Electricity and local governments: planning for a deregulated future.

The last major regulated industry in America is about to be deregulated. The resulting competition among electric power suppliers means that many new power purchasing options will exist with the promise of lower costs for most consumers. These changes will have far-reaching effects on local governments in their roles as both power consumers and power generators.

For more than 100 years, utilities have operated as monopolies, each with a designated block of customers or territories. Until now, the cost of electricity was set by public utility commissions and represented a large, fixed expenditure in a local government’s operation budget. In addition, if a utility is municipally owned, electricity revenues often subsidize the local government’s operations.

As building owners and infrastructure managers, cities and counties have more options today for saving energy and money in their facilities and systems than ever before. In fact, electric utility deregulation offers municipalities the potential to reduce power costs by 20 percent to 30 percent or more.

Electric utility deregulation will change the way local governments buy their electricity, lower the amount they pay and offer new alternatives for infrastructure maintenance and repairs.

Additionally, local governments operating utilities must reorganize to lower costs and compete with outside power suppliers.

Some municipal electric companies are high-cost providers because the local government uses electric rates as a form of taxation. However, deregulation means that larger customers in their territories will eagerly greet competitors offering lower-priced power, which then can result in reduced revenues for municipalities.

Lower electricity prices elsewhere could also drive industry to relocate, resulting in job loss and a reduced tax base. Thus, municipal power companies must become as cost-conscious and efficient as investor-owned utilities to brace for competition.

THE GOOD NEWS

Nonetheless, deregulation does offer good news for many local governments. As large energy customers, they are particularly attractive to utility companies.

This is especially true for cities with electrified rapid transit systems. As electric utilities prepare for deregulation by becoming more competitive, focusing on customer service and negotiating long-term contracts, local government customers can negotiate aggressive rate structures with current utility companies, upgrade their physical plants and explore new energy supply options that promise to lower fuel and power costs permanently.

Some cities are actually realizing benefits even before deregulation arrives. Recently, Philadelphia announced that it had negotiated with its local utility for discounted electric rates for city government and the school district. Administration officials say the city’s contract will save taxpayers an average of $5.3 million a year for four years, while estimated savings for the school district will be $1.6 million annually.

The city negotiated the reduced rates by investigating “competitive alternatives”–cogeneration plants in northeast Philadelphia and a reduction in peak power usage at city’ owned Veterans Stadium–to reduce its reliance on the Pennsylvania Electric Company (PECO).

Linking streetlights together was proposed to reduce PECO connection charges. Ultimately, the city and PECO settled on a four-year agreement with optional one-year renewals for four additional years.

In the fifth through the eighth years of the contract, the discount would be lower still, with annual savings to the city of $7.4 million.

NATURAL GAS

On the West Coast, the Association of Bay Area Governments (ABAG), formed a cooperative-purchasing program for natural gas and electricity on behalf of its member cities and counties around San Francisco Bay. ABAG plans include forming a power-purchasing pool and lobbying for legal authority to seek competitive electricity purchases.

ABAG’s first step was to initiate a group purchasing program for natural gas. It also plans on pursuing a similar program for electricity. Group purchasing, with ABAG members organized buying blocks based on their energy demands, is expected to save up to 12 percent on gas purchases for local governments with even greater potential savings on electricity.

In North Carolina, the Dover City Council fumed over operation of the i city’s electric generating system to Duke-Louis Dreyfus in an attempt to up to $77 million in energy costs keep the city on a competitive footing to attract industrial and residential customers.

Under the contract terms, Duke-Louis Dreyfus will supply all power to Dover through June 30, 2006.

California, Michigan, Ohio, Illinois, New York and New England are leading the way in utility deregulation, with California proposing the most innovative plans to date.

For example, in August 1996, California legislators approved a far-reaching plan that would open the state’s massive electricity market to competition and lower consumer rates.

The legislation will end the utility monopoly on generation, opening the market to competition so that retail customers could choose among electric energy suppliers as early as January 1998. Control of the transmission lines would be consolidated under a new independent systems operator. It also provides for a transition charge to be levied by utilities and for the recovery of stranded costs via a tariff. Additionally, it is expected to cut consumer rates at least 20 percent by 2002.

THE NEED FOR UNIFORM RULES

Federal action is also possible. With 51 regulatory agencies governing 198 publicly owned utilities, the pace and form of deregulation will vary from one jurisdiction to another unless the federal government steps in to establish uniform rules. U.S. Rep. Dan Schaefer (R-Colo.), is sponsoring House Bill 3790, which would make states choose their own power suppliers and set a deadline for states to break up utility monopolies. The bill, along with other initiatives, will be considered in 1997.

Electricity prices currently range from 2 cents per kilowatt hour to 16 cents per kilowatt hour, with the national average being 7 cents per kilowatt hour.

Experts believe the national aver age will decrease to between 3 cents per kilowatt hour and 5 cents per kilowatt hour with deregulation. However, it is important to recognize that the impact on existing utility prices will depend on:

* Stranded investment issues–how utilities and their stockholders will be compensated for their investments in power plants built under a regulated regime now that the plant is no longer cost effective or ic “stranded” by customers leaving the system.

Under the California legislation, for example, investor-owned utilities would be compensated for certain “stranded” costs, such as nuclear power plants, that would not be economical in a competitive market, through a system-wide competition transition charge. Under the proposed legislation, from Jan. 1, 1998, to Dec. 31, 2001, the transition charge would come to roughly 1 cent per kilowatt hour to 2 cents per kilowatt hour. The charge would help to raise more than $28 billion to cover certain stranded costs:

* The customer class, i.e., large users equal low rates and small users equal higher rates;

* Existing utility rates; and

* Geographic location and utilities serving the customer.

Utilities will likely recoup some stranded investments by placing a fee on transmission lines, in effect putting the cost of generation on the transmission grid, such as the fees outlined in the new California legislation.

Thus, a customer’s final costs could initially be higher than the anticipated average of 3 cents per kilowatt hour to 5 cents per kilowatt hour.

LOWER OPERATIONAL COSTS

Municipalities face particular challenges in a deregulated environment. Whether as customers or providers, local governments need to investigate the changes that deregulation will bring. Municipalities that also operate utilities should begin streamlining their operations to remain competitive. As customers, cities and counties should begin by negotiating new deals for lower priced electricity or other significant benefits and inducements from power producers. By planning for a deregulated utility environment, large users can thus lower their operational costs permanently.