City pursues a variety of ways to cushion the impact of biomass plant
Published: Saturday, September 22, 2012 at 4:50 p.m.
Last Modified: Saturday, September 22, 2012 at 4:50 p.m.
As the biomass plant rises off U.S. 441 in the face of a dedicated group of opponents who frequent City Commission meetings, the city continues to pursue a series of moves to cushion the rate impact when the facility, known as the Gainesville Renewable Energy Center, comes online in late 2013.
Steps to date have included a Gainesville Regional Utilities bond refinancing in excess of $180 million, a decision not to renew a $12 million contract to purchase power from Progress Energy and building up a reserve through customer fuel charges that is expected to reach almost $22 million by October 2013.
A step now under consideration was first identified as a cost-cutting option before the city signed the 30-year contract to purchase all the electricity from the 100-megawatt biomass plant that the private firm American Renewables will own and operate.
It would involve prepaying for a yet-to-be-determined portion of the electrical output in order to receive a discount from the $130-per-megawatt-hour price.
At this point, negotiations on the prepay plan are in the early stages and details are not in place on any potential agreement, GRU General Manager Bob Hunzinger said.
Still, the City Commission voted 5-2 on Sept. 11 to authorize GRU to hire up to three investment banks — Goldman Sachs, Bank of America Merrill Lynch and JP Morgan Securities — at a combined cost of up to $600,000 to serve as financial advisers on the structuring of a potential prepay deal.
That sparked public concerns over some of the risky transactions those banks were involved in during and since the recession, with Hunzinger saying the city’s plans would involve the more stable area of municipal bonds.
There were also concerns from members of the public and some commissioners over the potential conflict of interest if one of the banks advising the city then turns around and takes a financial interest in the deal by selling bonds that would finance the prepayment of electricity.
In an interview, Hunzinger said any prepay deal would provide the city protection.
Specifically, Hunzinger said the city would not issue the bonds and incur the debt to finance the deal and the city would not be the entity prepaying GREC for the electricity.
Instead, a “conduit” would be established as a separate legal corporation or partnership to issue tax-exempt bonds and prepay. As electricity is generated, the city then purchases that power from the conduit.
“If they (GREC) don’t deliver, we don’t have any obligation to pay ... because we didn’t prepay, the conduit did,” Hunzinger said.
GREC would benefit from receiving cash up front in order to pay off the loan that funded plant construction more quickly and cut down on interest costs, said Al Morales, GREC’s chief financial officer.
Morales said because the prepayment would achieve savings for GREC, there would be a discount on the price of electricity, which was set at an amount to cover labor and operational costs, the purchase of fuel, construction expenses and a profit margin.
While prepayment was identified as an option before the city inked the contract with GREC, the bond refinancing that closed in August came to pass after multiple city assumptions from the time of the project’s 2009 approval did not.
Cap and trade legislation has not materialized. A once expected state requirement for utilities to develop a renewable energy portfolio also did not. Natural gas prices plummeted. Against that backdrop, the city, which had planned to sell off half of the plant’s potential output at any one time — 50 megawatts — for a decade, has found no takers among other utilities.
So the city took advantage of low interest rates to pursue refinancing — a step that in other cases could be used to lower utility rates — in an effort to limit rate increases during the first several years after the plant comes online.
As it stands, the projection is that rates will rise by $10.56 per 1,000 kilowatt-hours the first year the plant is in operation and the increase above the current amount will be $23 per 1,000 kWh by 2019.
The utility refinanced $81.8 million at fixed interest rates and some $100.4 million at variable interest rates — amounts above the initial expectation but below the maximum threshold the City Commission authorized.
GRU Chief Financial Officer Jennifer Hunt said the utility now has 14 percent of its debt at a variable interest rate when, according to the utility’s financial advisers, 25 percent is the industry norm.
The current projection is that the refinancing will lower the utility’s annual debt payments for the first several years after the biomass plant goes into operation more significantly than previously expected — an expected reduction of some $23 million in 2017 when the prior estimate was about $10.3 million. It’s also projected to lower annual debt payments through 2026, when the prior projection was 2020.
After that, the projection is that annual debt payments will rise above the pre-refinancing amount from 2027 through 2040, with two extra years of debt payments in 2041 ($16.2 million) and 2042 ($16.7 million).
Over the next 30 years, the current projection is that GRU will pay a combined $1.57 billion in principal and interest payments on its debt.
Hunt said the refinancing will bring a net present value savings of almost $7.5 million over the next 30 years — a projected 5.9 percent on the fixed interest rate series of bonds and 2.6 percent on the variable rate.
That means the savings of the refinancing are expected to outweigh its costs by some $7.5 million when inflation and the expectation that the dollar will depreciate over time are taken into account.
Of the moves intended to cushion the future rate impact from the biomass plant, the decision not to lower the current rates at a time when the utility is seeing lower fuel costs, but instead to use customer fuel charges to build up a reserve fund, has caused the most ruckus at City Hall.
GRU has an informal policy of collecting no more than 10 percent over actual fuel costs from customers. If the utility adhered to that policy, the fund would be approximately $10.5 million at the start of the upcoming fiscal year. Instead, it will be closer to $18 million and will reach some $22 million by October 2013.
Under the Florida Administrative Code, an investor-owned utility that collected more than 10 percent above actual fuel costs would have to inform the Public Service Commission and potentially refund money to customers.
GRU, as a municipal utility, does not have its rates regulated by the PSC.
Biomass opponents have protested on the front steps of City Hall, demanding a refund for the “overcharge.” During public comment at City Commission meetings, they have argued that the city has violated its own ordinance related to fuel charges by building up a reserve fund of this size.
City Attorney Marion Radson and GRU Attorney Shayla McNeill have both said this is not a violation of city ordinance.
In an email to Commissioner Todd Chase, McNeill pointed to a portion of the city ordinance that allows Hunzinger, as the GRU general manager, to use the customer fuel charges to build a fund that would levelize fuel costs over time — provided that the City Commission has given approval.
McNeill opined that the commission’s approval of the annual GRU budget serves as the approval of the general manager’s “financial decisions” for the utility, including the build-up of a fund to levelize fuel costs.
At last Thursday’s meeting, Jo Beaty, the president of the anti-biomass group Gainesville CARE, noted that city officials had stated that customers would not begin paying for the biomass plant until it comes online.
She said the city had gone back on that pledge by using current customer fuel charges to build up a reserve fund to cushion against the future spike in fuel costs from the biomass plant.