WALLINGFORD — The Town Council took several steps this week to clarify its obligations to LS Power, which operates the town-owned Pierce Generating Station on John Street.
That action included giving up the town’s right of first refusal should LS Power seek to sell its lease of the power plant.
The council first made official joint accessibility to the decommissioning fund required by the lease. The fund was created in 2006 during a prior lease with the Connecticut Municipal Electric Energy Cooperative, an energy cooperative owned by several municipal utilities in Connecticut, to assure that if a leasee terminates its contract with the town, the equipment used to generate the electricity will be removed from the building at the leasee's expense, which potentially could cost in the millions.
The town leased the empty building to CMEEC, which brought in its own equipment, and then sold that lease to LS Power. That contract has a provision that LS Power can give the town 30 days’ notice if they want to leave, and should LS Power pull out of the deal and leave the equipment it would be up to the town to pay to remove it, which Town Attorney Gerald E. Farrell Sr. said could top $20 million. The decommissioning fund puts that responsibility on the leasee.
"We have the right as the landlord at the end of the lease whenever that occurs that we can require the tenant to take the plant and turn it back to what it was before. That's what the decommissioning fund is for," Farrell said. "They take what they put in and give us back the bare bones building prior to their entering into the lease.They take out what they brought in, leaving whatever was there."
The decommissioning fund assures the town won't be responsible for that cost, but the fund only contains $430,000 because the company has demonstrated that it has a relationship with a Rhode Island firm that would pay LS Power to purchase and remove the equipment and then sell it to a third-world country where such equipment is in demand.
"Wallingford did a decommissioning study and came up with $20 million, and then the lessee showed me that they could decommission the plant and this firm in Rhode Island would come in and pay to take everything out," Farrell said. "Evidently equipment that would have no value in Connecticut, and you'd have to pay to get rid of it, has considerable value in third world countries and this firm has figured out how to do that. It's not a make-believe thing, it took place already."
"We have reasonable confidence that in fact reselling to a third world country is going to happen and we shouldn't be concerned?" Council Chairman Vincent Cervoni asked.
"That's correct," Farrell said. "It's happened with this tenant already."
Councilor Vincent Testa questioned what would happen if the LS Power arrangement with the Rhode Island firm were to fall apart and if the town would then become liable for the equipment removal.
"They are still liable for the cost of decommissioning. We haven't waived that at all," Farrell said.
But when the initial decommissioning fund was created, it was supposed to be jointly administered by the town and LS Power. The town was never added to the account, and in the interim steps have been taken by the leasee of which the town was unaware, Farrell said.
"There has been a fund in place but it was not jointly administered. We found out it was being moved from bank to bank without our knowledge," Farrell said. "We said we want joint administration and this is setting up the joint administration we should have had for 10 years."Sale of lease
The town also has had the right of first refusal whenever a lease is sold, meaning if the leaseholder negotiates a deal to sell it, the town can step in and become the purchaser with the same negotiated price and conditions.
When CMEEC sold the lease to LS Power, the town waived that right, and LS Power now wants the town to permanently waive that ability, Farrell said.
"Their argument was it is very difficult to negotiate with the purchaser where anyone has the right of first refusal," Farrell said.
Previously, there was some thought the town might want to get back into generation, Farrell said, when one of the three Public Utility Commissioners advocated for it. "I don't think any of the three present commissioners think we should, or the director of utilities thinks we should. We've been out of the generation business for quite a while," Farrell said.
LS Power has been a good tenant, he said, paying more than $350,000 a year to the town in revenue which is split between the town and the Electric Division. "I think it is worthwhile to keep them a happy tenant," he said.
"So they want out?" Town Council Vice Chairman Tom Lafflin asked.
"I don't think that's going to happen. It means they have decided they can make a profit," Farrell said. "They are in the business of making a profit."
I'm not concerned about these guys. I'm concerned about who they sell it to," Lafflin said.
"We still have the right to look into whether who they are selling it to is credit-worthy," Farrell said. "We just are giving up the right to be the buyer, we are not giving up the right to approve the creditworthiness of the signee. We still have the right to say no, you're selling it to an entity that can't pay the lease."
By giving up the right of first refusal, we're giving up the right to go in there and match this buyer and say we'll take it," Cervoni said. "If we give up this right to first refusal, if they decide to go out and sell this lease, we still can compete, we just lost the right to say your low bid — we're taking that."
Councilor Christina Tatta said she wasn't willing to give up that right.
"I don't see a huge benefit at this point of us giving this advantage away," she said.
The council approved forgoing the right of first refusal, with only Tatta voting no, while unanimously agreeing to the modification to the decommissioning fund.