cover story

Posted Wednesday, March 7, 2018 8:31 pm

The push to sell JEA began, at least officially, simply enough. At JEA's November board meeting, member Tom Petway announced he was stepping down. In practically the same breath, he suggested that the time had come to consider privatizing the public utility.

Within hours, the mayor's office circulated a press release supporting the idea. From there, a series of events rapidly furthered the cause. JEA board chair G. Alan Howard ordered an incentive package for top employees, offering bonuses of up to twice their annual salary for staying in the event of a sale. Financial advisory firm Public Financial Management, a longtime advisor to the community-owned utility, was asked to analyze the potential transaction. PFM was also contracted by the city to solicit proposals from firms to serve as "financial advisor for strategic initiative opportunities," which many believe refers to selling JEA, though Mayor Lenny Curry denies it. JEA CEO Paul McElroy also began talks to extend his contract, which included a severance package of up to twice his potential annual salary of $520,000 if he were to be fired after a sale.

Within a matter of weeks, it looked like selling JEA-the state's largest municipal utility and the nation's eighth-largest, according to Bloomberg-was a done deal.

If the sale of JEA (full disclosure: my spouse is an employee) began cleanly, the issue was soon muddied by resistance from the community and City Council, many of whom felt blindsided and stunned by the speed at which privatization appeared to be progressing. At subsequent public meetings, many heated, about the sale, councilors remarked that "we know as much as [the public]" and encouraged media to continue its reporting on the issue. Several seemed troubled by recent events. Selling JEA has come up more than once, but never have things progressed so quickly.

Since November, rumors have flown around City Hall and within other circles that the plan to sell JEA had been in place far longer than anyone is letting on. Some traced it back a few months, perhaps to last spring, when Petway stepped down as board chair; others felt sure it had begun years prior, perhaps in 2015 when Mayor Lenny Curry cleared out the board in response to a story in The Florida Times-Union. Though the mayor has consistently denied being involved in the privatization push, as scandal after scandal has ricocheted around town, his reassurances and denials have done to little quell the rumors that he or his top donors are behind it.

As Jacksonville teeters on what appears to be the brink of selling off its water, power and sewer services provider, in whole or in part, events of recent years take on new light. Over the last several years, JEA has paid down debt, made strides in operational efficiency, improved customer satisfaction and maintained rates in the lower range nationally, all sound business strategy-and all of which makes the utility more attractive to prospective buyers. The interconnected web of business, personal and political alliances of key figures involved lends support to those who believe the plan has long been in place. Are their many ties merely indicative of a small town that gets smaller the higher the income bracket and more interrelated the business functions? Or is a small group of power players working together to push the sale of the utility? It depends on where one stands on the issue.

But no matter who you ask, everyone-from the mayor to the board to JEA executives and the "red shirts," linemen who he impetus for selling JEA is simple: Money.

OFF TO THE RACES

The sale of JEA is subject to approval of its board, City Council and the mayor. No one has appeared more stunned by the lightning-fast moves on the JEA privatization front than City Council. At a Feb. 6 meeting, Councilwoman Katrina Brown said, "We did not know what was going on. We found out just like you." Though none have committed to vote for or against it, there is a common refrain among many: "Why the rush?" Initially, most voiced this and other concerns quietly. The pitch increased when Action News revealed in late January that 67 JEA executives had been offered incentive packages to stay in the event of a sale, making many question whether it was a done deal. The offer was subsequently rescinded in a letter dated Feb. 2, in which McElroy stated that the Office of General Counsel had deemed it "non-binding and unenforceable," but this did little to tamper the alarm.

The following week, Folio Weekly broke the news that JEA board chair Howard had ordered the incentive package, which seemingly conflicted with statements the mayor made on Feb. 1, that the board "didn't know anything about [the offer]." (The mayor did not respond to our inquiries.) Howard disagrees, writing in a follow-up email, "I understand from media reports that the Mayor stated the Board of JEA was unaware of the retention offers. That was a true statement: the Board had not met and discussed this and was similarly unaware of the retention offers being sent. I knew, but the Board is not one person; it is the group of directors."

JEA board rules prohibit its CEO from making budget transfers of more than $5 million without the approval of the entire board. They also prohibit the CEO from acting at the behest of individual board members, who are also not permitted to issue directives to JEA employees, or "to exercise individual authority over the organization except as explicitly set forth in board policies." The incentives would have reportedly cost upwards of $15 million, a figure Howard, an attorney who practices in mergers and acquisitions, said he found surprising.

City Hall was still reeling when a series of events eclipsed the incentive package scandal. Days after the release of PFM's draft report analyzing selling JEA, McElroy asked City Council President Anna Brosche Lopez to call a special joint meeting of the JEA board and City Council for a presentation of the final report. She refused, writing, "I'm not going to be part of rushing it." She also alleged that the mayor's office had asked her to file emergency legislation to sell JEA, which he denies.

Curry then called the meeting for Feb. 14.

Little love was to be shared at City Hall on Valentine's Day, however. The presentation of PFM's report was, to most observers, a disaster.

PFM's Michael Mace presented the 26-page report, "JEA's Future Opportunities and Considerations," relatively quickly. In it, PFM predicted that, after paying off liabilities, selling JEA, estimated to be worth between $7.5 and $11 billion, which it noted represents a "VERY wide" range, would earn $2.9-$6.4 billion for the city. PFM cited the effect of emerging renewables and increased efficiency on future revenues, and the top dollar that recent municipal utilities have fetched on the market, as reasons to sell. It did acknowledge the loss of local control and other factors that may influence some to vote against the sale, but seemed to come out in favor of selling JEA. "Current market conditions are better than they have been throughout most of the time that JEA has been in existence," it states, implying that the city could miss out on an opportunity to get top dollar out of its utility.

But there are flaws in PFM's logic. For instance, if JEA is at its peak value, why would a private entity with access to billions and its own financial advisors be interested in buying? Further, given Florida Public Service Commission rules, whoever buys JEA will be permitted to recover their costs from ratepayers-regardless of when.

Unsurprisingly, the report did not seem to change any minds.

After the presentation, City Council pummeled Mace, McElroy and Howard with questions. One likened commissioning the $100,000-report without consulting them to putting the cart before the horse; another compared it to soliciting bids for your home when you haven't decided whether you're interested in selling. (Before a sale of 10 percent or more of JEA assets may proceed, a supermajority [13 of 19] of City Council must approve.) Several seemed to doubt PFM's numbers.

More than one councilor questioned the timing of the drive to sell, and whether there was a secret offer on the table. Both McElroy and Howard denied any talk of a sale prior to November 2017. But in response to a question from Councilman Tommy Hazouri, McElroy said, "We have been watching the capital equity market for 18 months ... this is a very different time." He also said, "There's a lot of interest because it's a valuable asset in a growing economy." Minutes later, he seemed to contradict himself, "We have not received any offers to buy the utility."

Both McElroy and Howard apologized for their actions concerning the sale. McElroy conceded that they "may not have the sequencing right," and Howard said, "If the cart's before the horse, that's on me."

Councilman Garrett Dennis, who has accused the mayor's office of pressuring him to go along with the sale, was particularly critical of JEA's board chair. Near the end of the meeting, he told Howard, "I don't have confidence in your leadership as chair of the board." (At its subsequent meeting, the board had nothing but kind words for their leader.)

News that broke the week after PFM's presentation brought the JEA sale back onto the front page. Many were surprised to learn that, in December, the city's finance department hired PFM to solicit bids for a "financial advisor for strategic initiative opportunities ... relating to the market analysis, opportunity review, planning, solicitation, evaluation, negotiation, and award of potential alternative delivery of existing or new projects or services which are similar [but not limited] to public private partnerships or the lease, sale, and/or disposition of City assets." (Emphasis added.) In a letter written at Brosche's request, the city auditor (who answers to City Council) called this procedure for soliciting bids outside of the procurement department "unusual." The mayor's office denies the offer had anything to do with privatizing JEA, but the T-U's Nate Monroe noted on Twitter that one of the firms that responded referenced its standing as a "Power & Utilities M&A franchise with a history of landmark transactions in the space." M&A is a common abbreviation for 'mergers and acquisitions.'

In addition to working for the city, PFM, the nation's largest financial and investment advisor in the public and nonprofit sectors, is nearing the end of an 11-year (five years initially, with two three-year extensions), maximum $4.25 million contract to provide JEA with financial advisory services. So PFM has essentially helped JEA become more attractive to buyers, and may now be facilitating the sale of the utility through a contract with the city.

WHO'S DRIVING THE BUS?

The question on many minds is, 'who is really behind selling JEA?' Theories vary, with some buying into the assertion that the pressure to sell resulted from more favorable market conditions, others that a small group of business interests is pushing for the sale in the hopes of benefiting from what many anticipate will be a flurry of city contracts. Jacksonville leadership has long catered to the powerful business community; whenever the city has money to spend, this group often benefits in the form of city contracts, which often balloon to cost far more than originally promised. The connections between key players are too numerous to mention, but it does bear mention that, according to the Florida Division of Corporations, since at least 2005, Howard either has been or is listed as the registered agent for six companies Petway and family are directors/offices of, three of which remain active. Councilman John Crescimbeni conceded that this is not necessarily improper-but said he might not have appointed them to the JEA board at the same time.

Although the mayor's office has continuously denied being involved in the push to privatize, and repeatedly stated that Curry has not made up his mind, many remain unconvinced. The fact that it was Curry's biggest donor who officially set all of this into motion has done much to fuel the speculation; according to the Florida Division of Elections, since Curry became mayor in 2015, Petway, members of his family and his company, U.S. Assure, have made donations totaling at least $195,000 to his political action committee, Build Something That Lasts, most recently on Dec. 21, when U.S. Assure donated $35,000, for a total of at least $85,000-$50,000 from the company and $35,000 from Petway and family-in donations for 2017.

FW has learned that Curry's Chief of Staff Brian Hughes was in frequent communication with JEA Chief Financial Officer Melissa Dykes in the weeks leading up to the release of PFM's report on the sale. According to phone records obtained via records requests, Dykes and Hughes, who served as a consultant on Curry's mayoral campaign and has been a frequent fixture by the mayor's side throughout his term, figuratively and literally, called one another 14 times from Jan. 2, the day Hughes became chief of staff, to Feb. 8; speaking or leaving voicemails 11 times. Via a JEA spokesperson, Dykes said in an email that on Feb. 6 and 7, they discussed "JEA electric rates for economic development," "an all-employee communication providing an update on the public discussion of a possible JEA sale process and listing EAP resources if needed," and Hughes informed her that "he believed legal would finish their review of a public records request for the draft report and whether anything in that report was protected or needed to be redacted." They also discussed in that conversation sending the draft report "to all stakeholders if legal concluded it was not protected." On Feb. 3, Hughes texted Dykes, asking to meet to "discuss the intersection of progress and org morale." Via text, Dykes agreed to a breakfast meeting on Feb. 7. (PFM's draft report was released on Feb. 7.)

FW asked Dykes to elaborate on the additional conversations we learned of after receiving her explanation of the three Feb. 6 and 7 conversations. We posed additional questions for McElroy and Mike Brost, general manager of electric systems, concerning some operational decisions, costs, electric outages that occurred on Jan. 1, 2018, which First Coast News reported affected more than 22,000 customers, the decision to close St. Johns River Power Park and what, if any, effect such has and will have on its energy supply. The utility refused to answer any of our questions, writing, "JEA is not in a position to participate in interviews regarding privatization at this point."

FW also asked Hughes what he had discussed with Dykes. Past the deadline given for print publication, via email Hughes acknowledged that he has been in contact with JEA's CFO since Feb. 8, regarding "a range of topics related to the intersection of city business and the operations of the JEA." Hughes noted that, as chief of staff, he is the mayor's "primary liaison to independent authorities," and that he, along with Chief Administrative Officer Sam Mousa and Chief Financial Officer Mike Weinstein, work "to help ensure the intersection of COJ business and the operations of independent authorities is consistent with Mayor Curry's vision to create and maintain jobs, foster economic growth, and protect the value of taxpayers' investments."

Regarding JEA, Hughes wrote, "Whether the future involves continuing as a municipal utility or some other model, I will work to support Mayor Curry's commitment to JEA. This is to ensure that the investment of taxpayer and ratepayer money is protected, and that we show respect for the hard work that the men and women of JEA have given this community for decades."

Although Curry has repeatedly said he isn't behind the sale-which he reiterated to FW-and that he hasn't even made his mind up about whether to sell JEA, the saga has started to take on a familiar pattern: A scandal erupts which seemingly implicates the mayor's office in a secret plan to help push the sale, the mayor denies it in the strongest terms, rinse and repeat. Meanwhile, citizens are receiving marketing calls from someone claiming that JEA has been mismanaged for years, City Hall is plagued with distrust and rumor, JEA employees are fearful of losing their livelihoods and future security and citizens and businesses are concerned about this may affect their lives and the city.

Attempting to quiet the rumblings, last week the mayor reached out to the union that represents line workers, whose red shirts and "JEA is not for sale" signs have been fixtures at city meetings lately, to discuss the potential sale. The mayor says he plans to meet with all stakeholders, the T-U reports. He continues to deny being behind privatization.

WHAT IS IT WORTH?

PFM believes that, after paying off liabilities, JEA would fetch between $2.9 and $6.4 billion on the open market. Those who support the sale have been busy licking their chops over this tasty barrel of pork. Those against worry about the uncertainty of such a wide range, particularly as it is extremely unlikely, if not impossible, that the entire utility would be acquired by a single entity, likely reducing the price. Recalling past examples of the city mismanaging funds, some worry that the money would be gone in a few years, most of it consumed by a few large projects, leaving the city with no JEA cash cow. All told, this year, JEA will contribute roughly $240 million-or nearly 20 percent-of the city's $1.2 billion budget.

JEA's annual contribution to the city is $115 million this year. It also contributes a franchise fee of 3 percent, roughly $40 million for fiscal year 2018; and public-service taxes of approximately $90 million, according to PFM. If it were sold, the public service tax would remain the same, and the city would lose the annual contribution, which would be offset to an unknown degree with property taxes (as a public asset, JEA doesn't pay property taxes), and a franchise fee. PFM says cities charge investor-owned utilities up to 6 percent for franchise fees.

In other words, there are a lot of unknowns associated with how privatization would affect the city's bottom line. PFM concedes that Jacksonville would need a comprehensive analysis to determine the impact, but concludes this section of the report optimistically, writing, "It should be possible to 'immunize' local government finance against adverse impacts from selling JEA if the proper conditions are imposed on potential buyers."

It is undeniable that JEA has experienced ups and downs in public opinion over the years.

Bonuses nearly always prove controversial (disclosure: my spouse has received bonuses). Rate hikes particularly so. The Hurricane Matthew restoration effort was seen by some-including the mayor, who was the most vocal-as mismanaged; the following year's response to Hurricane Irma was a substantial improvement on that front, as it performed better than many for-profit utilities around the state.

Even as the T-U editorial board, one of the biggest cheerleaders for the sale, urges people to think about the money and not to be nostalgic about the public utility that has served the city for over a century, many who oppose the sale have referenced the utility's history and connection to the community as almost secondary to its value. Today, public opinion of JEA is high. It hasn't raised rates in years. Last fall, many felt a sense of civic pride when JEA crews went to Puerto Rico to help the island recover from Hurricane Maria. Last summer, JEA celebrated the 1968 Pulitzer Prize-winning photograph "The Kiss of Life," in which a line worker, dangling from a utility pole, is being given mouth-to-mouth resuscitation by another utility worker. (The worker survived.) On July 17, the 50th anniversary of that photo, the mayor issued a proclamation expressing "our deep appreciation to JEA and all employees past and present for their continued commitment to safety and reliable service to our community."

READY TO SELL?

Prior to being sold, particularly a large, complicated transaction such as this, which PFM says, "would likely represent the largest and most complex municipal privatization in the United States," JEA would likely need to prepare itself, such as by reducing liabilities, getting the books in order, improving public perception and otherwise making it more attractive to potential buyers. In recent years, JEA has taken many actions that could be viewed as preparing for just such a transaction-it could also just be smart business.

But one decision sticks out for some: the closing of the St. Johns River Power Park. The coal-fired, 1,252-megawatt plant was built in the 1980s, after the 1970s fuel crisis-and resulting rate hikes-exposed utilities to the vulnerability of too heavily relying on one fuel.

Last year, Florida Power & Light, which owned 20 percent of SJRPP and had a power purchase agreement for an additional 30 percent of the plant's output, approached JEA with a $135 million offer to buy out its contract, close and demolish the plant. The board voted in favor; by the end of the year, SJRPP was closed.

Speaking on condition of anonymity, a JEA employee who works in power generation said, "[I] asked group of managers/electric engineers, 'Do you think the closure of SJ was a good idea?' and [one] said and the others agreed that the only people who thought it was a good idea were the people who made the decision."

Howard defended the decision, telling FW in an email, "The decision to close SJRPP was purely economical and was unquestionably in the best interest of JEA and its ratepayers." He denied that it had anything to do with privatization.

Closing SJRPP also contributed to what another JEA employee, speaking on condition of anonymity, said were the "first rolling brown-outs" he'd seen in nearly 20 years with the utility. (When JEA doesn't have the capacity to supply customers with power, such as during times of increased demand, it has three choices: rolling brownouts, blackouts or buying power on the open market, which is typically much costlier.) On Jan. 1, temperatures dipped extremely low; when some back-up generators also failed, he said they had to rapidly shed load by turning customers' power off for short intervals.

It is possible that this wasn't the last time JEA will struggle to keep up with demand. According to JEA's annual disclosure report submitted to the Municipal Services Rulemaking Board, last winter, its surplus capacity was 497 megawatts; last summer, it was 351 megawatts. This winter, when thousands had their power cut off during the Jan. 1 cold snap, it had 149 megawatts of surplus capacity. This summer it has seven megawatts of surplus capacity. JEA refused to answer questions about the closing of SJRPP and the effect it had on its capacity.

Closing the coal-fired plant also decreased the diversity of JEA's fuel portfolio, making it more heavily reliant on cheaper natural gas, the price of which has decreased in recent years thanks to fracking. JEA and its customers are now more tied to the price of natural gas, further exacerbated by the fact that natural gas, unlike coal, cannot be stockpiled.

So why close SJRPP? Simple, said both JEA employees: Private utilities hate coal. Not as much because of the environment impact, as the bottom line. Coal plants eat up operations and maintenance costs, which the Public Service Commission prohibits private utilities from passing along to their customers. They can pass along fuel costs, however. They can also pass along the costs of not only building new power plants, but can charge customers more than their costs and make a guaranteed profit on building a plant, which, based on JEA's current power supply and projections of rising demand in coming years, may be necessary in the future, a fact which could make it more attractive to buyers.

WHAT'S NEXT?

Though City Council initially seemed to grapple with how to proceed, in recent weeks, several have maneuvered to slow down the process and engage the public. Brosche has established a committee to examine the sale. (She has also established a committee to examine transparency in city government, which many believe is lacking.) Crescimbeni has filed two pieces of legislation, one to amend the city charter to require a voter referendum on selling JEA, the other to conduct a straw poll of voters on the subject. Others have taken their concerns to the press and community stakeholders.

Meanwhile, many remain convinced that this is being driven by the mayor and those of his benefactors who stand to benefit from the city having access to a large pool of cash to subsidize projects such as the Shipyards, The District, the Laura Street Trio, the St. Johns River dredging, etc., which Curry denies. Even those who are willing to consider selling have taken issue with the city selling its water, power and sewer provider, or some combination thereof, either for the wrong reasons or in the wrong manner. Former Jacksonville Mayor Jake Godbold wrote in an op-ed for the T-U, "There is no reason selling the JEA should not be examined once again. But it is absolutely imperative that any study be deliberate, dispassionate and thorough, not rushed or hurried simply because the mayor and some [of] his wealthy backers want it done that way."