City attorney says city uses electric fuel charge covers allowable costs

Published: Monday, March 4, 2013 at 7:23 p.m.
Last Modified: Monday, March 4, 2013 at 7:23 p.m.

The City Attorney's Office says Gainesville Regional Utilities uses the fuel adjustment charge levied on electric customers to cover allowable costs.

But the city's lead attorney stopped short of saying the city's current use of the charge complies with ordinances governing it and instead recommended that the City Commission revise the ordinance to reflect the city's "desired rate practices" and to ensure that the utility's use of "industry standard rate tools are more transparent to the public."

Those were some of the conclusions in a legal memo five months in the making and released over the weekend by City Attorney Nicolle Shalley.

The legal opinion was requested after several critics of the city's biomass contract and its financial decisions regarding GRU alleged that the city was illegally using the fuel adjustment charge and a related fuel levelization fund.

The crux of the dispute is the approximately $23 million "levelization" fund that GRU has built up over about three years through electric customer fuel charges. The utility intends to spend down the fund to try to limit rate increases when the 100-megawatt biomass plant comes online.

While other utilities have lowered electric rates in recent years in response to the drop in natural gas prices, GRU has held the line on rates and is collecting above its actual fuel costs to build up the levelization fund.

In addition to collecting actual costs for the fuel purchased to fire its power plants and electricity bought from other power companies, the city has, since a 1985 ordinance, had the ability to use the fuel adjustment charge to build up a "levelization" fund as protection against spikes and volatility in costs.

That ordinance stated that the levelization amount shall be "zero" unless the City Commission determines it is in "the public interest to offset fluctuation" in fuel prices by building up the fund. Then, the GRU general manager would be in charge of calculating the levelization amount.

Shalley's opinion noted that the fuel adjustment ordinance "does not require a specific process by which the City Commission determines" there is a need to build up the fund.

In the legal memo, Shalley recommended the City Commission make changes to the ordinance, possibly stating that it is in the "public interest" to maintain a levelization fund above zero and providing a process and guidelines for the commission and the GRU general manager to set the amount of the fund.

"That part of the ordinance doesn't have a lot of specifics," Shalley said. "Certainly the commission could put more specific information in there."

There was no public commission discussion of using the fuel levelization fund to limit rate increases from the biomass plant until budget meetings for this fiscal year.

In a July email to City Commissioner Todd Chase, GRU's attorney Shayla McNeill wrote that, in her legal opinion, the City Commission's approval of the annual GRU budget included approval of GRU leadership's financial decisions, such as the management of the fuel levelization fund.

GRU General Manager Bob Hunzinger previously said that the utility has an informal, unwritten policy of limiting the levelization fund to no more than 10 percent above the utility's actual fuel costs. But with the biomass plant looming, the approximately $23 million fund is now more than 20 percent of the utility's actual electric fuel budget this year.

That has led to some public backlash, allegations that the utility is overcharging customers and a handful of protests outside City Hall before commission meetings.

It also led to the request for Shalley to offer a legal opinion.

"GRU has collected, retained and expended fuel adjustment funds, including levelization, for the purposes of paying for fuel and purchased power costs," Shalley wrote. "GRU has not used the funds for other purposes. GRU is allowed to recover these costs whether it does so through the retail fuel adjustment or through the base rates."

Opinions on the legal opinion differed.

"Ultimately, the memo to me is what I assumed would happen," Chase said. "By the letter of the law it seems not to be illegal, but I don't think it's proper either."

Chase has said utilities should maintain a levelization fund as protection against spikes and volatility, but he said he feels it is improper to use such a fund to limit a cost increase the utility knows is coming.

Hunzinger noted that the memo concluded that the utility has followed industry standard practices, including Federal Energy Regulatory Commission accounting standards, in collecting and spending fuel adjustment money.

"What I got out of that memo is that GRU is following industry standard practices as far as collecting the fuel adjustment," he said.

As a municipal utility, GRU does not have its rates regulated by the Florida Public Service Commission, Shalley noted in the memo.

If an investor-owned utility over-collects on its fuel charge by more than 10 percent, it is called before the PSC to adjust its rates or potentially face an order to issue refunds to customers. In late 2009, the PSC ordered Florida Power & Light to refund customers more than $364 million.

"The Florida Public Service Commission would never allow an investor-owned utility to keep this much excess overcollection on the fuel adjustment charge," Nathan Skop, a former PSC commissioner, said Monday.

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