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Memo Cites Legal Hurdles for City to Get Out of Coal Plant

Photo by KUT News
A memo from the City of Austin Law Department cites bond debt, ERCOT regulations and an LCRA agreement as obstacles in abandoning the project that provides 20 percent of Austin's energy.

This is an excerpt from an article written by our Austin City Hall reporting partner, the Austin Monitor (formerly In Fact Daily).

The City of Austin faces formidable legal hurdles and, potentially, significant costs if the City Council decides to sell or shut down the city’s share of the coal-fired Fayette Power Project, according to a new city Law Department memo.

Potential problems arise from the city’s participation agreement with the Lower Colorado River Authority on the power plant, rules of the Electric Reliability Council of Texasthe City Charter, and city bond debt attributable to the plant, the memo states.

Assistant City Attorney Andy Perny sent the eight-page memo full of technical details to the Council last week. The memo was in response to requests from Council members for updates on options to get the city out of its share of the controversial power plant. The power plant is on today’s executive session agenda of the Council Committee on Austin Energy.

As part of Austin’s Resource Generation and Climate Protection Plan, the Council in 2010 adopted a goal to reduce energy that the city gets from the Fayette plant, with the eventual goal of modifying, closing or selling off the city’s 590-megawatt share of the three-unit 1,625-megawatt facility near La Grange. Austin co-owns two of the Fayette power-generating units with the LCRA, which also manages the plant operations.  

Council members have committed to getting the city to move beyond coal and are looking for ways to do it. But Perny’s memo makes it clear there are no easy answers from a legal standpoint. That’s not likely to sit well with some environmental groups that want the plant shut down due to carbon emissions and other environmental concerns. 

However, LCRA officials have stated previously that the river authority has no intention of shutting the plant down as long as it continues to operate effectively. At a Council session last month Austin Energy General Manager Larry Weis indicated that city utility officials had made several attempts to discuss the Fayette issue with the LCRA without success. 

The Fayette plant represents roughly 20 percent of the power-generating capacity owned by the city. If the city sold or shut down its share, Austin Energy would have to substitute one or more other reliable sources of electricity. In September 2012 Austin Energy issued a report proposing selling the city’s share of Fayette, replacing its energy with facilities fueled by cleaner-burning natural gas. Some environmentalists criticized the idea, however, saying that carbon emissions would in fact increase, not drop, if the new Fayette buyer continued to operate the plant, and the city added new gas-fueled power generation.

One major issue for the city, according to Perny’s memo, is the 1974 participation agreement between Austin and the LCRA on the Fayette plant. Under that agreement, the LCRA has the right of first refusal if Austin decides to sell its share to a third party. The city also has an obligation to maintain a minimum output of its share of the plant facilities and to pay a fixed percentage of operation and maintenance costs whether or not it uses energy from the plant. In addition, the agreement prohibits partitioning the plant facilities, meaning that the city on its own could not shut down a portion of the plant.

“LCRA’s right of first refusal presents two transactional obstacles to the City’s successful solicitation and closing on a prospective sale of the City’s ownership interest in FPP,” the memo states.

For one thing, the right of first refusal may discourage potential buyers from investing time and resources required to put together an offer if they face the prospect of that offer being matched by the LCRA. For another, the seven-month closing date and three-month evaluation period specified in the participation agreement may chill offers altogether, the memo adds.

In response to Council inquiries about whether the city can discontinue or significantly reduce its share of the plant’s output, Perny states in the memo: “The short answer to this question is the City cannot unilaterally retire any part of the FPP facility, though it can potentially reduce usage of energy and power from its share of FPP, subject to certain minimum generation scheduling obligations. In either event, the City would have to continue to pay the costs of operating and maintaining FPP regardless of the amount of usage of FPP by the City.”

Even if the city were able to get the LCRA to agree to exempt it from portions of the agreement relating to minimum generation, and in effect shut down one of the units, the city still would be liable for half the costs directly related to the two units and one-third of the costs related to the plant as a whole, the memo continues. Shutting down Austin’s share of the plant would result in significant ongoing operation and maintenance costs, with no offsetting revenue from power and energy sales, it adds.

Assuming again that the city were able to negotiate with the LCRA to split ownership of the two units, the city would need approval from ERCOT to shut down the unit, according to the memo, which outlines the steps that Austin and ERCOT would have to take. ERCOT manages most the state’s power grid.

In addition to the formidable legal difficulties wrapped in the participation agreement, the city also could face complications from the City Charter if it chose to sell its share of the Fayette plant, the memo states. The charter includes a provision prohibiting the sale of “all or any substantial part” of municipally owned facilities. The problem, according to the memo, is that the charter does not define what is meant by “substantial part,” opening it to interpretation and uncertainty. 

“Buyers want reasonable certainty when considering an investment of the magnitude of a purchase of the City’s interest in FPP, particularly certainty that the City has the legal authority to sell its FPP interest,” the memo states. “This kind of uncertainty may easily chill many potential buyers from considering a bid due to the risk that a court could either intervene to restrain a closing, or the worse risk that a court would undo the transaction after closing.” 

The memo further points out that, due to the charter question, an offer to purchase Austin’s share of the plant could open the door to a court challenge by parties who see coal as a source of cheap energy and want to keep the plant, or from environmental groups wanting the plant shut down and recognizing that a sale likely would result in its continued operation.

An additional concern raised in the memo relates to bond issues. Austin currently has about $175 million of outstanding tax-free debt attributable to the Fayette plant, mainly for the city’s share of investment in scrubbers to clean sulfur from emissions from the plant’s two co-owned generating units.The bonds are subject to Internal Revenue Service rules relating to private use of publicly financed assets, the memo states.

“Private-use restrictions would likely trigger the need to defease the entirety of the debt issuances that were associated with FPP in the event FPP were sold to a non-governmental entity,” the memo continued. These restrictions also could cause the forfeiture of $30.6 million in federally subsidized Build America Bonds that the city issued under the American Recovery and Reinvestment Act.

Also, the memo warns that shutting down the city’s share of FPP could impact Austin Energy’s electric rates and also could force the city to defeat its bond debts. Under state law, a utility may include in its rate base invested capital that is considered used and useful to provide electric service. In contrast, a plant that is no longer used and useful may be removed from rate consideration and the utility would not allowed to recover its investment, the memo points out.

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