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Utilities feel little pain in wallets

Last year's hurricanes left the state in shambles. But rate pass-throughs let consumers shoulder the utilities' financial burden.

By LOUIS HAU
Published July 23, 2005

The unprecedented hurricane season of 2004 wrought massive damage to Florida's electricity infrastructure, requiring hundreds of millions of dollars in repairs.

But in terms of financial effect, the state's investor-owned utilities came through the trauma virtually unscathed.

Who, then, is shouldering the cost?

You are.

This week, the Florida Public Service Commission closed the book on the 2004 storm season, voting to allow Florida Power & Light Co., the state's largest electric company, to pass on $442-million of its storm costs to customers via a three-year surcharge of $1.68 per 1,000 kilowatt hours on monthly customer bills.

That ruling comes after the commission's decision in June to allow Progress Energy Florida of St. Petersburg to pass on about $232-million in hurricane costs to customers, which will amount to a two-year surcharge of $3.35 per 1,000 kilowatt hours per month. Bay area neighbor Tampa Electric Co. racked up a relatively small repair bill and doesn't require a surcharge.

Progress and FPL's monthly surcharges don't represent all the expenses the companies incurred during last year's storms. Rather, they are the costs remaining after subtracting what the companies had accumulated in their storm damage reserve funds.

Those funds were paid for by customers as part of their base electricity rate.

The surcharges exclude capital costs. Customers pay for those, too, in the base rate.

The size of the surcharges may fall if either company opts to issue corporate bonds to cover hurricane costs.

But even then, guess who picks up the tab?

You do.

FPL parent FPL Group Inc. on Friday reported second-quarter net income of $203-million. Progress parent Progress Energy Inc. and Tampa Electric parent TECO Energy Inc. are scheduled to report second-quarter earnings next week.

The PSC is hardly alone in allowing regulated electric utilities to pass on to customers the costs of repairing damage by hurricanes, tornadoes and other catastrophic weather events, industry analysts say.

"Typically, utilities are allowed to recover the costs that they incur to provide service," including weather-related repair costs, said Paul Ridzon, a utility analyst for KeyBanc Capital Markets in Cleveland.

But the total of the costs the PSC allowed Progress and FPL to pass on to customers remains a sore point for state public counsel Harold McLean and other consumer advocates. They say the commission should not have reimbursed the utilities so much.

Consumer groups were particularly irked by the commission's decision to allow FPL to recover revenue lost to power outages, effectively allowing the company to charge customers for electricity it never sold.

The ability of utilities to pass on to customers the cost of fuel, environmental-compliance programs and hurricane repairs has prompted McLean to argue that Florida investor-owned utilities face little business risk.

Barry Abramson, a senior utility analyst with Gabelli Asset Management in Rye, N.Y., said regulated utilities bear some risks, such as the possibility of an economic downturn in their service territory or the time lag involved in getting state regulators to approve passing on costs to customers.

But regulated utilities are far more shielded from risk than most companies, which makes their publicly traded parent companies appealing to investors looking for stable gains, Abramson said.

Other Florida utilities managed to avert a big financial hit from last year's hurricanes. The PSC in March approved a settlement between Gulf Power and consumer advocates allowing the Pensacola utility to pass on about $53-million in hurricane costs to customers, via two-year surcharges of $2.71 per 1,000 kilowatt hours a month. Gulf agreed to absorb about $45-million in other costs because it had exceeded its authorized rate of return in 2004.

Meanwhile, Tampa Electric, which sustained relatively little damage from last year's storms, recategorized some of its $73.4-million in hurricane costs as capital investments, avoiding the need for a monthly surcharge. Friday's FPL Group second-quarter earnings release came less than a year after Hurricane Charley landed in the company's service territory in Charlotte County.

FPL said net income fell 21 percent from the same period last year. Lingering effects from the storm? Nope. The company said its earnings fell because of hedging losses and the effect of mild weather.

FPL Group's shares closed Friday at $43.22, up 33 percent since Charley made landfall.

[Last modified July 23, 2005, 00:53:16]