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City, LCEC provide updates on electric service

By Staff | Nov 6, 2015

The city of Cape Coral opened 2015 with a project easily on par with the significance of its decision years ago to embark on a decades-long water and sewer expansion project.

With its 30-year franchise agreement with the LCEC coming up for renewal in 2016, city staff spent the latter months of 2014 working with a consulting firm to explore an alternative to merely penning a new agreement with the electric co-operative.

The Spencer Consulting/WHH?Enterprise analysis and feasibility report into the possible “municipalization” of electric services in the city was presented to council in January. It set the foundation to a parallel track en route to a decision on whether the Cape should become its own utility provider or whether LCEC should continue to service the community.

Cape Coral City Council agreed to pursue both paths: To investigate whether to become a Municipal Electric Utility by acquiring LCEC’s electric infrastructure within the city limits while also opening negotiations with LCEC concerning the terms of a new franchise agreement.

Nearly a year later, the city has made some significant inroads on the first option. Staff has gathered the information it says demonstrates the city can acquire LCEC’s assets, operate and maintain the system, not raise utility rates, and still have an estimated $12 million per year for “value added” infrastructure improvements. The capital improvement plan under municipalization could include such things as the undergrounding of lines, additional and improved street lighting using LED bulbs and installation of fiber optic cables in conjunction with the ongoing water and sewer utilities expansion project into the north Cape.

Progress on the parallel track, though, is all but non-existant.

While City Manager John Szerlag and LCEC CEO Dennie Hamilton have had a pair of meetings in the wake of a controversy over a stop work order issued by the city for a transmission line rebuild, the “core negotiation team” established by the city and LCEC has not met and has no meetings scheduled although both entities agreed in May to meet monthly.

And while LCEC put a “boilerplate” franchise agreement on the table in March, the city has yet to counter with a list of conditions, saying the utility should be aware of items desired as upgrades, such as undergrounding, because they have been publicly discussed at council meetings.

The city’s goal? To either hammer out a franchise agreement with LCEC that would provide city residents with all of the benefits that could be accrued through a municipal takeover or to present to council an equal or better option centered around purchase and municipalization.

LCEC, meanwhile, remains focused on the negotiation of a new franchise agreement, a document that usually simply provides a utility with the ability to use city rights of way in exchange for a fee contractually determined.

Some history

A little shy of three decades ago, the then-sitting Cape Coral City Council grappled with an issue that has come due again: the terms of a franchise agreement with its electric utility provider, LCEC.

Then, as now, the electric co-op put a “standard” contract on the table, officials said, adding, that in 1986 council also looked to “add value” to the agreement.

To that end, the city proposed “right to purchase” language.

That municipalization clause was included primarily as a future “bargaining chip,” according to the consultant Joe Mazurkiewicz, who was Cape Coral’s mayor when the current franchise agreement with LCEC was approved.

The provision was found in an older franchise agreement and included so that the city, next time around, would be positioned to put propositions on the table rather than just accept the terms offered by the co-op, the position the city found itself in, Mazurkiewicz said.

“The specific reason was, when LCEC approached us last time, we had a take-it-or-leave-it proposition,” he said. “We thought if that clause was in, it would give the city some bargaining position.

“There was no discussion, nothing,” he added. “The only thing we got was that change in language.”

According to Mazurkiewicz, the purchase provision did not stem from either service problems with the utility or any foreshadowing that there might be some to come.

“Not at all,” he said. “I think LCEC has provided good service since they started providing service to the city long before the city became a city. I don’t think service has been an issue; neither was the question of were they, would they be, sustainable or reliable.”

As the person who proposed the language, Mazurkiewicz said he did not foresee things transpiring the way they are now.

“I saw it going differently,” he said. “I saw the city preparing a list of things they wanted from LCEC and using the clause as a bargaining chip.”

He has little issue with the city performing the due diligence needed to explore its options.

That does, however, come at a cost, he pointed out.

“Unfortunately, in this case we are paying both sides because we are members of the co-op and taxpayers in the city,” Mazurkiewicz said, adding what he would like to see is more public discussion with council input and direction.

“I have not heard a public discussion on what the city would like,” he said. “If I were king for a day, that’s where I would be going.”

What is a

‘franchise agreement’?

Traditionally – and historically here in the Cape- a franchise agreement is a contract between a city or county and a utility that essentially gives the utility the ability to use the entity’s rights-of-way for infrastructure, in this case such things as lines and poles. In exchange, the government collects a “franchise fee.”

In the current agreement with LCEC, the city collects a 3 percent fee on all accounts in the city. The franchise fee is unrelated to the city’s 7 percent public services fee, which is a separate tax not included in the franchise agreement.

The franchise fees in other areas serviced by LCEC are 3 percent in the city of Sanibel and in Everglades City. Marco Island had a 5 percent fee in 2004 but has reduced it to zero.

Lee County entered into a franchise agreement with LCEC beginning in 2014. The fee was set at 4.5 percent with an option to allow the county to raise it to 6 percent after five years.

While the franchise agreement with Lee County is new, LCEC has provided electrical services to much of the county for decades. A franchise agreement is not a service agreement and it is not required for an electic provider -either a non-profit co-op such as LCEC or a for-profit entity such as FPL – to operate. The state Public Service Commission determines exclusive service areas with franchise agreements dealing, primarily, with revenue that can be raised by local governments in exchange for easements.

That is the primary reason Lee County entered into a franchise agreement with LCEC, which serves 51,000 customers in North Fort Myers; 29,000 in parts of Lehigh Acres, 11,000 on Sanibel and 7,000 on Pine Island, (In its five-county service area, LCEC also serves 19,000 customers on Marco Island; 12,000 in Immokalee and an estimated 80,000 in Cape Coral.)

“FPL customers had been paying it since 1997,” said Lee County Commissioner John Manning, who also sat on the Cape Coral City Council with Joe Mazurkiewicz when LCEC’s current franchise agreement with the city was approved. “It was a fairness issue, and it really became a financial issue with the county at that time.”

The county was facing a $30 million budget deficit and so instructed staff to negotiate a franchise agreement with LCEC to include a fee for the unincorporated areas the co-op served.

“It went very, very quickly, so much so that I was surprised,” Manning said. “Everyone got along well.”

The process took a “couple of meetings” with much of the exchanges taking place electronically, giving the county some much-needed revenue, officials said.

“Electric Utility Franchise Fees are basically rents that the county charges the electric utilities for their use of county rights-of-way and other county property for their distribution systems,” the county said in a written response for background information on the county/LCEC negotiations.

“These fees are charged only in the unincorporated areas and are a major revenue source supporting the county’s General Fund.”

After property taxes, sales tax sharing from the state, and ambulance fees, electric utility franchise fees are the fourth largest revenue in the county General Fund, the county said.

County officials explained the process.

“First, attorneys for the county and LCEC met, and a draft agreement was proffered. After that there were several staff-to-staff meetings to negotiate the final agreement that would be taken to the Board.”

Following the required public hearings, the county adopted its agreement on March 18, 2014.

City update

In May, team members from the city – City Manager John Szerlag, Assistant City Manager Mike Ilczyszyn, city engineer Oliver Clark, city spokesperson Connie Barron, City Attorney Dolores Menendez, Assistant City Attorney Steven Griffin, legal consultant Brian Armstrong, consultant Bill Herington – and LCEC staffers -?Frank Cain, government affairs, Trish Lassiter, key accounts, and Bruce May, legal counsel, met and agreed to meet monthly.

Those meetings have not happened.

Instead, Szerlag and co-op CEO Dennie Hamilton have met twice in what the city refers to as “executive level negotiations.”

A third meeting is planned.

Meanwhile, city staff provided Cape Coral City Council members, and candidates then seeking office, with a progress report concerning its utility research on Aug. 19.

The report outlines problems city staff says it has had with both obtaining records and securing co-operation with LCEC.

“LCEC attended City Council meetings and workshops at which various ‘value-added’ concepts to include in a revised franchise were discussed by City Council and Staff,” the report states. “LCEC offered to include none of the value-added items discussed during the City Council meetings in the draft franchise that LCEC provided to City Staff. The draft franchise proffered by LCEC and the conduct of LCEC representatives to date, as discussed in this report, indicate that LCEC prefers to continue business as usual.”

The city’s goal is simple, said Ilczyszyn in a telephone interview: To provide Cape Coral residents with the best electric service possible, be that through a new franchise agreement with LCEC or through municipalization with the actual method of operation – city run, contracted out or some hybrid – to be determined.

“We have a vision for our great city of Cape Coral,” he said.

To that end, the city is approaching things differently than it has in the past. It is deviating, as well, from the traditionally revenue-driven goal, Ilczyszyn said.

What the city is doing, is asking the co-op to add its desired “value added” service components -things such as the undergrounding of lines, more energy efficient street lighting – to any new franchise agreement while also telling the city how it would accomplish this on par with how Cape Coral could do it through municipalization.

“If we can find a way for LCEC to provide those types of enhanced benefits to our community there is no problem to get to a franchise agreement with LCEC,” Ilczyszyn said. “What we have heard to date is ‘We will have to raise rates to do that.'”

Meanwhile, the city can do the various things hoped for without passing costs on the Cape Coral ratepayers, he said.

LCEC garners approximately $207 million a year in revenue from Cape Coral – 45 percent of its $412 million systemwide total, Ilczyszyn said.

“In 10 years alone it’s a $2 billion contract,” he said. “We would hope for a $2 billion contract they would have an interest in improving services to Cape Coral.”

A city pro-forma, or financial study, shows that the city could carve off $12 million per year to do capital improvements by eliminating the city’s “subsidy” of the rest of LCEC’s system, he said, citing customer density in the city.

Cape Coral City Council has yet to vote on any “value added” terms for inclusion in a franchise agreement.

The city also has not provided any counter to the franchise template submitted by LCEC.

The August update report indicates both actions are coming.

“Staff is consolidating information concerning potential franchise terms required to vastly improve the past and, unfortunately, current level of communication and information sharing between and among LCEC, the City and our residents and businesses,” the report states. “Staff anticipates being able to discuss such terms shortly with the Council and then to share them with LCEC after the Council’s consideration. Staff also will continue to seek information from LCEC relating to its assets in the City and the total equity (capital credits) of all LCEC customers within the City’s boundaries.”

LCEC says new franchise agreement would best benefit customers

LCEC and the city do have one common goal – both want what is best for the stakeholders.

LCEC, though, has more of them and they are spread across a five-county system.

“The main thing we want is a franchise agreement,” LCEC spokesperson Karen Ryan said. “We want an agreement that is in the best interest of our members – all of our members – and we believe that a franchise agreement is in the best interest of all of our members.”

The co-op also believes a franchise agreement is in the best interest of the members it has in Cape Coral. LCEC has not raised its rates in more than eight years and, in fact, reduced rates three times over the last two years. LCEC officials say the co-op’s rates are nearly 12 percent less than the Florida average while the utility was able to provide members with an equity distribution of more than $220 million over the years – a rebate rate that is among the best of the 800 non-profit electric co-operatives in the country.

There has been little to no movement in the direction concerning the franchise agreement option.

Nearly eight months after submitting a “starting point” franchise agreement, and more than five months after monthly meetings were agreed to, LCEC has not received a counter from the city nor has the co-op received a list of any “value added” upgrades the city wants to see in any new agreement.

“We have not received a list of items to be included in the franchise agreement,” Ryan said when asked for a negotiation status report. “At the end of March, LCEC provided the City with a preliminary document as a starting point to begin defining specific proposals/requests.”

What the cop-op has received is numerous requests for information. Ryan said the requests have been filled promptly with exceptions being information LCEC either does not have or considers proprietary.

As examples of the requests for records the co-op says it does not have are requests for some information that is Cape specific.

“We don’t keep records by geography – no utility does,” she said. “There are some facilties that are in Cape Coral that serve people outside Cape Coral and there are facilities that are outside of Cape Coral, for example North Fort Myers, that serve customers in Cape Coral.”

As an example of requested information the utility considers proprietary, she cited requests for individual customer equity amounts.

“It’s part of your personal account so we haven’t given that information,” she said.

The fact that LCEC is a co-op overseen by an elected board, not a for-profit utility provider, is a nuance that has been repeatedly cited by critics of the purchase option: In theory, the utility is “owned” by the customers/taxpayers who then would pay for any purchase by the city.

Ryan explained member equity, which the city has maintained it could tap should it opt to buy the utility.

“Equity or Capital Credits have a monetary value but they are not equivalent to cash or liquid assets,” Ryan said. “They represent a members’ share of the proceeds if the cooperative were to be liquidated.”

It’s similar to the equity in a home, she said, adding there is no “cash out” benefit.

“If the City acquires LCEC facilities the cooperative would not be liquidated,” Ryan said. “Members in Cape Coral would be designated as inactive like any other former LCEC customer, and their equity account balances would remain on LCEC’s books. As inactive members, they would no longer be allocated capital credits annually.”

As the city has its residents in mind, LCEC has to consider its entire membership, she said.

“It is important to keep in mind that LCEC will always try to do what is in the best interest of our overall membership,” Ryan said.

And taking into account the co-op’s entire membership, Cape Coral customers, do not “subsidize” customers outside the city.

“There is no subsidization that is occurring,” she said flatly. “The Public Service Commission regularly reviews our rates. We’re not governed by the PSC, with the exception of rates. They review them to make sure there is no subsidization.”

Ryan pointed out that LCEC began providing service to Cape Coral long before the city was much developed – or even was a city. Only Lehigh Acres came into LCEC’s service area after Cape Coral, she said, meaning customers throughout the entire rate structure funded much of the infrastructure the city enjoys today.

“At some point, everyone shares in the expenses,” she said. “For example, repaving a road in part of city does not mean people in other areas are subsidizing that road work.”

LCEC has not received any information from the city to substantiate its premise that it could acquire LCEC infrastructure, keep rates the same, and have $12 million to spend on improvements each year.

“We have not seen any indication of that,” she said, adding LCEC did see the original pro forma secured by the city in December of 2014 and presented to council in January.

“That pro forma did not indicate any possibility to do that,” she said.

LCEC has no issue with the city and its staff exploring all options, including municipalization. However she acknowledged the core criticism expressed by some concerning that action.

“We do understand that they do need to do their due diligence but we believe the idea of forming a municipal utility is very costly for taxpayers and for LCEC members -who are the same people,” she said.