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Friday, May 1, 2009

Independent Consultant Says The City Should Proceed with Purchase….Florida Public Utilities Says It Would be Unwise Not to Renew Franchise

Largest Business Decision of this Decade to be made by current City Commissioners
By Sid Riley
Should the City renew the municipal electrical service franchise with the current provider, Florida Public Utilities….or should the city move into another approach? That is the question of the hour in City Hall.
The existing franchise contract with FPU expires in 2010. Some cities are finding it to their advantage to become municipal utilities, operating as the electrical service provider for those citizens living within the city limits. The City Commission has four options to choose from.
● It can renew the franchise with Florida Public Utilities.
● It can deny the franchise renewal, purchase the existing infrastructure, sever and reconnect the system to serve only Marianna, and become a Municipal Utility.
● It can make the franchise available for bids from other eligible area electrical utilities, such as Gulf Power or West Florida Electric.
● It can deny the franchise renewal, purchase, sever and reconnect, and then enter into a contractual agreement with another area utility for day to day maintenance and operations management.
It should be clearly stated from the onset that regardless of which option is taken, there is little hope for the consumer to expect any reductions in utility rates in the near future. The reduction of electrical fees is not the intent or justification for consideration of these options.
Under the existing arrangement, the City of Marianna realizes revenues of approximately $1.0 million dollars per year in franchise fee payments from Florida Public Utilities. These fees are based on a percentage of gross electrical charges rendered by FPU within the city limits. Of course these fees are actually part of the FPU billing structure, and are in actuality additional fees paid by the citizens of Marianna, in excess of their electrical charges.
The only significant reason for Marianna taking over the electrical system would be to increase revenues for the city. Obviously, FPU is making a profit from selling electricity to the citizens of Marianna. If that profit is large enough to retire all involved debts, and create needed positive cash flow, it would be wise for the Commissioners to proceed with the change. Added revenues would then enable the City to more effectively deal with problems in city infrastructure related to decaying roads, aging sewer and water systems, and storm water run-off problems. Revenues from the electrical operations could enable the city to proceed with this much needed work without being required to increase other rates, taxes and fees in the City.
At Wednesday’s meeting of the Marianna City Commission, the utilities expert, Bill Herrington, who was engaged as a consultant by the Commissioners to prepare an in-depth analysis of the financial feasibility of the city proceeding with an acquisition of the electrical system which serves the citizens of Marianna, presented his analysis. In a spirit of fair play, the Commissioners also allowed executives of Florida Public Utilities an opportunity to present their views in the matter.
Consultant’s Presentation:
The initial portion of Herrington’s presentation dealt with defining differences in the "Severance and Reintegration" cost analysis he had previously prepared and presented to the Commission, as compared to data later presented to the Commissioners by FPU. FPU had estimated the cost of Severance and Reintegration of the system to be approximately $4.0 million dollars, while Herrington’s analysis had derived a cost of $1.8 million. Although Herrington stated that in his opinion, in the total scope of the question, this difference was not that significant to the decision. However, he did define some of the differences in approaches used to derive the costs.
FPU had included a redundant feed for back up service to Family Dollar, which Herrington had felt could be accomplished through another negotiated approach which would utilize the nearby FPU system which would be serving the area outside of the City limits. Also, FPU’s cost estimate had involved installation of all new transformers and feeders, while he had used rental of the existing devices from FPU. Also there were differences in the costing approach used relating to backbone feeders exiting substations. Herrington’s analysis then presented alternative solutions to these problem areas which would in total only add $151,000 to his original costing.
Herrington’s analysis presented a total cost estimate for acquisition and start up of $9.5 million dollars, which would be funded by issuance of municipal bonds at an interest rate of 5%. This was based on a customer count of 3148 customers, and approximately $107,000,000 in annual sales. During the debt retirement period, he projected an annual increase in revenues for the City of $330,000. He then calculated a 13.8 % internal rate of return on investment, showing that the investment was financially feasible and attractive.
Herrington also cited having more control over operations, policies, level of service quality were added advantages. He also described how combining municipal electrical administration with municipal gas distribution administration would have distinct advantages.
His report concluded by describing how municipalities all over the state are taking over their electrical utilities delivery systems. Florida currently has 34 municipal electric companies, with over 2,000 existing nation wide. Nationally, these have lower rates than investor owned utilities.
Florida Public Utilities Presentation:
The power point presentation for FPU was presented by a team of company executives, led by Chuck Stein, Senior VP and Chief Operating Officer. A major portion of the data was presented by Robert Bellemare, P.E. with consulting firm of UtiliPoint of Albuquerque, New Mexico. They were engaged by FPU to conduct a full financial analysis for comparison to the data prepared by Bill Harrington and his consulting firm.
First, FPU explained that the recently accomplished merger of FPU with Chesapeake Utilities will have no impact on local FPU operations. They stated that the City should continue to engage with FPU as their utility franchisee because of the successful 75 year history of providing service, their in-depth knowledge of the local systems, and the fact that the city is realizing $1.0 million per year in franchise fees without having to take any risks.
Then UtiliPoint began the financial analysis presentation. They began by disputing the $9.5 million total cost figure developed by Herrington. They feel a more correct figure will exceed $16.0 million dollars. The primary differences relate to the procedures used for cost of assets purchased by the city (new, requiring installation vs. used, installed purchased from FPU), differences in providing a redundant system for Family Dollar Distribution Center, and a $4.1 million "going concern" payment to FPU which Herington did not recognize as a requirement.
As a result of these differences, UtiliPoint displayed an annual loss for the city of $391,000 instead of the positive cash flow of $330,000 demonstrated by Herrington. They stated that if their estimates are correct, the city would have to raise rates in order to meet obligations.
The presentation also stressed the risk factors which are involved. These include the uncertain economy, a "no growth" environment in Marianna over the past five years, and a significant decline in kwh sold in the area due to the economy and conservation efforts.
Finally, the results of the customer survey which was made by FPU were discussed. This survey revealed that only 35% of those contacted were in favor of the purchase by the city, clearly showing that there was no public mandate.
In conclusion, FPU requested a ten year renewal contract from the city, and agreed to retain the existing purchase clause in the agreement.
The City Commission will hold a special workshop session at 5:00 on Monday, May 4 as a review of this matter. If they elect to proceed, the matter will be presented to the voters in Marianna in a referendum.

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