The Electric Utility industry has been returning its focus back towards regulated activities during the last 2 years, writes Sandy Cohen, as it retrenches from being caught in the boom-bust cycle of the energy commodity (including the power commodities) business, and from the extreme overbuild of power plants.
But ... this return to the "basics" carries its own risks, including increased exposure to the risks of regulatory oversight.
FPL Group has faced regulatory proceedings for its regulated utility ... and just recently reached a settled agreement with various intervenors in the regulatory process.
We view the settlement agreement as a general positive, as settlements are nearly always preferable to a fully litigated rate proceeding. Settlements certainly reduce the risk of a more negative financial outcome, and also reduce tensions between the utility and its regulators.
Below are 3 links to different releases regarding the settlement agreement:
- Yahoo Finance Business Wire News Release on FPL's Settlement Agreement
- FPL Group's Press Release on the Settlement Agreement
- Merrill Lynch's Capsule Report on the Settlement Agreement (this link to a PDF is likely only temporary)
The company is expected to post an 8-K on the settlement agreement shortly.
FPL Group had asked for a $420 million rate increase. Some of the intervenors has recommended very large rate DECREASES (the most extreme, a $700 million decrease). The settlement calls for no change in rates at all, and a continuation of a revenue sharing mechanism between ratepayers and shareholders. No set ROE (return on equity) was established (as is typical in rate settlements in Florida), but FPL can petition for a rate increase if its ROE drops below 10% (extremely unlikely to occur, in my opinion). And FPL will be able to earn a recovery on additional new power plant investment At a rate of 11.75% ROE ... which is a positive. FPL's allowed equity ratio, on which they are permitted to earn a return, remains a very healthy, and high, 55%+.
We expect to have to increasingly track the regulatory environment of the electric utility industry over the next 6-12 months.
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