It’s hard to overstate the degree to which a controversial cash-for-stock plan rendered the executives hopelessly conflicted

COMMENTARY | On July 23, in the hours after the JEA board of directors approved putting the city-owned utility out for sale, former CEO Aaron Zahn and his executive team had a celebration at Volstead, a speakeasy-style bar in downtown and a frequent afternoon watering hole for city officials.


In under-oath testimony given during an investigation of his tenure, Zahn told city attorneys the evening was simply a "get-together" for a "senior leadership team that had been working 100-hour work-weeks" in preparation for what was certainly the most consequential day JEA had in decades.


Zahn said he covered some of the tab and left "quite early."


Prompted by lawyers, Zahn recalled two others at the bar that evening: Brian Hughes and Jordan Elsbury, two of Mayor Lenny Curry’s top officials.


"... the Volstead is a very frequent place to go, so it could have been a coincidence," Zahn said, adding that on this historic day for JEA he probably only "exchanged pleasantries" with Hughes — a man with whom, according to people who worked with and around him at JEA, Zahn met or spoke with all the time.



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Pleasantries and coincidences aside, Zahn and his team certainly had reason to celebrate: They had convinced the board to put JEA out for sale — a goal Zahn had been working toward for months.


Even more consequentially for each member of the executive team, however, the board had also signed off on a cash-for-stock scheme that Zahn had already realized could generate as much as $280 million to divvy up between participants.


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That could cover a lot of bar tabs.


The value of the payout was inextricably tied to the amount of net proceeds City Hall would get from a private JEA buyer. Under the plan, JEA would issue up to 100,000 "units" that could be purchased for $10 a piece.


The higher the JEA sale proceeds, the higher each unit would be worth, and thus the higher amount an employee could cash them out for. The City Council Auditor found it possible each individual unit could grow in value from $10 to more than $6,000 if the net proceeds to the city totaled $5 billion (a realistic scenario — public records indicate the sale price offered by JEA bidders ranged between $4 billion to more than $6 billion).


There was no cap on the amount of money the plan could have generated, and it easily could have been hundreds of millions of dollars.


CONFLICT OF INTEREST


The scheme — referred to internally as a performance unit plan, or PUP — has in the months since come under intense fire from lawyers, City Council members and the public: In addition to its uncapped cost, the plan was also rife with conflicts of interest. Zahn, for example, who would have been eligible to buy into the plan, had apparently begun the process of deciding how many units employees would be eligible to provide.


Zahn told city lawyers he "never created a formal spreadsheet or any recommendation" but had begun discussing it with the plan administrator — JEA board member Camille Lee-Johnson (who, under the plan, was able to turn over all her duties to an executive team member). Rank-and-file employees knew almost nothing about this cash-incentive scheme or how to participate, and it was widely assumed within JEA the plan was set to benefit executives by far the most.


It’s hard to overstate the degree to which this plan rendered the executives hopelessly conflicted: Every decision they made that impacted the possible sale price of JEA affected their possible future payouts under the performance-unit-plan.


This could have cost ratepayers substantially down the road.


Zahn’s executive team, for example, came up with a complicated workaround that would have left the city — and ratepayers — on the hook for billions of dollars in costs tied to Plant Vogtle, an under-construction nuclear power plant in Georgia. This would have allowed a buyer to acquire JEA without taking on those costs, thus likely increasing dramatically what bidders were willing to pay for the utility.


Taking the obligation off the private buyer to absorb Vogtle costs, in other words, would have boosted the net proceeds City Hall could get — and would have in turn juiced the value of the performance units — but left ratepayers saddled with the burden of paying it off themselves.


HIGHER RATES = HIGHER BONUS


Recent revelations in public documents show another conflict of interest: Although the executives promised that any sale would come with a minimum three-year period of "rate stability," they were actually indicating to buyers that they would be able to charge substantially higher electric rates during that time.


The "rate stability" period was often interpreted by local media to be a rate "freeze," a mistaken interpretation JEA did nothing to correct, despite its willingness to object strenuously and publicly to other characterizations about the sale it deemed unflattering.


Like the Vogtle workaround, the effect of allowing utilities to immediately charge higher rates made the JEA transaction a more lucrative and attractive one for private buyers — while also increasing the potential value of the performance unit plan.


These were not small rate increases: The amount of revenue from the base rate portion of a ratepayer’s bill could have risen from $71.27 per megawatt hour to a ceiling of $81.46 per megawatt hour in the 2021, $82.94 in 2022, and $84.45 in 2023.


Taken together, the Vogtle workaround and the rate increases meant Jacksonville ratepayers faced substantially higher bills in the future if a transaction had taken place, while executives could have walked away with millions in payouts built upon that ratepayer-borne burden.


The stock scheme incentivized executives to make decisions that weren’t necessarily in the best interests of ratepayers. Auditors had previously noted that possibility in their review, but the issues above are real-life examples of that conflict playing out.


This was the opposite of what was supposed to happen: Privatizing JEA was going to help ratepayers, to insulate the city from a bleaker utility industry landscape, to protect utility workers by placing them under the care of a more nimble private operation. At least, that’s how Zahn sold it.


In reality, ratepayers would have been covering those JEA bar tabs for decades to come.


Nate Monroe’s City column appears every Thursday and Sunday.


nmonroe@jacksonville.com