Power plant lawsuit tries to evoke California city's troubled past

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Two years after an official report pronounced it "free of scandals," the largely industrial city of Vernon, California, faces a lawsuit that tries to evoke its earlier troubles.

The city government's existence was threatened in 2011, leading it to accept a series of reforms to keep state lawmakers from following through on disincorporation legislation.

On Jan. 31, 2017, John Van de Kamp, the former state attorney general turned independent reform monitor for the city, pronounced the town “free of scandals that brought it into disrepute,” in his final report. Van de Kamp died two months later at 81.

A lawsuit filed Friday in California Superior Court in Los Angeles County seeks to dredge up that history.

The suit by Bicent California Malburg LLC, stemming from a dispute with the city over the power plant it purchased from Vernon, lists prior problems with corrupt leaders, who have since left.

"Over the years, many Vernon senior officials have been indicted, convicted or pled guilty to (among other things) voter fraud, misappropriation of funds, and conflicts-of-interest for employing friends and family at city jobs paying exorbitant salaries," according to the 212-page lawsuit.

But Vernon officials say it is the power company that is behaving in bad faith.

Bicent, controlled by Beowulf Energy Co., claims in the suit that Vernon's failure to maintain its distribution system has harmed the Malburg Generating Station. "Plaintiffs recently learned that Vernon has used its control over the Facility’s power output to conduct secret and unauthorized 'dispatch experiments' by which it hoped to show that the Facility’s power generating capacity did not meet contractual requirements, so that Vernon could avoid making payments owed under the PPTA," the lawsuit said.

"Vernon’s distribution and transmission systems are unusually prone to repeated voltage spikes and electrical disturbances," Bicent argues in the suit. It is represented by Andrew Levine, a partner with BraunHagey & Borden LLP.

The power plant is interconnected to Vernon’s electrical systems, "so it is subject to the effects of those spikes and disturbances, which have caused or contributed to serious damage to Malburg Generating Station," according to the lawsuit.

Vernon’s lawyers say that Bicent failed to generate the amount of power dictated in a purchase agreement and overbilled the city’s electric utility by $6 million — and filed the lawsuit to distract from its own failure to live up to its agreements.

The city is the plant's only customer, but Vernon also obtains power from other sources to supply its mainly industrial and commercial customers with electricity.

The city, four miles south of downtown Los Angeles, has a residential population of 211, but its industrial and commercial businesses employ about 55,000 people.

Bicent claims it is able to generate the power required under the power purchase tolling agreement and that repairs required to its system were necessary because Vernon failed to adequately maintain its connected distribution system causing damages to the plant, said Levine, Bicent's attorney.

In particular, Vernon has failed to install and put into service critical protective relays that were part of the original design of its interconnection systems, left other protective equipment in an inoperative state, and failed to maintain the protective equipment that Vernon does have. If left unremedied, these failings threaten further, catastrophic harm to the power plant, according to the lawsuit.

The issue arose when the Bicent notified the city in April that it had a problem with its generator that would require part of the plant to run at 35 megawatts instead of its normal output of 40 megawatts, said William Kissinger, Vernon’s outside counsel and a partner at Morgan, Lewis & Bockius LLP. And in order to run at 35 megawatts, another part of the plant couldn’t operate, taking out another 20 megawatts, Kissinger said.

“They said don’t worry, the power plant will still be able to generate the power needed, which didn’t seem possible, particularly during the summer when capacity is eroded,” Kissinger said. “When we questioned that, that is when things got testy and they said you are the reason why the power plant is not able to generate the full amount.”

The lawsuit is purely a distraction tactic by Bicent, said Kissinger. He added that the issue is more than Bicent’s mis-billing; he said the firm has made statements to the city that raised concerns about whether Vernon would have sufficient capacity to meet the obligations to its customers.

“We have issued multiple notices of default” on the purchase agreement, said Hema Patel, Vernon’s city attorney. “In response to charges we raised that they are defrauding the city, they are coming up with charges related to the distribution system. We feel it is an effort to squeeze the city and then walk away from the claims we are asserting.”

In its lawsuit, Bicent asks the judge to require Vernon to pay upfront the remainder of the purchase agreement that extends through 2028. Levine wouldn’t disclose how much money that would be.

Levine claims his client has discovered that the facility has been damaged a number of times through issues in the city’s distribution system dating back to 2013.

Vernon Electric issued $500 million in bonds to construct the plant that opened in 2005 and to pay for a pre-purchase natural gas agreement, but then sold it to Bicent for $287.5 million in 2008. It also entered into a power purchase contract with Bicent to purchase the power from the generating station for 15 years. At the end of the 15-year period, the city has the option to buy back the generating station for $1, according to a 2012 state auditor’s report.

Bicent owns the plant, but pays the city to lease the ground underneath the plant, Patel said.

The utility, which issued $1.3 billion in bonds primarily for its electric system between 2004 and 2012, had $368 million outstanding as of year-end fiscal 2017, according to its most recent comprehensive annual report.

A significant amount of the utility’s outstanding debt is related to a natural gas prepay transaction struck in 2006, according to Moody’s Investors Service. The utility has $142 million remaining of the $419 million 2009 revenue bonds issued for the prepaid gas as of the June 2017 fiscal year end. The deal was intended to provide the then-city owned 134 megawatt gas-fired power plant with natural gas at below-market prices.

Since Vernon could not sell the gas to Bicent, a private for-profit company, without violating the tax exempt status of the bonds used to purchase the gas, it struck an agreement for the Sacramento Municipal Utility District to purchase the gas at a loss until the pre-paid natural gas agreement expires in fiscal year 2021. Vernon has to purchase natural gas on the market to satisfy Bicent’s fuel needs.

Moody’s Investors Service in August revised its outlook on the city’s $368 million in outstanding electric enterprise debt to stable from negative and affirmed it at Baa3.

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