An Analysis of the Florida Municipal Power Agency Audit

An Analysis of the Florida Municipal

Power Agency AuditMARCH 2015

UPDATED APRIL 2015

Dear Fellow Taxpayers,On February 9, 2015, Florida TaxWatch was asked to analyze the Florida Auditor General’s preliminary and tentative audit of the Florida Municipal Power Agency (FMPA) by State Representative Debbie Mayfield and make recommendations based upon that analysis. Florida TaxWatch issued its analysis of the preliminary and tentative audit in March 2015.

Florida TaxWatch now updates that March analysis to reflect the findings contained in the Auditor General’s final audit report (Report No. 2015-165), released one business day before this report was released. It is important to note that the recommendations in this report regarding the need for increased oversight and accountability remain unchanged.

I hope that the analysis and recommendations contained herein are helpful to the Legislature, and the taxpayers they serve, as it considers this issue.

Sincerely,

Dominic M. Calabro President & CEO

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an analysis of the florida Municipal power agency audit

EXECUTIVE SUMMARYThe Florida Municipal Power Agency (FMPA) was established in 1978 to provide competitively priced, reliable power and value-added services for its member municipalities. Concern over higher rates has caused some FMPA member municipalities to “break ranks” in pursuit of lower power rates. Member municipalities wishing to terminate their participation in FMPA projects have experienced difficulties exiting their FMPA contracts.

After careful review and consideration of the Auditor General’s final audit report (Report No. 2015-165), FMPA’s annual reports, FMPA’s financial statements for the past ten years (from the fiscal year ending September 30, 2005 to the most recent fiscal year ending September 30, 2014), and other relevant information, Florida TaxWatch offers the following conclusions and recommendations to improve the oversight and accountability of FMPA, and to make the activities of the FMPA more transparent to the taxpayers:

Conclusions

1. Of the five power projects currently operated by the FMPA, only the municipalities participating in the Stanton, Tri-City and Stanton II projects received reduced average all-inclusive billing rates in fiscal year 2014. Customers in these municipalities represent less than 14 percent of the total megawatt hours billed by FMPA during fiscal year 2014.

2. Looking at the period covering the last 10 fiscal years (2005-2014), the demand for power decreased for every FMPA power project, with the exception of St. Lucie. The average all-inclusive billing rates, however, increased for every power project. The reduced demand for energy, coupled with increased fixed costs, has resulted in increased billing rates for FMPA members.

3. Competition in wholesale electricity markets creates incentives for efficiency and innovation while providing the most affordable prices consistent with long-term investments. These efficiency gains translate to reduced fuel use, lower costs, lower emissions, and fewer power plants needed to meet demand. The exit provisions in the power supply agreements make it extremely difficult for member municipalities to test the electricity market and pursue more competitive wholesale rates.

4. The Auditor General identified a number of operating policies and practices that have contributed to higher costs for FMPA member municipalities. These activities and practices have resulted in millions of dollars in losses and increased the risk of future losses, and have called into question the governance, oversight, and accountability of the FMPA.

5. Only one of the six FMPA Governing Board Officers is an elected official; the other five Governing Board Officers are appointed officials who do not report directly to voters. Thus, the rates paid by FMPA member municipalities are established by individuals who do not report or answer directly to the voters.

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A FLORIDA TAXWATCH REPORT

Recommendations

1. The Joint Legislative Auditing Committee should exercise its jurisdiction and invite the Office of the Auditor General to review and discuss its audit findings and to give the FMPA an opportunity to respond and defend its operating policies and practices.

2. The Joint Legislative Auditing Committee should require the FMPA to submit a corrective action plan, and to make periodic reports of its progress implementing this plan. Terms like “will consider” and “as soon as practical” should be replaced with specific corrective actions to be taken, including the proposed exit strategy for the Taylor swaps, and specific dates by which these actions will be completed. The exit strategy for the Taylor swaps should be designed to be transparent, minimize losses, and avoid the issuance and financing of additional debt.

3. Membership on the FMPA Board of Directors and Executive Committee should be limited to local elected officials who report directly to the voters. In addition, one or more independent officials, who have the requisite electric utility experience and expertise and are not a representative of any member municipality, should be appointed to the Board of Directors and Executive Committee.

4. The exit provisions contained in Section 29(c) of the existing power supply contracts should be revised to: (a) make expressly clear and understood what is meant by “all of the additional costs reasonably paid or incurred, reasonably anticipated to be paid or incurred, or reasonably projected to be incurred by FMPA as a result of the member’s withdrawal;” and (b) eliminate the provision granting the FMPA the sole discretion to interpret and apply the severance provisions. Members should be able to exit with reasonable and predictable exit costs to best serve their customers.

5. In addition to periodic operational audits conducted by the Auditor General, the Legislature should direct the Office of Program Policy Analysis and Government Accountability (OPPAGA) to conduct a study, or to contract with subject matter experts to conduct a study, to determine whether, given the increased competition in the wholesale electricity market, the FMPA represents the most effective means for ensuring that its member municipalities are receiving the most affordable prices consistent with long-term investments.

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INTRODUCTIONThe Florida Municipal Power Agency (FMPA) was established as a joint action agency in 1978 under the Florida Interlocal Cooperation Act (subsection 163.01, Florida Statutes) and the Joint Power Act (Part II of Chapter 361, Florida Statutes) to finance, acquire, construct, manage, operate, or own electric power projects, or to accomplish these same purposes jointly with other public or private utilities. An amendment to the Florida Interlocal Cooperation Act in 1985 and an amendment to the Interlocal Agreement in 1986 authorized FMPA to implement a pooled financing or borrowing program for electric, water, wastewater, waste refuse disposal or gas projects for FMPA and its members.1

Also in 1986, FMPA began purchasing or building the power resources and purchasing the transmission services necessary to meet all of the needs for power of participating member municipalities, a concept known as “All-Requirements” power supply. Since its inception, All-Requirements has grown into FMPA’s largest power supply project, with 14 participating member municipalities.

Through the All-Requirements Project (ARP), FMPA has acquired varying ownership interest in several power plants located throughout Florida, including the Stanton Energy Center Units 1 and 2; Indian River Combustion Turbines A, B, C, and D; and Stanton Unit A. FMPA holds 100 percent ownership interest in the Treasure Coast Energy Center; Cane Island Units 1, 2, 3, and 4; Key West Units 1, 2, 3, and 4; and Stock Island MS Units 1 and 2.2

FMPA functions as a “wholesale” power agency, providing economies of scale to its member municipalities. In a wholesale electricity market, electricity is generated by a power company that will not deliver it directly to the end-use customer. In a wholesale electricity market, the commodity is the megawatt (MW), which may be bought and sold a number of times before it is ultimately used by the end consumer. According to the Electric Power Supply Association, the wholesale market is open to anyone who, after securing the necessary approvals, can generate power, connect to the grid, and find a party willing to buy their output. It is not necessary to own any generation or serve any end-use customers to be a participant in the wholesale market. Just as with many other commodities, individual traders (or power marketers) exist who buy power on the open market and re-sell it.3

1 Florida Municipal Power Agency, “Imagine Forward, Our Next 35 Years: 2013 Annual Report.”2 Auditor General, State of Florida, “Operational Audit : Florida Municipal Power Agency,” Report No.

2015-165. March 2015.3 Electrical Power Supply Association, “Electricity Primer – The Basics of Power and Competitive

Markets,” retrieved from www.epsa.org/industry/primer/?fa=wholesaleMarket, March 2, 2015.

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It is the mission of FMPA to “provide competitively priced, reliable power and value-added services for municipal electric utilities through joint action.”4 Success in accomplishing this mission is measured by FMPA’s ability to help its member municipalities “stay competitive with cost-effective generation and services” and by “providing competition in the wholesale market to drive down costs.”5

SCOPE AND PURPOSEOn February 9, 2015, Representative Debbie Mayfield wrote to Florida TaxWatch President and CEO Dominic Calabro to request that Florida TaxWatch analyze the January 21, 2015 audit of the FMPA conducted by the Auditor General, and to propose recommendations to the Florida Legislature that will serve all Floridians. On February 20, 2015, the FMPA submitted its response to the Auditor General’s preliminary and tentative findings. After careful review and consideration of FMPA’s response, the Auditor General issued its final audit on March 27, 2015.

This paper will focus on the extent to which FMPA is offering competitively priced and cost-effective power generation and services to its member municipalities, and will attempt to answer the following questions:

• Is the FMPA offering its member municipalities cost-effective power generation and services and driving down costs?

• If not, then what are the reasons why the FMPA is not offering its member municipalities cost-effective power generation and services?

• If not, what actions are necessary to make sure FMPA member municipalities receive cost-effective power generation and services?

To answer these questions, Florida TaxWatch carefully reviewed and analyzed the Auditor General’s final audit report (Report No. 2015-165), FMPA’s annual reports, FMPA’s financial statements for the past ten years (from the fiscal year ending September 30, 2005 to the most recent fiscal year ending September 30, 2014), and other relevant information.

4 Retrieved from http://fmpa.com/about/overview/ on March 3, 2015.

5 Retrieved from http://fmpa.com/about/overview/ on March 3, 2015.

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COMPETITIVE RATE COMPARISONSIn its March 2015 final audit report, the Auditor General compared monthly residential service bills for the month of December 2013 for Investor Owned Utilities (IOUs), non-FMPA member municipal electrical utilities, FMPA ARP members, and FMPA non-ARP members. The Auditor General reported that the weighted average monthly bills for FMPA ARP member municipalities are greater than the weighted average IOU bills by $7.12 (6 percent) and the weighted average of non-FMPA member municipal electric utilities’ monthly bills by $4.09 (3 percent). Within FMPA, the weighted average bill for an FMPA ARP member is higher than the weighted average bill for an FMPA non-ARP member by $4.81 (4 percent).6

The Auditor General acknowledges that the higher residential rates paid by FMPA ARP members are attributable to a number of factors, some of which are beyond the control of FMPA. The Auditor General looked at residential rates for a one-month period in 2013. To get a longer look, Florida TaxWatch reviewed FMPA’s financial statements for the last ten fiscal years, from October 2005 through September 2014, for each of FMPA’s five power projects.

All-Requirements ProjectThe ARP is part of the Florida Municipal Power Pool (Pool). The Pool is a consortium of three municipal energy suppliers: the ARP, Lakeland Electric, and the Orlando Utilities Commission. Through the ARP, the FMPA provides all of the electricity needs for the ARP members that are not met by other FMPA projects. Member municipalities that receive power through the ARP are: Bushnell, Clewiston, Fort Meade, Fort Pierce, Green Cove Springs, Havana, Jacksonville Beach, Key West, Kissimmee, Leesburg, Newberry, Ocala, and Starke.

The ARP includes ownership interest in Stanton Energy Center Units 1 and 2, Stanton Unit A, and Indian River Combustion Turbine Units A, B, C, and D. The ARP also includes the purchase of power for resale to ARP participants and 100% ownership or ownership cost responsibility (for jointly owned and participant-owned units) of Treasure Coast Energy Center, Cane Island Units 1, 2, 3, and 4, FMPA’s Key West Combustion Turbine Units 1, 2, 3, and 4, and Key West Stock Island MS Units 1 and 2.7

Energy rate adjustments are driven by the ARP’s Operation and Maintenance (O&M) Fund month-end cash balance and the cash balance needed to meet the targeted balance of 60 days of cash within the O&M Fund.

If it is determined that the O&M Fund balance is over the 60-days O&M Fund cash balance target amount, the energy rate adjustment will result in a lower billing rate relative to projected

6 Auditor General, State of Florida, “Operational Audit : Florida Municipal Power Agency,” Report No. 2015-165. March 2015.

7 Florida Municipal Power Agency, Financial Statements for the Fiscal Year Ended Sept. 30, 2013.

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expenses and thereby reduce the future O&M Fund balance. Likewise, if the O&M Fund balance is below the 60-day cash target, the energy rate adjustment will result in a higher billing rate relative to projected expenses and thereby increase the future O&M Fund balance.8

In fiscal year 2013, increases in the price of natural gas caused the average all-inclusive billing rate (which includes budgeted demand, energy and transmission expenses) for participating municipalities to increase to $90.36 per megawatt hour (MWh).9 For 2014, due to costs associated with the market price of natural gas, the average all-inclusive billing rate increased to $91.25 per MWh.10

Examining the FMPA’s all-inclusive billing rate and demand for power (as measured by the number of megawatt hours billed to participating municipalities) over the past ten fiscal years shows the following changes, for the first five years, last five years, and ten years in the aggregate:

FY2005 - FY2009 FY2010 - FY2014

DEMAND FOR POWER

AVG. ALL-INCLUSIVE BILLING RATE

DEMAND FOR POWER


5% 53% 9% 4%

FULL TEN YEAR PERIOD

DEMAND FOR POWER


17% 33%*

*When adjusted for inflation,11 the increase was 10 percent.

8 Florida Municipal Power Agency, Financial Statements for the Fiscal Year Ended Sept. 30, 2013.9 Florida Municipal Power Agency, Financial Statements for the Fiscal Year Ended Sept. 30, 2013.10 Florida Municipal Power Agency, Financial Statements for the Fiscal Year Ended Sept. 30, 2014.11 Inflation adjustments were calculated using the Bureau of Labor Statistics’ CPI Inflation Calculator,

retrieved from http://www.bls.gov/data/inflation_calculator.htm, March 3, 2015.

5.0M

5.5M

6.5M

7.0M

6.0M

$60

$70

$80

$90

$100

$110

FY’05 FY’08 FY’11 FY’14

MW

H B

ILLE

D

RA

TE P

ER M

WH

ARP BILLEDARP MWh Billed Vs. Rate Charged Per MWh

Source: FMPA Financial Statements

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St. Lucie ProjectFMPA has an 8.806 percent ownership interest in St. Lucie Unit 2, a 1,002 megawatt (MW) nuclear power plant owned primarily by Florida Power and Light (FPL). Member municipalities that receive power through the St. Lucie Project are: Alachua, Clewiston, Fort Meade, Fort Pierce, Green Cove Springs, Homestead, Jacksonville Beach, Kissimmee, Lake Worth, Leesburg, Moore Haven, New Smyrna Beach, Newberry, Starke, and Vero Beach.

Increased capacity12 at Unit 2 and the Unit’s return to service permitted FMPA to reduce the average all-inclusive billing rate in fiscal year 2013 by 31 percent, to $70.09 per MWh.13 For fiscal year 2014, decreased capacity utilization from refueling outages resulted in an increase in the average all-inclusive billing rate 16 percent, to $81.27 per MWh.14


FY2005 - FY2009 FY2010 - FY2014

DEMAND FOR POWER


DEMAND FOR POWER


8% 16% 16% 14%


DEMAND FOR POWER


9% 35%*


12 2012 modifications increased the electric output from approximately 853 MW to 1,002 MW.13 Florida Municipal Power Agency, Financial Statements for the Fiscal Year Ended Sept. 30, 2013.14 Florida Municipal Power Agency, Financial Statements for the Fiscal Year Ended Sept. 30, 2014.15 Inflation adjustments were calculated using the Bureau of Labor Statistics’ CPI Inflation Calculator,


400K

450K

500K

550K

600K

650K

700K

$40

$60

$80

$100

$120

MW

H B

ILL

ED

RA

TE P

ER M

WH

STLUCIE BILLED

FY’05 FY’08 FY’11 FY’14

St. Lucie MWh Billed Vs. Rate Charged Per MWh


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Stanton ProjectFMPA has a 14.8193 percent ownership interest in Stanton Unit 1, a 441 MW coal-fired power plant operated by its primary owner, the Orlando Utilities Commission. Member municipalities that receive power through the Stanton Project are: Fort Pierce, Homestead, Kissimmee, Lake Worth, Starke, and Vero Beach.

As a result of decisions to use more economical natural gas fired power plants, FMPA increased the average all-inclusive billing rate 9 percent, to $131.77 per MWh in fiscal year 2013.16 For fiscal year 2014, decisions to increase coal fired power plant usage as coal prices became more economical, and longer than anticipated outages of other generating units in the Florida Municipal Power Pool permitted FMPA to decrease the average all-inclusive billing rate 27 percent to $96.47 per MWh.17


FY2005 - FY2009 FY2010 - FY2014

DEMAND FOR POWER


DEMAND FOR POWER


2% 25% 21% 38%


DEMAND FOR POWER


22% 90%*


16 Florida Municipal Power Agency, Financial Statements for the Fiscal Year Ended Sept. 30, 2013.17 Florida Municipal Power Agency, Financial Statements for the Fiscal Year Ended Sept. 30, 2014.18 Inflation adjustments were calculated using the Bureau of Labor Statistics’ CPI Inflation Calculator,


STANTON BILLED

150K

250K

350K

450K

550K

$30

$60

$90

$120

$150

MW

H B

ILL

ED

RA

TE P

ER M

WH

FY’05 FY’08 FY’11 FY’14

Stanton MWh Billed Vs. Rate Charged Per MWh


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Tri-City ProjectFMPA has a 5.3012 percent ownership interest in Stanton Unit 1. Member municipalities that receive power through the Tri-City Poject are: Fort Pierce, Homestead, and Key West.

As a result of decisions to use more economical natural gas fired power plants, FMPA increased the average all-inclusive billing rate 11 percent, to $146.06 per MWh in fiscal year 2013.19 For fiscal year 2014, decisions to increase coal fired power plant usage as coal prices became more economical, and longer than anticipated outages of other generating units in the Florida Municipal Power Pool permitted FMPA to decrease the average all-inclusive billing rate 38 percent to $90.73 per MWh.20


FY2005 - FY2009 FY2010 - FY2014

DEMAND FOR POWER


DEMAND FOR POWER


6% 23% 18% 20%


DEMAND FOR POWER


14% 60%*




TRI-CITY BILLED

50K

100K

150K

200K

$30

$60

$90

$120

$150

MW

H B

ILLE

D

RA

TE P

ER M

WH

FY’05 FY’08 FY’11 FY’14

Tri-City MWh Billed Vs. Rate Charged Per MWh


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Stanton II ProjectFMPA has a 23.2367 percent ownership interest in Stanton Unit 2, a 453 MW coal-fired power plant operated by its primary owner, the Orlando Utilities Commission. Member municipalities that receive power through the Stanton II Project are: Fort Pierce, Homestead, Key West, Kissimmee, St. Cloud, Starke, and Vero Beach.

As a result of reduced capacity utilization, FMPA increased the average all-inclusive billing rate 17 percent, to $100.32 per MWh in fiscal year 2013.22 More capacity utilization permitted FMPA to reduce the average all-inclusive billing rate 17 percent, to $83.21 per MWh in fiscal year 2014.23


FY2005 - FY2009 FY2010 - FY2014

DEMAND FOR POWER


DEMAND FOR POWER


30% 25% 25% 33%


DEMAND FOR POWER


30% 74%*




STANTON II BILLED

400K

500K

600K

800K

$40

$60

$80

$100

$120

MW

H B

ILL

ED

RA

TE P

ER M

WH

FY’05 FY’08 FY’11 FY’14

700K

Stanton II MWh Billed Vs. Rate Charged Per MWh


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FMPA CONTRACTINGThe desire for more cost-effective rates has caused some FMPA member municipalities to “break ranks” in pursuit of lower power rates; however, these municipalities have experienced difficulties exiting their FMPA contracts. Because the FMPA issues revenue bonds to finance the construction of power generating units and procurement of power supply, the FMPA enters into power supply project contracts with its member municipalities to provide security for the repayment of the bonds. These are 30-year contracts that are automatically renewed each year to maintain a perpetual 30-year contract period.

There are provisions in the contract that permit members to terminate their participation in a project. With sufficient notice, a member may eliminate the automatic annual contract extension and allow the contract to expire without renewal. The cities of Starke, Green Cove Springs, and Fort Meade have all given FMPA notice that the term of their ARP contract will not renew automatically each year after the initial contract term. The term of Starke’s contract terminates on October 1, 2035; the term of Green Cove Springs’ contract terminates on October 1, 2037; and the term of Fort Meade’s contract will terminate on October 1, 2041.

Another, albeit shorter-term, exit provision permits members to terminate its contract and withdraw from the ARP three years after first providing a three-year written notice. In 2008, the City of Lake Worth voted to end its power supply agreement with the FMPA, effective in 2014.Members choosing to end their agreement with FMPA in this fashion are required to pay:

• The amount needed to retire the member’s current share of all bond principal and interest paid to maturity or redemption, bond premiums, and lines of credit (reference - Section 29(c)1 of the contract); and

• All of the additional costs reasonably paid or incurred, reasonably anticipated to be paid or incurred, or reasonably projected to be incurred by FMPA, as determined by FMPA in its sole discretion, as a result of the member’s withdrawal, which is commonly referred to in the electrical utilities industry as “stranded costs” (reference - Section 29(c)2 of the contract).25

It is important to note that the FMPA has sole discretion in calculating these additional (stranded) costs, a fact which (according to the Auditor General) represents a “compelling case” against the decision for a member municipality to terminate its agreement with the FMPA. A case in point is the City of Vero Beach.


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The City of Vero Beach electric system provides service to roughly 34,000 customers, with about two-thirds of its sales to customers outside the city limits. As an FMPA member, the City has contracts to purchase electric power from FPL’s St. Lucie Unit 2 nuclear power plant, and from the Orlando Utilities Commission’s two coal-burning plants. In February 2010, the City asked FPL to begin to explore the potential purchase of the City’s electric utility. The City’s electric system is dependent on the use of coal as its primary fuel, and the move to FPL and its use of natural gas as a primary fuel was seen as a way to lower the rates.

In response to a $179 million offer from FPL, the Vero Beach City Council in February 2013 approved the purchase and sale agreement with FPL. One month later, a referendum asking voters to approve the sale of the City’s electric utility to FPL was approved by almost two-thirds of the voters. In addition to lower rates, the sale of the City’s electric system to FPL will permit the City to:

• “Shore up” its underfunded employee pension plan;

• Retire “Big Blue,” a 50+ year-old electric plant that is costly to maintain and that provides only one percent of the City’s power;

• Pay off its outstanding debt associated with projects financed with bonds issued by the FMPA;

• Transfer its current entitlement shares from FMPA projects (St. Lucie Unit 2, Stanton, and Stanton Unit 2) to the Orlando Utilities Commission; and

• Exit its current contracts with FMPA and the Orlando Utilities Commission.

The FMPA has yet to sign off on the proposed sale, citing several issues that must first be resolved in order to ensure the protection of FMPA’s bond holders, including:

• The purchase of electrical generating capacity that is currently surplus;

• The assumption of liability for current and future power plant problems;

• Environmental cleanups at the City’s generating plant;

• Assuring bond holders that their investment will remain sound; and

• How FMPA’s tax-free bonds might be affected if part of its assets is acquired by a for-profit investor-owned utility.26

It is difficult to understand how and why FMPA member municipalities would choose to enter into power supply contracts that automatically extend each year to maintain a perpetual 30-year contract period, and that grant the FMPA sole discretion to determine and assess the additional costs necessary for the member municipality to sever its agreement with FMPA.

26 James Kirley, “New Attorney Calls Vero Beach Electric Sale “A Challenging Undertaking,” May 6,

2014, retrieved from www.TCPalm.com, February 1, 2015.

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By allowing the FMPA to essentially hold its member municipalities hostage, the exit provisions in the power supply agreements make it extremely difficult for member municipalities (like the City of Vero Beach) to test the electricity market and pursue more competitive rates.

Competition in wholesale electricity markets creates incentives for efficiency and innovation while providing the most affordable prices consistent with long-term investments. These efficiency gains translate to reduced fuel use, lower costs, lower emissions, and fewer power plants needed to meet demand. Competitive markets also transfer much of the risk of a costly and long-term power plant investment from captive rate payers to competitive suppliers.27

In its February 20, 2015 response to the Auditor General’s preliminary and tentative findings, the FMPA acknowledged that this matter will be discussed by the Executive Committee, and cautioned that these contracts cannot be “amended, modified, or otherwise altered in any manner that will adversely affect the security for the Bonds.”

Florida TaxWatch understands and appreciates the need to make sure that any municipality that chooses to withdraw from an existing FMPA contract pays its share of any outstanding debt, and to protect the remaining participants from taking on additional debt as a result; however, Florida TaxWatch believes that Section 29(c)2 of the contracts can be amended without affecting the security of the bonds to make expressly clear and understood what constitutes “additional costs reasonably paid or incurred, reasonably anticipated to be paid or incurred, or reasonably projected to be incurred by FMPA as a result of the member’s withdrawal.”

27 Electrical Power Supply Association, “Electricity Primer – The Basics of Power and Competitive Markets,” retrieved from www.epsa.org/industry/primer/?fa=competition, March 2, 2015.

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FACTORS THAT AFFECT FMPA BILLING RATESFactors Beyond FMPA’s ControlThe Auditor General attributed the higher residential rates paid by FMPA ARP members to a number of factors, the following of which were deemed to be not attributable to FMPA:

• Because some ARP members participate in non-ARP projects, they receive their power from multiple sources at differing wholesale rates, which are factored into customer billings;

• ARP members add additional (service) costs to customer billings; and

• The transfer of electric fund revenues by FMPA member municipalities to their general funds can sometimes contribute to above average rates.

Factors Within FMPA’s ControlOne reason for higher FMPA wholesale rates identified by the Auditor General that can be attributable to FMPA is an increase in fixed costs. The two largest factors making up ARP member billings are:

• Energy charges—cost of purchased fuel; and

• Demand charges—fixed costs allocated to members based upon a member’s peak demand during the peak hour of the peak day (coincident peak demand). The largest component is principal and interest payments on FMPA’s debt service.

The Auditor General determined that, since fiscal year 2005-06, the energy charges have decreased 44 percent, from $54.82 per MWh to $30.80 per MWh. During that same period, however, demand charges have increased 103 percent, from $10.81 per MWh to $21.98 per MWh.28 The Auditor General attributed this increase largely attributable to the increase in debt cost associated with the construction of the Treasure Coast and Cane Island units.

The Auditor General reported that demand for energy generated by the FMPA has decreased steadily since fiscal year 2008-09. The average monthly billed MW has decreased 18 percent during this period, from 13,919 in fiscal year 2008-09 to 11,455 (proposed) in fiscal year 2014-15. The reduced demand for energy, coupled with increased fixed costs, has resulted in increased billing rates for FMPA members.


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Other Activities and PracticesThe Auditor General identified other FMPA activities and practices that have contributed to higher costs for FMPA member municipalities. These activities and practices have either resulted in losses or increased the risk of future losses, and have called into question the governance and oversight of the FMPA. These include:

• Fuel hedging29 practices that were inconsistent with industry practices used by comparable joint action agencies and that resulted in net total losses of $247.6 million over the past 12 fiscal years;

• Investment practices in natural gas exploration and production that are not consistent with industry practices used by comparable joint action agencies and that involved more categories of risk. As a result, the Auditor General valued FMPA’s investment at a deficit of $14.6 million, which FMPA member municipalities must annually subsidize;

• Entering into interest rate swap30 agreements associated with the Taylor County coal project (which was never built) without issuing any underlying bonds to fund FMPA’s share of the project costs ($624 million). The Auditor General concluded that, absent the underlying bonds, the swaps did not permit FMPA to effectively manage the interest rate risk. The Auditor General further concluded that these rate swaps “represent risk-taking in excess of industry practice” and that the fees associated with terminating the rate swaps would be significant.31 As of October 2014, the value of the Taylor swaps was negative $108 million;

• Peak shaving32 activities by FMPA members;

• Investment policies that are subject to inconsistent applications;

• Employee leave usage and accumulation policies that have created significant future payouts as employees resign or retire. Since fiscal year 2009-10, the projected payout liability for sick and annual has increased 75 percent, from $722,935 to $1,263,432;

29 Fuel hedging is a tool to mitigate exposure to future fuel prices that may be higher than current prices.

30 Swap agreements convert variable interest rates to fixed rates (to reduce interest rate exposure) and are designed to lock in financing rates for a project that might not require permanent funding until a future date.

31 Auditor General, State of Florida, “Preliminary and Tentative Audit Findings: Florida Municipal Power Agency.” Page 12.

32 Peak shaving occurs when an ARP member attempts to control or lower their energy load at the time of the ARP’s coincident peak demand to reduce the demand cost component on their monthly bill. Since total ARP demand costs are fixed, any actions taken by one ARP member to lower its energy consumption on the coincident peak demand day adds a dollar-for-dollar cost increase to other members’ demand costs.

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• The absence of a contract specifying the compensation package for the General Counsel;

• A compensation package that obligates the FMPA to pay or reimburse the Chief Executive Officer (CEO) for health insurance premiums and fund the CEO’s health reimbursement account for life, even if the CEO is terminated for cause;

• Increased risk associated with the failure to document how certain expenditures serve a public purpose;

• Increased risk associated with the failure to follow established policies and procedures to guide the competitive procurement of goods and services and the selection of bond professionals; and

• Travel policies that are subject to inconsistent applications.

In its February 20, 2015 response to the Auditor General’s preliminary and tentative findings,

FMPA expressed its intent to retain an independent management consulting firm to advise

the Executive Committee on the issues involving fuel hedging, natural gas exploration

and production investment, interest rate swaps, peak shaving, and contract termination

provisions. FMPA attributed the losses from its fuel hedging program to decisions in 2008

to raise hedge levels to mitigate rate increases from higher natural gas prices, which were

followed in 2008 by a steady decline in natural gas prices. This caused FMPA to suspend its

fuel hedging program; however, the losses as reported by the Auditor General exceeded $247

million.

FMPA’s Executive Committee decision to participate in a Public Gas Partners (PGP) project

in 2005, when natural gas prices were experiencing great volatility and beginning to reach

unprecedented levels, has resulted in a cash flow deficit of $14.6 million. FMPA defends this

investment as “not a materially significant investment to the ARP’s total assets” and estimates

that the average rate impact of this deficit is $0.27 per MWh, or one-third of one percent.33

In November 2006, the FMPA purchased more than $700 million in interest rate swap

contracts in anticipation of constructing a coal plant in Taylor County (Taylor swaps).

Interest rate swap contracts work like this—FMPA looks for a counter party that thinks it

can make money on the lower rate and that is willing to accept the risk associated with the

fluctuating rate. FMPA then swaps its variable (lower) interest rate for the counter party’s

fixed (slightly higher) rate. FMPA maintains its debt, but at a different and more stable

interest rate. As pointed out in the Auditor General’s preliminary and tentative findings, this

is an acceptable industry practice.

33 Response to Preliminary and Tentative Findings, February 20, 2015 letter to David W. Martin, Florida Auditor General. Page 13.

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A 2007 shift in state energy policy limiting carbon emissions essentially killed the Taylor

County coal plant project, which left FMPA with $700 million in Taylor swaps and no

project on which to base the issuance of bonds. The Auditor General’s preliminary and

tentative audit findings make reference to a June 2009 decision by the Executive Committee

to exit the Taylor swaps, but only if such exit did not require an outflow of cash by the

FMPA. At this time, the Taylor swaps were valued at negative $34 million.34

In 2010, FMPA was able to sell 5 of its 14 swaps contracts for a gain of $84,000. By

September 2014, the remaining 9 Taylor swaps contracts were valued at negative $99

million. One month later, the Taylor swaps were valued at negative $108 million.35 A

February estimate by the Town of Indian River Shores places the approximate value of the

Taylor swaps at negative $150 million.36 The Auditor General characterized the actions of

the Executive Committee as being more consistent with “a bet that prevailing bond interest

rates will rise before any accompanying bond may be issued than a hedge against interest

rate changes.”37

In its February 20, 2015 response, FMPA references more than two years of extensive

discussions and a number of workshops about different termination alternatives. FMPA’s

Executive Committee members have ostensibly agreed on an exit strategy, which will be

executed no later than September 30, 2015. No details of this strategy are provided.

The September 30, 2015 date is significant because, unless FMPA has a project on which to

issue bonds by October 1, 2015, FMPA will have to terminate the swaps.38 Although FMPA

does not outline its exit strategy, it would appear to have the following options:

• Sell the remaining swaps contracts—FMPA could sell its remaining 9 swaps if it can find a buyer or buyers;

• Renegotiate the remaining swaps contracts—if FMPA is unable to find buyers for its remaining 9 swaps contracts, it could try to renegotiate more favorable terms with the 9 counter parties;


35 Ibid.36 Resolution No. 15-01, Town of Indian River Shores, February 2, 2015.37 Auditor General, State of Florida, “Operational Audit : Florida Municipal Power Agency,”

Report No. 2015-165. March 2015.38 Minutes From the Florida Municipal Power Agency’s Taylor Swaps Workshop of the Utility

Board of the City of Key West, Florida, July 10, 2014.

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• Do nothing and hope the market improves—depending on how much the market improves, FMPA may be able to exit the remaining swaps contracts with little or no loss;

• Find a project—self-explanatory; or

• Pay the costs to terminate the swaps contracts—if FMPA is unable to make any of the above options work, then it would have to pay the $108 million (estimated) termination costs. This would most likely require the FMPA to issue and finance considerable debt, the costs of which would likely be passed along to its customers.

In its February 20, 2015 response, FMPA’s governing boards commit to “consider” or “address” the Auditor General’s recommendations concerning investment policy; employee compensation, severance and benefits; purchasing policies and procedures; credit card use; and travel expenditures “as soon as practical.” This does not give Florida taxpayers comfort that these issues will be timely addressed, if at all. Florida TaxWatch believes that FMPA should amend its response to identify specific actions to be taken to address the Auditor General’s recommendations, including the proposed exit strategy for the Taylor swaps, and the date(s) by which these actions will be completed. The exit strategy for the Taylor swaps should be designed to be transparent, minimize losses, and avoid the issuance and financing of

additional debt.

Governance and OversightThe “other activities and practices” described above reflect poor decision-making, bad investment decisions, and a lack of proper oversight and management controls. The result is hundreds of millions of dollars of losses and increased risk of additional losses, which must be paid by FMPA’s customers. That these activities and practices could go on for so long without correction begs the question of “who oversees and governs the activities of the FMPA?”

Because of the interstate nature of electricity sales, the wholesale electricity market is regulated by the Federal Energy Regulatory Commission (FERC). Although responsible for the regulation of the transmission and wholesale sales of electricity in interstate commerce, there are certain areas that are outside the FERC’s jurisdiction and dealt with by state public utility commissions, including:

• Regulation of retail electricity and natural gas sales to consumers;

• Approval for the physical construction of electric generation facilities; and

• Regulation of activities of the municipal power systems, federal power marketing agencies like the Tennessee Valley Authority External Link, and most rural electric cooperatives.39

39 Federal Energy Regulatory Commission. Retrieved from www.ferc.gov/about/ferc-does.asp, March 2, 2015.

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The FMPA is governed by a Board of Directors and an Executive Committee and operates on a project-oriented basis. These two groups are responsible for providing the proper oversight of each FMPA project, and are accountable to its municipal members and taxpaying customers. Each of the 31 member municipalities may choose to participate in one or more projects, or not to participate in any project.

Each project is independent from the other projects, and the project bond resolutions specify that no revenues or funds from one project may be used to pay the costs of any other project. The Board of Directors governs and makes decisions regarding each project with the exception of the ARP. Each of the 31 member municipalities appoints one member to the Board of Directors. Board members from municipalities that choose not to participate in any of the FMPA power projects each get one vote; board members from municipalities that participate in the ARP each get two votes; and all other Board members each get 1.5 votes. Board members establish the rate structure for all projects with the exception of the ARP.

The Executive Committee governs and establishes the rate structure for the ARP. Each member municipality that buys power through the ARP may appoint a member of the Executive Committee. The Governing Board Officers are identified on the “Leadership” page on the FMPA website.40 Identified are the Chairman, Vice Chairman, Treasurer, and Secretary of the Board of Directors, which establishes the rate structure for all projects with the exception of the ARP, and the Chairman and Vice Chairman of the Executive Committee, which establishes the rate structure for the ARP.

Two things stand out in this structure. First, the same person serves as Secretary of the Board of Directors and as Vice Chair of the Executive Committee. Second, only one of the six Governing Board Officers identified on the FMPA website is an elected official; the other five Governing Board Officers are appointed officials who do not report directly to voters. This suggests that the rates paid by FMPA member municipalities are established by individuals who do not report or answer directly to the voters.

The FMPA’s member municipalities share some responsibility for the poor decision-making, bad investment decisions, and lack of proper oversight and management controls identified by the Auditor General. These municipalities appoint Governing Board and Executive Committee members, who in turn voted to approve the decisions, investment strategies, and operating policies and procedures that were called into question by the Auditor General. This suggests a need for the member municipalities to more carefully monitor the actions of their appointees and the impacts of their decisions.

40 Florida Municipal Power Agency. www.fmpa.com/about/leadership

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CONCLUSIONS & RECOMMENDATIONSIs the FMPA offering its member municipalities cost-effective power generation and services and driving down costs?Of the five power projects currently operated by the FMPA, only the municipalities participating in the Stanton, Tri-City and Stanton II projects received reduced average all-inclusive billing rates in fiscal year 2014. Customers in these municipalities represent less than 14 percent of the total megawatt hours billed by FMPA during fiscal year 2014. Municipalities participating in the ARP and St. Lucie projects, which represent more than 86 percent of total megawatt hours billed by FMPA during fiscal year 2014, received increased average all-inclusive billing rates in fiscal year 2014.

Looking at the period covering the last 10 fiscal years, the demand for power decreased for every FMPA power project, with the exception of St. Lucie. The average all-inclusive billing rates, however, increased for every power project. During this 10-year period:

ARP ST. LUCIE STANTON TRI-CITY STANTON II

DEMAND RATE DEMAND RATE DEMAND RATE DEMAND RATE DEMAND RATE

17% 33% 9% 35% 22% 90% 14% 60% 30% 74%

If not, then what are the reasons why the FMPA is not offering its member municipalities cost-effective power generation and services?

The Auditor General acknowledged that the reduced demand for energy, coupled with increased fixed costs, has contributed to the increased billing rates for FMPA members. Since 2005, energy charges have decreased 44 percent. During the same period, however, demand charges (largely attributable to the increase in debt cost associated with the construction of the Treasure Coast and Cane Island units) have increased 103 percent.

Other activities and practices by FMPA have contributed to financial losses, including fuel hedging practices and investment practices in natural gas exploration and production that are inconsistent with industry best practices. Still other FMPA activities and practices, such as entering into rate swap agreements without issuing underlying bonds to fund FMPA’s share of project costs, investment and employee travel policies that are subject to inconsistent application, failure to follow established procurement policies and procedures, and questionable compensation packages for FMPA executives contribute to greater risk of increased losses and call into question the governance and oversight of the FMPA, and the extent to which FMPA executives are accountable to the member municipalities and customers.

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Only one of the six Governing Board Officers listed on the FMPA website is an elected official; the other five Governing Board Officers are appointed officials who do not report directly to voters. Thus, the rates paid by FMPA member municipalities are established by individuals who do not report or answer directly to the voters.

If not, what actions are necessary to make sure FMPA member municipalities receive cost-effective power generation and services?

Florida TaxWatch offers the following recommendations to improve the oversight and accountability of FMPA, and to make the activities of the FMPA more transparent to the taxpayers:

1. The Joint Legislative Auditing Committee should exercise its jurisdiction and invite the Office of the Auditor General to review and discuss its audit findings and to give the FMPA an opportunity to respond and defend its operating policies and practices.

2. The Joint Legislative Auditing Committee should require the FMPA to submit a corrective action plan, and to make periodic reports of its progress implementing this plan. Terms like “will consider” and “as soon as practical” should be replaced with specific corrective actions to be taken, including the proposed exit strategy for the Taylor swaps, and specific dates by which these actions will be completed. The exit strategy for the Taylor swaps should be designed to be transparent, minimize losses, and avoid the issuance and financing of additional debt.

3. Membership on the FMPA Board of Directors and Executive Committee should be limited to local elected officials who report directly to the voters. In addition, one or more independent officials, who have the requisite electric utility experience and expertise and are not a representative of any member municipality, should be appointed to the Board of Directors and Executive Committee.

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4. The exit provisions contained in Section 29(c) of the existing power supply contracts should be revised to: (a) make expressly clear and understood what is meant by “all of the additional costs reasonably paid or incurred, reasonably anticipated to be paid or incurred, or reasonably projected to be incurred by FMPA as a result of the member’s withdrawal;” and (b) eliminate the provision granting the FMPA the sole discretion to interpret and apply the severance provisions. Members should be able to exit with reasonable and predictable exit costs to best serve their customers.

5. In addition to periodic operational audits conducted by the Auditor General, the Legislature should direct the Office of Program Policy Analysis and Government Accountability (OPPAGA) to conduct a study, or to contract with subject matter experts to conduct a study, to determine whether, given the increased competition in the wholesale electricity market, the FMPA represents the most effective means for ensuring that its member municipalities are receiving the most affordable prices consistent with long-term investments.

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Documents

An Analysis of the Florida Municipal Power Agency Audit