Fletcher: Vero can't afford to not sell old power plant
While former mayor Jay Kramer and Councilman Dick Winger were quick to sound alarms last week over how Vero Beach could survive without the revenue it skims off the inflated bills of electric customers, backers of a proposed $179.6 million deal to get Vero out of the electric business say the real question is whether Vero can afford to risk potentially ruinous repair costs for an antiquated power plant.
Vice Mayor Craig Fletcher, who called last week’s proposed deal to sell Vero electric to FPL “magic,” visited the power plant Monday and said not selling the electric utility could put the city in great financial peril – peril that would dwarf any financial adjustments the city would need to make after a sale.
A fourth-generation Vero Beach resident and retired aeronautical engineer, Fletcher expressed empathy for the employees who lovingly and meticulously care for the well-preserved generators at the power plant. “They love that old equipment,” he said.
But replacing just one of the five aging generators with a modern-day model could by itself come close to bankrupting the city. Fletcher said that when he served on the City Council a decade ago, utility staff put a proposal on the table to re-power the plant with new, more efficient generating equipment.
“The generator alone cost $60 million and that didn’t include installing it and everything else that’s involved,” he said. “You’re talking potentially $120 million that would have to be bonded out. The payments on that would take up all that money that’s now being transferred into the general fund because bonds have a first-issue requirement – that they be paid off first.”
City Manager Jim O’Connor and Vero’s new Power Resources Director Tom Richards said the city could possibly devise a cheaper option – and perhaps get by with possibly $23 million or so in upgrades to the system – if faced with that predicament.
Richards, however, could not estimate what a new generator might cost to purchase and install if one of one of the two main units gave out.
Fletcher noted that the repairs and maintenance of the plant – as with anything mechanical that is coming up on 50 years old – are getting more and more costly. He opened a page in the 2012-13 budget as an example. “Right here, you’ve got a $3.4 million inspection on the generator, and that’s just an inspection, that’s just to crack the thing open.”
Actually, there’s nearly $5 million in the budget for three inspections on Units 2, 4 and 5. Major repairs would cost extra. The city has obtained permission to be out of service for six weeks from early November to mid-December to complete the work.
Whatever repairs are needed, Fletcher said, would need to be done quickly while the generator is cracked open, and the City Council wouldn’t have much of a choice other than to write a check. Due to federal regulations and contract stipulations, the City of Vero Beach is required to keep Big Blue in tip-top shape and ready to fire up to support the power grid.
That means the city does not have the option of unilaterally shutting the plant down if repairs become cost prohibitive.
In that kind of desperate scenario, O’Connor said a legal team would need to be hired to negotiate options for the city. O’Connor and Richards guessed that any plans to permanently take the power plant offline would require somewhere between $15 to $17 million in major transmission upgrades.
But for now, just keeping the plant running until it can be turned over to FPL is tougher than it sounds, because some of the components at the plant are not even manufactured anymore.
“I remember recently hearing about something out at the plant that needed to be repaired and they told me that no one makes the parts, and there are only two guys who know how to do the work,” Fletcher said.
Richards verified that inspecting and overhauling old generators is a highly specialized field, and the city brings technicians in from out of state to do the work. Richards also confirmed that certain components are only custom made by General Electric at one of their plants, possibly in upstate New York.
He said the massive steel casings of the generators would be lifted off by huge cranes and set to the side. If any custom parts were needed, they would be trucked up to GE and forged, using the old parts as molds or models.
On top of the risk of big-ticket mechanical items wearing out in the next few years as components age, there are volatile fuel costs which show up as spikes in customers’ electric bills. The Vero Beach Electric Utility, which currently charges rates roughly 30 percent higher than FPL, can raise rates without even a vote of the City Council if fuel costs or other expenses go up.
All those factors add up to an unquestioned need to get out of the electric business, according to Fletcher.
“I have a vested interest in this,” he said. “People are only thinking about how this will affect them in the next two or three years. I’m thinking about 20, 30 or even 50 years down the road what Vero will look like for my children and my grandchildren. I have a picture of Vero without the power plant and it is different. It’s a much better, cleaner Vero Beach.”
Councilwoman Tracy Carroll agreed that not selling the utility involves unacceptable risk. She ran on an “Operation Clean Sweep” pro-FPL sale slate of candidates with Mayor Pilar Turner in 2010 and was re-elected on that same platform in 2011. Carroll doesn’t like the fact that so many factors of the city’s power contracts put operational decisions out of the city’s control.
“If this doesn’t go through, we at the City of Vero Beach would be left with the requirements of the city contracts, required to keep that aging dinosaur ready to go at any moment to supply that hole in the grid,” she said. “The minute it’s flipped on, we bear the cost, the huge cost to run the thing. Every time it goes on it costs the city more and more money.
“Unfortunately it’s impossible for things to just stay the same. The risk is a continually increasing cost that we pay for electric,” she said. “That plant reached the end of its natural, useful life a number of years ago when the cost of turning it on became substantially more than what the going rate of power was.
“The reduced lower rates (from FPL) will help us in the short term,” she said. “But we’ve got to look at it as the City Council for the long term – of having to have that plant as a requirement to be part of the grid, and having an outside force telling us when we need to flip the thing on.”
City Manager O’Connor said he also sees no doomsday scenario for the City of Vero Beach in a post-electric era.
He pointed out that 90 percent of the cities in the country operate without income from an electric utility, and that, in those communities, leaders set priorities and taxpayers decide what services they are willing to fund through property taxes.
Despite the naysayers, O’Connor said he doubts city residents, or the council, would suddenly abandon the deal. “I don’t think this community is going to turn on a dime. I think we are going to have a very viable sales agreement.”
Key elements of the deal to sell Vero electric to FPL
The deal attorney John Igoe presented Aug. 16 to the Vero Beach City Council would sell the electric utility to Florida Power and Light, get the city out of a 20-year power contract with Orlando Utilities Commission (OCU) and transfer the city's long-term obligations to buy from a Florida power cooperative to FPL for three years and ultimately to OUC.
To strike that delicate but critical balance, all parties in the deal gave a little or a lot. FPL increased the cash purchase price from $100 million to $115 million, out of which the city would pay off $46.1 million in debt it will still have on the books at closing, projected to occur no earlier than Jan. 1, 2014.
FPL also agreed to take over Vero's share of the Florida Municipal Power Agency (FMPA) rights and responsibilities for three years at an estimated cost of $30 million to FPL.
OUC agreed to cancel its contract with the city 16 years early in exchange for the $20 million exit penalty outlined in the agreement. OUC also agreed to absorb Vero's interests in the FMPA and buy power under that agreement in exchange for $34 million consideration from the city.
After the closing, Vero Beach Electric employees would have jobs with FPL for at least two years. During the four years that FPL estimates it would take to make $7.7 million in transmission upgrades to strengthen the local system and pave the way to dismantle the power plant, FPL would pay the city $1 million per year to lease the riverfront land underneath Big Blue.
Other items in the deal were brought forward from the April 2011 letter of intent from FPL, including
FPL's assumption of $14.4 million in pension liabilities for the electric employees, the $7.8 million relocation of the substation off the river and the dismantling of the power plant at a cost to FPL of $4.7 million so the city would get back a vacant parcel of land on the Indian River lagoon.
City Manager Jim O'Connor said the deal was about what he expected and that he's pleased with the terms.
FMPA membership was considered the largest stumbling block, but O'Connor said that his thoughts going into negotiations, after serving on the FMPA board during his tenure as Bartow city manager, were that "as long as FMPA was made whole, they would be willing to work with the city."
Instead of waiting until the Sept. 30 deadline to find out if the negotiating team would be able to find the way to move forward with a sale, Vero taxpayers, ratepayers and staffers now have that path mapped out.
O'Connor said they hope to have a proposed Memorandum of Understanding ready for review Sept. 4, giving the Utilities Commission a chance to discuss it and ask questions before it would come before the City Council for a vote, potentially on Sept. 18.