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South Daytona is poised to negotiate wholesale power supply contract with FPL


December 12, 2011

By Robert Varela
Editorial Director

With federal regulators having slammed the door on Florida Power & Light’s request for stranded costs, South Daytona, Fla., faces only one more significant hurdle in its five-year quest to form a municipal electric utility. That hurdle is negotiation of a wholesale power supply contract with Florida Power & Light, its former franchisee—and more specifically, whether FPL will negotiate in good faith.

The city has overcome two obstacles raised by FPL. The investor-owned utility told the Federal Energy Regulatory Commission it refused to engage in power supply contract negotiations because the city had no financing and it did not have a vendor in place to run a municipally owned utility.

South Daytona has lined up ENCO to operate and maintain its electric distribution system, said City Manager Joseph Yarbrough. ENCO has fulfilled that role for Winter Park, Fla., since 2005. The City Council is expected to approve a $22 million line of credit at its Dec. 13 meeting. That will serve as a bridge loan to cover the city’s $15 million acquisition of FPL’s distribution system and to provide startup funds until the city secures long-term financing.

Negotiation of a wholesale contract would appear to be a relatively minor hurdle for a number of reasons. For one, in response to South Daytona’s request for proposals for wholesale power supply, FPL earlier this year submitted a detailed proposal to sell wholesale power to a city-owned utility. South Daytona accepted FPL’s proposal, which was the low bid, and city officials said they want to sign a 10-year contract with FPL.

The investor-owned utility is guaranteed to make money on such a contract. FERC requires FPL to offer cost-based wholesale rates (plus a reasonable return) in its service territory because the investor-owned utility has market power in its footprint.

"A business deal is a business deal, as long as it’s profitable," City Manager Yarbrough told Public Power Weekly.

However, FPL’s willingness to negotiate in good faith is called into question by its stalling, hard line and scare tactics over the past five years. South Daytona initially looked into creating a municipal utility after FPL flatly refused to negotiate a new franchise agreement that included an option for the city to purchase the distribution system, an option the city had for 60 years.

The ensuing municipalization effort "has been a real eye-opener for this little community," Yarbrough said. "The last five years have been like pulling teeth. I never dreamed in my wildest dreams that it could be this hard." FPL initially claimed South Daytona would owe $24 million in stranded costs, but dropped that to $8 million when it had to file with FERC. The IOU also sent letters to citizens "with the clear intent of frightening you with purported higher electricity rates if the city were to acquire its own electrical utility," the city noted in a response.

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