August 30, 2014

Municipal Utilities in Florida

A surge in interest for Florida's municipal utilities

For the first time since 1992, a Florida municipal utility may go into private hands. And it's not the only municipal in the state that has explored a sale.

Mike Vogel | 3/4/2013

The flurry of interest in selling, then, is unusual. It has several drivers. In Vero, Big Blue is past age 50, costly to maintain and of little use, Fletcher says. It provides only 1% of the city’s load — the rest comes via Orlando Utilities and others. Per agreements with Orlando, however, the Vero plant must be on call to serve as a “peaking” plant, an industry term for a plant fired up only to meet peak power demands. Some days, units at the plant, staffed 24 hours a day, are started only to conduct government regulatory air quality tests, Fletcher says.

Meanwhile, like many cities nationally, Vero’s city employee pension plan is underfunded — to the tune of more than $30 million. “It so happens in this time and space, one can solve the other,” Fletcher argues. Money from selling the utility can plug the pension gap; future liabilities would be avoided by moving new employees to a 401(k)-like defined contribution plan.

Also motivating the sale is proponents’ belief that government shouldn’t be in the electric business. “Smaller-government-is-better is a huge portion of what we’re trying to do,” Fletcher says.

But the main attraction for voters is rates. Some Florida munis have rates that beat investor-owned utilities. But others don’t compare as favorably, especially against FPL, which thanks to a heavy share of low-cost natural gas in its generation portfolio can claim the lowest bills in the state for a residential user who consumes 1,000 kilowatt-hours per month, a typical measure.

Comparing rates, it should be said, is a contentious business. Who’s cheapest depends on type of user — residential, commercial, industrial — and how much power is consumed. “Be careful what you look at,” says Nicholas Guarriello, FMPA general manager and CEO. “They have low rates. We have low rates. It goes back and forth.” However, he volunteers, “I’ll tell you overall Power & Light is doing a good job” on rates.

Indeed, before November’s city council election, FPL blanketed Vero with direct mail advertisements showing its monthly rate of $94.62 for a typical customer compared to $124.52 in Vero, where the ultimate power source is more dependent on coal, a fuel source under costly regulation.

Moline, of the muni electric trade group, argues that FPL’s rates won’t stay low. FPL’s base rate indeed is increasing this year, but FPL says its overall rate will go down thanks to lower costs. Additionally, Moline argues FPL’s ads misleadingly ignore the 6% franchise fee that would be tacked onto Vero bills once a sale goes through, making FPL’s rate advantage less favorable.

To Moline, the FPL ad blitz is just one tactic in a larger campaign. “FPL has an aggressive and direct strategy to take over as many municipal electric utilities as it can while its rates are artificially low,” Moline says. Vero City Council member Jay Kramer agrees: “Vero Beach is just the first domino to fall. You’re going to start seeing it more and more.”

There’s no such strategy, says Pam Rauch, FPL’s vice president for development and external affairs. Rauch says FPL has just been responding to locals interested in getting FPL’s low rates. “We believe it’s a win-win,” Rauch say, bringing Vero lower rates while not negatively affecting existing FPL rate payers.

Utilities in Florida are chasing growth as they struggle with excess capacity caused by slower real estate development and empty houses not demanding power. Additionally, customers are using less energy. Usage by FPL customers began falling before the recession and intensified through 2009 before moderating. In 2011, FPL saw a 2% drop in average customer usage, which translated into $107 million less in revenue.

While the Vero utility’s 34,000 customers are a smidgen compared to FPL’s 4.6 million, acquiring them would represent the biggest annual gain for FPL since 2007.

But picking up any more cities looks unlikely. In Lakeland, three businessmen, Publix Vice Chairman Barney Barnett, economic developer Steve Scruggs and investor Brian Philpot, pitched the idea of changing the city charter to make it easier to sell the utility. (The charter has a high bar: 66% of registered voters.) TECO and FPL expressed interest in buying. But the idea ran into such fierce opposition that the three men dropped it, and Scruggs even apologized.

Lake Worth was going out for bids for wholesale power supply when FPL raised the idea of a sale. It’s gone nowhere. In Jacksonville, city council member Matt Schellenberg proposed last year that the city study a sale but then withdrew his resolution. “I’m still pursuing it,” he says, but he said he must educate the public more.

In Vero, voters are scheduled to speak in a March 12 referendum. Those who would gain most by a switch to FPL won’t get to vote, however. Some 61% of the municipal’s customers live outside the city limits and have long chafed at not having a say in setting rates. The proposed deal is valued at $179 million, but the valuation includes items such as upgrading transmission equipment, assuming liabilities, moving a substation and, after three years, taking down Big Blue. Of the $111.5 million cash portion, the city won’t see a lot of it. For example, $54 million will go just to extract Vero from long-term power supply contracts with FMPA and Orlando Utilities.

Voters will have to weigh the trade-offs. In favor of selling is Fletcher’s argument: Funding the pension, getting someone else to retire Big Blue and the saving on rates. City Manager Jim O’Connor, brought in by a pro-sale council majority to effect a sale, estimates city rate payers will see a 25% reduction even after they pay a franchise fee.

Tags: Energy & Utilities

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