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LCEC/city impasse: Franchise talks break down again

By Staff | Sep 28, 2017

After eight months of effort led by the Council for Progress, franchise negotiations between the city of Cape Coral and its electrical services provider have hit another impasse.

LCEC has sent the city a “final offer” franchise agreement and related memorandum of understanding, giving the municipality 90 days to consider the terms proffered.

The co-op maintains the documents, while not wholly in line with all the points suggested by Council for Progress facilitators and agreed to by city staff, include ample concessions made as a result of the talks.

The city should expect no others as the co-op has gone as far as it can, Dennie Hamilton, LCEC executive vice president and chief financial officer, wrote in a Sept. 26 letter to Cape Coral City Manager John Szerlag.

“… Should the city not accept agreements essentially similar to those offered, the terms of the LCEC offer will be rescinded and may not exist in the future,” Hamilton wrote.

In the event of a city rejection of the proposal, LCEC will continue to provide services without an agreement in place, Hamilton said.

“If the city is not willing to accept a new franchise and letter agreement essentially the same as that we have proposed, it is not the end of the world,” Hamilton wrote. “In fact, the parties would avoid the time and expense of prolonged negotiations, LCEC would continue to provide electric service to the citizens of Cape Coral without a franchise agreement as it has for the past 9 months, and LCEC would collect and remit a 3 percent fee to the City for LCEC’s use of the City’s rights-of-way, consistent with the now-expired 1986 franchise agreement.”

Hamilton concludes by saying he is open to a meeting to share city staff’s response to the “final offer” submissions to the city made Sept. 20, two days before the Council for Progress membership was to get an update on the talks before voting to accept or reject the franchise terms recommended by its two-person volunteer facilitation team.

It’s simply time to move forward, LCEC spokesperson Karen Ryan said Wednesday.

“As evidenced by at least two years of effort and more than $1 million in expenditures, LCEC has been open to negotiating a new and equitable agreement with the City,” she said. “Our position continues to be focused on serving all of our customers’ best interests. We do not feel it is responsible to compromise our fundamental cooperative principles or our business model.”

“LCEC made numerous concessions to the City in the final proposed agreement,” she added. “In addition, concessions have been made over the course of the past two years this issue has been on the table. All concepts reflected in the LCEC draft franchise and letter agreements were discussed at length during many negotiation sessions over the past two years. Our proposed franchise agreement puts those concepts into precise language for the Council to review.”

Both the city of Cape Coral and the Council for Progress expressed surprise – and some confusion – at LCEC’s decision to draft its “final offer” documents and submit them with a deadline date.

Szerlag contends LCEC’s draft franchise agreement and memorandum contain new terms in conflict with verbal agreements reached with the help of Joe Mazurkiewicz, executive director of the Council for Progress, and Brian Rist, the business group’s chair.

It is his intent to present the Council for Progress’s now membership-approved terms to the Cape Coral City Council for its consideration, Szerlag said in a Sept. 22 response letter, urging LCEC to get on board with those terms should City Council approve them as well.

“Assuming City Council passes a resolution formally advancing the attached (Council for Progress recommended) terms included in our Franchise Agreement, I am asking LCEC to join us and move forward by approving the attached Term Sheet,” Szerlag wrote. “This would be in the best interests of everyone.”

The abridgment of the temporary detente in what has been a long and often contentious process has Mazurkiewicz disappointed but still hopeful.

The positions held by the city and LCEC are, for the most part, close, he said, adding that some of the differences are phrasing and language.

“There were upward of 20 issues in our eight months and we’re up to half a dozen with minor issues,” Mazurkiewicz said Wednesday.

Both sides have made concessions with the city moving back on some of the key items it had hoped to attain in a new agreement with LCEC.

“There were many issues the city gave up on, most notably the equity, the demands for a Cape Coral office,” he said. “Those were the two big ones.”

“We did not want to create anything in the franchise agreement that would cause LCEC to raise rates to comply with the change,” Mazurkiewicz added.

In addition, the city backed off on a request that LCEC change the timetable it uses to refund equity held by its members and withdrew a demand that the co-op set a separate rate structure for customers in the city limits.

The city took that special rate demand to the Florida Public Service Commission as a complaint but then withdrew its contention that city ratepayers “subsidize” others within the more rural sections of LCEC’s service area.

The current talks began after the FPSC complaint was dropped by the city.

Sticking points that remain include the length of the new agreement (the city wants a 20-year term with a 10-year auto renewal provided there is no default of the franchise agreement terms; LCEC wants a 30-year term but will consider a shorter period if the city eliminates its demand for a buyout option, something LCEC says it has in no other franchise agreement); rate constraint parameters; franchise fee audits (the city wants one every three years, LCEC proposes five) and buyout terms should the city opt for asset purchase at the end of the agreement.

The two parties are also slightly apart on franchise fee escalation. The fee is a type of tax imposed by the city, collected by the utility, and passed through to its customers within Cape Coral.

A franchise fee is a standard franchise agreement provision in exchange for a utility using city rights-of-way without the need for per-project notification and request. It is separate, and in Cape Coral’s case, in addition to the city-imposed 7 percent Public Services Tax.

The current franchise fee is 3 percent. The city proposes that the 3 percent fee stay the same for the first year, that the city have the option of increasing it up to 4.5 percent in the first five years and up to 6 percent after that, piggybacking on LCEC’s franchise agreement with Lee County through a “favored nation” provision that would assure parity with county actions.

LCEC agrees but wants requirements for a public hearing and City Council vote included in the contract.

Mazurkiewicz said the parties are largely in agreement here as a City Council vote to change the fee rate would be required anyway.

Another sticking point, though, is one that could be a deal-breaker, at least for LCEC.

While the city backed off most of its special rates demands, it continues to want the co-op to establish a special bulk rate for the city with regard to street lighting. LCEC’s position remains that the “city will pay the same street light rate available to every other municipal customer” in LCEC’s Public Service Commission-approved service area.

Cost basis equity remains at the heart of LCEC’s position. While appreciative of the Council For Progress’s effort, Ryan said the co-op cannot accept the recommended terms that tread on LCEC’s service-area wide business model. The utility is a not-for-profit member co-op with its own elected board vested with the duty to serve all of its member customers equally and cannot agree to terms that would impede that core value, she said.

“The Council for Progress representatives made an effort to help us reach an agreement and we thank them for their time,” Ryan said. “The CFP Task Force and City Staff do not have the advantage of having managed a large electric utility. Some of their positions would require us to turn over financial and operational control of the electric system to the City while remaining accountable for serving our customers – no responsible business would agree to that.”

City staff is in the process of preparing an analysis of the terms and conditions in the LCEC tendered franchise and memorandum of understanding drafts. To be examined are items the city maintains were added or deleted “outside the scope” of the prepared City of Cape Coral LCEC Franchise Agreement Term Sheet dated as of Sept 7.

All three parties also say they are willing to meet again.

“I think the city has asked for another meeting and Brian and I have both agreed to facilitate that meeting,” Mazurkiewicz said.

He was asked whether he thought such a meeting might be moot.

“I hope it’s not,” he said. “That may be wishful thinking because of the eight months we have put into it. We have come so far; there are just a couple of major issues.”

As of Thursday morning, LCEC officials said they had not been approached as to a possible date but would be willing to meet again with the city and the Council for Progress.