Bringing power to the people; keys for new municipal utilities

Doc Holliday and the Earp brothers would have been right at home in modern Las Cruces, N.M., scene of a 20th-century western showdown over electric power. The legendary gunslingers likely would have galloped out of Tombstone, Ariz., across the state line and into the fight, which pits the residents and government of Las Cruces against El Paso Electric (EPE).

The city is battling to take over EPE’s local distribution system and establish a new municipal utility, primarily to relieve citizens and businesses of the highest electric rates in the region.

“We’ve been able to demonstrate the fact that we can reduce rates by at least 20 percent over the next 10 years if we municipalize,” says assistant city manager Jerry Trojan.

However, Las Cruces, a desert town of around 66,000 people, represents an 8 percent chunk of EPE’s business, and losing the city would be a significant blow for the investor-owned utility (IOU), in bankruptcy since 1992. Thus, EPE has put up a seemingly endless series of hurdles and outspent the promunicipalization municipalization side seven to one, according to Trojan.

“I think that’s what discourages a lot of places from taking control of their own destiny,” he says. “[The IOU) tries to run you into the ground.”

Las Cruces and EPE have been at it since 1988, when the city began initial discussions. The campaign for municipalization started in earnest in 1991, and three years later voters gave their approval in a city referendum.

The most recent battle is over the city’s right to condemn EPE’s local system. Trojan says he is confident this right will be affirmed in court, and the parties will eventually agree on a takeover price. “Perseverance and patience do pay off, [although] we’re not there yet,” he says.

Las Cruces, system would become one of more than 2,000 publicly owned utilities, which provide power to 13.6 percent of the nation’s ultimate customers, post around 12.7 percent of electric revenues and produce 10.5 percent of all kilowatt hours generated, according to the federal Energy Information Administration.

The Los Angeles Department of Water and Power, with around 1.3 million customers and revenues of $1.9 billion in 1994, is one of the largest publicly owned systems. Most, however, are much smaller, with a median customer base of 1,700.

The lion’s share of the electric power market goes to the nation’s 249 IOUs, which serve 75.6 percent of the customers, post 78.8 percent of revenues and generate 75.4 percent of the power. The rest of the pie is divided among 937 cooperative systems and 10 federal power agencies.

However, this structure is being shaken by deregulation and increasing competition. Cities and counties have more choices, and many are looking at new municipals as a way to take advantage of these choices. At their best, the municipals hold the promise of lower rates and local control.

In 1994, established publicly owned utilities had average residential rates of 6.7 cents per kilowatt hour (kWh), compared to 8.8 cents for IOUS and 7.8 cents for cooperative systems, according to EIA. Public power commercial rates also averaged 6.7 cents per kWh, compared to 7.9 cents and 7.4 cents for IOUs and cooperatives, respectively.

However, the gap disappeared in industrial rates, with both publicly and investor-owned utilities averaging 4.9 cents and cooperatives averaging 4.7 cents.

Thirty-one new municipals have been established since 1980 in places like Washington City, Utah; Massena, N.Y.; and Clyde, Ohio, according to the American Public Power Association (APPA), a membership group of publicly owned utilities. Many – as Las Cruces is attempting to do – wrested customers away from dominant IOUs that were none too eager to lose them.

“We haven’t known of any new municipals formed that turned out to be a mistake,” says David Penn, APPA’s deputy executive director for policy analysis. “They all have turned out to be big money winners.”

Nevertheless, dramatic changes in the industry have both positive and frightening implications for governments considering new municipals Improved access to wholesale power transmission, due largely to the Public Utility Regulatory Policies Act of 1978 and the Energy Policy Act of 1992, has been a major plus.

Wholesale power is the lifeblood of municipal utilities, most of which have distribution systems but no generation or transmission capabilities. Since new municipals would be equally dependent on wholesale power, greater access to transmission is an encouraging development.

The laws have promoted wholesale competition by requiring IOUs in most cases to wheel outside power into their control areas, whereas, previously, the IOU could simply refuse to transmit power it did not generate or charge unfair rates for its transmission services.

Several municipals have used improved transmission access to shop around for cheaper power. For example, the Madison, Maine, municipal utility cut 40 percent from its power costs by switching suppliers, from Central Maine Power (CMP) to Northeast Utilities. In turn, rates for customers have dropped around 27 percent.

In 1993, Madison requested bids from several IOUs, including CMP, as well as three independent power producers (IPPs). CMP did not respond until nine days after the deadline, when Madison was in the midst of negotiations with Northeast, according to utility superintendent George Stoutamyer.

“Our goal was to lower our rates,” Stoutamyer says. “If CMP had given us a proposal [on time] that was competitive, we probably would have accepted it. The object wasn’t to get away from CMP.”

Madison eventually signed a 10-year contract with Northeast, which generates power at a New Hampshire facility and wheels it to the city through transmission lines owned by CMP.

Still, multibillion-dollar mergers of IOUS represent a potential threat to transmission access. At least 15 such mergers have been completed since 1986, and several more are in the works. For example, Baltimore Gas & Electric is attempting to join with Potomac Electric Power to form a company with assets of $15 billion.

As transmission capabilities are consolidated through these mergers, the chances increase of limits on wholesale competition. The Federal Energy Regulatory Commission (FERC) and state utility commissions have been vigilant concerning transmission access, but the threat remains.

Retail wheeling is another key element of the fray into which new municipal utilities would be jumping. Simply put, retail wheeling would take wholesale wheeling a step further by allowing ultimate customers to choose power providers, just as they now choose providers of services such as long-distance telephone.

A closely watched proposal by the California Public Utilities Commission would institute retail wheeling for a representative group of IOU customers in the state by 1998 and for the remaining customers by 2003. The proposal, if implemented in California and copied by other states, would significantly affect the situation both for IOUs and municipals.

At least 39 states are actively studying retail wheeling, according to APPA’s Penn. Although state commissions in most cases cannot order municipals pals to offer retail wheeling, municipal customers such as large industries are already pushing hard for this option.

Penn raises the following questions to consider if widespread retail wheeling becomes a reality. * Would municipals have enough management and ratemaking flexibility to compete successfully for retail customers? * Would retail wheeling affect municipals’ ability to borrow? * How vulnerable would highly leveraged municipals be compared to privately owned utilities with a debt/equity mix?

Potential problems in an environment of greater competition also include: * Stranded costs. Municipal rates could be affected if FERC and/or the states allow IOUS to recover costs that they claim are stranded by the loss of wholesale or retail customers; * Industrial rates. The municipals’ rate advantage is often strong for residents, but not necessarily for industries. In 1994, for example, municipals and IOUs had the same average industrial rates, according to EIA.

The danger exists for a city or district to take on serious debt in forming a municipal and to subsequently lose a large industrial customer. The bottom line for governments considering municipalization is to assess their ability to compete, given industry changes that may occur.

Tips from Massena, N.Y.

The electric utility of Massena, N.Y., is one municipal successfully navigating the industry’s minefields. The city established its utility in 1981 after battling seven years to take over service from Niagara Mohawk Power, the local IOU, eventually paying $7.7 million to buy out the company’s distribution system.

As of IS@@, the Massena utility had $5.9 million in revenues and 9,000 customers out of the 20,000 residents in its service area. The utility buys around 90 percent of its power from the New York Power Authority’s Niagara Falls hydroelectric facility and the rest from investor-owned New York State Electric and Gas.

“It’s a lot cheaper to buy someone else’s surplus power than to build your own generating plant,” says Clifford Engstrom, utility general manager.

Residential customers have been the big winners so far, currently paying about one-third the rates paid in neighboring communities still served by Niagara Mohawk. Total savings since 1981 are around $60 million, according to Engstrom.

“It’s got to be run as a business,” he says. “We want to maximize return to our stockholders.

“In our case, our stockholders are our customers; instead of dividends, we give them lower rates.”

Massena got into the power business after commissioning a feasibility study in 1974 eventually spending around $1 million to look at start-up and operating costs and relevant utility regulations. Potential for reducing rates was also a major consideration.

“If you can’t show close to a 20 percent reduction, it’s probably not worthwhile to take on the added risks and expenses [of forming a new utility],” Engstrom says.

“If you have one large [industrial] customer, I caution people to look at what the rates would be if that customer left,” he says, pointing out that in such a case the municipal would likely have to raise residential charges.

In most cases, the feasibility study is a call to arms for an entrenched IOU like Niagara Mohawk or a cooperative utility. If its pockets are deep, the utility can carry on the fight for years in the courts and media and through direct appeals to customers.

“They’re going to try to scare the bejesus out of you,” Engstrom says. “That’s expected. That’s their job.

“The utility is going to come up with a lot of good, legitimate questions to knock [the municipal utility, down, and you have to deal with those issues in an effective manner.,,

Niagara Mohawk, for example, argued that a new municipal utility would have higher, not lower, rates. The company said the city would lose tax revenues and that service would not be reliable during emergencies.

However, none of the dire predictions have come true. In fact, Engstrom counters. 1) rates have been consistently lower; 2) the electric department pays the same amount of taxes as did Niagara Mohawk; 3) the department has been as quick or quicker to restore power.

If the will to form a municipal utility remains after all the legal and political battles, Engstrom offers the following recommendations: * Put together a well-qualified and non-political utility board. In Massena, the board members are unpaid and appointed for staggered, five-year terms. They have a variety of backgrounds, including business, technology and finance. * Have enough capital available at start-up to purchase all field and office equipment and inventory – utility poles, service trucks, etc. – as well as to pay operating expenses for four months. Municipals may also want to establish reserve funds similar to those in Massena, which sets aside revenues for depreciating equipment and handling liability/ casualty problems; * Conduct environmental assessments of all equipment taken over from the IOU. Making sure the equipment has no major problems can help avoid surprises after start-up; * Nail down rates, billing and accounting procedures two months before start-up. Have employees and equipment in place at least one month in advance;

Set rates high enough to pay for operating expenses as well as capital expenditures and emergencies. If an initial 40 percent reduction in rates looks possible, Engstrom advises going instead with a 25 percent reduction. Thus, in a few years the utility would be more likely to reduce rates again than to backtrack with an increase; * Set the operation up correctly from the beginning and start a program of preventive maintenance.”It’s a lot cheaper to do a minor repair now than a major repair five years down the road,” Engstrom says. In addition to maintenance, Massena is putting about $1 million a year into capital improvements@ and * Plan early for emergencies. For Massena, icy winter storms are a major factor given the city’s location near the Canadian border.Like any utility, we have the same type of problems,” Engstrom says.Most of our problems are caused by Mother Nature.”