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What did Vero Beach get for a half million dollars?

STORY BY LISA ZAHNER, (Week of December 8, 2011)

The GAI Consultants appraisal report citing a $184.9 million value of the Vero Beach electric system may or may not play a role in the sale of the utility to Florida Power and Light, but the consultants' “expert” opinion is still costing ratepayers close to a quarter million dollars.

On top of that, Vero has contracted with GAI for $35,000 to work on selling the city’s power asset entitlements. On the water-sewer side, Vero ratepayers have forked over $94,000 to GAI to appraise the water system and another $79,000 to tell the city how to “optimize” water-sewer operations to stay afloat financially.

Vero ratepayers spent $85,000 last year for GAI to value and study the parts of the water-sewer system outside the city limits. Added to the work on the electric system, that’s more than a half-million dollars of utility business for Orlando-based GAI.

Reports produced by GAI have been criticized as hard to understand and the 16 pages of status reports provided with City Council agenda this week are also fairly cryptic. It will probably never be known whether ratepayers got their money’s worth from GAI or whether the public got taken for yet an expensive ride by consultants, but at least this City Council is demanding to see status reports and bills along the way.

"I haven't found them (the GAI reports) particularly helpful and I will look forward to see if they incorporated comments from the council and the committees and the final implementation of the water-sewer optimization plan," said Mayor Pilar Turner.

Turner said she doesn't feel the GAI electric appraisal is very relevant to the process of negotiating the utility's sale.  "Many of the assumptions were not reasonable, not using current data and there was a lot of speculation," she said. "The good news is that they haven't really broken the budget – yet,"

The value of the electric system, as determined by GAI, is the value to the city as a complete, operating system, including continued service of Indian River Shores, South Beach and the mainland county customers. The value includes decades of income to the general fund from the utility. The value also includes the real estate the power plant and substation sits on. Electric customers paid $11,500 for a real estate appraisal of property never intended to be sold. The city also has paid the Gray Robinson law firm nearly $11,000 in legal fees – in addition to the engineering and appraisal charges.

Turner said in her opinion a very expensive appraisal was done to appease naysayers who demanded the city hire consultants to value the electric system as part of the due diligence process, but that the appraisal  is not mandatory prior to selling the electric system. Should the water-sewer system be sold, however, an appraisal would be required by state statute.

GAI Principal Gerry Hartman has stated that the company has more than 800 employees nationwide and a huge pool of experienced engineers, analysts and support personnel to draw from to provide for Vero’s utility needs. He said he would pull people off other projects and put every available person on the job to expedite the electric, water and sewer appraisals. Still, only a handful of GAI staffers are working on the projects and the principal team members are dividing their time between both the electric and water-sewer efforts.

Since the electric system appraisal project started in April, Hartman has billed for 115 hours at $220 per hour. He billed for another 51 hours on the electric entitlements service contract. On water sewer projects over the past six months, Hartman billed another 69 hours. All told this summer and fall, Vero has paid Hartman 235 hours for a total of $51,700.

Engineers dubbed “Utility Management Consultants” have worked 324.75 hours on the electric appraisal at $135 per hour for a total of $43,841. Other engineers billing $95 per hour worked 155.25 hours on the appraisal. A CPA spent 185.25 hours at $180 per hour and a financial analyst crunched numbers for 327.25 hours – more than eight weeks at 40 hours per week – at $90 per hour. Project support, presumably a clerical employee, provided 3.75 hours of services at $55 per hour. On top of all of that was a $34,745 bill for “electrical engineering asset documentation.”

On the outset, the purpose of the appraisal was to make sure the council did its “due diligence” prior to striking a deal with Florida Power and Light.

GAI critic, including utility activist Glenn Heran, thought the appraisal was a costly delay tactic and that the status quo crowd was praying for the number to come back huge.

“I don’t place much faith in GAI’s appraisal, it’s not supported by the available market data,” Heran said. “The number is significantly higher than any known comparable sale of a municipal utility in Florida and it’s higher than the number that can be supported by FPL rates.

“The idea that GAI valued the City of Vero Beach electric utility based upon Vero rates is absurd. They valued it based upon the rates of an unregulated price monopoly,” Heran said.

Newly elected Councilman Dick Winger has sung GAI’s praises on the campaign trail and has spoken highly of GAI’s opinions about the value of the electric, water and sewer systems. Winger billed himself as the “fair price” guy and, during a candidate forum went on record quantifying what he thought a fair price would be. He based this solely on the appraisal and other advice given by GAI and Hartman.

"We need to get $160 million plus any penalties," Winger said.

That price, Winger said, is what Vero needs to get from FPL just to break even.

Other than having a special meeting – more than one month after the reports were published – to discuss the electric, water and sewer appraisals, the reports haven’t gotten much attention and it’s tough to know whether the huge numbers GAI put forth have served to steer the electric negotiating process at all.

The water-sewer appraisal of more than $100 million effectively killed any potential deal with Indian River County to take over the Vero system. It’s still a big question mark as to whether the electric appraisal number will do the same for negotiations with FPL.

Opponents of the sale, such as Florida Municipal Electric Association leader Barry Moline have called a sale on the current terms “stupid” and claim FPL is trying to “steal the utility” from the residents and taxpayers.

Although Moline’s statements have stirred up a small group of citizens dead-set against a sale, his opinions have been all but brushed off by the sitting members of the 2010-11 City Council, except for Jay Kramer.

Kramer, often seen as a voice in the wilderness by his fellow council members, is still pushing for a partial sale of the electric system.

The so-called voices of reason, or voices of caution on the Utilities Commission and the Finance Commission, urged the City Council to get some idea of what the electric system might be worth – even if it’s only realistically worth what a buyer will pay for it – but even Hartman has admitted that the appraisal amount and the price the system would garner if sold are two completely different things.

Also, it’s important to note that the appraisal is the value of the system “as is” to the current owner, with the current rate structure of 22 percent higher costs to the customer than for the same amount of power from FPL.

Based upon the April 4 letter of intent and public statements and correspondence since then, FPL officials say the company is willing to pay up to $100 million in cash for the system.

The city would also receive increased property taxes on the system assets once sold of about $1.7 million. FPL would take over the unfunded pension liability for electric utility employees, which is estimated at about $14 million. Employees would have guaranteed jobs for two years, saving the city untold amounts in severance pay.

FPL would decommission the Big Blue and move the substation currently on the property, for a total cost of somewhere between $5 and $8 million. Over the course of five years prior to the plant being decommissioned, FPL would make somewhere in the neighborhood of $20 million to $30 million in transmission upgrades which would serve not only Vero Beach customers, but all FPL customers for years to come.

GAI’s Hartman has warned the council that extricating itself from no less than nine outstanding contracts might cost upwards of $2 million – plus GAI’s fees for handling all this business.