With vote on Georgia nuclear project imminent, FERC asked to intervene

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With a vote looming on whether to cancel Georgia’s troubled nuclear reactor project, federal regulators may intervene in the dispute between two public power agencies over the project's rising costs.

Co-owners of the two reactors under construction at Plant Vogtle – Georgia Power Co., Oglethorpe Power, MEAG and the city of Dalton - set Monday as the deadline to determine if work will continue on the reactors. MEAG’s board meets Thursday to begin its deliberations about the fate of the project.

A vote of the owners is required because of a recent announcement by Georgia Power that it will cost another $2 billion to complete the project, over the $25 billion estimated late last year. At least 90% of the co-owners must vote affirmatively for it to proceed.

On Tuesday, Florida-based JEA filed a petition asking the Federal Energy Regulatory Commission to weigh in on the 20-year power purchase agreement it has with the Municipal Electric Authority of Georgia, even though both utilities are typically exempt from FERC’s review.

“This agreement revolves around wholesale, interstate commerce of electricity, so it should be evaluated by FERC,” said JEA Interim Managing Director Aaron Zahn. “Exorbitant cost overruns and continued delays, all of which are being shouldered by ratepayers across the Southeast, suggest that the Plant Vogtle expansion project is no longer just and reasonable, let alone consistent with prudent utility practices.”

The take-or-pay PPA requires JEA purchase 206 megawatts of power from MEAG’s 22.7% ownership interest in the twin reactors and to pay debt service on $1.42 billion of Project J bonds issued to date to finance a portion of the project.

Public Citizen Inc., a Washington, D.C.-based nonprofit consumer advocacy group, has asked to intervene in the petition before FERC.

“I try to identify those FERC dockets that have important ramifications for consumers,” said Tyson Slocum, director of Public Citizen's Energy Program. “I need to investigate this because I don’t have the answers to the questions Jacksonville is raising.”

If FERC decides to take jurisdiction over the PPA, Slocum said it could delay lawsuits filed by JEA and MEAG last week because the petition would be considered a filed federal rate, giving FERC priority over the pending litigation.

If FERC takes the case, the commission would determine if the PPA rates are “just and reasonable.”

A spokesman for FERC said he could not comment on the likelihood of the commission reviewing the agreement between JEA and MEAG. The case number is EL18-200. The commission is taking comments until Oct. 17.

JEA Board Chairman G. Alan Howard said Tuesday that MEAG should not vote to continue work on the twin reactors. The rising cost of the project will be difficult for JEA customers to pay, especially the “50,000 families that live at or below the poverty line” in Jacksonville, he said in a letter to the Georgia power agency.

Should the Vogtle project be canceled, Howard said JEA secured term sheets for replacement power at a facility he didn’t disclose that would provide for the payment of sunk costs and debt service, and would still save JEA, MEAG and PowerSouth Energy Cooperative more than $2.5 billion.

Alabama-based PowerSouth also has a 20-year PPA to purchase 124.8 megawatts of output from the Vogtle expansion project and is the obligor on $457.9 million of Project P bonds outstanding as of Dec. 31, 2017.

PowerSouth didn’t immediately respond to a request for comment about whether it is considering JEA’s offer. The coop has expressed support for work on the new reactors to continue since the Georgia Public Service Commission voted in December 2017 to support the project at the then-estimated completion cost of about $25 billion.

“MEAG Power has received a letter from JEA,” the agency said in a statement. “It will be reviewed by the board at the appropriate time and considered on its merits.”

JEA’s replacement power offer comes just a week after the northeast Florida municipal utility filed a lawsuit asking a state court to void the PPA because it hadn’t received the required approval from the Jacksonville City Council. The complaint also alleged the agreement violated Florida law and public policy.

The same day MEAG filed a three-count federal complaint in Georgia contending that JEA breached its contract to buy electricity that will be generated by the project and seeking a declaratory judgment to enforce the PPA.

Analysts say litigation between the Georgia and Florida public power agencies is negative for bonds and Department of Energy loan guarantees that support MEAG’s ownership interest in the reactors.

JEA and PowerSouth are the only obligors on the agreements to pay the bonds and loans on their respective agreements for the first 20 years.

S&P Global Ratings, Moody's Investors Service and Fitch Ratings have all warned their ratings could be downgraded on various bonds because of the lawsuits over JEA’s power purchase agreement.

Fitch said Tuesday that the litigation heightens uncertainty about the validity of the PPA, even though it views the agreement as being “valid, legal and binding.”

“Multiple legal opinions were provided as part of the initial bond offering and DOE loan process, including an opinion provided by JEA's general counsel, that JEA had all necessary power and authority to enter into the PPA,” said Fitch analyst Kathy Masterson. “There can be no certainty that the legal outcome will be favorable to bondholders.”

Citing the pending lawsuits, JEA said it would not answer The Bond Buyer’s questions about whether the utility would pursue action against the attorneys that issued opinions saying JEA could unilaterally approve the PPA.

Court documents stating that JEA had such authority were signed or reviewed by former chief financial officer Melissa Dykes, who is now JEA’s president and chief operating officer, and Jody Brooks, JEA’s chief legal officer who worked on the amended PPA while she was a member of the city’s office of general counsel.

The Washington, D.C.-based firm Gibson, Dunn & Crutcher LLP, which also represented JEA, is listed on PPA documents filed in court.

“Any court decision which invalidates or otherwise compromises the bondholders’ security under the PPA, could be problematic for MEAG Power as it looks to debt finance its remaining share of the project through public market issuance and U.S. Department of Energy-guaranteed loans,” Moody’s analyst Kevin G. Rose said Monday.

Although JEA would likely derive long-term benefits from reduced power supply costs if its lawsuit is successful, Rose said that could expose the Florida utility to additional lawsuits from the Vogtle project’s other participants - creating the potential for credit risk due to costly and protracted litigation.

“Should the court find that the PPA required City Council approval, we would view this finding as raising serious governance issues for JEA, which we would consider negative for JEA’s credit profile,” said Rose.

Although JEA continues to express “strong” concerns about the project and takes issue with the shift to an uncapped, cost-plus contract from a fixed price contract for the Vogtle project, Moody’s said the concerns are not a new development and have been incorporated into JEA’s Aa2 rating and negative outlook.

JEA has not “expressed any intention to violate terms of the existing take-or-pay contract and continues to make payments as billed on a timely basis,” according to Moody’s.

“Unlike JEA, PowerSouth, which has a similar PPA with MEAG Power, continues to support the Vogtle project,” Rose said.

S&P placed JEA’s bond ratings on CreditWatch Negative Sept. 14 and said the utility’s legal assertion that its board acted beyond the scope of its authority in approving the PPA raised questions about the quality of the utility's internal controls.

“In our opinion, the utility's legal claims seeking to repudiate the board's actions after a decade call into question the utility's willingness to meet its contractual financial obligations,” said S&P analyst David Bodek.

JEA has about $1.47 billion of outstanding senior lien debt and $960 million of subordinate debt.

The Georgia project has been on a rocky road since the former primary contractor, Westinghouse Electric, filed for bankruptcy on March 29, 2017 to shed its debt for the fixed-price contract to build the reactors in Georgia and a similar project in South Carolina.

While the Vogtle owners voted to complete units 3 and 4 last year with new managers, South Carolina’s twin nuclear reactor project was abandoned, though it remains a political football because outstanding debt must be paid even though there won’t be an associated revenue-producing asset.

Southern Nuclear has taken over as the manager of the Vogtle project and Bechtel Power Corp. is the primary construction contractor. Georgia Power is spearheading the project for the co-owners.

Both Southern Nuclear and Georgia Power Co. are affiliates of Southern Co.

Under the new structure there is no fixed price for completing the project, which one reason JEA has questioned the validity of the project and its power purchase agreement since the fall of 2017.

On March 9, JEA told MEAG that it wasn’t asking to be absolved of its obligations and that JEA would continue to perform under the PPA, according to a material event notice on the Municipal Securities Rulemaking Board’s EMMA filing system.

That position changed when JEA filed suit to repudiate its agreement.

Analysts have said the struggles to complete the Plant Vogtle expansion underscore the challenges with such a large-scale project, which will use new AP 1000 nuclear reactors designed by Westinghouse. Westinghouse continues to do the design work.

Although Georgia Power said project costs have risen, the in-service dates projected for the units late last year remain on track for November 2021 and November 2022.

When the Vogtle expansion was first licensed, the reactors were projected to come online in 2016 and 2017. Those dates were later pushed back to 2019 and 2020.

On Wednesday, 20 members of the Georgia General Assembly signed a letter to Georgia Power, Oglethorpe Power and MEAG about their concern over the “ever-escalating cost” of the Plant Vogtle expansion.

They said Georgia Power’s plan to absorb its share of the increased cost – and not to request a rate increase – placed a disproportionate cost burden on member cooperatives and municipalities that receive power from MEAG.

Before voting to move forward with the project, the lawmakers said the co-owners should establish a cost cap “that protects all Georgia electric ratepayers from this and future overruns.”

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Lawsuits Energy industry Revenue bonds JEA Municipal Electric Authority of Georgia Florida Georgia Washington DC