Vero electric sale faces big hurdles; no closing seen in 2014
In the coming weeks, Florida Municipal Power Agency staffers will weigh in on a proposed fix to some of the remaining hurdles blocking the sale of Vero electric to Florida Power & Light, but even the best-case scenario may delay the closing past 2014.
Getting final versions of all the documents drafted, approved and voted on by all the various levels of governance within the statewide power cooperative is expected to drag on well more than a year, thus making a 2014 closing date a long shot.
FPL attorney Patrick Bryan acknowledged that the FMPA has long been resistant to releasing Vero from its cadre of municipal utilities. The FMPA’s heartburn boils down to the fact that its membership contracts were crafted to prevent cities from escaping or selling their electric utilities, seeking to keep them perpetually enmeshed in the electric business.
“FMPA’s objective regarding any sale of the city’s utility is to protect bondholder security and thus the FMPA and municipal participants, and to protect the tax-exempt status of their bonds,” Bryan said.
“These are legitimate objectives under their contracts.”
The city’s repeated attempts to work around these seemingly airtight commitments it took on in the 1970s – when it not only joined but helped form the fledgling FMPA – have led to what Vero’s transactional attorney John Igoe described as “differences of opinion with FMPA counsel.”
Bryan told the Vero Beach City Council last week that continued progress toward a closing would require the FMPA to honor publicly made commitments to work with Vero toward a sale of the electric utility.
“The comprehensive proposal that has been recently submitted to FMPA meets these objectives, and addresses and resolves each of the FMPA’s related concerns,” Bryan said, adding that the FMPA and its members would be in a “better credit position” after the transfer of Vero’s power contracts to Orlando Utilities Commission.
Igoe identified the areas where there is still a wide gap between the positions of FMPA counsel Fred Bryant and the city’s negotiating team.
The first sticking point is the fact that Vero lent its good credit to the FMPA to help it get started, and its electric utility revenues were put up as collateral so the FMPA could incur hundreds of millions in debt to build power plants and infrastructure and purchase shares of FPL’s St. Lucie nuclear plant and OUC’s two Stanton coal plants.
Every month, Vero buys a set amount of power via those contracts – sometimes at prices substantially above market value.
The FMPA takes a cut of those sales for operations and to pay down debt. After the sale, OUC would take the city’s place both in accepting the monthly power allotment and as guarantor on that debt. Igoe and FPL’s Bryan say that’s a win for the FMPA, but the co-op fears that if OUC goes under, it could damage the remaining members.
“OUC has one of the highest credit ratings of utilities in the country,” Igoe said, “but the FMPA is focusing on the remote risk that OUC would file for bankruptcy.”
The legal work-around on the table pledges Vero’s franchise fees and utility taxes indefinitely, and requires the city to purchase surety bonds. The surety bonds would kick in if OUC defaulted and couldn’t pay for its monthly allotment of power. If the surety bonds were insufficient, only then would the city need to cover the debt with its franchise fees and utility taxes.
Councilman Dick Winger asked how much these so-called “credit enhancements” would cost and no estimate was given. Winger also asked Bryan if FPL would help the city meet those costs, and he said FPL would consider it.
Another area of discord centers around how, procedurally and legally, the FMPA would let the city out of the organization and its All Requirements Project.
At the end of 2009, Vero stopped buying power from the All Requirements Project, but lingered as a member on the projects commitments. Among those commitments are financial vehicles called the Taylor Swaps which the FMPA purchased in an effort to get a lower interest rate on bonds it might need down the road to build a coal plant in Taylor County. The plant was never built and the bonds accordingly were never floated. But the FMPA is left holding more than $300 million worth of this bad debt that it must find a cure for in the next two years.
Vero’s membership in the FMPA and its ties to all this debt are governed by contracts which, if amended, need to be unanimously approved by every member, thereby giving any member city veto power on the sale of Vero electric to FPL.
Igoe is proposing the FMPA allow Vero to cancel its old contracts and execute new ones, which would only require a majority vote or a vote of the executive committee.
The new proposal counts on FMPA officials having the motivation to deal charitably with Vero’s negotiating team so the sale can happen.
As former Vero councilman and utility activist Charlie Wilson pointed out, the FMPA holds all the financial and legal cards. Wilson described the parties as akin to a couple getting divorced. The FMPA, he said, is the one “living in the big house and collecting alimony,” with Vero and its ratepayers, Wilson said, “eating TV dinners.”
Wilson, along with CPA Glenn Heran, who has long pushed for the sale and formed a political action committee to promote a “yes” vote in the March referendum, are now urging that Vero take a proactive approach to dealing with the FMPA.
A multi-front fight is what they recommend, engaging the Florida Legislature, hiring a lobbyist, appealing to the Florida Public Service Commission, stirring up public opinion and even directly pleading with the mayors of the 33 FMPA member cities to let Vero out and thereby preserve their own right to leave the co-op someday should a good deal come along.
The argument is that the FMPA enables municipal electric utilities to overcharge millions of customers across the state – especially those who live outside city limits but buy power from their utility systems – and that the only way the FMPA will let Vero out of the co-op is if the FMPA begins to feel the heat of political pressure threatening their very existence.
Meanwhile, Vero officials must walk a tightrope. Open warfare against the FMPA could sour the current negotiations and delay the sale further.
The city council also must decide whether or not to begin trimming the city budget and weaning the staff off the more than $7 million in direct and administrative transfers into the general fund, money gleaned from the city’s 33,000 electric ratepayers. If those transfers were reduced, the city could bring electric rates down in 2014 regardless of when the closing would take place.
Igoe is scheduled to bring back some news to the Vero Beach City Council on Aug. 20. The end of July is not expected to see any progress as Igoe said key FMPA staffers are on vacation and unavailable to meet.