Public Power: A Great Option for Your Future

Deborah Penn 
Local government officials have a vital role to play in protecting local electric consumers—a simple truth that has been emphasized by the recent turmoil in the electric utility industry. Local officials are rediscovering their fiduciary responsibility to citizens and taxpayers to explore cities’ and counties’ rights, limitations, and obligations under their franchises with investor-owned utilities (IOUs). As they review their options, many are considering an alternative to service from the IOU that would ensure greater local control: creating a municipal electric utility or public power utility.
Just having this option to own and operate an electric utility gives the locality greater leverage in negotiating for improvements in electric service with the IOU, especially when a franchise is about to expire. Moreover, the IOUs do a better job when they believe they can be displaced. The success of the newest public power utilities in delivering reliable, low-cost power shows the viability of this option, contradicting dire predictions from the IOUs and their national organization, the Edison Electric Institute. 
Recent attempts at the deregulation of the electricity industry have cost consumers plenty in terms of higher rates and interruptions in service. Mergers and consolidations among some IOUs have meant the closing of local service centers and a reduction in infrastructure investments for cost-cutting purposes. Managers and administrators in these communities are keenly aware that electric service is essentially local. To be delivered responsively, electric service must be provided by local utility personnel, who are not confused by mixed and distant corporate goals.
During this period of turmoil and financial distress, the poor performance of some IOUs has directed a welcome spotlight on the success of the nation’s existing public power utilities. These locally regulated, public power utilities generally have been able to protect their customers from the market risks and abuses affecting the electric industry in the past few years. As public power utilities look out for the interests of their communities, they are turning heads in cities, towns, and counties where private power companies are struggling to perform.
There are approximately 2,000 publicly owned electric utilities in the United States. Public power utilities are:
•	Owned by state and local governments, serving about 14 percent of the nation’s electricity consumers, or some 40 million people. 
•	Well run, stable, and secure. By the year 2005, roughly 500 of them will have celebrated their 100th year in business. 
•	Focused on supplying low-cost, reliable power to their communities, with their one mission and purpose being to serve their citizen-owners. 
•	Nonprofit, holding down electricity costs for their communities and charging considerably less than their privately owned counterparts, according to the most recent federal data. On a national average, IOU residential customers pay about 15 percent more than public power customers. 
•	Diverse in size, with about 1,400 of them serving communities with populations of 10,000 or fewer, and others serving some of the nation’s largest cities and regions, such as Los Angeles, San Antonio, Memphis, Orlando, and Long Island, New York. 
•	Governed locally, with 59 percent of them (and three-fourths of the smaller ones) governed by city or town councils and 41 percent governed by independent utility boards. 
•	Responsive to broader community goals, offering citizens local control, community participation, and accountability for decisions involving utility rates, service policies, power-supply choices, and infrastructure investments. 
•	Involved in community-wide economic development efforts, helping to solve local problems and dealing cooperatively with a wide range of public works and business development projects. 
•	Well suited to integration with other local government services. About 95 percent of public power communities have city water; 89 percent, city sewer service; and 71 percent, city wastewater services. 
•	Innovative and efficient, scoring high in customer satisfaction polls and pioneering environmentally friendly technologies and techniques. According to the U.S. Department of Energy’s National Renewable Energy Laboratory report, for example, public power utilities are among the top performers in providing “green” power to their customers. 
In addition, public power utilities support other local services through payments in lieu of taxes, transfers to the general fund, and free or reduced-cost services. In fact, when all taxes, fees, and other contributions are considered, public power contributes as much as or more than the IOUs do. This is not surprising because public power utilities measure their success by how much money stays at home and is invested in the local community, not by how much leaves in the form of dividends to stockholders.
Public power is highly regarded by all of the major financial ratings agencies. In 2002, the credit-rating agency Standard & Poor’s downgraded 182 private energy companies while upgrading only 12, a ratio of more than 15 downgrades for every upgrade. In the same year, S&P reviewed 197 publicly and cooperatively owned electric utilities and made 12 upgrades and 14 downgrades. As S&P noted, the record was a testament to the consumer-owned utilities’ ability to respond to new challenges.
In light of public power’s solid performance record, it’s no wonder that there’s a resurgence of interest in forming municipal electric utilities. When IOUs fail to commit sufficient resources to local infrastructure projects, economic development, renewable energy, or energy efficiency projects, local government has a right and obligation to look at this viable alternative. 
Investor-Owned Utilities Oppose New Public Power Systems
IOUs may be expected to block most attempts to form public power utilities because they stand to lose customers and profits. Also, new public power utilities, being high-profile examples of what citizens can do for themselves, encourage more localities to explore the public power option.
IOUs tell city officials that public power initiatives are too risky, too time-consuming, and too expensive. The successful public power utilities, they argue, were established many years ago, when communities were smaller and costs were lower. Even a study of the public power alternative, they say, is a waste of time. They are wrong on all counts.
A new public power utility is established after a thorough cost-benefit study estimating the value of the utility assets to be acquired and the projected cost of running a new utility. Only if the facts are compelling and the idea has the support of local citizens do community leaders take the next steps toward forming a public power utility. 
Such support was evident in Winter Park, Florida, in September 2003, when citizens turned out in droves to vote overwhelmingly—69 percent to 31 percent—in favor of a referendum authorizing the city to buy the local distribution facilities of the investor-owned utility.
The newest public power utilities have succeeded in arranging for reliable, predictable, and cost-effective sources of wholesale power, just as the existing public power utilities have done for decades. And because these new utilities are nonprofits, they quite commonly pass the savings straight through to their customers.
On average, a new public power utility is formed in about three or four years. The length of the process depends on many factors, including the locality’s legal basis for forming the utility and the level of support that comes from local business, community leaders, and citizens.
IOUs warn cities and counties that the municipalization process may involve huge legal expenses. This advice is, to say the least, disingenuous because it is the IOU that brings the lawsuits in an attempt to derail the locality’s plan. Not all communities face legal hurdles, and some that do will abandon the public power initiative. But over time, many communities have pushed forward because of the potential long-run benefits for local citizens. They have pursued their legal rights and won landmark cases, setting important precedents for other communities.
Legal and other start-up expenses in establishing a public power utility are to be expected, as with any new business. Ultimately, the start-up costs for the new public power utilities have proven to be small relative to the long-run savings to the community.
When a locality sets up a public electric utility, it acquires a revenue-producing asset that grows in value and pays dividends for generations to come. Cash flow may be channeled through the local treasury, and payments in lieu of taxes set at the appropriate level. Local officials decide how dividends from the new system will be paid to citizens, whether in the form of lower rates or of increased financial support for other public services.
The benefits obtained from forming public power utilities are as diverse as the systems formed, as shown by the records of the newest systems. Here are two examples:
•	The Long Island Power Authority (LIPA), formed about five years ago to serve 1.1 million customers on Long Island, New York, reduced rates by an average 20 percent, made important system reliability and safety improvements, assisted more than 300 businesses with beneficial partnerships, and helped create or retain more than 50,000 jobs. LIPA’s clean-energy initiative offers rebate incentives and consultation services to commercial and industrial customers that install qualifying energy-efficient technologies. 
•	Hermiston, Oregon, a city of 14,000 people, first began evaluating the public power option in 1996 and five years later, in 2001, energized its new utility. Hermiston Energy Services has made customer service a priority, giving customers the ability to pay bills in person or through drop-boxes around town, an option that had been missing since the IOU closed its local office. Electric rates in Hermiston are slightly lower than before the public power system was formed and are expected to drop further in a few years, when the utility finishes paying off some of its start-up costs. 
Localities Benefit from Just Evaluating the Public Power Option 
Dozens of communities have demonstrated the benefits of considering the public power option, even when they have concluded that they are best served by staying with their present franchise holders. By exercising their right to self-franchise, they have gained leverage in negotiating provisions to improve the price, quality, and reliability of electric service and to meet other community goals, such as the choice of whether or not to “underground” portions of the distribution system.
Often, the IOU finds ways to grant concessions to consumers and taxpayers when faced with losing its profitable customer base through municipalization. While the actual creation of a public power utility might have meant even greater benefits over time, the very existence of an alternative to the incumbent provider was key.
Two years ago, for example, then-Mayor Bob Knight released the findings of a municipalization feasibility study for Wichita, Kansas: the city could save as much as $654 million in electricity costs over the next 20 years. The public power evaluation was one “tool in the toolbox“ in the city’s overall campaign to achieve lower rates. The study was an important facet of a campaign that won significant electric rate reductions for the community.
During a franchise renewal period, local officials have a once-in-a-generation chance to learn about alternatives to their current franchise arrangement. Cities and counties may increase their leverage by considering franchise extensions of one or two years or by signing new, shorter franchises with terms of five or 10 years. Shorter franchises allow the locality to gather more information on the technical and economic feasibility of alternatives.
Local officials are better able to protect consumers against high electric rates, poor reliability levels, and unresponsive service when they are well informed about their options for providing electric service. A thorough review of franchise documents and of the local government’s right to pursue alternatives under state law puts the community in the best possible position to exert beneficial local control over this essential service. 

Deborah Penn is vice president of information services, American Public Power Association (www.APPAnet.org), Washington, D.C. APPA is the national service organization for the nation’s more than 2,000 community- and state-owned electric utilities.
 
Creating a Municipal Electric Utility, as Seen from the Trenches
Three years ago, the electric franchise agreement was about to expire between investor-owned Progress Energy and the city of Winter Park, Florida. Progress Energy presented a new 30-year agreement to city officials, but it lacked one important clause: the right to purchase the poles and wires from the private utility. 
A Snag
This deficiency was significant because the previous 30-year agreement had clearly stated that the city had the right to buy the electric distribution system when the contract ended at an arbitrated price. In 2000, Winter Park was not considering buying the poles and wires and forming a municipal electric utility. Some unusual circumstances, however, changed the minds of city leaders. 
In this beautiful, tree-lined central Florida city, electric reliability is horrendous by any measure. Even Progress Energy doesn’t dispute this point. The utility giant, headquartered in Raleigh, North Carolina, now admits that it cut costs to raise profits before its recent multistate merger and ought to be doing a better job at keeping the lights on in Winter Park. But what got city officials’ attention was that the utility 1) refused to give any kind of guarantee that they would improve reliability, and 2) refused to give the city the right to purchase the poles and wires—30 years from now—in a new franchise agreement.
Winter Park officials were flummoxed. Citizens were receiving poor service from a vendor, and this vendor was presenting a contractual agreement to continue this service, forever, and without recourse to any means of improving it. Backed into a corner, Winter Park officials took the only reasonable route they saw. They began investigating the formation of a municipal electric utility.
Findings
First, the good news. Winter Park found that it could buy the local poles and wires and create a new municipally owned utility, keep rates about the same, improve reliability, place more wires underground, and use the profits for civic programs. 
The bad news was that Progress Energy was, and is, an unwilling seller. 
To get to the decision point, city officials were forced to take Progress Energy to court and to appeal several times, simply to interpret the franchise agreement. Progress Energy claimed that the plain language allowing Winter Park to acquire the poles and wires didn’t actually mean what it said. The court disagreed. Then, the utility tried to stop collecting for and paying the 6 percent franchise fee, which caused a crisis for the city’s budget.
Finally, a judge ordered arbitration to identify a price. Months later, an arbitration panel came back with a $42 million price tag for the poles and wires. A Progress Energy witness at the arbitration hearing testified that buying the local utility itself would probably be a good deal for the city at $75 million. 
Upon receiving the arbitrated price in May 2003, city officials decided to hold a public referendum as soon as possible, which turned out to be September 2003. Winter Park didn’t want Progress Energy to build community opposition to the idea of setting up a locally owned utility before the city had a chance to tell its story. So, during the late summer months, the legal delays and wrangling were put on hold. It was campaign time, and what a misleading, desperate campaign it was!
Tactics
From the city’s perspective, there was only one road, the high road: full disclosure of the facts in a positive, objective fashion. For Progress Energy, however, there was another road. Here’s a summary of the types of actions it took, many of which were based on false charges about the record of municipal electric utilities:
Campaign meddling. During the 2002 city election, before the case went to arbitration, Progress Energy directed its suppliers to make campaign contributions and to support candidates sympathetic to signing a franchise agreement and giving up on the municipalization effort. They lost.
“Push polling.” The private utility used a campaign firm to call city residents and ask their opinions on the September referendum. The poll quickly turned into a sales pitch, however, as the caller asked leading questions like “If the city issues $49 million in debt and goes bankrupt, do you think it’s right for the citizens of Winter Park to pay that debt?”
False claim. Progress Energy inaccurately stated that municipal electric utilities are all alone when hit by a major storm. The truth is that municipals have a better record of reliability than private utilities, get the lights on faster, and work together statewide to back each other up with mutual aid agreements.
Another false claim. The private utility made the untrue assertion that the impact of the city’s debt would be more than $7,000 per person, when in reality it will be less than $2,000, and only between $60 and $80 per year over 30 years. Total debt repayment can be done without raising electric rates, so no new debt burden will accrue.
“Why” question. The utility asked the question “Why has no other Florida city created a municipal utility since 1943?” The answer is simple: private utilities fight each city so hard that there are major hurdles to overcome, and few city officials are willing to take them on.
Confusion. Winter Park had presented local citizens with the good experience of Las Cruces, New Mexico, a city that had won the right to buy the local utility, gotten a reasonable and fixed price, and recovered all its court costs and other fees from the debate. Progress Energy, on the other hand, found someone in Las Cruces to disagree with this account.
Misleading analysis. The private utility hired a national consulting firm to conduct a “back-of-the-envelope” economic analysis to counter the city’s more thorough study of costs and benefits. The report used false assumptions about who the city could buy power from and stated a conclusion that even the report’s author admitted was wrong.
Enormous campaign spending. Progress Energy formed a political action committee (PAC) called Taxpayers Committee Against Government-Owned Electric. Out of $523,000 raised by the PAC, just $750 came from nine people other than Progress Energy. Literally, 99.9 percent came from the utility. It tried everything—including advertising on television, the newspaper, billboards, and multiple mailings. The city’s PAC raised about $50,000 from 125 people, and focused its message mostly on mailings.
These campaign tactics may seem strong to some and mild to others. Most important, though, is that the city of Winter Park fought an opponent that seemingly cared only about protecting its profit margin and not about improving its electric service, and appeared to bend the truth so far that it became unrecognizable.
On September 9, the citizens of Winter Park went to the polls and the results exceeded everyone’s expectations. In the highest voter turnout in a decade, the electorate voted 69 to 31 percent to issue $49.8 million in bonds to purchase the local electric distribution system. The vote represents an overwhelming mandate to take control of the local poles and wires and improve reliability. Finally, it confirmed that voters listened to the facts and were not swayed by the barrage of misleading claims made by the private utility.
Barry Moline, executive director, Florida Municipal Electric Association, Tallahassee, Florida. 	

© 2003 International City/County Management Association.