Progress Energy 2004 Annual Report Download - page 48

Organizations. The Company cannot predict the outcome
of these matters on the Company’s earnings, revenues or
prices or the investments in GridSouth and GridFlorida
(See Note 8D).
A FERC order issued in November 2001 on certain
unaffiliated utilities’ triennial market-based wholesale
power rate authorization updates required certain
mitigation actions that those utilities would need to take for
sales/purchases within their control areas and required
those utilities to post information on their Web sites
regarding their power systems’ status. As a result
of a request for rehearing filed by certain market
participants, FERC issued an order delaying the effective
date of the mitigation plan until after a planned technical
conference on market power determination. In December
2003, the FERC issued a staff paper discussing
alternatives and held a technical conference in January
2004. In April 2004, the FERC issued two orders concerning
utilities’ ability to sell wholesale electricity at market-
based rates. In the first order, the FERC adopted two new
interim screens for assessing potential generation market
power of applicants for wholesale market-based rates,
and described additional analyses and mitigation
measures that could be presented if an applicant does not
pass one of these interim screens. In July 2004, the FERC
issued an order on rehearing affirming its conclusions in
the April order. In the second order, the FERC initiated a
rulemaking to consider whether the FERC’s current
methodology for determining whether a public utility
should be allowed to sell wholesale electricity at market-
based rates should be modified in any way. Management
is unable to predict the outcome of these actions by the
FERC or their effect on future results of operations and
cash flows. PEF does not have market-based rate
authority for wholesale sales in peninsular Florida. Given
the difficulty PEC believes it would experience in passing
one of the interim screens, on August 12, 2004, PEC
notified the FERC that it would revise its Market-based
Rate tariff to restrict it to sales outside PEC’s control area
and file a new cost-based tariff for sales within PEC’s
control area that incorporates the FERC’s default cost-
based rate methodologies for sales of one year or less.
PEC anticipates making this filing in the first quarter of
2005. Although the Company cannot predict the ultimate
outcome of these changes, the Company does not
anticipate that the current operations of PEC or PEF would
be impacted materially if they were unable to sell power
at market-based rates in their respective control areas.
Franchise Litigation
Three cities, with a total of approximately 18,000
customers, have litigation pending against PEF in various
circuit courts in Florida. As previously reported, three
other cities, with a total of approximately 30,000
customers, have subsequently settled their lawsuits with
PEF and signed new, 30-year franchise agreements. The
lawsuits principally seek (1) a declaratory judgment that
the cities have the right to purchase PEF’s electric
distribution system located within the municipal
boundaries of the cities, (2) a declaratory judgment that
the value of the distribution system must be determined
through arbitration, and (3) injunctive relief requiring PEF
to continue to collect from PEF’s customers, and remit to
the cities, franchise fees during the pending litigation,
and as long as PEF continues to occupy the cities’ rights-
of-way to provide electric service, notwithstanding the
expiration of the franchise ordinances under which PEF
had agreed to collect such fees. The circuit courts in
those cases have entered orders requiring arbitration to
establish the purchase price of PEF’s electric distribution
system within five cities. Two appellate courts have
upheld those circuit court decisions and authorized the
cities to determine the value of PEF’s electric distribution
system within the cities through arbitration.
Arbitration in one of the cases (with the 13,000-customer
City of Winter Park) was completed in February 2003.
That arbitration panel issued an award in May 2003
setting the value of PEF’s distribution system within the
City of Winter Park (the City) at approximately $32 million,
not including separation and reintegration and
construction work in progress, which could add several
million dollars to the award. The panel also awarded PEF
approximately $11 million in stranded costs, which,
according to the award, decrease over time. In
September 2003, Winter Park voters passed a
referendum that would authorize the City to issue bonds
of up to approximately $50 million to acquire PEF’s
electric distribution system. While the City has not yet
definitively decided whether it will acquire the system,
on April 26, 2004, the City Commission voted to proceed
with the acquisition. The City sought and received
wholesale power supply bids and on June 24, 2004,
executed a wholesale power supply contract with PEF.
On May 12, 2004, the City solicited bids to operate and
maintain the distribution system and awarded a contract
in January 2005. The City has indicated that its goal
is to begin electric operations in June 2005. On
February 10, 2005, PEF filed a petition with the Florida
Public Service Commission to relieve the Company of its
statutory obligation to serve customers in Winter Park
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Management’s Discussion and Analysis