CEA cities consider loan options, including potential liability
The Clean Energy Alliance board of directors will be considering two options for $4.5 million in loans to finance startup costs: one that would require the member cities to contribute to a $2.5 million security, or an alternative that could initially prevent the promised 2% rate discount.
The CEA, one of the newest Community Choice Energy programs in the state, is on pace to begin delivering energy to customers in Del Mar, Solana Beach and Carlsbad in May 2021, and will start generating revenue.
One option, offered by River City Bank, would be repaid over a five-year period and would cost the CEA approximately $460,000 in interest and fees over that time. Del Mar, Solana Beach and Carlsbad would have to cover a $2.5 million security, either with cash or by serving as guarantors. This option would also include a separate $500,000 loan from Calpine Energy Solutions to reach the full $4.5 million that the CEA needs.
The security could be divided based on each city’s load-based share, which would be $2.25 million from Carlsbad, $175,000 from Solana Beach and $75,000 from Del Mar. It could also be divided any other way the board chooses, pending approval from the bank and city councils of all three member cities before a final CEA board decision.
During a June 18 CEA board of directors meeting, board members favored the idea of their cities serving as guarantors instead of providing cash collateral if they choose River City, given the coronavirus-related revenue cuts each city is enduring.
The second option, from JP Morgan, would be repaid over a three-year period, with costs of $575,300 in interest and fees. JP Morgan would also require the CEA to abide by a series of covenants that would restrict the agency’s ability to set rates, potentially negating the promised 2% percent discount that CEA customers would receive compared to their current rates with San Diego Gas & Electric, depending on which plan they select.
Those covenants include requiring the CEA to have an operating reserve equal to 90 days of operating costs, and set rates to cover operating and debt service costs.
Whichever option the CEA board approves, funds from the loan would be used to pay each of the three member cities $150,000, which is a reimbursement of the initial funding they provided to start the agency.
Solana Beach City Councilwoman Kristi Becker, who serves on the CEA board, said during the June 18 meeting that the terms of the JP Morgan option are a “deal-killer” because they might prevent the promised rate discount. Becker said in an email that she supports the River City option, including a guarantee from Solana Beach for $175,000 of the security.
Del Mar Mayor Ellie Haviland, who serves as the CEA board’s vice chair, said at the meeting that “losing the ability to control how we set rates does sound like a deal-killer.” She added that the JP Morgan loan would be “frontloading the costs at a time when we’re going out to our customers for the first time and really wanting to offer an attractive package.”
In a followup phone call, Haviland also said it could be beneficial to have the shorter three-year repayment period that JP Morgan is offering, even if the River City option provides more rate-setting flexibility from the outset.
“They both have their advantages and disadvantages and we’re lucky that we have two options to choose from,” she said.
CEA staff members are in the process of reaching out to the three cities to determine the best way forward, including whether the cities would be willing to contribute to the $2.5 million security for the River City option. The board will select an option and CEA staff will finalize the process over the next two months.
In Del Mar, the River City option’s $2.5 million security reopens a debate among City Council members that began earlier this year. On April 16, shortly after the COVID-19 pandemic upended city budgets across the country, the council discussed whether it made financial sense to ask the CEA board to postpone the May 2021 launch date.
City Councilman Dwight Worden was part of the council majority that wanted to proceed with the original plan, in part because the member cities did not anticipate any financial liabilities after contributing the initial $150,000 each.
Worden, who serves as Del Mar’s alternate CEA board member, said in a phone interview that it would be a hard decision for the City Council to contribute to the $2.5 million security for the River City option.
“My expectation was we were not going to be asked to cross that firewall and take on additional liabilities,” he said. “I’m not saying I’m a yes or a no, I want to see how it’s vetted out and I want to hear from my community.”
If the River City option is selected and Del Mar contributes its $75,000 load-based share of the security in the form of cash collateral, the funds could be paid from the city’s $150,000 reimbursement. If the city serves as a guarantor for the $75,000, it would have to provide that money only if the CEA fails to meet its financial obligations. CEA staff members have said the risk of the agency defaulting is low.
Del Mar Deputy Mayor Terry Gaasterland was the lone vote against proceeding with the planned CEA launch date during the council’s April meeting. In a phone interview, Gaasterland said she supports the JP Morgan option to avoid the additional financial liability for Del Mar.
“The way I look at it is, especially today in COVID times when our budget is very tight,” she said, noting the council’s recent vote to cut $4 million in spending from the 2020-21 budget, “every dollar counts, and $75,000 certainly counts.”
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