Haskell advises against selling JEA
While the recent dialogue and debate concerning the potential sale of JEA has in certain ways been productive and valuable, it has now become unduly divisive and distracting. It is time to end this unproductive discussion so that our community and its leadership can return its focus to other important matters.
Although no single, comprehensive study has been made on this subject, it is clear that consideration of asset values, unresolved liabilities facing JEA, potential future costs to ratepayers and many intangible factors demonstrate that selling JEA is not in our city’s best interests.
In seeking to determine the likely market value of JEA’s electric utility it should first be noted that the idea of selling JEA has been floated several times over the past three decades, and each time was found unworthy of further pursuit. Little has changed in the capital markets or the electric utility industry that would make a current sale significantly more attractive. Indeed, revenues and profits for the last five years have been flat or down for the entire industry, including JEA. It is simply not a growth industry where buyers are aggressively seeking acquisitions.
Given this environment, customary valuation metrics such as multiple of net income, multiple of rate base and multiple of book value consistently produce net sale proceeds after discharge of debt and other transaction costs of approximately $2.5 to $3.0 billion. But these metrics do not consider major JEA liabilities such as the Plant Vogtle debacle, the potential pension liability, nor costs associated with the shutdown of the St. Johns River Power Park and discharge of its debt. Taking these into consideration reduces the proceeds by as much as $1 billion.
Using a rather generous figure of $2.2 billion of net proceeds, and assuming this amount were used to discharge the city’s bonded debt or invested in marketable securities, a budgetary benefit of approximately $110 million annually would result. However, an investor-owned utility would pay property taxes to the city of approximately $45 million but would not pay the current JEA contribution of $92 million (electric utility only), resulting in a revenue reduction of $47 million annually. Thus earnings or other benefits from the estimated $2.2 billion of net sale proceeds, minus $47 million per year or its equivalent, would be the net result of the transaction.
However, an investor-owned utility would have to pay state and local taxes, higher interest on its debt as a taxpaying vs. non-taxable borrower, federal and state income taxes and a return on equity — all of which JEA does not pay. While a new owner may realize certain economies of scale and territorial adjacency, JEA itself enjoys similar savings through joint purchasing with other city agencies and use of the combined utilities billing system. There is only one potential purchaser whose service area is adjacent to JEA’s. Thus a new owner would have to find operational savings or new revenue of several hundred million dollars annually. The most obvious sources of new income would be rate increases.
The water and sewer utility is not considered here as it is unlikely that a buyer could be found for both utilities, and the issues surrounding them are quite different and should be considered separately.
