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Vero still seeking deal that frees it from power agency

STORY BY LISA ZAHNER, (Week of June 6, 2013)

Vero Beach and the Florida Municipal Power Agency appear to still be as much as $35 million apart in negotiations aimed at freeing the city to sell its electric utility to Florida Power and Light in 2014.

The gap stems from a claim by FMPA officials that Vero is on the hook for part of between $90 million and $326 million in paper losses that the co-op incurred by making a bad bet on interest rates when it was considering building a coal generation power plant in Taylor County in 2006.

The coal plant was never built after the recession hit and demand for electricity plateaued, but by Oct. 1, 2015, the FMPA must either cover its loss from speculating in a financial instruments called “interest rate swaps” or convert the swaps to bonds for the construction of a new power plant or plants.

Whether Vero has any contingent liability – and if so, how much – is a matter of dispute. 

A meeting of the two parties last week resulted in no real progress, with attorneys on both sides now preparing for the next face-to-face negotiations.

“We have not formulated the response to the Taylor swap issue. We do have a meeting scheduled for June 12 and we are discussing and doing background to determine if there is any exposure in the Taylor swaps from a legal perspective,” said Vero Beach City Manager Jim O’Connor.

Over the Memorial Day holiday weekend, Vero City Council members were forwarded a complex set of charts and documents by e-mail from FMPA bond counsel and deputy legal counsel.

The upshot of the correspondence is that the FMPA appears to be taking the position that the City of Vero Beach is on the hook for somewhere between $10 million and $35 million in contingent liabilities related to the Taylor swaps.

Councilwoman Pilar Turner, who serves as Vero’s representative on the FMPA board, said the city’s transactional attorneys John Igoe and Rick Miller have some good arguments why Vero should not be liable.

Utility activist Glenn Heran, a CPA who has analyzed statewide electric issues for going on six years, said he had studied the FMPA’s May 24 response and related documents and agrees with Turner that it is legally questionable whether Vero Beach is  liable for the Taylor swaps.

“Assuming that Vero is liable, then the liability is only a contingent one as the FMPA may find a project for the Taylor Swap bonds and thus the cost would be mitigated,” Heran said.

“Whether there is a cost to Vero or not has nothing to do with the sale of Vero Electric to FPL. 

“However, if there is a cost, it is known as a sunk cost and each member city will have to pay its proportionate share.”

Heran said the city could simply cover its contingent liability with a letter of credit or maybe a surety bond.

“So long as Vero covers the ‘potential’ liability, say with a letter of credit, then no city would theoretically vote against Vero leaving the FMPA as Vero will have caused no harm to the other FMPA member cities” he said.

Assigning  a hard liability for the Taylor swaps to each of the FMPA member cities proportionately would be a political nightmare for the FMPA, Heran said.

Vero’s participation at 10 percent is at the low end of the scale, with the liability of other member cities amounting to many more potential millions.

For example, the worst-case scenario for Ocala would be about $64 million as opposed to Vero’s $35 million.

In Heran’s opinion, the FMPA could be holding the potential of massive losses on the Taylor swaps over Vero’s head as a bargaining chip to squeeze a few million in cash out of the City of Vero Beach in exchange for letting it exit the co-op in 2014, before the Taylor swaps come home to roost.

The Taylor swaps are not the only ill-advised investment made by the FMPA.

Vero utility customers remember only too well how electric bills skyrocketed in 2009 in large part due to a bad hedge the FMPA made on the price of natural gas.