Legal battle between city and biomass firm grows


Supporters hold signs outside City Hall during a workshop on Gainesville Renewable Energy Center on Jan. 9, 2012 in Gainesville.

Matt Stamey/Staff photographer
Published: Tuesday, February 5, 2013 at 10:54 a.m.
Last Modified: Tuesday, February 5, 2013 at 10:54 a.m.

The legal battle continues to grow between the city of Gainesville and the company behind the Gainesville Renewable Energy Center biomass plant.

On Friday, GREC filed a counterclaim to Gainesville's prior demand for arbitration. GREC's counterclaim seeks unspecified monetary damages from the city.

In December, the City Commission filed for arbitration on the premise that the late 2011 sale of a 40 percent stake in the biomass plant, combined with the prior sale of a 17 percent stake, constituted a change of controlling interest that should have triggered the city's contractual right of first offer to buy the plant.

At arbitration, Gainesville is seeking to require GREC to allow the city the opportunity to make an offer to buy a controlling interest in the plant.

The GREC counterclaim argues that the city's demand for arbitration is “not an effort to enforce any legitimate rights” under the 30-year contract to purchase all of the plant's output but an “opportunist pretext to force GREC back to the bargaining table … to renegotiate” the contract.

“As a result, this claim is brought solely in an effort to wring contractual concessions to which GRU is not entitled and which GRU explicitly bargained away in arm's length negotiations among sophisticated parties,'' the response reads in part.

“GRU's back-door effort to obtain that which it is denied by contract, cannot be allowed to continue at GREC's expense. GRU must be held accountable for the damages GREC has sustained as a result of the baseless demand.

“Indeed, members of the City Commission have been openly vocal about their desire to force a renegotiation of the economics of GRU's agreement with GREC, and GRU brings this arbitration solely as a leveraging device to force GREC back to the bargaining table despite its prior valid agreement.”

The biomass firms' attorneys argued that politics and low natural gas prices cannot be the basis to alter the terms of the contract.

On Friday, the member companies that own stakes in GREC also filed a federal lawsuit against Gainesville over the arbitration claim against them. The companies assert that because GREC was the firm Gainesville entered a contract with, Gainesville could only file arbitration against GREC — not its members. The city did both.

Meanwhile, GREC executives were in Gainesville Tuesday to have individual meetings with city commissioners to give an update on the plant's construction, which is more than 70 percent complete. The City Attorney's Office made attorneys available to sit in on each meeting.

In an email sent to commissioners Tuesday morning, City Attorney Nicolle Shalley said the commissioners were in a “somewhat unique situation with GREC” with meetings on an update of plant construction happening in the midst of two “adversarial” legal proceedings.

“In particular, I wanted to make you aware that statements made by commissioners, both in public meetings and privately to GREC or others, as well as staff negotiations on the prepay transaction, have been cited in the answering statement as evidence that ‘GRU's ulterior motive for filing its demand is simply to force GREC to re-negotiate the terms of the PPA,' ” Shalley wrote.

Even as city commissioners voted to seek arbitration in December, commissioners spoke of maintaining an amicable working relationship and a partnership with GREC.

Asked if the counterclaim showed a turn toward the contentious, Commissioner Thomas Hawkins responded, “I beg to differ.”

“Arbitration is what it is,” Hawkins said. “It's in the lawyers' hands … There's a difference between what the lawyers write amongst themselves to be reviewed by lawyers or an arbitrator and the conversations other people have. The conversations I have had with them (GREC representatives) have not been contentious.”

Hawkins acknowledged the price gap between what the city will pay for biomass and current natural gas prices. But he said he maintains his support of the biomass plant, believing it will mean long-term price stability when fossil fuel prices fluctuate and it will bring fuel diversity for the electric utility.

Al Morales, the chief financial officer of GREC, declined to comment on the specifics of the arbitration counterclaim. Morales said the company's stance is that it has done nothing to violate the power purchase agreement and there was no sale of a controlling ownership interest. He said GREC officials traveled to Gainesville to meet with city commissioners “to keep the lines of communication open” as attorneys work through the dispute.

City Commissioner Todd Chase, who has been outspoken in his concerns about the rate impact of the plant and his belief that the contract must be renegotiated, declined comment for the time being.

“At this point, I think the prudent course of action is to make no comment and continue to stay on top of the issue as best I can,” Chase said.

The GREC counterclaim argues that the sales of ownership stakes have not constituted a change of controlling interest that would trigger the city's right to make an offer to purchase the plant.

When the City Commission approved the power purchase agreement for the biomass plant in 2009, Kansas-based Tyr Energy owned a 49 percent stake while Boston-based Energy Management Inc. and BayCorp Holdings Ltd. out of New Hampshire each owned 25.5 percent.

In May 2011, Fagen Power, the construction company building the plant, obtained an approximately 17 percent stake as part of a construction financing.

Then, in late 2011, Tyr sold its interest — 40 percent at the time — to Starwood Energy.

The GREC response described those transactions as changes of minority ownership interests that did not constitute a change in control.

EMI and BayCorp continue to hold two of the three seats on the GREC board, just as when the contract was approved, the counterclaim stated.

The GREC response also argued that the city had not expressed any prior interest in acquiring the plant but, conversely, “has stated repeatedly that it does not want to encumber its books with more debt that would be required to effect such a purchase.”

The city only sought to assert a right to first offer after negotiations on a potential deal to prepay for some of the plant's output fell through, the counterclaim argues.

GREC has no legal obligation to renegotiate the contract and the two sides have already been “unable to mutually agree on any revision to the terms,” the response continued.

Attorneys for GREC noted that the firm obtained construction financing based on the terms of the contract.

They also cast doubt if the plant would still be eligible for federal stimulus tax incentives if a municipal government takes an ownership interest.

Without those incentives, the city's price for biomass would, under the contract, rise by $8.35 per megawatt-hour or a total of $197 million over the 30-year life of the contract, the counterclaim stated.

Mayor Craig Lowe declined to comment because of the ongoing arbitration.

“For the issues at hand, this is the process we have,” he said of the arbitration.

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