Jacksonville launches sweeping investigation of JEA

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Jacksonville, Florida, has launched a sweeping investigation into the failed attempt to sell city-owned JEA, a probe that is expected to delve into the role that the municipal utility’s contract to buy nuclear-generated power from Georgia played in the privatization effort.

The city's Special Investigatory Committee, composed of City Council Members Rory Diamond, Randy Defoor, Brenda Priestly Jackson and Council President Scott Wilson, met for the first time Monday and requested 84 documents plus eight interrogatories from JEA, formerly the Jacksonville Electric Authority.

“We’re here because something has gone wrong with JEA,” said Jacksonville City Council Member Rory Diamond.

The committee will investigate future strategic operations options considered by JEA, including the privatization effort that the utility code-named Project Scampi. JEA’s former board of directors terminated the controversial initiative on Dec. 24. It will also scrutinize a proposed employee incentive proposal some have likened to a stock option plan.

“We’re here because something has gone wrong with JEA,” Diamond, who is chairing the committee, said Monday. The “job of this committee is to investigate and to get to the bottom of this so that we know exactly what went wrong at JEA.”

The committee will do its work in an “impartial, fair, reasonable, detailed and thorough manner,” said Diamond, an attorney and former federal prosecutor for the U.S. Department of Justice who specialized in the prosecution of public corruption and financial fraud cases.

The documents and materials uncovered in the investigation will be made public, and the committee plans to establish a process for whistleblowers to provide tips.

The power purchase agreement JEA has with MEAG Power wasn’t among the documents requested by the investigative committee, but Diamond said he anticipates the contract to purchase power from two nuclear reactors under construction at Georgia’s Plant Vogtle will come up as the committee meets in coming weeks.

“We at least want to discuss that the driver of the need to sell JEA, in part, was related to the uncapped liability related to Plant Vogtle,” Diamond said in an interview with The Bond Buyer Tuesday.

In addition to the city’s investigation, Melissa Nelson, the elected state attorney for Florida’s Fourth Judicial Circuit, has turned over her offices’ inquiry into the controversial privatization effort to federal prosecutors.

JEA now estimates that the process to get bids for the utility cost an estimated $13 million, according to an invoice log received through a public records request. Not all expenses have been submitted by various firms, nor have all the invoices been approved by the city’s Office of General Counsel, according to JEA spokeswoman Gina Kyle.

The invoice log doesn’t include charges from the Dalton Agency, an advertising and public relations firm that JEA paid $25,000 a month, Diamond said. His committee has requested copies of communications between the utility and Dalton.

Diamond said the committee will probably receive the last two years of public relations advice Dalton gave JEA, including talking points about the invitation to negotiate the sale of the utility and preparing letters to the editors of local publications.

“It just seemed like a lot of money to be spending of the taxpayer’s dollars” to convince the public to sell their own utility, he said.

JEA also used the Dalton Agency to send out press releases to the media in September 2018 announcing that both the utility and the city of Jacksonville filed a lawsuit asking a Florida state court judge to strike down the utility’s PPA with the MEAG, formerly the Municipal Electric Authority of Georgia. Both have argued JEA didn’t have authority to approve the power purchase agreement, even though it was amended several times and Jacksonville city attorneys signed off on legal documents supporting it.

The PPA requires JEA to pay debt service on bonds and federal loans issued by MEAG to pay a portion of its 22.7% ownership interest in two nuclear reactors under construction at Plant Vogtle. The agreement also entitles JEA to the first 20 years of electricity generated by the project.

“It has become clear that this purchase agreement should be considered ‘ultra vires’ [beyond the authority of JEA] since it was implemented without the approval of the City Council, which violates Florida law,” Aaron Zahn, then JEA’s interim managing director, said in a release. “A favorable judgment from the court deeming the agreement void will have the added benefit of providing relief to ratepayers across northeast Florida from having to shoulder the financial burden of this project.”

Litigation filed by Jacksonville and JEA in an attempt to invalidate the PPA led Moody's Investors Service to downgrade nearly all credit ratings of the two entities in October 2018. Jacksonville’s issuer credit rating was lowered to A2 from Aa2. JEA’s senior lien electric system revenue bond rating was lowered to A2 from Aa2.

“The city's [legal] action calls into question its willingness to support an absolute and unconditional obligation of its largest municipal enterprise, which weakens the city's creditworthiness on all of its debt and is not consistent with the prior Aa rating category,” said Moody’s analyst Edward Damutz.

On Sept. 28, 2018, S&P Global Ratings cut its ratings to A-plus from AA-minus on JEA’s senior-lien electric system bond ratings. S&P said its action was prompted by the lawsuit and escalating costs to build the new reactors.

The legal challenge, which is now pending in a Georgia federal court, was filed about three months after Zahn told JEA’s board of directors that in order to remain a municipally owned utility it needed to lay off one-third of its employees and increase electric rates more than 25%. After that, JEA began a strategic planning process to review its operations, including getting bids to sell the utility.

“We have made a massive document request to JEA and if they were to produce everything it will include documents related to Plant Vogtle litigation,” Diamond said. “It would also produce documents related to any litigation we might have with Nassau County or St. John’s County regarding JEA and their attempt to try and trigger a provision where they could buy out JEA in their counties.”

Diamond said the committee is being cautious about the documents it requests to ensure that none become public records that would otherwise be covered by a confidentiality exemption in Florida law.

A Jacksonville City Council committee is investigating what led JEA to get bids to sell the city-owned utility.

JEA officials appeared before the City Council in December to explain why the strategic planning process was undertaken. A printed presentation said that JEA over the past two decades had seen a number of factors that “forever changed” the markets it operates in, including “a business decision driven by the threat of carbon legislation” that was “poorly executed in the form of an ‘uncapped’ hell-or-high water contract” to purchase nuclear-generated electricity from Plant Vogtle.

Diamond said he has introduced a law in which Jacksonville will “outlaw” the use of uncapped or limitless contracts by the city and its independent agencies, such as JEA. He expects the measure to be considered and approved by the City Council in a month.

Take-or-pay power purchase agreements are commonly used in the electric utility industry.

On a JEA special website where documents related to the failed sale attempt are posted, a draft transmission agreement prepared by the Pillsbury Winthrop Shaw Pittman LLP law firm shows that JEA was considering retaining the PPA with MEAG, a move that may have made the utility more valuable to bidders.

The document gives another reason for retaining the contract liability.

“JEA intends to continue the Vogtle PPA until its conclusion or termination so as not to cause any adverse tax effects on bondholders,” it says.

In a limited public offering memorandum last year, MEAG said the capital requirements for JEA’s PPA were estimated at about $2.9 billion, most of which has been financed with $2.004 billion of long-term bonds and $575.7 million of U.S Department of Energy loan guarantees.

JEA continues to make debt-service payments on the PPA while challenging the legality of the agreement in the Atlanta Division of the United States District Court Northern District of Georgia.

In December, MEAG filed a motion for a declaratory judgment on whether the PPA between JEA and MEAG is valid and enforceable. JEA also filed a motion for a declaratory judgment stating, in part, that neither JEA nor the city can be bound by Georgia law pertaining to its bond validation proceedings.

“The plaintiffs’ claim for declaratory judgment is precluded under Georgia law because it is a collateral attack on a final judgment that held the PPA valid and enforceable,” MEAG said in a Dec. 27 filing. “This court should thus declare that the PPA is valid and enforceable.”

Both Jacksonville and JEA filed motions in January opposing MEAG’s filing.

Federal Judge Mark H. Cohen has allowed all parties to file additional pleadings on the PPA issue. A decision could be handed down soon.

Last month, JEA’s board of directors voted to fire Aaron Zahn with cause due to what city attorneys said was mishandling of the privatization effort. After that vote, the board of directors resigned, while board member Kelly Flanagan will serve until the end of her term this month.

On Tuesday, Jacksonville Mayor Lenny Curry appointed seven new members to the JEA board of directors who must be confirmed by the City Council.

Melissa Dykes is JEA’s interim managing director and chief executive officer. She has said she won’t apply to become the permanent director.

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