BY MARK SCHUMANN

VERO BEACH – On Jan. 10, just four days after presenting a proposed “purchase and sale agreement” between the city and Florida Power & Light, the city’s transactional attorneys wrote a memo explaining their rational for why the transaction “does not involve the sale or lease of all or substantially all of the City’s electric and integrated utility system.”

That memo is now before officials of the Florida Municipal Power Association, with whom the city has a contractual obligation to not “sell, lease abandon or otherwise dispose” of the assets of its electric utility system so long as it remains a member of the association.

The city’s attorneys, John Igoe and Rick Miller, will reportedly travel to Orlando Tuesday to meet with FMPA officials.

Currently, the city is a member of the FMPA’s 15-member All Requirements Project.  Without the consent of all 15 members of the group, the city will be obligated to retain its membership in the All Requirements Project until Sept. 30, 2016.

Because the proposed purchase and sale agreement between the city and FPL has a Dec. 31, 2016 expiration date, the deal might still be closed, but only after Sept. 30, 2016, unless, that is, the city is able to get a waiver to leave the All Requirements Project early, or unless it can convince the FMPA it is not actually selling its electric system.

But what if the city’s transactional attorneys can convince the FMPA that FPL is paying some $197 million dollars for something other than the “purchase” of Vero Electric?  If a thorn can be portrayed as a rose, if you will, then the city could still hand its electric system over to FPL well before its membership in the All Requirements Project can be terminated, presumably on Sept. 30, 2016.

In the simplest terms, the transactional attorneys are attempting to persuade FPMA officials that the city isn’t selling Vero Electric to FPL.  Rather, they claim, the city is simply transitioning out of the utility business, at which point FPL will “ultimately provide power to the City’s former service area.”

The argument the city’s transactional attorneys are putting before the FMPA seems to ignore the fact that, as with many businesses, the most valuable asset Vero Electric is its customer base, not the power plant or the transmission and distribution lines.  It is precisely that revenue stream the FMPA contract prevents its members from selling so long as they share in the organization’s obligations and potential liabilities.

Further, the transactional attorney’s Jan. 10 memo asserts that the city’s electrical utility is being “abandoned,” not sold.  But if the city is “abandoning” the system, it is doing so in exchange for some $111.5 million in cash plus other considerations valued by FPL at another $85.5 million.   In exchange, FPL will acquire the rights to the city’s 34,000 customers, as well as ownership of its extensive and well-maintained transmission and distribution system, along with the associated right-of-ways.  Some say it is a contortion of the facts to call the transaction anything other than a “purchase and sale.”

In addition to likely having to field some challenging questions about their novel characterization of the sale of Vero Electric as something other than a sale, Igoe and Miller may hear at least two additional concerns from FMPA officials.

Apart from the All Requirements Project, the city participates in three other FMPA power projects – Saint Lucie Two, Stanton One and Stanton Two.  As a participant in this projects, the city is obligated to buy power and to pay a proportionate share of debt service and maintenance costs.

Because the city has contracted with the Orlando Utilities Commission to assume those obligations in exchange for $34 million in cash, the OUC will be taking on what was Vero Beach’s primary liability to the FMPA and its bondholders.

However, Vero Beach will continue to be secondarily, or contingently liable. In the event the OUC should be unable to meet what had been the city’s obligations, the city would have to step in.  But because the city will no longer own a utility system, it will have no way of buying FMPA power and paying off FMPA bonds, should the OUC ever be unable to do so.

Though FPL could assume the city’s contingent liability, the company is reluctant to do so.  The obligation, should it ever arise, would fall, not to rate payers, but to the company’s share holders.  And that is not a risk FPL seems inclined to take.

A third area of possible concern from the FMPA may center on the city’s power purchase agreements involving the OUC and FPL.  As a part of the deal, FPL is agreeing to buy for three years power from the OUC that the city would otherwise be committed to take.

This issue had been raised before under the term “private use.”   Internal Revenue Service regulations limit the circumstances under which power can be sold, when that power is generated with plants funded through tax-exempt bonds.

One such limitation requires that the power be sold at market value.  The power purchase agreements negotiated by the city, the OUC and FPL, however, call for FPL to buy that power for whatever it costs the OUC to generate it.

Presumably, Igoe and Miller will return from Orlando with a clear idea of when and under what circumstances the city will be able to “sell” its electric system to FPL.

Beyond the FMPA’s approval, the proposed deal must be cleared by state and federal regulators.