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The last time we did an interview was in April 2018. One of the questions I asked you was, “So, talks of privatization are over?” and you said, “As far as I understand, the mayor and the city council have all come to an agreement on that." Fast forward to where we are now, and privatization is a possibility that’s being explored again. I feel like it contradicts your statement, no?
I don’t see it that way. One of the things that I think it’s important for the public to understand is we’ve done a significant amount of work relative to understanding the position of JEA within the competitive market. We spent quite a bit of time in the first part of 2018 establishing our CSEF measures, customer, community, environmental, and financial value, and how we will really measure the performance of JEA both now and in the future.
In January of 2019 we hired McKinsey, one of the foremost leading firms in the entire world on the energy and water sector to help advise the board on a strategy on how to remain relevant to the customer in the face of energy efficiency, distributed generation, storage, distributed water systems. Candidly, when you look at our performance over the last ten years we’ve lost about 30% of the load per customer on the commercial industrial side and 20% on the residential, side so finding ways to keep relevant with your customer is really critical.
In May what we did with McKinsey was presented to the board a scenario of JEA’s future which we called the status quo, which effectively was putting the burden of all those financial challenges squarely on the back of the customer and that would imply about a 50 to 60% rate increase over the next ten years or we could cut the contributions to the city to zero and effectively be able to reduce that to about 40% rate increases.
The board didn’t think that was reasonable outcome, so they asked us to produce a management response so July we came back with a traditional utility response and that was effectively cutting costs, so absorbing the costs internally, becoming more efficient, cutting overheard by about 600 jobs, including myself and about ten of the senior leadership team members and really allowing the business to be designed to shrink as the competitive markets grow around us.
In July the board said that doesn’t seem like a reasonable strategy either, perhaps you can look at other growth initiatives. So, at the July board meeting we presented two ways to deal with the constraints that JEA has that are impeding our growth. The first was looking at constitutional statute and charter changes and how would we go about over a five or seven year period of lobbying to have those policy changes and then the second was really looking at perhaps the root problem is not being community owned but being governed because a lot of the constraints are created by the government organization that we currently operate underneath.
That being said, what I’d like the community to know is that while we have the authority now to go out and investigate all of the scenarios that were laid out in July, the traditional utility response and remaining government and shrinking, that’s not off the table. No decision will be made quickly, all we’re going to do is collect all the facts and data for the entire community to be fully informed about what JEA can look like going forward.
I understand you are responding to the study from January and presenting those different options, but going back to what you said last year about privatization, do you think you spoke too soon since they’re not technically over as we’re looking into the possibility of it again?
Yeah, I can understand how there might be a misconception there, but the mayor and city council had made a statement that they were not pursuing privatization, nor is JEA at this time. All we’re doing is evaluating what he potential future outcomes, or future scenarios, or organizational and operational activities of JEA might look like. That being said, I think it is important for the community to understand, you know, do you, and it is a policy question, do you want JEA to be designed to shrink or to you want it to grow and be prosperous in the everchanging market.
For example, as you go through education, you learn new things as you do more research, so I think what we’re doing now is just being pragmatic and having a methodical and deliberate dialogue that’s open and transparent with the community about what JEA, what potential opportunities lie in front of us and what challenges lie in front of us and how can we confront them head on
You talked about constraints, what kind of constraints are there that were limiting the growth of JEA?
For example, there are some constitutional constraints. For example, government entities in the state of Florida are not allowed to lend credit to private entities for the benefit of private entities, for example, and there’s an exception for that, for utilities to build power plants. That makes a lot of sense, right, because some 50, 60 years ago when this segment of the constitution was put in place what was government doing but building a lot of power plants, so that exception existed. However, if we wanted to get in the distributed solar or storage markets and lend credit to you as a private individual or to companies for their benefit, which is effectively the business model of solar and storage today, that would be very difficult. Or even getting into the market of electrification for electric vehicles on road.
If we wanted to push electric vehicles, for example, JEA could put 50,000 electric vehicles on the streets of Jacksonville by helping companies switch from diesel or gas to electric and that would actually help drive cash flow for JEA by about $100 million a year but we would be very constrained from a constitutional perspective of doing that, because we couldn’t lend our credit to a private company. Now, other private companies can do that, but we’re not allowed to because we’re governed.
Why can’t we do it without a private company?
The private companies are the ones that own the vehicles.
What about when it comes to solar panels, solar energy?
At the end of the day, the customer is that consumer, so you’re improving their asset if you’re putting solar storage in their building, so effectively you’re lending your credit to that individual and or commercial or industrial client.
So you’re saying we wouldn’t be able to invest in solar energy unless we partnered with private companies?
We are able to invest in solar energy at utility scale, so we’re doing that right now. In fact, in the first quarter I signed 250 megawatts of power purchase agreements with a private company to build on JEA’s land out west in Jacksonville. Now, that’s utility scale.
The same thing is building another natural gas plant, where it’s a 250 megawatt solar plant. However here if I were to be putting solar on your specific roof, and lending you money to be able to improve your home we start to run into some constitutional statute issues that prohibit JEA from being in that JEA business model.
Why would JEA have to lend me money if I want to get solar panels on my roof?
Today, if you were to put a 10 kilowatt system in it, would probably cost you somewhere around $20,000 including investment tax credits which come from the federal government, if you have an extra $20,000 do you want to put it on your roof or go on vacation or invest in your own retirement or buy a new vehicle or put it to the education of your children.
So often times in the industry what will happen is the private company, a solar company, will come in and say I’ll lend you the money upfront and I’ll charge you back over a period of time, and that will be the business, it’s called solar leasing, as well as they also do solar as a service.
Have you looked at any other public utilities out there using solar energy or investing in solar energy without privatizing or solar part of their utility?
Alot of the IOUs are heavily into this business, you might have seen some of our competitors, I call them competitors, have made large announcements of putting solar out there. The reality is utility scale solar is still far more economical than residential, commercial scale, but what you need to know is that the utility scale solar doesn’t deal with the disruption of the technology for you the consumer who might choose to put in effectively what is your own power plant behind the meter. Once you do that, we effectively have lost you as a customer forever
You talked about solar energy and investing in new technology a lot last year, but not about the need to go outside of these “constraints” or the need to have some privatization to lend money. It seemed like solar energy was going to increase jobs and it was going to be just through JEA as it is now.
It’s similar to saying I’d like to plan a trip to New York. We both can agree that you want to go to New York but then you start doing the investigation of how do you go from Jacksonville to New York. There are ways I can take a plane, I can take a train or I can take a car and you start to investigate the difference scenarios, how much would they cost, right? And then you start to plan your route.
The work that we’ve done over the last year is very similar to planning a trip. You start to break it all down into its segment pieces and what we found as we started developing the business plans on each of the new emerging technologies and we could get in those new business lines, what we found is we either had constraints from a constitutional perspective, a statute perspective, a charter constraints, some kind of policy constraint, or a business organization constraint. So we didn’t end up in a position where we said, ‘Well privatization is the only answer.’
As we started to building the business strategy on how to get in to those new emerging technologies we started finding that we had governmental and regulatory constraints that inhibited us from actually being able to participate.
What is another constraint?
One of the things in the city charter is effectively JEA is limited in being able to provide services in Duval County or adjacent counties. What the community should know is we are running one of the top five water and wastewater utilities in the United States, and I don’t mean that just an operation statistic, financial metrics, we are leading the industry in the implementation of AI for climate change preparedness, hurricane response, we also have a lot of actual property that we’re building.
So when you go around and talk to different utility directors, especially in the hurricane prone areas, we are so far ahead of any utilities, especially small scale utilities that don’t even have the resources to be investigating these types of tools and resources, so it would be very reasonable for us to start to look at expanding a water and wastewater footprint beyond our current service territory to be able to provide the type of value to other customers, around the state of Florida and perhaps around the United States, however our charter does not allow for that.
There has been a picture of JEA that’s been painted as ‘doom and gloom’ over the past several months, so how would a charter constricting expansion JEA coincide with the ability to explore privatization, selling and merging if JEA’s numbers are going down?
So I don’t think there’s actually been a picture of ‘doom and gloom’, that’s certainly been a storyline we’ve seen play out in the media. What we’ve been doing it putting out the facts. Which is, in the face of constraints we have only a certain number of resources we can do. Raise rates, cut costs.
If we were to alleviate constraints we can move faster, we can be adept and compete and adapt emerging technologies as well as expand our footprint and be a growth business.
I don’t think they’re mutually exclusive, it’s just simply acknowledging for example if you and I were going to have a 400 meter race and you had hurdles and I didn’t my guess is you’d probably win because I’d have to clear the hurdles, especially since I’m not very good at clearing hurdles.
So, effectively JEA today as a government entity has a series of hurdles in front of it where a lot of other companies that are in our space, they don’t
The phrase ‘doom and gloom’ came about when it was announced that people may be losing their jobs.
Yeah, including me.
Yes, that goes into the idea that the utility does have some kind of ‘doom and gloom’ if you will if you’re also involved. If 500 plus employees weren’t faced with losing their jobs, then what kind of picture would you paint of JEA?
What we need to understand is that over the past JEA has accumulated a lot of debt so we have approximately $4 billion in debt from our electrical water system, and that doesn’t include Plant Vogtle. We have a substantial amount of fixed costs and as I said, our sales have been declining, so we’ve declined 10% over the last ten years and we continue to see the market pressures of energy efficiency distribute generations, storage and efficiencies on the water side continue to drive those sales down.
So if you have decreasing sales and therefore decreasing profitability, yet you have substantial debt loads, at the end of the day the only access to capital JEA has today is customer receipts. In order to increase free cash flow, we have to cut costs.
I don’t know if that’s ‘doom and gloom’, it certainly has a dramatic impact on our employees and on our community if we would have to eliminate 500 jobs, and I feel for that, I’m empathetic for that 16:00 but if you’re positioning the business to be responsible in order to be able to pay back your investors that’s just prudent business practice. It’s designing a business to shrink without giving it the tools it needs to invest in growth opportunities.
With so much debt and declining profits, why would any company want to invest in JEA, buy JEA, merge with JEA?
That’s a great question. It’s because they don’t have the hurdles that we have. A great example of that, if you look at the telecom space, back in the 1990s or so, there were hundreds of telecom companies, it might have been Southern Bell, there were a lot of different characters.
When mobile telephones came to fruition in the late 1990s, did you have a non 904 area? Yes. 816. And was that for where lived between 2000 and 2005? Yes. That’s when the telephone industry deregulated due to technology disruption due to the mobile phone. We’re seeing the same thing in the energy sector and probably five to ten years from now we’ll see the same thing in the water sector.
The reality is that as mobile telephony expanded those companies that were accelerating and had those service offerings for their customer, had a far better, broader offering than just wire line can alone. So now we’re starting to see it in terms of cable and telecom competing, right, comcast verse Verizon, the triple play.
The same thing is happening in the electric and water sector to where Shell Oil has recently announced they want to be the largest electric company in the entire world in ten years, think about that, that’s an oil company effectively saying they’re not even in the industry but they want to be the largest in the world in ten years. You have Tesla, which everybody thinks of as a car company, but effectively is just a development platform for electric storage and for at utility scale.
You’re seeing the advent of technology and technology disruption create a nexis where all of these companies are converging and many of the competitors, we call them competitors because they take our sales, are not even utility companies anymore. In fact, Amazon and Apple and Google have announced that they’re now powering their own facilities as well as exploring being in the utility sector
So these hurdles and constraints, were they present a year and a half ago?
Absolutely.
We’ve never heard anyone talk about hurdles or constraints, particularly these specific ones, when we were talking about JEA for months a year and a half ago?
So, the management team had not done the work. The work we did over the past year of really trying to push the boundaries of being able to provide our customers knew of better offerings being provided by the other companies is to really identify this constraint matrix.
In our June board meeting you can go back and look at it, I believe it was Appendix A. In the July board meeting I believe we fully fleshed it out. We engaged some legal teams to evaluate as well as worked with OGC to do a very methodical analysis of all the constraints. That being said, you can see some manifestations of those constraints in the past. For example, you know JEA some five or seven years ago tried to get into retail natural.
Do you know who the largest retail natural gas provider in Duval County is? It’s in our charter, so in fact JEA should be the provider, but it’s Peeple’s gas, which is owned by TECO. Well JEA went head to head trying to get into retail natural gas effectively, even though it was in our charter, so it was not limited there, you had a government entity trying to compete with a private sector and the argument went as follows, why allow government and when it was up for city council to vote on who got the franchise agreement, the argument as follows from TECO.
Why would you let government ever compete with a private sector, we’ll pay property taxes, we’re more nimble, you can hear it played out already and if you’re a public official you have a hard time justifying why government ought to compete with private sector company. We’re seeing in the solar space right now. We often see solar companies push back on any policy initiatives that JEA has around rooftop and net metering issues. We also had JEA’s management team try to get into liquid natural gas.
You know who the largest liquid gas company is in Jacksonville? A southern company, Georgia Utility and JEA tried to get into that. And actually when we tried to get into that our Sunshine Laws were used against us and inf act as we were competing against it the competitor at the time asked us for our entire business plan and we ad to give it to them. Imagine if you went to Apple right now and asked for all the plans and all the pricing for your next iPhone.
They would fight you for it. In fact, they would kind of life. But JEA in our current organization, if someone asked us for that, we have to give all of our pricing information, we have to give all strategic planning information, so how do you compete in a competitive market if that’s one of the restrictions you have to abide by?