantees associated with the generating facility. †Each of these factors is evaluated below.

 

Need for Power

According to FPUC, dialogue with Rayonier began in 2010 about optimizing the generation capabilities of the pulp/paper mills located on Amelia Island.† Optimizing the generation capacity of the mills would make additional, excess QF power available for FPUC.† Initially, these discussions were limited to consideration of placing a gas-fueled boiler at the mill sites, which would produce additional steam and thus enable the mills to produce more excess power.

FPUC retained Sterling Energy, an energy consulting group, to provide more in-depth analysis of the options for enhanced energy supply arrangements with the mills.† Sterling Energy brought to FPUCís attention the expanded opportunities that would be available if a Combined Heat and Power unit (CHP) was installed, instead of a gas boiler.† The possibility of Rayonier installing and owning such a unit at its mill site was discussed with Rayonier, but Rayonier preferred not to own the unit.†

FPUC then retained several additional experts to consider other options for the installation of a CHP unit on Amelia Island.† The three options considered were FPUC ownership, third party ownership, and affiliate ownership.† However, FPUCís current contract with JEA prohibits FPUC from self-generating, except in limited emergency situations or when it is otherwise required to do so by law, as in the case of power supplied by a QF.† In addition, Rayonierís team expressed hesitation about engaging in a new project that could potentially involve an entirely new third party with whom they had no previous business dealings.† As such,† FPUC and Chesapeake determined that the Eight Flags project: (1) gave Rayonier comfort to move forward with the project; (2) ensured a greater level of control at the corporate parent level to ensure that cost inputs were

 

accurate and reasonable and that project timelines were met; (3) reduced the level of regulatory uncertainty; and (4) avoided potential disputes arising from existing contracts.

In response to a staff data request, FPUC states that Eight Flags facility was self-certified as a QF as of September 12, 2014. Thus, FPUC is obligated to purchase the energy from Eight Flags, at or below the utilityís avoided costs, which will displace a portion of the need to purchase energy from JEA.† In addition, staff would note that currently the Amelia Island service area is served by a radial 138 kV transmission line.† The Eight Flags facility will have the capability to serve a significant portion of FPUCís base load needs on the island and should reduce the potential impact of severe weather on critical services such as hospital, police, water and sewer, etc.

 

Cost Effectiveness

FPUCís Agreement with Eight Flags provides a reliable and substantial generation source to FPUCís power supply portfolio that is not only located on the Island, but will provide power to the Company on a cost-effective basis. †The all-in cost of power provided by the Eight Flags facility is projected to not exceed FPUCís all-in cost of purchased power from JEA. †For example, for the year 2016 FPUC projects that the cost from the Eight Flags facility will be $84.30/MWh while the average JEA rate would be $95.40/MWh.† Savings are projected each year and overall the Agreement is projected to have a NPV savings of $28 million. ††

Security for Capacity Payments/Performance Guarantees

The Agreement requires Eight Flags to maintain performance security in a set amount (confidential), based upon the committed capacity and Eight Flags credit rating. †In the event of default, FPUC would be eligible to collect this amount in full. †When the Eight Flags facility becomes operational, the expected annual energy produced will be 166,510 MWh.† Eight Flags will be required to maintain a monthly performance Service Guarantee of an on-peak and off-peak capacity factor that would result in reducing the overall monthly payments.† Because no early capacity payments are being made throughout the term of the Agreement, additional performance security for early payments are not necessary. †The provisions contained in the Agreement are similar to other purchased power agreements approved by the Commission in the past and are sufficient to protect FPUCís ratepayers in the event that Eight Flags defaults in its obligations. †

Conclusion

Staff recommends that the Agreement satisfies the requirements of Rule 25-17.0832(3), F.A.C., and the Commission should approve FPUCís request for cost recovery of the Agreement between FPUC and Eight Flags. †The Eight Flags facility will have the capability to serve a significant portion of FPUCís base load needs on the island and should reduce the potential impact of severe weather on critical services.† Payments for capacity and energy pursuant to the Agreement are expected to yield $28 million in net present value (NPV) savings to FPUCís ratepayers over the 20 year term of the Agreement.† The performance security requirements of the Agreement sufficiently protect ratepayers in the event of default.


 

 

 

Issue 2

 Should this docket be closed?

Recommendation

 Yes.† This docket should be closed upon issuance of a Consummating Order unless a person whose substantial interests are affected by the Commissionís decision files a protest within 21 days of the issuance of the proposed agency action.† (Corbari)

Staff Analysis

 This docket should be closed upon issuance of a Consummating Order unless a person whose substantial interests are affected by the Commissionís decision files a protest within 21 days of the issuance of the proposed agency action.