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Jacksonville's public utility JEA and the fight to privatize it

During his farewell address as he left the board of Jacksonville’s municipal utility in 2017, businessman Tom Petway suggested it might be time to consider selling JEA, Florida’s largest municipal utility. Petway noted that most Floridians were served by the private marketplace and told the board he thought JEA was worth as much as it would ever command from a buyer — the utility, he said, was “at, or very near, peak performance.”

The board took Petway’s advice and commissioned a valuation assessment of JEA. That step, and others that followed, teed up a two-year civic battle that is now in a ceasefire but may not have settled JEA’s future.

JEA got its start in 1895, when the city’s electric division began generating electricity from a single wood-burning plant on Main Street. Today, the utility operates five power plants in Jacksonville — and is actively growing its solar footprint — as it provides electric, water and sewer services to hundreds of thousands of households in and around Duval County. It gets high marks in customer satisfaction and has one of the strongest credit ratings among city-owned utilities.

JEA also generates a steady stream of revenue for Jacksonville, pumping $116 million into city coffers in 2018 and $138.2 million in 2019.

JEA: The Fight Over Privatization

BACKING A SALE

  • Mayor Lenny Curry
  • Alan Howard, former JEA board chairman, former CEO Aaron Zahn and six former board members: Chair April Green, Fred Newbill, Camille Lee-Johnson, Dane Grey, Henry Brown and Kelly Flanagan. (The entire board resigned.)
  • The suitors: NextEra Energy, the parent company of Florida Power & Light; Emera; American Public Infrastructure; American Water Works; Duke Energy; JEA Public Power Partners; IFM Investors PTY; MIRA; E&W Development

THE SALES PITCH

  • A sale would erase both JEA’s and the city of Jacksonville’s debt
  • Philosophical opposition to government ownership
  • Long term, conservation moves by consumers are reducing demand for electricity
  • Governmental restraints and regulations will limit JEA’s ability to get into new lines of business
  • Consumers face big rate increases, and JEA will have to cut or eliminate the dividend it pays the city
  • Utilities are commanding big premiums in the market; JEA is at peak value

OPPOSING

  • Former Mayor Jake Godbold and many members of the Jacksonville City Council
  • The citizens of Jacksonville, who polls show oppose privatizing JEA
  • Business leaders like CSX CEO Michael Ward, Jacksonville Jaguars owner Shad Khan, construction company executive Preston Haskell and the Jacksonville Civic Council, a group of about 80 local CEOs

REASONS NOT TO SELL

  • JEA is financially healthy, offers good service and is appreciated by consumers
  • JEA delivers a steady revenue stream to the city — $116 million in 2018 and $138.2 million in 2019
  • Questions about political motives and the use of funds from a sale of JEA beyond paying off the city’s debt
  • Questions about the sale process and contracts involving Zahn and other JEA executives
  • The ability of other municipal utilities to adapt to market conditions and modernize their business plans

Why put it on the auction block?

In public, the biggest cheerleaders in the privatization discussion have been the utility’s own executives and board members, including former JEA board Chairman Alan Howard, a transactional attorney who ordered the evaluation of JEA shortly after Petway’s exit

Jacksonville’s mayor, Lenny Curry, has been seen as a proponent of a sale but has played coy with the issue. He has said a sale could make the city debt-free and noted that privatization appealed to him “philosophically.” The mayor, a Republican, told the city council that a “government-run utility monopoly” isn’t in the best interests of the community over the long run and that “less government is better for the people.”

Curry avoided taking a firm yea-ornay stance on the issue — saying only that he supported “exploration” of a sale, leaving many to speculate about who exactly was driving the sale.

Curry did, however, appoint the man who came to spearhead privatization — Aaron Zahn, a former wastewater treatment company executive whom the city council approved as a JEA board member in February of 2018 to replace Petway. The board unanimously voted to name Zahn JEA’s CEO a few months later — even though he had no experience running a utility.

Once in the job, Zahn mounted a “strategic planning initiative” that accentuated the virtues of a sale and painted JEA as a “declining business” with few desirable ways out other than privatizing. Private ownership, Zahn suggested, was a better business model for dealing with challenges, including declines in electric use, that all utilities face in the coming years.

Over the past year, Zahn and other top JEA executives have said that electric sales are shrinking — despite a steady growth in customers — because so many consumers have adopted energy-efficient technologies such as LED lighting and rooftop solar. They argued that governmental and regulatory constraints are limiting their ability to get into new lines of business, such as residential solar installation or electric vehicle financing. In the long run, they said, JEA would have few options besides raising rates, slashing staff or possibly eliminating its financial contribution to the city.

Pro-privatization forces also cited the sizzling market for power companies. Howard noted at a March 2018 meeting that a Canadian energy firm’s 2016 purchase of TECO energy for $10.4 billion was an “eye-opener” for company executives. The Emera-TECO transaction indicated a “tremendous amount of locked-in value at JEA,” he said — and an advisory firm’s estimate that a JEA sale could net “ $6 billion or more” made it a discussion worth having.

But opponents — ranging from former Jacksonville Mayor Jake Godbold to City Councilman Matt Carlucci to former CSX CEO Michael Ward — railed against privatization, arguing that the city would regret giving up ownership of JEA. “The mayor has suggested we would pay off our debt — and who knows what else we would use the money for,” Carlucci said. “There’s really been no clear end-game given.”

As the board explored a sale in early 2018, the forces opposed to a sale mobilized, with the discussion quickly devolving into a political melee. Union leaders and some city council members accused Curry of secretly spearheading a sale — a charge the mayor denied. The backlash grew as some Jacksonville heavyweights, including Jaguars owner Shad Khan and Preston Haskell (founder of the Haskell construction company and a former JEA board chairman), weighed in against privatization.

In the dark

In April 2018, Curry relented and vowed he wouldn’t submit a privatization plan to the city council, which would have to approve a sale. But the fight reignited last July when the JEA board passed a resolution inviting companies to bid on it. The utility even assigned a code name to the negotiation process — “Project Scampi” — and conducted its sales talks via “shade meetings” that were held behind closed doors with the promise that transcripts would be released after the JEA board recommended a purchaser.

Adding to the cloak of secrecy was a “cone of silence” policy that prohibited any possible decision-makers in a sale (including the mayor, city council members and JEA board members) from discussing the sales terms with the media, the public or the bidders. Such language is common in competitive bidding processes — and is intended to insulate those involved in negotiations from allegations of backroom dealing. But as negotiations proceeded, many in the city felt they were being left in the dark. JEA spokeswoman Gina Kyle said the discussions followed state law and JEA policy and were intended to “protect the process from third-party tampering.”

Sixteen companies responded to Project Scampi with offers, and in December, JEA executives traveled to Atlanta to meet with a group of suitors, including NextEra Energy, the parent company of Florida Power & Light, and Emera, the Canadian company that bought TECO. Other bidders included American Public Infrastructure, American Water Works, Duke Energy, JEA Public Power Partners (a consortium of Bernhard Capital Partners, Emera, SUEZ and Provident Resources Group), IFM Investors PTY, MIRA, and E&W Development.

Around the same time, JEA began promoting a “non-governmental ownership path” to customers. A brochure mailed in tandem with October bills warned that the utility was headed for a “financial cliff” that could lead to rate increases as high as 52% by 2030 despite a 16% growth in customers. Curry spoke favorably of a potential sale, noting that it could allow the city to pay off $2.2 billion in debt.

Polling indicated voters in Duval County — who would have to approve the sale of JEA via a public referendum — disapproved of the plan, however. Nearly 60% of those polled by researchers at the University of North Florida last fall said they opposed selling JEA, and 47% disapproved of the job performance of Zahn.

The business community wasn’t sold on it either. The Jacksonville Civic Council, a group of about 80 local CEOs, hired its own experts to assess a possible sale. Their conclusion: JEA was “not in a death spiral” and that the sales exploration process was “flawed” and lacked transparency.

“The exercise currently being conducted by the JEA appears to have as its objective the provision of at least $3 billion in funds to the city of Jacksonville,” but the administration had failed to answer “fundamental questions” about whether the city needed the funding and, if so, how much it needed and “for what purpose,” the council wrote in a Nov. 5 letter to City Council President Scott Wilson and Mayor Curry.

Within weeks, public opposition to privatization coalesced amid a series of controversies involving Zahn. Among them: A bonus scheme, now canceled, that would have produced a windfall for Zahn and other JEA executives if the utility had been sold, and an undisclosed land deal involving Zahn and a JEA lobbyist. Also raising eyebrows were $1.8 million worth of contracts JEA awarded to various investment advisers, law firms and lobbying firms. One contract was with the law firm where Howard, the former JEA board chairman, works.

At the end of November, Councilman Carlucci called on Zahn to resign; in mid-December, the JEA board ousted Zahn from his $520,000-a-year post and at Curry’s request pulled the plug on the sales negotiations on Christmas Eve.

The imbroglio has resulted in departures of other top staff and sparked calls for investigations by a grand jury and city council. And it didn’t come cheap. At the end of the day, JEA spent more than $10 million exploring a sale.

What’s next?

As fallout from the privatization push continues — State Attorney Melissa Nelson referred the matter to federal investigators — questions about the utility’s future remain.

At an emergency board meeting in December, Melissa Dykes, JEA’s interim managing director and CEO, said the company would “continue to look at and refine” several other strategic planning scenarios the company has been exploring. Those include remaining a government-owned utility; converting the utility into a co-op, where customers would be co-owners; or converting JEA into a corporation and pursuing an initial public offering.

However, an update that JEA provided to credit rating agencies last August stated that the utility would pursue a “traditional utility response” if its privatization efforts failed. In that case, JEA would continue to deleverage its balance sheet, aiming to make the utility’s electric system debt-free by 2030, while also pursuing “all applicable and possible revenue-generating initiatives.”

Under the “traditional” response scenario, the utility might have to raise electric rates 26% and cut 574 jobs by 2030 to continue making its contribution to the city — or raise rates by 13% and eliminate its contribution to the city, the document stated.

Amy Zubaly, executive director of Florida Municipal Electric Association, says her group has no position on JEA’s future business model but “objects strongly” to JEA’s assertion that public power entities are “ill-suited to function as sustainable modern electric utilities” because of governmental constraints.

"We have utilities providing community solar programs. Utilities can get into providing rooftop solar if they want. We’ve got member utilities — in Gainesville and Ocala — that provide broadband service. There’s electric vehicle charging stations going up, and utilities are coordinating that. So I’m not sure what they’re being hamstrung from,” says Zubaly, who represents 32 of Florida’s 33 public power utilities. (She says JEA dropped its membership in the group last October after FMEA’s board sent Zahn a letter asking him to set the record straight on his “mischaracterization” of public power.)

Across the county, other municipal utilities are pursuing innovative programs to strengthen their bottom line. New York Power Authority, for instance, is moving forward with a plan to become the nation’s first fully digitized utility. In California, Sacramento’s public power company has been focused on transportation and spurring the adoption of electric vehicles by offering customers a choice of cash incentives or free electric car chargers.

Closer to home, the Orlando Utilities Commission, Florida’s second-largest municipal utility, has partnered with Orlando International Airport to install more than five dozen electric vehicle charging stations and build a floating solar array on airport property. The Orlando utility is also the anchor tenant in a 1,200-acre solar project with the Florida Municipal Power Agency (FMPA) and NextEra Florida Renewables that when finished will provide clean electric energy to its own Central Florida customers and to customers of 11 smaller municipal utilities across the state.

“Most U.S. cities that own their electric utility are making progress to meet changing dynamics while maintaining their strong financial position. So the JEA effort to privatize was unique,” observes Dan Aschenbach, a clean-energy consultant who spent 36 years evaluating the electric industry for Moody’s Investors Service.

Like Zubaly, Aschenbach doesn’t view the public utility business structure as a stumbling block. “The municipal business model is actually seen as a strength to tackle the industry challenges because of its easier ability to change rate policies, promote energy efficiency and maintain lower cost. Municipal electric utilities are about 12% lower cost than the private sector,” he says.

Issues remain

Going forward, JEA’s biggest hurdle may prove to be its debt obligation to Plant Vogtle, a troubled nuclear expansion project in Georgia. JEA projected its portion of construction costs would be about $1.4 billion when it first invested in the project in 2008. Delays and cost overruns have swelled JEA’s current projected tab to about $2.47 billion through 2043.

So far JEA has been unsuccessful in its efforts to get the courts to void its agreement with the Municipal Electric Authority of Georgia, which is building Plant Vogtle. Litigation between JEA and MEAG is ongoing.

Meanwhile, some suspect the battle over selling JEA may not be over yet.

“This popped up once a couple years ago, and when it got put down, it popped back up,” Al Ferraro, a Jacksonville City Council member, said at JEA’s emergency board meeting on Christmas Eve. “I feel like this is a rerun that I’ve been through, except this has gotten worse, and I’m just afraid that if we continue on the path, then it’s going to be more money, more everything. We want to fix this problem.”

 

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