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JEA solicitation seeks strategies to 'future-proof' Fla. utility

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Jacksonville, Fla., utility JEA wants companies interested in taking over the state's largest municipal utility to explain how they intend to embrace the changes transforming the power sector.

Fearing the utility will face financial hardships if it fails to technologically adapt, JEA's board of directors voted July 23 to allow the senior leadership team to solicit interest in various ownership structures and launched the formal process on Aug. 5. The options include allowing another company or a consortium of firms, either domestic or international, to operate the utility.

The news has grabbed the attention of several investor-owned utilities with operations in Florida. NextEra Energy Inc., which owns Florida Power & Light Co. and recently acquired Gulf Power Co., is monitoring the developments with JEA's solicitation, NextEra CEO Jim Robo said during the company's July 24 earnings call. Duke Energy Corp. CEO Lynn Good said on Aug. 6 the company, which has Duke Energy Florida LLC, does "evaluate opportunities" near its service territory, but the utility is more focused on organic growth.

Tampa Electric Co. and Florida Public Utilities Co. did not respond to a request for comment.

JEA started to explore privatization in late 2017, creating a major Wall Street frenzy as a third-party consultant estimated JEA's market value at between $7.5 billion and $11 billion. However, the utility halted privatization talks in May 2018 after backlash from Jacksonville Mayor Lenny Curry and his administration. Managing Director and CEO Aaron Zahn told S&P Global Market Intelligence in late 2018 that JEA's privatization inquiry was "dead."

The utility executives' latest effort, however, suggests more urgency: JEA's senior leadership warned in the May 28 board meeting that it could face a $2.3 billion cash gap in 2030 if JEA maintains a "business as usual" strategy. The cash shortfall would force JEA to either increase base rates by 52%, cut staff by 26% or raise rates by 40% and stop contributing to the city of Jacksonville's general fund.

JEA leaders are concerned the company's status as a government-affiliated structure severely limits JEA from pursuing strategies that non-municipal utilities typically do, such as selling equity and assets or creating new partnerships.

"JEA's response under the current constraints would be limited to head count reductions, cost cuts, service level declines and rate increases over the next decade," the company wrote in its solicitation document published Aug. 5.

Proposals are due by Sept. 30 and negotiations on submitted bids will start on Oct. 15. JEA's minimum requirements for bids include keeping the utility's value to at least $3 billion, distributing at least $400 million to customers and protecting certain employee retirement benefits.

If the bidding results in JEA being fully or partially sold, parties would need approval from various state and federal parties, including the Florida Public Service Commission and Federal Energy Regulatory Commission. The city of Jacksonville would also need to conduct a referendum and win a majority vote to approve the transaction.

In its evaluation criteria for proposed ownership models, JEA is asking respondents to come up with initiatives that will "position the business for the future," add new revenue streams and "future-proof" the business. JEA executives have noted in previous meetings that the municipal utility has failed to take advantage of the various changes in the sector.

"Our energy business is a story of technology disruption," JEA President and COO Melissa Dykes said during the utility's May board meeting. "Disruption is becoming the new normal in our industry."

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Some of those disruptions remain opportunities for JEA, but the company's solicitation and executives have noted those opportunities also represent potential threats to its business.

Distributed generation, such as rooftop solar, has been an example of that dynamic; JEA has lost more than $2.5 million in net income annually since its fiscal year 2014 due to solar power's skyrocketing usage in its service area, CFO Ryan Wannemacher said during the company's May board meeting. Battery storage faces a similar trajectory, and distributed generation paired with storage could reach cost parity with JEA by 2025 if it does not change its business model.

Beyond solar, JEA said in its solicitation that front-of-the-meter and behind-the-meter growth, such as creating grid electrification businesses or utilizing more data for analyzing JEA customers' energy needs, could be two of the biggest value creators in its next ownership model. Expanding into neighboring areas and moving into other services such as mobility and telecommunications are also strategies for potential owners to pursue.

"Participating in technology disruption will be key to JEA's future," Dykes said.

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JEA's energy facility ownership and power purchase agreements illustrate how the utility has thus far been conservative about adding renewables to its energy supply. The company's portfolio consists of mostly gas, with the Northside Generating Station that burns both oil and coal, and a 5.98% stake in the Scherer coal-fired plant in Monroe County, Ga., according to S&P Global Market Intelligence data.

As of July 30, JEA's 239.8 MW of contracted power consists of 200 MW of gas and 25 MW of solar, with a sprinkling of wind and biomass PPAs. However, JEA's contracted solar capacity will increase ten-fold with five contracts slated to start toward the end of 2021, according to S&P Global Market Intelligence data. That capacity is dedicated to the city of Jacksonville and the Duval County Public School System's goals to meet 100% of electricity needs with renewables by 2030.

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Whoever succeeds in the solicitation will also have to consider JEA's complicated legal dispute with Municipal Electric Authority of Georgia, or MEAG, over JEA's PPA for 206 MW of nuclear energy from two delayed reactors at Alvin W. Vogtle Nuclear Plant, in which MEAG has a 22.7% project share. In September 2018, the two companies sued each other after Vogtle project partner Oglethorpe Power Corp. disclosed that total project costs would increase by $1.5 billion to finish and MEAG decided to continue construction, despite JEA's objections and its desire to get out of the contract. The PPA legal battle remains tied up in the court as Vogtle project partners push to finish units 3 and 4 by 2021 and 2022, respectively.

In its solicitation notice, JEA said it understands organizations participating in the process "may have further questions regarding the pending litigation and the potential treatment of the PPA in any ultimate transaction" from JEA's request for proposals.

"JEA does not anticipate that any transaction will be structured in a manner that would violate the terms of the PPA," the utility said in the document.