JEA rehires its former CEO in interim role amid management turnover
This story has been corrected. A full explanation is at the bottom.
A retired CEO will return to lead Jacksonville's municipal water and electric utility.
The new governing board for JEA voted unanimously Tuesday to hire Paul McElroy as interim chief executive officer and general manager while a search is underway for a permanent manager.
Among the issues facing the city-owned utility is a power purchase agreement with the Muncipal Electric Authority of Georgia that it is seeking to void through a federal lawsuit.
McElroy was the CEO at JEA for 5-1/2 years until he resigned in April 2018. During that time he agreed to a revision of the MEAG PPA, which was first approved by a previous CEO, Jim Dickenson,
"To me trust is earned," McElroy said, when he answered a board member's question about how JEA could earn the Jacksonville community's trust after last year's attempt to sell the utility. That effort was scuttled by the former board of directors after political and community blowback that resulted in the departure of the chief executive and replacement of all board members.
All seven of the new board members spoke appreciatively about McElroy's prior service and supported hiring him. He will earn $276,041 to work full time for six months. After that he'll work part-time to comply with pension regulations against "double-dipping.”
There was no discussion about the take-or-pay PPA with MEAG or the ongoing lawsuit over the contract, for which JEA, Jacksonville and MEAG have, at times, hired five outside law firms between them to pursue the litigation.
In the suit, the city and the utility contend that JEA improperly approved the PPA and that it straps ratepayers with an "uncapped" liability for costs toward building two nuclear reactors at Plant Vogtle in Georgia.
In a rating presentation to the board on April 28, JEA says that over the next five years rates will increase primarily because of costs associated with the PPA.
"JEA estimates the average residential bill impact from incorporating the Vogtle PPA charges to be limited to inflationary levels of up to 3% per year" from 2022 to 2024, assuming fuel rates decrease.
The power purchase agreement requires JEA to pay debt service for 20 years on bonds and federal loans issued by MEAG to pay a portion of its 22.7% ownership interest in the reactors. The agreement also entitles JEA to purchase the first 20 years of electricity generated by the project, which is about 84% complete.
If the lawsuit filed by JEA and the city is successful, JEA may have trouble obtaining the power purchase agreements it needs with other agencies in the future, according to Dan Aschenbach, a partner at the public finance and clean energy investment consulting firm AGVP Advisory.
Since the 1980s, he said take-or-pay contracts have been the mainstay of U.S. public power electric utilities to finance major generation facilities.
"The take-or-pay contracts, which means a local utility must pay even if the project does not get constructed or operate, are important to provide investors confidence that these large generation projects are secure obligations," said Aschenbach, a former utility analyst for Moody's Investors Service.
The contracts typically are for generation projects involving joint-action agencies like MEAG Power, he said, adding that across the U.S. there are more than 20 such agencies that have debt for take-or-pay obligations.
Since JEA and Jacksonville filed a lawsuit against MEAG in an attempt to void the PPA, the utility has seen its bond ratings downgraded several times.
On Feb. 21, S&P Global Ratings lowered to AA-plus from AAA JEA's water and sewer debt, citing governance issues. S&P said the outlook is developing. After the lawsuit was filed in September 2018, S&P lowered ratings on the senior-lien electric bonds to A-plus from AA-minus, citing the rising cost of the delayed nuclear reactor project and the litigation.
In October 2018, Moody's Investors Service downgraded the senior electric revenue bonds to A2 from Aa2, and placed a negative outlook on the debt, citing similar credit risks. Moody's also downgraded the water and sewer system debt to A2 from Aa2.
Fitch Ratings has maintained its AA rating and stable outlook on the electric system debt. The ratings were affirmed in November 2019.
"With regards to JEA, the main reason their credit ratings fell was the view that they were trying to abrogate their take-or-pay commitment on the MEAG power sales contract," Aschenbach said.
He also said that other joint-action agencies have objected to the JEA's litigation "because of the concern that if such a commitment made by JEA were easily eliminated, their own contracts could be subjected to such actions.
"Certainly, if JEA walked away from the legal commitment they made it would be a negative factor that future power suppliers would have to consider in dealing with JEA," he added.
JEA told The Bond Buyer that it has 15 power purchase agreements, including the PPA with MEAG and 13 for solar projects. JEA did not respond to a request for comment about whether procedures will be changed to avoid problems such as those with the MEAG PPA.
McElroy, who previously worked at JEA for a total of 16 years, including six years as chief financial officer, will become JEA's interim CEO on Monday.
He's stepping into the job because the governing board, in its April 28 meeting, fired Melissa Dykes because of her association with the senior leadership team involved in last year's tainted sale process.
Board chairman John Baker called Dykes an "amazing woman" as he cast the last vote to terminate Dykes without cause, making it a unanimous decision to end her eight-year tenure with Florida's largest utility.
Dykes had been serving as the interim CEO and general manager since Dec. 17, when former CEO Aaron Zahn was fired because of irregularities that occurred during the proposed sale, which the previous board of directors ended late last year before making a final decision due, in part, to pushback from the community.
Baker, who is part of a new seven-member board installed this year, led the discussion about needing to terminate Dykes; not because she wasn't capable of doing the job but because she was part of the former administration now being investigated by a federal grand jury and the City Council.
"The CEO is the face of JEA and I don't think it's appropriate under these circumstances for her to lead" the agency, Baker said.
McElroy provided the JEA board with a 13-page outline documenting his "significant achievements" while he was at the helm of the utility, which included reducing debt by more than $2 billion and securing AAA and AA bond ratings; investing $1 billion in infrastructure without issuing debt; and contributing $116 million annually to the city, the highest amount ever paid.
The last section of McElroy's outline is entitled the "Nuclear Plant Project That Became a Train Wreck."
"Sometimes the train goes off the tracks," his outline says, recounting the history, rising costs and delays of the nuclear project.
In 2008, when the PPA was signed, McElroy said that as much as 80% of JEA’s power was being produced with coal and pet-coke and the political climate was changing, with debate intensifying about carbon dioxide emissions and climate change.
In December 2017, the project was less than 50% complete and its total costs exceeded $26 billion compared with the original cost estimate of $14 billion, McElroy said.
Then the project owners voted to continue with the project, and the Georgia Public Service Commission concurred, despite its own staff recommending against allowing work to continue.
"McElroy and the others assumed the PSC would not permit the project to proceed," his outline said. "The final chapter on Project Vogtle Units 3 and 4, with its zero CO2 emissions will unfold over the next 23 years and coincide with projected stricter CO2 emission standards, climate change and sea level rise.”
Jacksonville and JEA, however, are pursuing the federal lawsuit in Georgia contending that in approving the contract with MEAG that "JEA acted beyond the limits of its authority by entering into the PPA in violation of the constitution, laws, and public policy of the state of Florida, rendering the PPA ultra vires, void, and unenforceable," according to an amended complaint for declaratory judgment filed Oct. 25, 2018.
The suit cites six grounds as to why the PPA should be voided, among them that JEA's bond counsel advised the utility "incorrectly" that it could represent that the contract had been authorized in accordance with the law and that JEA failed to obtain the consent of the City Council.
JEA is seeking a jury trial.
The high cost of the PPA is one reason prior JEA staff recommended selling the utility. Although the sale was terminated before completion, the process has attracted the attention of federal investigators.
On April 21, JEA received a subpoena from a federal grand jury convened in Jacksonville. It demands the production of a massive amount of documents, communications and emails related to the sale process and an incentive performance plan that was created but never approved.
Update: The story was updated with JEA's response to the question of how many power purchase agreements it has.
Correction: JEA's power purchase agreement with Georgia's MEAG was signed by former chief executive officer Jim Dickenson. Paul McElroy approved a revision of the PPA after he became CEO. The story incorrectly said McElroy signed the initial agreement.