Modesto could pull plug on energy project

kvaline@modbee.comJune 23, 2014 

The Modesto City Council could pull the plug Tuesday night on a proposed $10.76 million deal with Siemens Industry to have the global company replace about 9,500 streetlights with longer-lasting, more efficient ones and conduct other upgrades to reduce the city’s energy costs and its carbon footprint.

City officials are recommending the council not approve a 15-year agreement with Siemens to finance the work. Officials have called this a self-funded, clean-energy project because the city would use the money it saves on utility bills and operations costs to pay Siemens and have money left over, but city officials now have questions about the project’s financing.

Those questions arose after council members voted 6-1 at their June 10 meeting to enter into a performance contract with Siemens for the project. The contract would take effect only if the council approves the 15-year financing agreement. Councilman Bill Zoslocki voted no because he had questions about the project’s cost.

The agreement calls for Modesto to lease the upgrades from Siemens; the city then would own them after making 15 years of payments. The city would pay 2.75 percent interest on the payments. The upgrades would cost $8.4 million, but the interest would raise the project’s total cost to more than $10 million.

Siemens wants the interest on the lease payments to be tax free, but a city report states that Modesto can certify that and comply with the state debt limit for local governments only if the payments do not exceed the “fair rental value” for the equipment and services. The report states the payments appear to be higher than market.

For instance, the report states that Siemens estimates its cost for the streetlights – which make up two-thirds of the project – at $5.4 million, while the city estimates it could do the work for $3.7 million or contract the work out for $3.2 million. (The rest of the project includes upgrading the lighting at 16 city facilities.)

Interim City Manager Jim Holgersson said the city and its legal advisers became aware of this and other issues after getting more detailed information after the June 10 council meeting.

The city report states that Modesto is just now completing its due diligence on the financing agreement because the document is complex – 39 pages in length – and Siemens delivered it to the city June 5. The report raises other concerns, such as the agreement requiring Modesto to be responsible for any claims or liabilities.

A Siemens’ competitor told council members June 10 that Siemens’ streetlight costs were too high and urged them to put that work out to bid. Holgersson said the city and its advisers – as part of the city’s due diligence – would have conducted the financial analysis even if no one had spoken against it.

Three Siemens officials attended Monday’s City Council agenda review meeting, asking the city to postpone the decision on the financing agreement so the company and the city can have more time to resolve their differences. City staff members met with Siemens last week and Monday and expect to meet with them Tuesday, but did not postpone the decision.

Siemens officials say they have been working with the city for about two years. In April 2013, the council approved having Siemens conduct an energy audit and propose recommendations based on the results. The city picked Siemens from among eight firms that competed for the work. Modesto will owe Siemens $225,000 for the energy audit.

Holgersson said the audit will be invaluable even if the council decides not to use Siemens. He said that’s because Modesto will use the document as it looks at how to reduce its energy costs and use. Modesto officials say the city spends about $7 million annually on utilities, with most of that for electricity.

The council will meet at 5:30 p.m. in the basement chambers of Tenth Street Place, 1010 10th St.

Bee staff writer Kevin Valine can be reached at kvaline@modbee.com or (209) 578-2316.

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