FMEA Letter to Gov. Scott — Veto HB 759

May 25, 2017

The Honorable Rick Scott
State of Florida
The Capitol
400 S. Monroe Street
Tallahassee, FL 32399-0001

Re: Please veto HB 759

Dear Governor Scott:

I write to ask you to veto HB 759. This local bill, impacting the people of Gainesville, would have two major, negative impacts:

1. Expands government while limiting home rule.

2. Raises electric rates and taxes on the people of Gainesville.

The bill was passed over the objection of the Gainesville City Commission, and without unanimous support by the local legislative delegation.

Attached is a summary of why this bill is bad for Gainesville and bad for Florida. Please veto HB 759.

Amy Zubaly
Interim Executive Director
Florida Municipal Electric Association (FMEA)

HB 759 will Significantly Raise Electric Costs for Consumers and Expand Government Bureaucracy

Expands government and limits home rule authority

The bill creates a new, unnecessary government bureaucracy, the Gainesville Regional Utilities Authority (Authority). Governance of the current local utility, Gainesville Regional Utilities (GRU) would be transferred to a new local five-member board, appointed by the Gainesville City Commission.

The City of Gainesville, including Gainesville Regional Utilities, is opposed to the bill. The creation of a utility authority, as outlined in this bill, is a local issue and a decision like this, regarding an asset owned by the city, should be left up to the city and local community, not by the legislature. HB 759 was NOT agreed upon unanimously by the Alachua County legislative delegation. In addition, the City has taken many proactive steps toward improving the operations of the utility, which are leading to lower rates. This legislation would undermine those efforts and take the governance of the utility, away from the City.

HB 759 Raises Electric Rates and Taxes on the People of Gainesville

The bill separates the new Authority governing board from the current governing board, the City Commission. However, it leaves the asset ownership with the City of Gainesville, while removing the rate-setting authority.

This separation of governance from asset ownership is a major concern. Credit rating agencies – S&P, Moody’s and Fitch – place high value on the municipal electric utility governance model, consistently granting high credit ratings due to the ownership model whereby governing boards who control rates and assets are highly accountable and guarantee strong credit metrics. Recently, S&P stated about Gainesville Regional Utilities:

“The stable outlook reflects our view that GRU’s management and the city commissioners are committed to maintaining the utility’s strong credit metrics.”

S&P’s credit rating of AA- has allowed Gainesville Regional Utilities to obtain low interest rates for its $1 billion in outstanding debt. This benefits customers with lower interest payments. A change to the governance structure, whereby the governing board is separated from the City – the asset owner – would be seen as generally unfavorable by rating agencies, and potentially raise borrowing costs. One rationale concern of the City Commission is that the new governing board would lower the debt service coverage ratio, from the current 2.0 to 1.25. This issue was raised publicly within the past two years, but would have resulted in a lower credit rating. The current governing board – the City Commission – rejected it. There is extreme uncertainty in the potential actions of the new Authority governing board.

Seeing HB 759 pass, rating agencies and national banks told us this week GRU’s credit rating could easily drop to BBB. We believe a reasonable estimate of the resulting borrowing impact would be 55 to 70 basis points. This is an unnecessary cost – paid for by the people of Gainesville in higher financing for electric and water costs – that can and should be avoided by your veto.

Future borrowing costs would also be higher. Currently, to help lower consumer costs from a long-term power supply agreement, Gainesville Regional Utilities has entered into a memorandum of understanding to purchase a local biomass power plant – the Gainesville Renewable Energy Center – at a cost of $750 million. Using debt paid over 30 years, the additional financing costs would be $125-150 million more with the lower credit rating and higher interest cost.

Bond Counsel to the City and GRU, reviewed HB 759 to determine the effect if the legislation was implemented. Counsel expressed their concern that the legislation may conflict with existing covenants made by GRU with its bondholders and liquidity and credit facilities securing outstanding indebtedness of the GRU. The remedies available to such holders and banks for breach of covenants include immediate termination of such facilities and acceleration of the underlying indebtedness and may increase future borrowing costs. The new authority may as a result be required to seek clarification from the courts of its powers and authority to comply with its existing bond covenants.

Raising Taxes on the People of Gainesville

The new Authority has absolute control over its budget. There appears to be no ability to limit the new Authority’s expenditures as long as those expenditures benefitted the utility. In addition, the new Authority may reduce the transfer from the utility to general government by three percent each year. The general fund transfer from the utility to the City is in essence the city’s return on its investment in the utility and taxes that would otherwise be paid, if the utility were privately owned. The City relies on that transfer as a significant portion of its budget. If the transfer funds are reduced, the City would either have to vastly reduce services or increase ad valorem taxes, or the City would need to resort to the judicial system to assert that it was not receiving a fair return on its investment. All of which would affect the utility ratepayers, the vast majority of whom are City taxpayers and/or users of City services.

Unaccountable Rate Setting

The new Authority would have plenary control on rate-setting without being required to answer to anyone. HB 759 lacks any budget and policy direction to the new Authority other than it is created for the purpose of “managing, operating, controlling, and otherwise having broad authority with respect to the utilities.” Therefore, business decisions which benefit the utility are within the purview of the new Authority. New Authority members may be removed from office only for: malfeasance, misfeasance, neglect of duty, habitual drunkenness, incompetence, permanent inability to perform his or her official duties and certain felony and misdemeanor convictions. The new Authority could impose significant additional costs on the ratepayers who would have no redress to remove (or ask the City Commission to remove) the Authority Members. The new Authority’s plenary control over business decisions which affect rates contradicts the Florida Legislature’s policy allowing utilities to have a monopoly subject to governmental controls. The legislature allows utilities to have a monopoly in their service territories, as long as there is a guardian to protect the ratepayers.

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