BY MARK SCHUMANN

Vero Beach’s City Council is on the verge of signing a contract with Florida Power & Light for the sale of the city’s electric utility.  Though the agreement contains several contingencies that could delay a closing until late 2016, or could derail the sale altogether, the Council seems eager to put the deal before voters on March 12.

As described by proponents of the sale and by representatives of Florida Power & Light, the deal is worth $179 million to the city.

And yet, when all the i’s are dotted and the t’s crossed on the sale contract, and the signatures are inked on power transfer agreements between the city, the Florida Municipal Power Agency, the Orlando Utilities Commission and FPL, the city is likely to net no more than $4 million out of the sale.

Based on an appraisal done for the city by GAI Consulting, the city’s 34,000-customer electric system is worth just under $200 million.  FPL has valued its offer at $179 million.

So, what gives?  If the city is selling its electric system for $179 million, why will there be just $4 million left for the city after the dust settles?

For starters, though the city’s transmission and distribution system is in excellent condition, FPL has earmarked more than $24 million of its offer for capital improvements to expand transmission capacity and to build a new substation on land the city will be turning over as a part of the deal.

Statements by city officials and FPL representatives might lead the public to believe the new $7 million substation is only made necessary because of the city’s request that the 17.2-acres power plant site be completely cleared once the plant is decommissioned. In fact, the current substation does not meet FPL’s long-terms needs, and would have to be replaced by a new substation, whether it is built on the current power plant site, or on another location near the intersection of 17^th Street and Indian River Blvd.

Some have argued that FPL’s inclusion of the cost of capital improvements in the total value of its offer is much like a buyer of a home wanting to claim that the cost of adding a new bedroom should be considered a part of the purchase price.  The former owner will never sleep in the new bedroom, so how can it be considered a benefit to them?

Another $30 million of FPL’s offer will go to pay the OUC for power the city would otherwise have bought if it had remained in the utility business.  As a part of the deal, the OUC will assume the city’s commitment to buy 49 megawatts of power from the FMPA.  FPL is agreeing to buy that power from the OUC for three years.  According to FPL, it will cost $30 million to buy that power, rather than generating it at one of its own plants.

The OUC will be paid $34 million as compensation for taking on the city’s obligations to the FMPA. These commitments include debt service on long-term power generating projects the city bought into decades ago.

In return for agreeing to let the city out of a 20-year wholesale power agreement,  the OUC will receive an additional $20 million.  Some recent criticism of the deal centers on the city’s commitment to pay $20 million to the OUC regardless of whether the deal closes in Jan., 2014, or Dec. 2016.

After paying the OUC $54 million, and after accounting for another $54 million FPL proposes to spend on capital improvements and wholesale power, the city’s take would be $89 million – except that there will be other deductions from the proceeds.

FPL is agreeing to take on the city’s 100 electric system employees for two years, though their current positions are not guaranteed.  The city’s pension obligation to these employees will be assumed by FPL at an estimated cost of $14 million.  However, any of these 100 employees who retire before the closing, even if it is delayed three years, will remain on the city’s pension plan, at an estimated cost of $3 million to the city.

Finance Commission Chairman Peter Gorry has estimated the transaction and transition costs to the city will total approximately $8 million, including legal fees to the city’s transactional attorneys and to the FMPA, additional pension obligations for employees who retire before the deal closes and compensation for accrued sick leave and vacation time not assumed by FPL.

Vero Electric also has $50 million in bond and bank debt, much of it taken on to expand and maintain the transmission and distribution system and the power plant.  This debt will have to be paid off out of FPL’s cash offer of $115.5 million.

If the closing is delayed until late 2016, which now seems all but certain, the city will have three years of addition interest expense on its utility debt, costing another $5 million.

During 2014, 2015 and 2016, the city will also be obligated to make long-term capital improvements to the system.  According to the city’s five-year capital budget, those improvements will coast $20 million.  Since the city will be paying cash for the work, the $20 million will be included in the electric rates during the three-year delay.

Because rates were increased in late 2012 to cover the cost of 2013 capital expenses, some may argue that the strategy of paying capital costs out of cash in 2014, 2015, and 2016 will not require much in additional rates increases.  But that is about as compelling an argument as a racketeer bragging that he’s not increasing the amount he plans to extort from in the coming years.

Beyond the identifiable expenses the city will bear as a result of the sale being delayed three years, a potentially far great liability looms.  If the electric system is seriously damaged by a hurricane while it is under contract to be sold to FPL, the city can expect little or no help from the Federal Emergency Management Agency.

In calculating the total cost of a three-year delay, perhaps the biggest expense, though, will fall on the city’s electric customers, who will have to wait for lower rates.

FLP recently reduced the cash component of its offer from $115 million to $111.5 million.  The difference represents the value FPL is placing on its willingness to release the city from liabilities that may arise from its operation of Vero Electric.

However, this limited release of liability will not cover environmental cleanup that might be needed at the power plant site.  FPL is offering to cover up to $500,000 of they cost of any environmental cleanup.  Company representatives have said a phase one environmental study did not reveal any issues with the site, but some have raised questions about what might be found under the power plant once it is dismantled.

When all the pipers are paid, Gorry expects the city will be left with no more than $4 million in cash from the sale.  But his estimate assumes the city will not have to buy security to cover its secondary liability to the FMPA.

Though the OUC is taking on the primary responsibility to pay off Vero Beach’s share of the FMPA’s bonded indebtedness, trustees representing bondholders may still want the city to be in a position to make good on the debt, if the OUC should falter.  It is an unlikely scenario, but because bond trustees are responsible for protecting the interests of bondholders, they may want to see FPL assume Vero Beach’s secondary liability.   That will almost surely come at an additional cost to the city.

Failing that, the trustees might ask the city to put up a security bond.  If so, most, if not all, of the remaining $4 million will go to pay insurance premiums.

Largely because it is costing nearly $100 million for the city to exit is FMPA and OUC obligations, the city is in much the same position as a homeowner who owes more on their house than it is worth.

While it can be argued that FPL’s $179 million offer is a fair price for Vero Electric, it is hard to see the deal as one that is good for the city and its taxpayers.  At the same time, some city leaders who have their doubts about the deal make it crystal clear something must be done to address the concerns of customers who have grown weary of paying rates far higher than FPL is charging.

One alternative that has been given much scrutiny and analysis by Councilmen Jay Kramer and Richard Winger, but that has received little if any attention from Council members Tracy Carroll, Craig Fletcher and Pilar Turner, is a partial sale.

Kramer and Winger say one primary advantage of a partial sale is that it avoids the $64 million cost of exiting the FMPA — $34 million in cash plus an additional $30 million FPL says it will spend to buy power from the OUC for three years.

An additional benefit of a partial sale is that all 22,000 of Vero Electric’s customers who are not located in the city could benefit from FPL rates years before a sale of the full system can be closed, if it can be accomplished at all.

City Manager Jim O’Connor recently set the chances of a sale of the full system at 60 percent.  Why, then, is there not more pressure on the city to move to sell its 22,000 county customers to FPL?

Some argue that simply based on the economics of scale, it is hard to imagine how the city could operate a 12,000-customer system more efficiently than it has run the current 34,000-customer operation.

As is almost always the case, though, the devil, or in this case the angel, is in the details.  By selling off its 22,000 disgruntled county customers, the city could move almost immediately to decommission the power plant, which is costing $5 million a year to operate and maintain.

A partial sale would enable the city to avoid the costs of exiting its FMPA commitments.  Just as importantly, a sale of the city’s 22,000 county customers and its transmission and distribution system outside the city, including its interest in the Fort Pierce Utility Authority tie line, would be worth approximately $92 million.  With the proceeds from a partial sale the city could pay off its $50 million in electric system debt, while still having an additional $42 million left to restructure its pension obligations and build reserves.

What would a partial sale mean to the 12,000 customers who would remain with a downsized, restructured Vero Electric?

Kramer and Winger believe that by renegotiating wholesale power agreements with the OUC, dismantling the power plant, and outsourcing transmission and distribution and customer service Vero Electric could reduce rates to within 10 percent of FPL.  And that differential, they believe, would be seen by many city residents and taxpayers as a fair tradeoff for avoiding the tax increases and cuts in services that will surely result from a sale of the full system.

If a partial sale could net some $50 million more for the city, while also reducing rates for all customers, most especially for those county customers and Indian River Shores residents who are screaming for FPL rates, why, then, has the option of a partial sale received so little attention?  The answer: politics.

Several members of the Council seem bound and determined to get the city out of both of its utility businesses, regardless of the ultimate cost to the city.  At least for Councilwoman Pilar Turner, her motivation appears to be a fundamental belief that governments have no business being in business.  Never mind that she would like to turn the city’s profitable water and sewer system over to the county.  According to its latest balance sheets, the county is operating its water and sewer utility at a $3- million-a-year loss.

With support from fellow Council members Carroll and Fletcher, Turner last year stacked the Utility Commission with members who share her views.

Utility Commission Chairman, Scott Stradley, whose commission is charge with advising the Council on how best to operate its utility businesses, agrees with Turner that the city should sell both Vero Electric and its water and sewer system.  Stradley says the profits from these operations only lead to bloated, inefficient government.

It should be no wonder, then, why Stradley has not been inclined to lead the Utility Commission to more fully explore the potential benefits of a partial sale.  In what was little more than a charade, Stradley invited Kramer to a Utility Commission meeting late last year to explain how a partial sale might work.

After hearing Kramer’s presentation, Turner’s handpicked Utility Commission gave the concept a few minutes of consideration, and then moved on to other business.

If the City Charter is to be followed and respected, it is the Finance Commission, and not the Utility Commission, that should be advising the Council on how it can best reduce electric rates in a way that balances the interests of the city and its taxpayers with the legitimate concerns of the city’s 22,000 county customers.

Because the members of the Utility Commission have little if any familiarity with the city’s overall finances, they are ill-prepared to advise the Council on the likely impact of a sale on city services and taxes.  And yet, it is to the Utility Commission that Carroll, Fletcher and Turner have looked for advice that will echo their own thinking.

This week both the Utility Commission and the Finance Commission will consider the latest, and supposedly last version of the purchase and sale agreement between the city and FPL.  The Utility Commission will meet Tuesday at 10 a.m.. The Finance Commission will meet Thursday at 2 p.m.

When it comes to the proposed sale of Vero Electric, it is as if the troop trains are loaded and are rolling toward the front.

Political momentum is moving the city toward a sale of Vero Electric under terms that could be far less beneficial to the city than other options.  But those options have not been seriously considered by a majority of the Council; and they may very well never be considered, given the political impetus now pushing a full sale forward.