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FPL's fracking investment is a money loser so far

A worker makes his way down a stairway at a Florida Power & Light natural gas power plant in Cape Canaveral.
Published Aug. 25, 2015

Florida Power & Light belittled critics who opposed its precedent-setting plan to charge customers for a $191 million natural gas investment in Oklahoma.

"Flawed assumptions, contradictions and even invented facts pervade their arguments," FPL told state regulators on Dec. 12.

Turns out the flawed assumptions might be FPL's own.

The utility's prediction that the project would be a big money-saver took a body blow this month as FPL filed a report with state regulators forecasting $5.8 million in 2015 losses for its customers. Millions of dollars in projected first-year savings have vanished, the Aug. 14 report shows.

FPL told regulators in December the most-likely scenario showed $107 million in net customer savings during the 50-year project. That is now cut by more than half to $49.2 million — even before the deal's first birthday.

Critics said the loss underscores a reality with Florida's investor-owned utilities whose estimates of costs and savings often seem like guesswork even as regulators accept them as gospel. Look no further, they said, than Progress Energy and its successor company, Duke Energy Florida, and the billions in cost overruns that led Duke to scrap plans for a Levy County nuclear plant in 2013.

Those losses will be borne by customers.

"They produce these wild and crazy estimates," said state Rep. Dwight Dudley, a St. Petersburg Democrat who is often critical of utilities. "Who has a crystal ball that can see 50 years in the future in a wildly volatile field like oil and natural gas production? It's preposterous."

FPL, the state's largest utility with 4.8 million customers, said its investment remains a great deal for customers even if savings are lower than hoped.

"It's still $50 million" in long-term savings, said FPL spokeswoman Sarah Gatewood, who said the loss was mostly tied to natural gas prices not meeting FPL's forecast. "What we're seeing is still a great thing for customers. We still project significant savings over the life of the project."

While Palm Beach County-based FPL does not have any customers in Tampa Bay, other utilities are expected to consider similar deals. Duke, for example, has signaled interest.

Officials with the Office of Public Counsel, which represent consumers at the Florida Public Service Commission, said they fear the first-year loss hints that even $49.2 million in long-term savings may prove illusory.

"The decline in FPL's own projected savings to a negative amount in the first year is a grave concern and does not bode well for the project," said Charles Rehwinkel, deputy public counsel.

FPL won PSC permission in December to invest $191 million in the fracking project in the Woodford shale area of southeastern Oklahoma. Fracking is a process that injects liquids into the earth to free up natural gas. (FPL said the total will be lower than $191 million, though it did not cite a specific total when asked Friday.)

It was the first time the PSC allowed a utility to charge the costs of such an investment to customers, which critics said unfairly transferred the speculative risk off the backs of utility shareholders. Critics also called it a back-door way to earn profit. Normally, utilities do not earn a return on fuel purchased to generate power.

But a rate of return of around 10 percent can be earned on capital ventures such as the Oklahoma project, the OPC said. And that, critics noted, is guaranteed profit whether the project is a boon or bust.

FPL said the deal poses little risk and benefits customers by securing cheaper fuel as a hedge against market volatility. FPL said it gets no guaranteed profit because the PSC must approve all its costs.

Its critics, FPL told the PSC in December, "fret over production-related and price-related risks. … None of these areas of purported 'riskiness' should give the commission any pause."

Commissioners, who do not comment on matters they may have to rule on again, have since given FPL the green light to pursue additional natural gas investments up to a cap of $500 million.

"Day one, customers would pay less, and there is just an argument as to how much customers will save," former Commissioner Eduardo Balbis said in December of the Oklahoma project.

The Woodford deal is intended to secure a supply of natural gas at just the cost of production, which FPL said is not subject to market-price fluctuations. When the market price of natural gas exceeds Woodford's production cost, FPL saves by securing fuel for power plants at a lower price.

Think of it this way:

Let's say you grow a bushel of corn in your back yard. Tallying the cost of seed, pesticide and other expenses, that bushel might have cost $10 to grow. If a bushel of corn at the supermarket costs $12, you realize $2 in savings. If the supermarket price drops to $8, you have lost $2.

Natural gas prices in the open market have fallen more than FPL anticipated, FPL said, so the fracking investment isn't making as much money.

A secondary problem, FPL said, is that first-year production was late getting started, so roughly half of the gas has been produced — 7.3 billion cubic feet. Production next year is forecast at 19.9 billion cubic feet.

Even with these problems, FPL called the deal a no-lose situation for customers.

The utility said that is because Woodford will account for no more than 3 percent of the natural gas it burns. Any losses on that 3 percent would be dwarfed by the enormous savings that customers would realize through lower prices in the open market where FPL buys 97 percent of its supply, FPL said.

"That's more than $200 million in savings for customers in 2015 alone — or about $3 (per) month on the typical residential bill," said Gatewood.

FPL, which warned the PSC that fuel prices are volatile, said the lower long-term savings figure of $49.2 million is still within the range of possibilities it predicted.

But FPL consistently pushed $107 million as the most-likely customer savings the investment would generate, even emphasizing that number after evidence was introduced to the PSC that likely savings would be much lower, based on a different price forecast, or about $51.9 million.

Commissioners in their order approving the deal cited that more-conservative estimate of savings — $51.9 million — and not the higher $107 million figure FPL emphasized.

Sam Forrest, FPL vice president of energy marketing and trading, said in PSC testimony that the utility derived risk estimates, at least in part, using 10,000 computer simulations, which showed an 85 percent probability of savings on Woodford. A lawyer asked Forrest if he found it ironic these are called "Monte Carlo simulations" after the gambling mecca.

"I didn't name it," Forrest said. "So I don't know why it would be ironic."

Contact William R. Levesque at levesque@tampabay.com.

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