When will the time be right for Vero Beach to renegotiate its deal with the Orlando Utilities Commission?

NEWS ANALYSIS

MARK SCHUMANN

As of January 1, the City of Lake Worth began buying power from the OUC at a much lower rate than Vero Beach is paying under terms established in a 20-year agreement signed in 2008.  (see related story) Lake Worth’s January bill from the OUC, given to Inside Vero in response to a public records request, reveals that the 5-year deal Lake Worth made with the OUC is yielding a rate some one-third less per megawatt hour that Vero Beach is paying.

The rate differential between Lake Worth and Vero Beach raises the question of whether Vero Beach officials are doing all that can be done to lower rates, while negotiations drag on over the proposed sale of Vero Electric to Florida Power & Light.

To be sure, the discussions between the city and FPL are on hold, awaiting the next proposal from FPL.  Just this week, FPL officials cancelled a planned meeting with City Manager, Jim O’Connor, explaining that they need more time, presumable to develop options, now that it is known both the Florida Municipal Power Agency and the OUC want more to assume Vero Beach’s power entitlements before Jan. 1, 2018 that FPL can or will pay.

Though it has been reported in the island press that the sale of Vero Electric is “being held hostage” by the FMPA, in truth neither the FMPA nor the OUC wants or needs the 40-plus megawatts of power Vero Beach must hand off to some municipal utility before it can sell its electric system to FPL.  Both the OUC and the FMPA have named a price at which they would take on Vero Beach’s power entitlements before Jan. 1, 2018.  As of Jan. 1, 2018, the OUC will be contractually obligated to assume Vero Beach’s position in the Stanton I and Stanton II power projects for $34 million in cash and other considerations.

If the sale is to go forward now, someone will need to step in and assume Vero Beach’s Stanton I and Stanton II power.  FPL cannot take the power, because Internal Revenue Service rules prohibit private use of municipal power.  The only other options seem to be delaying the closing to 2018, at which point the OUC will take the power, or to close sooner and pass the cost on to the 34,000 customers of Vero Electric in the form of a surcharge tax.

After receiving the FMPA’s offer in early December, it took FPL nearly two months to announce the deal will need to be restructured.  All the while, local utility activists are keeping a cumulative count of how much more Vero Electric’s customers are paying for power than they would as customers of FPL – some $2 million a month.

One path to lower rates could be a renegotiated wholesale power contract with the Orlando Utilities Commission.  According to Tom Richards, Power Resources Director for Vero Electric, the city was billed $2,684,000 by the OUC for 33,641 megawatts of power purchased in January.  At $79.78 per megawatt hour, Vero Beach’s rate is $25.27 higher than the $54.51 Lake Worth is paying for electrons comes from the very same power provider.

Based on the amount of power Vero Electric purchased from the OUC in January, the city’s customers would have saved some $850,000.  If, that is, the city were not locked into rates set when the price of coal was relatively low compared to what was then a near-historic high price for natural gas.  Annualized, a savings of $25.27 per megawatt hour from the OUC would amount to approximately $10 million a year. That would translate into a 10 percent savings for the 34,000 customers of Vero Electric.

Vice Mayor Jay Kramer has long contended the city should be working now to renegotiate its deal with the OUC.  Kramer also insists there are other opportunities for the city to reduce rates.  To begin with, Kramer says, the city should resume the practice of financing the cost of long-term capital improvements to the power plant and to the transmission and distribution system.  By financing capital improvements, rather than paying for them out of cash reserves, Kramer and others familiar with city finances contend electric rates could be reduced another $2.5 to $3 million a year.  The savings to the customers of Vero Electric would translate to another 2.5 percent to 3 percent a year.

Decommissioning of the power plant, which would also require successful negotiations with the OUC, could save $4 million a year – another 4 percent that could be shaved off local power bills.

Taken together, these cost savings could bring Vero Electric’s rate for 1000 kilowatt hours of residential use down to $108 to $110.  At least for customers within the city, $108 to $110 per kilowatt hour is close to what they will be paying when a new 6 percent franchise fee is added FPL’s rates.

But what are the chances Vero Beach can renegotiate with the OUC?

As a part of the power purchase agreements that are ancillary to the purchase and sale agreement between Vero Beach and FPL, the OUC has agreed to terminate its wholesale power contract with Vero Beach for $20 million in cash.  Should the proposed sale of Vero Electric fall through, the city could still exercise its option to terminate the existing OUC contract.  The city could then either renegotiate with the OUC, or make a deal with some other power provider, perhaps even FPL.  Offset by savings of $10 million a year, a one-time payment of $20 million would seem like a good investment.

If it turns out that the sale of Vero Electric can only be held together by extending the closing date to early 2018, city leaders will surely feel pressure to work with the OUC to bring rate relief to the customers of Vero Electric sooner rather than later.