“It’s a bad idea and it’s a bad precedent,” Barry Moline of the Florida Municipal Electric Association says of a bill that would restructure Gainesville Regional Utilities.

BRADENTON, Fla. - A bill that opponents say could increase borrowing costs for Florida's fifth-largest municipal utility is at the desk of Gov. Rick Scott.

House Bill 1355, sponsored by Rep. Keith Perry, R-Gainesville, passed during the recently concluded legislative session.

HB1355 would allow voters in Gainesville to decide in a referendum next March whether to amend the city's charter and create a utility authority to govern Gainesville Regional Utilities.

Scott can sign the bill into law, let it become law without his signature, or veto it.

GRU is currently governed by the Gainesville City Commission. The city also issues debt for the utility, and owns the assets.

The city commission voted to oppose the legislation earlier this year.

Barry Moline, executive director of the Florida Municipal Electric Association, said the governor should veto the bill.

"It's a bad idea and it's a bad precedent," Moline said in an interview. "The legislation creates separate governance for GRU but the ownership of all assets remain with the city, and the city has no control over the rates."

Such a governance structure would be viewed unfavorably by rating agencies and it could negatively impact ratings, Moline said in a March 18 letter asking Scott to veto the bill.

"Rating agencies and national banks told us this week GRU's credit rating could easily drop to BBB-plus," Moline wrote. "We believe a reasonable estimate of the resulting borrowing impact would be 150 basis points."

The utility carries ratings of AA-minus from Standard & Poor's, AA-minus from Fitch Ratings and Aa2 from Moody's Investors Service.

Moline also said another concern is that the new governing board could lower the debt service coverage ratio from the current 2.0 to 1.25, which could also result in rating downgrades.

In November, Standard & Poor's dropped its long-term rating on the Gainesville utility one notch from AA, citing GRU's commitment to make fixed payments to the Gainesville Renewable Energy Center - an uneconomical 100 megawatt biomass fueled power plant – resulting in "very high rates, limiting financial flexibility and weakening fixed cost coverage."

GRU's rates are among the highest in the state, resulting in ratepayer backlash and changes in utility management, S&P also said.

The utility had $925 million of outstanding utility system revenue bonds and $65 million of commercial paper notes as of Sept. 30, 2015.

A reorganization of GRU's structure may be questioned by banks and bondholders because it is not clear whether the concept conforms to bond covenants, said a legal expert who asked not to be identified.

The legislation being considered by the governor is the result of backlash over GRU's high rates and annual transfers to the city's general fund.

HB1355 would transfer the decision-making power over GRU's rates and any transfers to the city's general fund to the authority, leaving ownership of the assets with the city, Perry, the bill sponsor, told the House Government Affairs Subcommittee Jan. 25.

"The goal, and it's been the goal in Gainesville for many groups, is to take the politics out of the policy making of a utility," Perry said, complaining of the high rates.

While the city commissioners would appoint members of the new authority, they would have no power to remove them.

Perry's bill would also pay each authority board member $18,000 a year, to be adjusted periodically according to the Consumer Price Index. The board would hold a minimum of 12 meetings per year.

Most municipal utility board members in Florida are appointed and serve with little or no recompense.

City commissioner Craig Carter said paying a salary concerned him.

"I don't want to pay any board member because that would start a precedent," Carter told The Bond Buyer Tuesday, adding that reflects his opinion and not necessarily the view of the entire commission.

Carter also said he would prefer that the decisions over GRU's rate structure and the general fund transfer at least be made jointly, between the commission and utility authority board members.

Under HB1355, the new authority would have the sole power to determine rates, and to reduce general fund transfers up to 3% annually.

In 2014, GRU transferred $37.4 million, or 9.6% of its revenues, to the city, according to S&P.

The transfer was $34.9 million in fiscal 2015.

One reason for the large transfer is that about 40% of Gainesville's tax roll is exempt from ad valorem taxes because the city is home to the University of Florida, the state's flagship institution, the city's lobbyist, William Peebles, told the House Regulatory Affairs Committee Feb. 25.

Peebles also said that GRU has high electric rates largely because of its investment in the biomass plant.

"We have among the highest rates in the state of Florida, and in the nation," Kamal Latham, vice president for public policy for the Gainesville Area Chamber of Commerce, told the committee. "We need this to address pressing challenge."

In addition to the chamber, Latham said the local builders' association also supported the bill.

Dave Ferro, president of the Gainesville/Alachua County Association of Realtors, said real estate agents often deal with prospective buyers who always ask if property is in GRU's service territory.

"The city of Gainesville also uses the utility…as an ATM," he said, referring to the annual transfers.

Ferro also said that many utility customers do not live in the city limits, and are not represented by the commissioners who run GRU.

"We believe this bill is a strong step toward fixing that," he said.

If the referendum passes in March, the five-member Gainesville Regional Utilities Authority would be created as a unit of city government to broadly manage the utility "free from direction and control of the Gainesville City Commission," according to HB 1355.

At least one member of the board would be appointed from the unincorporated area within GRU's service territory.

Gainesville is in north-central Florida, and has about 125,661 residents in the city limits.

GRU is a multi-service utility that provides about 93,000 retail and wholesale customers with electricity, natural gas, water, wastewater, and telecommunications services

In February, the City Commission appointed seven members to serve on a new Utility Advisory Board to advise the commission on utility issues.

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