Exiting FMPA
This afternoon, the Commission meets in closed session to discuss the cost and strategy of the lawsuit we filed against FMPA. This revolves around FMPA's decision to stop paying for the natural gas pipeline construction that they had previously agreed to after we announced our intention to "exit FMPA"
That "exit FMPA" thing is what I want to talk about today. What does it mean and why are we suddenly hearing "We're not really exiting FMPA" from Utility Director, Becky Mattey and Commissioner Chris McVoy? They've each said that a few times in the last month or so. McVoy repeated it Tuesday night when Mulvehill tried to bring back the "Sustainability" Manager position. The other acronyms tossed around a lot whenever the FMPA thing comes up is "CROD" and "ARP".
First some definitions:
FMPA - Florida Municipal Power Agency - is a kind of cooperative with 30 members. Members include cities that own their own electric utility like we do here in Lake Worth. Members can participate in FMPA in three ways:
1. Power Supply - Members may buy all or any part of the power supply they resell to their own customers through FMPA. This is the biggest part of what FMPA does - make bulk purchases of power for their members to resell to their own customers through their own transmission and distribution systems. FMPA is the wholesaler and the members are the retailers.
2. Other Stuff - Members may buy all or any part of the material, supplies, equipment and other operational components the member cities need to transmit and distribute the power they resell. Here, FMPA serves as a sort of Costco type wholesaler/retailer for members to buy stuff they need to actually get the power to customers.
3. Either or any piece of both of the above.
For our purposes today, we're going to concentrate on the prime directive, Power Supply.
There are five different FMPA Power Supply Projects that members can participate in to purchase all or part of their power. This power can come from the generating capacity of FMPA members or from power generation plants owned by other companies, like FP&L, or Orlando Utilities Commission (OUC). Members can choose to buy all or part of their wholesale power through FMPA, depending on which of the five different Power Supply Projects they sign up for.
1. All Requirements Project
2. St. Lucie Project
3. Stanton Project
4. Tri-City Project
5. Stanton II Project
Fourteen cities buy all their Power Supply through FMPA. Lake Worth Utilities is one of those. We are part of the All Requirements Project (ARP).
Lake Worth Utilities is also one of the fifteen FMPA members that participate in the St. Lucie Project. St. Lucie is a nuclear generating plant on Hutchinson Island operated by FP&L. All together, the fifteen FMPA members who are part of this project, "own" almost 9% of the generating capacity of this plant. For Lake Worth Utilities, that means we are entitled to 18 MegaWatts of power from the St. Lucie Plant.
LWU is also one of the seven FMPA members who participate in the Stanton II Project. Stanton II is a coal fired generating plant operated by Orlando Utilities. All together, the seven FMPA members who participate in this project "own" 23% of the generating capacity. For LWU, that means we are entitled to 10 MegaWatts of power from the Stanton plant.
Under these two projects, St. Lucie and Stanton II, LWU is covered for 28 Megawatts of power. LWU needs in the neighborhood of 90 MegaWatts of power to service all their customers, so we have to be able to get the other 62 MegaWatts from somewhere else. Right now, that "somewhere else" is the All Requirements Project.
Here's where it gets a little hinky. LWU happens to own it's very own power generating plant, the Thomas P. Smith plant right here in Lake Worth. Having that generation capacity is what makes LWU eligible to be a part of the All Requirements Project, (ARP). We have a few different electricity generators in our plant and they operate with a variety of different types of fuel, diesel and diesel/natural gas combined as well as oil/natural gas combined. All together, our generators owned fully by LWU can produce a total capacity of 91 MegaWatts. Good news, except they all can't run simultaneously and even if they could, while these generators have been fairly well maintained, they are old and not terribly efficient when it comes to how much fuel it takes to run them. In less than ten years, several of these generators will just be obsolete and replacements parts will be simply unavailable.
What LWU brings to the table in the ARP project is the capacity we have to generate electricity, despite the high cost and unreliability of our generators. What LWU agreed to in order to be part of the ARP is the promise to buy all our power through FMPA and to maintain our generating capacity just in case all the other more efficient and more reliable power supply sources under the FMPA umbrella of Projects go down. So FMPA gets our generating capacity if and when they ever need it and we get "energy credits" based on our generating capacity to reduce what we pay FMPA for the power we buy in exchange.
Seemed like a good idea at the time, I guess, except that FMPA started speculating on the price of natural gas futures and got stuck with ridiculously high rates way above market rates for a long time. The FMPA members and we, their customers got stuck with ridiculously high rates then, now and into the future as a result.
So the next good idea was for LWU to exit out of the ARP and find other places to buy power. We still get to keep our part of the St. Lucie Project and our part of the Stanton II Project if we want, and we most likely do. But there's a big ole (hugely expensive) hitch in getting out of the All Requirement Projects.
I know this is all really exciting stuff and you're just hanging on every word to see how it all turns out. Unfortunately, I'm gonna hafta stop for now. I have an appointment with my dentist. I'll pick up here when the Novocaine wears off!
OK. I'm back. No Novocaine today, but sometime soon we're gonna have to explore the psychedelic albeit temporary properties of Nitrous Oxide.
The big ole, hugely expensive hitch is what's called "stranded costs". That means measuring the impact of our withdrawal from the ARP on the other members in terms of dollars - how much of a penalty we would have to pay for leaving them stranded. That's somewhere in the neighborhood of $30,000,000 so just tearing up this contract is and never was an option.
There is, however, an exit or termination clause in the ARP contract that pretty much says, we can be relieved of our obligation to buy all our power from FMPA as long as we meet a couple requirements.
1. We have to give them five years notice and once we do, it's irrevocable. We did that on December 31, 2008, which means we have until January 1, 2014 to meet the rest of the requirements.
2. We have to secure another source of power with the capacity to provide equal to or greater than, but absolutely not less than the most electricity LW ever needs on say, the hottest day of the year when all the A/C's all over town are crankin. That's called "Peak Load". Add to that a reserve of 15% because who knows and that's the amount of MegaWatts we have to be able to provide our customers without relying on the power we buy through the ARP project. Remember, the MegaWatt capacity we are entitled to through the St. Lucie nuclear and Stanton II coal fired projects are not affected. We will still be entitled to that combined capacity of 28 MegaWatts.
This little clause in the ARP contract is what is going to save us from having to pay Stranded Costs. It's called the Contract Rate of Delivery. That means, we are free to REDUCE the amount of power we buy from FMPA.
To recap, right now we buy all our power and "exchange" or sell all our generating capacity to FMPA through the ARP under the existing Capacity and Energy Sales Agreement. On December 31, 2013 that Capacity and Energy Sales Agreement dies and is reborn on January 1, 2014 as the Contract Rate of Delivery agreement, the CROD.
What that means is that we still have the option to buy power from FMPA - but not the obligation to buy ALL our power, or even ANY of our power from FMPA - Only that part that we haven't figured out a way to buy from someone else, or produce ourselves. There is a number for how much power we have to be able to provide LWU customers and that's called the Peak Load + a 15% reserve added on top of that. Under the new terms of the ARP contract that go into effect on Jan.1. 2014, we are only contracting for a specified rate of delivery, that rate of delivery to be determined by what I said above - just that part of what we haven't already secured from St. Lucie and Stanton II, secured from someone else, or from our own power plant.
The trick is to reduce our overall Peak Load as much as possible before the Jan. 1, 2014 deadline. Here's why. Let's say at the deadline the Peak Load in LW is 100MW in round numbers to make this a little easier. Ok, now let's say we have spent the five years before the deadline rounding up alternative power suppliers or we've beefed up our own generation capacity to take care of our own power needs but the best we could come up with from either of those or a combination of both of those is say 95 MW.
So we would still have to buy 5% of our power from FMPA and they are fully prepared to stick it to us like never before when it comes times to decide how much they're going to charge LWU for those 5MW. AND we will have irrevocably lost the 6 million annual energy credit dollars we previously had coming to us.
It is therefore in our interest to:
1. Reduce the "Peak Load" in LW by as much as possible. This is the argument McVoy was using to justify the Sustainability Manager position.
2. Pull together a few options for getting new power suppliers in place ready to hit the switch on Jan.1, 2014. That's what Energy Advantage Consultants and Sue Hersey were hired to do. They have come up with three possible ways LW can go.
One is a stand alone option. That means retiring some of the older generators we have and replacing them with a new, bigger generator that can crank out enough power without killing us in fuel costs.
One is to sign an agreement with another power supplier, like FP&L or Progress Energy to supply the juice, but LW still owns the transmission and distribution systems that gets that juice to our refrigerators.
And the last one, is some kind of hybrid of the above two.
The only thing part Commissions have done so far in any of this is to set priorities for how they want these new potential power providers to provide power. Not surprisingly, environmentally friendly generation is high on their list of priorities.
What they have done NOTHING about is coming up with plans to make our own generating capacity practical and economically feasible as part of the mix. That inaction pretty much leaves buying power from an outside company the only viable option. HOWEVER, the RFP to solicit a new power provider does very clearly mention the generation capacity and the PERMIT we own as highly valuable assets any potential power provider should take into consideration.
The PERMIT to operate a generation plant is by far the single most valuable asset in our Utility. It's practically priceless because for anyone to get a new one takes years and many millions of dollars. We simply cannot allow that asset to be diluted and rendered useless by having no practical, economically feasible source of generating electricity at the Thomas C. Smith power plant. That and That Alone is the carrot we hold for any power provider interested in servicing LWU.
Ok, So the RPF is supposed to go out sometime this month with the winning bid to be selected in September this year. That will leave about 15 months for whatever the new power supply source is going to be to get up and ready. It also means that this Commission has from the time the bids all come in until September to negotiate and make a decision on just what kind of a hybrid deal we intend to make. That's also the same time they have to do the annual budget thing.
I do not not not understand why we are sitting around waiting for Becky Mattey to jump into her golden lifeboat whenever she feels like it. When are we going to start looking for a Utility Director with plans to stick around while we go through this incredibly complicated and critical process. Right now I think it's Becky's plan to leave at the end of May. That is precisely when the RFP responses are going to start rolling in. Who does this Commission think they are going to turn to for answers to the thousands of questions this process had damn well better inspire as option after option comes rolling in?
Sure, Sue Hersey and Energy Advantage Consultants are going to be a big help, but there's not one thing they can add to the discussion about what is the City of Lake Worth and LWU prepared to do to take advantage of the generating capacity we have? The Long Range Plan for LWU is all about Transmission and Distribution - not at all about power generation.
So, that's as clear as I can be. Please don't hestitate to ask me for further clarification on any of this. I'll do my best to answer anything as well as I can. Everything I've said here is documented in the back-up to the September 13, 2011 Workshop and the FMPA website.
BTW, the lawsuit being discussed in closed session today has nothing to do with preparing for Dec. 31, 2013. This is about FMPA not living up to obligations they agreed to when we signed on with them in 2002. They agreed to take over the payments for the natural gas pipeline we built and were going to use but had to abandoned when Enron went south. As soon as LWU announced their intention to switch to the CROD in five years, FMPA said, OK, pay for your own damn pipeline. I'm just not real sure, but I think those payments were somewhere in the neighborhood of $65,000 a month, but the City somehow has paid all that off and I don't know why and I don't know when. Betcha anything, an Internal Auditor could find out!
UPDATE: In the comments below, Jessica Plotkin mentions the tour of the water and power plants taken by the Finance Advisory Board. CLICK HERE to read those minutes from May 17, 2010.
OK. I'm back. No Novocaine today, but sometime soon we're gonna have to explore the psychedelic albeit temporary properties of Nitrous Oxide.
The big ole, hugely expensive hitch is what's called "stranded costs". That means measuring the impact of our withdrawal from the ARP on the other members in terms of dollars - how much of a penalty we would have to pay for leaving them stranded. That's somewhere in the neighborhood of $30,000,000 so just tearing up this contract is and never was an option.
There is, however, an exit or termination clause in the ARP contract that pretty much says, we can be relieved of our obligation to buy all our power from FMPA as long as we meet a couple requirements.
1. We have to give them five years notice and once we do, it's irrevocable. We did that on December 31, 2008, which means we have until January 1, 2014 to meet the rest of the requirements.
2. We have to secure another source of power with the capacity to provide equal to or greater than, but absolutely not less than the most electricity LW ever needs on say, the hottest day of the year when all the A/C's all over town are crankin. That's called "Peak Load". Add to that a reserve of 15% because who knows and that's the amount of MegaWatts we have to be able to provide our customers without relying on the power we buy through the ARP project. Remember, the MegaWatt capacity we are entitled to through the St. Lucie nuclear and Stanton II coal fired projects are not affected. We will still be entitled to that combined capacity of 28 MegaWatts.
This little clause in the ARP contract is what is going to save us from having to pay Stranded Costs. It's called the Contract Rate of Delivery. That means, we are free to REDUCE the amount of power we buy from FMPA.
To recap, right now we buy all our power and "exchange" or sell all our generating capacity to FMPA through the ARP under the existing Capacity and Energy Sales Agreement. On December 31, 2013 that Capacity and Energy Sales Agreement dies and is reborn on January 1, 2014 as the Contract Rate of Delivery agreement, the CROD.
What that means is that we still have the option to buy power from FMPA - but not the obligation to buy ALL our power, or even ANY of our power from FMPA - Only that part that we haven't figured out a way to buy from someone else, or produce ourselves. There is a number for how much power we have to be able to provide LWU customers and that's called the Peak Load + a 15% reserve added on top of that. Under the new terms of the ARP contract that go into effect on Jan.1. 2014, we are only contracting for a specified rate of delivery, that rate of delivery to be determined by what I said above - just that part of what we haven't already secured from St. Lucie and Stanton II, secured from someone else, or from our own power plant.
The trick is to reduce our overall Peak Load as much as possible before the Jan. 1, 2014 deadline. Here's why. Let's say at the deadline the Peak Load in LW is 100MW in round numbers to make this a little easier. Ok, now let's say we have spent the five years before the deadline rounding up alternative power suppliers or we've beefed up our own generation capacity to take care of our own power needs but the best we could come up with from either of those or a combination of both of those is say 95 MW.
So we would still have to buy 5% of our power from FMPA and they are fully prepared to stick it to us like never before when it comes times to decide how much they're going to charge LWU for those 5MW. AND we will have irrevocably lost the 6 million annual energy credit dollars we previously had coming to us.
It is therefore in our interest to:
1. Reduce the "Peak Load" in LW by as much as possible. This is the argument McVoy was using to justify the Sustainability Manager position.
2. Pull together a few options for getting new power suppliers in place ready to hit the switch on Jan.1, 2014. That's what Energy Advantage Consultants and Sue Hersey were hired to do. They have come up with three possible ways LW can go.
One is a stand alone option. That means retiring some of the older generators we have and replacing them with a new, bigger generator that can crank out enough power without killing us in fuel costs.
One is to sign an agreement with another power supplier, like FP&L or Progress Energy to supply the juice, but LW still owns the transmission and distribution systems that gets that juice to our refrigerators.
And the last one, is some kind of hybrid of the above two.
The only thing part Commissions have done so far in any of this is to set priorities for how they want these new potential power providers to provide power. Not surprisingly, environmentally friendly generation is high on their list of priorities.
What they have done NOTHING about is coming up with plans to make our own generating capacity practical and economically feasible as part of the mix. That inaction pretty much leaves buying power from an outside company the only viable option. HOWEVER, the RFP to solicit a new power provider does very clearly mention the generation capacity and the PERMIT we own as highly valuable assets any potential power provider should take into consideration.
The PERMIT to operate a generation plant is by far the single most valuable asset in our Utility. It's practically priceless because for anyone to get a new one takes years and many millions of dollars. We simply cannot allow that asset to be diluted and rendered useless by having no practical, economically feasible source of generating electricity at the Thomas C. Smith power plant. That and That Alone is the carrot we hold for any power provider interested in servicing LWU.
Ok, So the RPF is supposed to go out sometime this month with the winning bid to be selected in September this year. That will leave about 15 months for whatever the new power supply source is going to be to get up and ready. It also means that this Commission has from the time the bids all come in until September to negotiate and make a decision on just what kind of a hybrid deal we intend to make. That's also the same time they have to do the annual budget thing.
I do not not not understand why we are sitting around waiting for Becky Mattey to jump into her golden lifeboat whenever she feels like it. When are we going to start looking for a Utility Director with plans to stick around while we go through this incredibly complicated and critical process. Right now I think it's Becky's plan to leave at the end of May. That is precisely when the RFP responses are going to start rolling in. Who does this Commission think they are going to turn to for answers to the thousands of questions this process had damn well better inspire as option after option comes rolling in?
Sure, Sue Hersey and Energy Advantage Consultants are going to be a big help, but there's not one thing they can add to the discussion about what is the City of Lake Worth and LWU prepared to do to take advantage of the generating capacity we have? The Long Range Plan for LWU is all about Transmission and Distribution - not at all about power generation.
So, that's as clear as I can be. Please don't hestitate to ask me for further clarification on any of this. I'll do my best to answer anything as well as I can. Everything I've said here is documented in the back-up to the September 13, 2011 Workshop and the FMPA website.
BTW, the lawsuit being discussed in closed session today has nothing to do with preparing for Dec. 31, 2013. This is about FMPA not living up to obligations they agreed to when we signed on with them in 2002. They agreed to take over the payments for the natural gas pipeline we built and were going to use but had to abandoned when Enron went south. As soon as LWU announced their intention to switch to the CROD in five years, FMPA said, OK, pay for your own damn pipeline. I'm just not real sure, but I think those payments were somewhere in the neighborhood of $65,000 a month, but the City somehow has paid all that off and I don't know why and I don't know when. Betcha anything, an Internal Auditor could find out!
UPDATE: In the comments below, Jessica Plotkin mentions the tour of the water and power plants taken by the Finance Advisory Board. CLICK HERE to read those minutes from May 17, 2010.
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