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Changes made in Vero electric contract
BY LISA ZAHNER - STAFF WRITER (Week of January 1, 2010)

While top Vero Beach city leaders have said there were no changes to the contract signed with the Orlando Utilities Commission and the version that was shown to the City Council, Vero Beach 32963 has found 115 changes between the two.

In fact, the differences start at the Table of Contents where several sections of the contracts don’t match up. By far the most troubling change is how the contract defines which of the city’s bond ratings would be scrutinized by OUC, potentially triggering the need for the city to put up extra collateral to ensure performance of the contract.

All the while, city staff has denied the existence of the changes. When questioned by the State Attorney’s Office, City Manager Jim Gabbard told an investigator that no unauthorized changes were made between a redacted (or partially blacked out) contract reviewed by the City Council in private meetings April 7, 2008

and an unredacted version signed by City Attorney Charlie Vitunac and Mayor Tom White on April 21, 2008. Former Councilman Charlie Wilson has said he’s looked at the contracts and found 25 differences between the redacted and unredacted versions. But he, too, was told by city staff that no changes had been made. Wilson said he’s not surprised that even a superficial review by Vero Beach 32963 found so many alterations.

“This is just part of a series of things, a pattern of how things happen at the city,” he said, referring to the fact that he was assured by top city staff that no changes had been made to the contract.

“I don’t think the Council ever approved the actual contract, there was no contract attached to the meeting agenda or minutes and the mayor exceeded his authority when he signed the contract,” Wilson said. “Clearly the OUC contract, in my opinion, is not valid and I don’t believe it would withstand a court challenge, but a court challenge is the only way to remedy the situation.”

On Dec.1, the City Council directed Vitunac to bring back a written opinion on whether the changes made to the OUC contract were “material.” Vitunac said that he would need to consult Boston attorney Meabh Purcell, whose firm worked on the contract.

Vitunac, and City Manager Jim Gabbard are on vacation and could not be reached for comment. Assistant City Attorney Wayne Coment said the document is in the works.

“What they’re working on is a table showing the changes and the legal implications of the changes,” Coment said.

Coment said a contract is not like an ordinance, which is legislation, so attorneys have more leeway in making minor changes after an elected body approves a contract.

“If it’s just changes in language here and there, they can make certain changes that aren’t significant,” Coment said. “If the changes were made only to clarify something, the wording could change and it could be just fine.”

Should the contract be materially different, the legality of the executed document could be called into question.

What was changed?

In addition to the changing of page numbers for fi ve sections of the contract on the Table of Contents, one does not need to look very far to fi nd alterations to the document. On page 1, paragraph 3 of the introduction, the phrase “Vero Beach has an entitlement to approximately 48 MW of generation capacity”

was changed to “Vero Beach has an entitlement to approximately 50 MW (not including CROD MW quantities) of generation capacity.” Changes exist throughout the document, ranging from altered punctuation and capitalization of words to the addition and rewording of entire sections. It’s evident that what is marked “fi nal draft” on April 7, 2008 was gone over again thoroughly by attorneys.

Nine of the changes involve the words “effective date” and “turnover date” as these were changed back and forth from effective to turnover and turnover to effective in describing the date when one or both of the parties must do something. The effective date is April 21, 2008, when Mayor Tom White signed the contract and the turnover date is Jan. 1, 2010.

Whole sections were added, including one on page 4 under the conditions of the contract. This section, Firm Transmission Service, states the condition that “Vero Beach obtains Firm Transmission Service from FPL within a reasonable period after the Effective Date, and the terms of such service are reasonably acceptable to Vero Beach.”

This one means that the city had to negotiate rights to use FPL transmission lines to bring power from OUC to Vero Beach. An accompanying letter from OUC further clarifi es this stating that “reasonable” shall be no more than $4 million. Since this was not included in the original contract, is this $4 million extra that the city is spending to switch to OUC?

Among the other changes:

Several changes alter the words “Units 1, 3 and 4” to “Vero Beach Power Plant.” The entire power plant consists of fi ve units, two of which work in combined cycle. Since different costs and controls are associated with the different units, this change could be important.

In at least two places, the words “OUC Contract capacity” were changed to “Supplemental Wholesale Electric Capacity” in referring to charges the city might incur during times of congestion on the power grid.

In a section labeled Payment, two changes were made adding the word “Monthly” to the description of charges. “Demand Charge” was changed to “Monthly Demand Charge” and “Energy Charge” was changed to “Monthly Energy Charge” but the terms ancillary services and fuel payments were left without the word “monthly.”

Some changes simply added one word, made a word plural or singular, abbreviated a word that was spelled out or spelled out a word that was abbreviated. Words became capitalized when they were not and some capitalized words became lowercase. Parenthesis were added or deleted. Words were underlined or underlining was removed. These small edits were found throughout the document.

Long-time critic of the city’s electric utility Dr. Stephen Faherty said he’s curious to see Vitunac’s report to the council.

“It will be interesting to see how they outline the changes and how they determine what is material, and if that materiality will have anything to do with the cost of whatever it is that was changed,” he said.

As an example of how any one of these changes could open up a veritable can of worms, take a look at one change in the Exhibit D - Definitions section of the contract.

On page D-1 a change altered the meaning of the word “bonds” in a way that could potentially cost the city millions of dollars. The redacted April 7, 2008 version states that “Bonds” shall mean the city’s obligations as they relate to ownership of part-interest in the Florida Municipal Power Agency and bonds held by FMPA:

The unredacted April 21, 2008 version, however, amends the defi nition of “Bonds” with the words “and (ii) Vero Beach Florida Electric Revenue Bonds.”

It is unclear why the city’s electric revenue bonds were specifically inserted into this defi nition and who asked for the insertion. The importance of this change is how it relates to another part of the contract, which lays out protections which cover the city and OUC against any fi nancial instability that the other party may experience which would result in the downgrading of its bonds beyond an acceptable level.

The city currently holds $60 plus million in bonds on the electric utility. Over the summer, consultant Henry Thomas of Public Resources Management Group warned city offi cials that the current cash situation of the city’s electric, water and sewer utilities put the city in danger of having its bonds downgraded.

At the time, the electric utility had burned through $12.5 in reserves in about nine months and was described as “broke” by Finance Director Steve Maillet. The water and sewer utilities were borrowing cash from other city funds to operate.

Thomas said his fi rm recommends utilities keep 90 days of operating cash to maintain good bond ratings because electric is a capital intense industry, with constant needs for repair and reinvestment.

Former Electric Utility Director R.B. Sloan has previously stated that the electric utility costs $110,000 a day to run, meaning that the city would need to keep about $10 million on hand at all times to have 90 days of operating cash.

At fiscal year end, the electric utility had a little more than $5 million in operating cash, thanks to hikes in electric bills bringing in increased revenues over the summer and early fall. During the quarterly budget review meeting on Dec. 8, Maillet said the electric utility had less than $3 million in operating cash as of November 30.

“No one would probably go back and look at the existing bonds unless the city went out to borrow more money,” Thomas said. “But even without that being in a contract with OUC, they should be motivated to keep that up.”

Thomas said bond raters also look at the management and stability of a utility as a sign of fi scal health. With the steady procession of not only electric utility directors but also city managers, Vero might not score so high on that criterion.

Should the bond ratings slip and the city not be able to recover within a year, dollar amount that the city would need to provide in collateral to ensure “due performance” would be a matter for the attorneys to interpret, as the total value of the 20-year contract has been estimated to be about $2 billion.