city of south daytona · city of south daytona ... of fpl assets in sd february 2009 – –...

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City of South DaytonaCity of South Daytona ----------------------------------------------------------------------------------------

Acquisition Feasibility Report forAcquisition Feasibility Report forFPL Electric Distribution SystemFPL Electric Distribution System

February 17, 2009February 17, 2009

Scott Simpson, EsquireScott Simpson, EsquireKoreyKorey, Sweet, McKinnon, Simpson &, Sweet, McKinnon, Simpson & VukeljaVukelja

Brian Armstrong, EsquireBrian Armstrong, EsquireNabors GiblinNabors Giblin & Nickerson, P.A.& Nickerson, P.A.

R.L. WilloughbyR.L. WilloughbyPower ServicesPower Services

ShereeSheree BrownBrownUtility Advisors NetworkUtility Advisors Network

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HISTORYHISTORY

1948 1948 –– 1978 30 year FPL franchise with 1978 30 year FPL franchise with purchase optionpurchase option

1978 1978 –– 2008 30 year FPL franchise with 2008 30 year FPL franchise with purchase optionpurchase option

2006 2006 –– Met with FPL representative to Met with FPL representative to renew existing franchiserenew existing franchise

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2006 2006 –– City retains WHH Enterprises, Inc. City retains WHH Enterprises, Inc. to conduct preliminary evaluation of to conduct preliminary evaluation of acquisition acquisition

2007 2007 –– City retainsCity retains PowerServicesPowerServices, Inc. , Inc. and Utility Advisors Network, Inc. to and Utility Advisors Network, Inc. to study detailed feasibilitystudy detailed feasibility

2007 2007 –– City authorizes filing lawsuit City authorizes filing lawsuit against FPL to protect franchise fee against FPL to protect franchise fee revenuerevenue

June 2008 June 2008 –– City submits consultantCity submits consultant’’s s preliminary feasibility study preliminary feasibility study

November 2008 November 2008 –– FPL provides City with FPL provides City with feasibility assessment feasibility assessment

December 2008 December 2008 –– City authorizes City authorizes consultants to do a detailed inventory consultants to do a detailed inventory of FPL assets in SDof FPL assets in SD

February 2009 February 2009 –– Consultants submit final Consultants submit final reportreport 44

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City ValuationCity ValuationI.I. Acquisition ValueAcquisition Value

Replacement Cost:Replacement Cost: $14,987,762$14,987,762Depreciation:Depreciation: $10,705,072$10,705,072Purchase Price:Purchase Price: $ 4,282,690$ 4,282,690

====================II.II. Severance and Reintegration CostsSeverance and Reintegration Costs

Cost to isolate system from Cost to isolate system from FPLFPL’’s system:s system: $3.7 million$3.7 million

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Comparison of City and FPL ReportsComparison of City and FPL Reports Replacement Cost NewReplacement Cost New

CityCity FPLFPL$14,987,762$14,987,762 $21,858,285$21,858,285

*FPL values Carmen Drive substation *FPL values Carmen Drive substation property at $1,290,000, which City property at $1,290,000, which City appraisal valued at $300,000appraisal valued at $300,000

*FPL includes City purchasing $1,500,000 of *FPL includes City purchasing $1,500,000 of underground utilities installed by Cityunderground utilities installed by City

ComparisonComparison ofof CityCity andand FPLFPL ReportsReports DepreciationDepreciation

City City FPLFPL71%71% 44%44%

* City* City’’s depreciation based on detailed s depreciation based on detailed inspection of FPL assets in Cityinspection of FPL assets in City

* FPL* FPL’’s depreciation is based on a s depreciation is based on a Statewide system averageStatewide system average

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Comparison of City and FPL ReportsComparison of City and FPL Reports Severance and ReintegrationSeverance and Reintegration

CityCity FPLFPL$3.700,000$3.700,000 $5,600,000$5,600,000

*FPL assumed that City would *FPL assumed that City would underground all of the new lines at a underground all of the new lines at a cost of $1,000,000 per milecost of $1,000,000 per mile*FPL assumed that all utility poles on*FPL assumed that all utility poles on BevilleBeville Road are located within Road are located within Daytona BeachDaytona Beach

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ASSUMPTIONSASSUMPTIONS ININ PREPARINGPREPARING OPERATING PROFORMA OPERATING PROFORMA

AssumptionsAssumptions

Retail rates based on current FPL rates plus 9% Retail rates based on current FPL rates plus 9% based on announced March 09 rate increase based on announced March 09 rate increase

Wholesale power based on Progress EnergyWholesale power based on Progress Energy’’s rate s rate to Winter Parkto Winter Park

General fund transfers maintained at 08General fund transfers maintained at 08--09 09 budgeted franchise fee and utility tax amountsbudgeted franchise fee and utility tax amounts

Administrative costs based on incremental cost of Administrative costs based on incremental cost of adding electrical service to existing utility departmentadding electrical service to existing utility department

2010 Operating Pro2010 Operating Pro--formaforma

Total RevenueTotal Revenue $16,092,075$16,092,075Total ExpendituresTotal Expenditures $15,482,982$15,482,982ProfitProfit $609,094$609,094

2011 Profit2011 Profit $729,884$729,8842029 Profit2029 Profit $2,188,681$2,188,681

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VariablesVariables

Revenue:Revenue:–– FPLFPL’’s future retail rates future retail rate

Costs:Costs:–– Wholesale powerWholesale power–– Stranded costsStranded costs–– Acquisition priceAcquisition price

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CONSIDERATIONSCONSIDERATIONS

Will not have this purchase option againWill not have this purchase option again

FPL has not offered any compensation for FPL has not offered any compensation for the City relinquishing the purchase optionthe City relinquishing the purchase option

City will be expending funds on burying City will be expending funds on burying overhead lines along Ridgewoodoverhead lines along Ridgewood

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MunicipalizationMunicipalization benefits: benefits: Why are you here?Why are you here?

Save $ for businesses & consumers?Save $ for businesses & consumers?

Excellent customer service & satisfactionExcellent customer service & satisfaction–– Why? Council is Why? Council is ““CEO,CEO,”” demands actiondemands action

–– A lot easier to call local elected officials, city manager A lot easier to call local elected officials, city manager or utility director than the CEO of a large utilityor utility director than the CEO of a large utility

Excellent reliabilityExcellent reliabilityMore underground wiresMore underground wires

Faster response during outagesFaster response during outages

$ stays in community $ stays in community

?

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Why Purchase Electric Why Purchase Electric Distribution System Now?Distribution System Now?

One opportunity to purchase at most advantageous price possible:One opportunity to purchase at most advantageous price possible: replacement cost new less depreciationreplacement cost new less depreciation

FPL will not agree to include purchase option in new franchise aFPL will not agree to include purchase option in new franchise and nd has offered nothing of value to convince City to relinquish thishas offered nothing of value to convince City to relinquish this valuable option to purchase at attractive price: the Cityvaluable option to purchase at attractive price: the City’’s hand has s hand has been forcedbeen forced

City successful track record operating utilitiesCity successful track record operating utilities

City decision to operate water and wastewater utilities has had City decision to operate water and wastewater utilities has had LONG TERMLONG TERM beneficial impact on City and its residentsbeneficial impact on City and its residents

The CityThe City’’s plan to underground electric facilities requires City, not s plan to underground electric facilities requires City, not FPL, to pay most of the costs. If City buys FPL distribution syFPL, to pay most of the costs. If City buys FPL distribution system, stem, the City will benefit directly from its investmentthe City will benefit directly from its investment

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Public Power in FloridaPublic Power in Florida34 municipal electric utilities 34 municipal electric utilities (of 400+ cities)(of 400+ cities)

3 million Floridians (15%)3 million Floridians (15%)Large & SmallLarge & Small–– JEA: 409,000 customersJEA: 409,000 customers–– OUC: 198,000 customersOUC: 198,000 customers–– Moore Haven: 984 customersMoore Haven: 984 customers–– South Daytona: 6,500 customersSouth Daytona: 6,500 customers

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U.S. Electric UtilitiesU.S. Electric UtilitiesNumber of Electric Utilities

2007

Investor-Ow ned217

Cooperative992

Federal 9

Publicly Ow ned 2,010

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U.S. Electric UtilitiesU.S. Electric UtilitiesUltimate Customers

2007Cooperative

12%

Investor-Ow ned73%

Federal 0%

Publicly Ow ned 15%

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FloridaFlorida’’s Public Power s Public Power UtilitiesUtilities

Winter Park

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U.S.U.S. Electric UtilitiesElectric Utilities

ResidentialResidential CommercialCommercial IndustrialIndustrial

Publicly OwnedPublicly Owned 9.2 cents9.2 cents 8.6 cents8.6 cents 6.1 cents6.1 centsCooperativeCooperative 9.7 9.7 8.98.9 6.06.0PrivatePrivate 10.810.8 9.49.4 6.16.1

*Revenue/kWh,*Revenue/kWh,U.S. Department of Energy, U.S. Department of Energy, Energy Information Administration, Energy Information Administration, Form EIAForm EIA--861, 2007861, 2007

2007 Rates/kWh*

2020

FloridaFlorida Electric UtilitiesElectric Utilities

ResidentialResidential CommercialCommercial IndustrialIndustrial

Publicly OwnedPublicly Owned 10.7 cents10.7 cents 9.5 cents9.5 cents 7.1 cents7.1 centsCooperativeCooperative 10.5 10.5 9.59.5 8.08.0PrivatePrivate 11.411.4 9.89.8 8.08.0

*Revenue/kWh,*Revenue/kWh,U.S. Department of Energy, U.S. Department of Energy, Energy Information Administration, Energy Information Administration, Form EIAForm EIA--861, 2007861, 2007

2007 Rates/kWh*

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Electric UtilitiesElectric Utilities’’ PhilosophyPhilosophyPublicPublic PrivatePrivate CoopCoop

Locally ownedLocally owned

Consumer ownedConsumer owned

Consumer governedConsumer governed

Profit to: stockholdersProfit to: stockholders

membersmembers

communitycommunity

Collect & pay taxesCollect & pay taxes

Open meetings, recordsOpen meetings, records

Public accountabilityPublic accountability

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ReliabilityReliability

Source: Florida Municipal Power Agency Reliability ProjectSource: Florida Municipal Power Agency Reliability Project

0

50

100

150

200

250

Minutes

MUNIS FPL TECO PEF GULF FPUCFlorida Utilities

Average Length of a Services Interruption (L-BAR)

2004200520062007

Number of minutes each customer is out of power during an outage. L-Bar = minutes of interruptiontotal number of outages

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Hurricanes and EmergenciesHurricanes and Emergencies

Mutual AidMutual Aid

FMEA and APPA members agree to FMEA and APPA members agree to assist each other during stormsassist each other during storms

Immediate responseImmediate response

20042004--05 Hurricane Seasons05 Hurricane Seasons–– Hundreds of Crews assistedHundreds of Crews assisted

from across FL and the USfrom across FL and the US

FEMA Reimbursement FEMA Reimbursement

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Momentary Average Interruption Momentary Average Interruption Frequency IndexFrequency Index

(MAIFI)(MAIFI)MAIFI is a measure of momentary outages, typically MAIFI is a measure of momentary outages, typically less than one minute in duration, recognizable by less than one minute in duration, recognizable by blinking digital clocks and VCRsblinking digital clocks and VCRs

Progress Energy Florida had a high MAIFI when the Progress Energy Florida had a high MAIFI when the City of Winter Park purchased its electric distribution City of Winter Park purchased its electric distribution system in June 2005system in June 2005

By focusing on system reliability within the City, By focusing on system reliability within the City, Winter Park reduced MAIFI dramaticallyWinter Park reduced MAIFI dramatically

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Is There Is There ““Cost CompetitionCost Competition”” Today?Today?

Utilities compete at wholesale Utilities compete at wholesale for generation today, buying for generation today, buying and selling to each other.and selling to each other.Most sales are for large Most sales are for large quantities.quantities.Individual customers not Individual customers not allowed to purchase power allowed to purchase power separatelyseparately

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MunicipalizationMunicipalizationCity purchases local poles & wires.City purchases local poles & wires.–– Issues bonds to purchase system.Issues bonds to purchase system.

–– Maintains with own crew or contracts out.Maintains with own crew or contracts out.

Purchases power on wholesale market.Purchases power on wholesale market.

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Difficult Choices:Difficult Choices: Weighing the Pros & ConsWeighing the Pros & Cons

What is most important to What is most important to you?you?–– Rates?Rates?

–– Reliability?Reliability?

–– Undergrounding?Undergrounding?

–– Storm response?Storm response?

Cost will probably be Cost will probably be about the same in the about the same in the long runlong run

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Is this complicated?Is this complicated?

Heck No!Heck No!

Not rocket science:Not rocket science:–– If 2,000 cities can do it, so can we!If 2,000 cities can do it, so can we!

–– We have good lawyers.We have good lawyers.

–– We have good engineersWe have good engineers

–– If itIf it’’s a good idea, the politics s a good idea, the politics will follow.will follow.

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PerspectivePerspective100100--year decision...year decision...City made wise decision to enter water and City made wise decision to enter water and wastewater business years ago wastewater business years ago Electric service will supplement the excellent Electric service will supplement the excellent utility services recognized by City residentsutility services recognized by City residents

http://www.cityofmarcoisland.com/Public_Documents/index

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Valuation DiscrepanciesValuation DiscrepanciesDepreciationDepreciation::

-- FPL has not provided depreciation FPL has not provided depreciation records to Cityrecords to City-- FPL suggests use of statewide FPL suggests use of statewide averageaverage-- Statewide average reduces true Statewide average reduces true depreciation for assets located in South depreciation for assets located in South DaytonaDaytona

ResultResult::-- City forced to perform actual inventoryCity forced to perform actual inventory-- FPL estimate invalidatedFPL estimate invalidated-- City estimates validatedCity estimates validated

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Valuation DiscrepanciesValuation Discrepancies (continued)(continued)

Land CostLand Cost::-- FPL values land at $1,290,000 FPL values land at $1,290,000 based on statewide estimatebased on statewide estimate

ResultResult::-- City forced to hire land appraiserCity forced to hire land appraiser-- FPL estimate invalidatedFPL estimate invalidated-- City estimate validatedCity estimate validated

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City Investment in Underground FacilitiesCity Investment in Underground Facilities::-- FPL suggests City must FPL suggests City must ““pay pay againagain”” for assets paid for by Cityfor assets paid for by City

ResultResult::-- City never transferred ownership of City never transferred ownership of assets to FPLassets to FPL

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Distribution Facilities Outside CityDistribution Facilities Outside City::-- FPL suggests the City would be FPL suggests the City would be required to purchase significant required to purchase significant distribution assets located outside Citydistribution assets located outside City

ResultResult::-- City forced to perform on site City forced to perform on site inspectioninspection-- 3 poles located outside City3 poles located outside City

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MiscellaneousMiscellaneous::-- FPL assumptions regarding revenue, debt service, FPL assumptions regarding revenue, debt service, operating expenses, capital outlays each designed to operating expenses, capital outlays each designed to create appearance that transaction not feasible create appearance that transaction not feasible -- FPL assumes electric service operation will be FPL assumes electric service operation will be starting from scratch using irrelevant industry start up starting from scratch using irrelevant industry start up costscosts

ResultResult::-- City consultantCity consultant’’s reasonable assumptions embedded s reasonable assumptions embedded in feasibility reportin feasibility report-- City consultant focused on incremental cost to add City consultant focused on incremental cost to add electric service to the existing water and wastewater electric service to the existing water and wastewater services provided by the Cityservices provided by the City

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Stranded CostsStranded CostsCompensation for Alleged Lost ProfitsCompensation for Alleged Lost Profits

None Claimed to DateNone Claimed to Date

FPL Burden of ProofFPL Burden of Proof

Compelling Arguments Dictate No Compelling Arguments Dictate No Stranded CostsStranded Costs