BRADENTON, Fla. - A Florida bill that would subject the state's only municipal joint action power agency to a rate-setting authority could jeopardize its credit ratings.
House Bill 773, sponsored by state Rep. Debbie Mayfield, R-Vero Beach, would place any electric utility created by the Florida Interlocal Cooperation Act under the auspices of the state's Public Service Commission, which governs the rates of investor-owned utilities.
The Florida Municipal Power Agency would be the only municipal utility impacted by HB 773.
The Orlando-based agency is owned by 31 municipalities that provide electricity to about 2 million Floridians.
"If FMPA were placed under state regulation it would be a credit negative and likely result in a downgrade if certain protections weren't included like adhering to bond covenants," said Moody analyst Dan Aschenbach.
PSC regulation raises problematic issues for a joint action agency, including a lag in rate setting and often inadequate cost recovery, he said. Those are also major reasons why investor-owned electric companies are rated lower than municipal utilities.
No other state regulates joint action agencies, Aschenbach said.
Florida Municipal Power has about $1.7 billion in long-term debt related to five projects in which various cities participate.
Moody's assigns A1 and A2 ratings to bonds issued for the projects; Fitch Ratings rates them either A-plus or A.
While HB 773 does not have a companion measure in the Senate and no committee hearings have been scheduled more than halfway into the legislative session, the bill is an outgrowth of a controversy that has dogged the FMPA because Vero Beach was unable to unwind its contracts with the joint action agency.
Mayfield, who could not be reached for comment, has long voiced concern about high electric rates tied to FMPA contracts that impact Vero Beach and unincorporated Indian River County residents who have no avenue to complain about their bills.
For years, the city has wanted to receive electricity from investor-owned Florida Power & Light, believing FPL's costs for electricity would be lower than FMPA's.
Bondholder protections have prevented Vero Beach from cutting ties with FMPA. Actions by the power agency to abide by its covenants have also strengthened FMPA's credit, Aschenbach said.
However, an operational audit the state Auditor General's office released in March was critical of the agency's expenses, operations, and investments from October 2012 through June 2014, the review period.
Mayfield requested the $200,000 audit.
State auditors cited 15 areas questioning FMPA operations, including fuel hedging practices and FMPA's decision to enter 14 swaps with a notional amount of $700 million in November 2006 in anticipation of issuing debt to pay for a portion of a coal plant project.
In February 2007, the PSC postponed a decision to license the coal project, and by July of that year then-Gov. Charlie Crist issued an executive order prohibiting new coal plant construction.
No bonds were issued by FMPA for the cancelled coal project that would have been covered by the forward swaps.
Entering into the swaps in advance of the bond issuance was not consistent with industry practices used by other joint action agencies comparable to FMPA, auditors said.
The swaps would have cost $150.13 million to terminate as of March 30, according to FMPA assistant general manager Mark McCain.
McCain said the agency's executive committee in February approved a credit agreement with Wells Fargo and Bank of America to provide interim financing for the swap termination costs. This month the committee and consultants will discuss strategies for dealing with the swaps, which must be terminated by Sept. 30.
The Auditor General's report also criticized FMPA for spending and hiring policies, including a provision to pay the chief executive officer six months of his salary and health insurance premiums for life if terminated for cause.
During the period covered by the audit, the power agency spent $23,844 on parties, tickets to local tourist attractions, staff gift cards for various occasions, Orlando Magic NBA season tickets, charity fund-raising lunches, and retirement parties.
FMPA also spent $12,030 for flowers, Christmas tree rentals, and decorations. Another $106,850 was spent on meetings, refreshment catering, vendor services for utensils, plates and cups, and break room supplies.
"We have already take action on a number of recommendations, and every audit recommendation will be addressed in the coming months," McCain told The Bond Buyer.
Mayfield, a member of the Joint Legislative Auditing Committee, was highly critical of FMPA's response to the operational audit when it was reviewed on March 30.
"The report is eye-opening as to how FMPA operated," she said.
Mayfield asked if FMPA is regulated or sanctioned by any agency, in the way the PSC oversees investor-owned utilities. She also asked if any agency is looking after the interests of ratepayers who live outside city limits but receive electricity from the city utility.
Audit manager Marilyn Rosetti said FMPA is not subject to PSC oversight or any other agency that regulates rates. She also said she did not know how a customer living outside a municipality could complain about rates.
"I want to be clear that FMPA owns every decision we have made, including decisions that didn't turn out the way we hoped," said FMPA board chairman Bill Conrad. "We will address every finding in the audit."
Sen. Wilton Simpson, R-Trilby, asked Conrad why residents in Vero Beach and Indian River County reportedly have electric rates 41% higher than FPL's rates.
Conrad said FPL is a wholesale provider, and FMPA provides electricity to city substations.
What happens to the rates customers pay is beyond FMPA's control, Conrad said, adding that cities can add fees and transfer utility revenue to the general fund.
Those transfer fees were cited by Moody's as a concern in an April 2014 credit report on FMPA's St. Lucie Nuclear Power Plant project.
Moody's said one challenge facing project participants is that many utilities have sizable transfers of electric revenues to city general funds, "which can sometimes contribute to above-average retail rates for some members."
Most of FMPA's members transfer revenue annually from the local utility to support their general fund, according a 2013 survey by FMPA.
The survey found that transfers ranged from a high of $67.9 million or 15.2% for the Orlando Utilities Commission to a low of $297,565 or 19% for the small city of Moore Haven.
Vero Beach had the eighth-highest transfer from its utility at $5.6 million or 6.2% in 2013.