Taking Over a Utility Takes Time, Money : Some Cities Have Found That Out; S.D. May Too
When the New Orleans City Council decided it had had enough of rising electricity rates and legal battles with its local utility, it turned its attention to taking over troubled New Orleans Public Service Inc. and running it as a city agency.
Five years, two studies, many lawsuits and several hundred thousand dollars later, the takeover is still some months away.
“This is not something you do on a lark,” said Clinton Vince, the Washington attorney who represents New Orleans in its buyout bid.
Study Isn’t Cheap
The San Diego City Council, which this week raised the possibility of acquiring San Diego Gas & Electric Corp. to head off the utility’s merger with Southern California Edison, might well heed Vince’s words.
For, although the advantages of “municipalizing” a power company can be compelling and the savings to ratepayers substantial, the experiences of other major cities show that San Diego should be prepared for a substantial expenditure of time and money if it is serious about accomplishing that goal.
“Studying municipalization is not cheap,” said Gary Groesch, executive director of the Alliance for Affordable Energy, a community group in New Orleans “But, when you compare it to the alternative . . . hopefully you save money.”
San Diego must determine whether, “if you could afford it, and you could legally do it, would it be in your best interests?” said City Manager John Lockwood.
A thorough study could take years of examination by lawyers, engineers, accountants and energy experts just to determine whether a takeover is advantageous economically, experts said.
Further study may be required to determine whether the city wants to buy SDG&E;’s generating plants, transmission equipment or distribution lines. More work would be required to determine how a city preparing to spend $1.5 billion to upgrade its sewage treatment system could raise money to buy its local utility.
Chicago Opens Coffers
In Chicago, the city government has spent about $750,000 for two years of study into whether it should take over Commonwealth Edison, said Susan Stewart, executive director of Citizens Utility Board, a nonprofit statewide consumer agency.
Albuquerque and nearby Las Cruces, N. M., are starting with an initial expenditure of about $70,000 in their joint examination of providing electric power themselves.
San Diego is nowhere near ready to begin.
With a City Council resolution passed only Tuesday, Lockwood is just beginning to compile a list of tasks to be assigned, and he won’t meet until Wednesday with City Atty. John Witt about the legalities of the situation.
“I don’t know if it’s feasible,” Witt said. “But it’s one thing you’ve got to keep the door open on and the utility executives should take seriously.”
No one knows how much San Diego would have to spend to purchase SDG&E.; SCEcorp’s chairman, Howard Allen, invited the city to top his firm’s $2.4-billion offer if it is interested. But Witt said the city would have to purchase only SDG&E;’s assets, at a book value of about $1.2 billion.
Opinion is divided predictably, along public and private lines, on whether a city takeover of a major utility is worth the effort. The American Public Power Assn. cites 1986 data showing that residential electricity users pay 25% lower rates, and commercial and industrial users pay 13% less, when power is supplied by a public entity instead of an investor-owned utility.
A separate study of 30 large U. S. cities showed that residential users pay an average of $9.32 less a month for electricity supplied by publicly owned utilities.
No Shareholders
Publicly owned utilities don’t have to pay shareholders, pay no federal taxes, pay top executives lower salaries and can issue bonds less expensively for capital improvements, said Stewart, who believes that Chicago ratepayers could save 10% to 40% by taking over the utility.
Publicly owned utilities in Los Angeles; Seattle; Jacksonville, Fla.; Memphis, Tenn.; Omaha, Neb., and San Antonio all have lower rates than neighboring investor-owned utilities, said Larry Hobart, the public power association’s executive director.
“The potential benefits are very large,” Hobart said. “For example, in Chicago it’s estimated they could save $18 billion over a 20-year period.”
But officials with investor-owned utilities, who serve 75% of the nation’s electricity customers, argue that municipal takeovers are not necessarily in the ratepayers’ best interests.
Millions in Debt
“Municipalization isn’t, in fact, a good opportunity (for savings) in every community,” said Richard Wilkins, a spokesman for Toledo Edison, a wholly owned subsidiary of Cleveland-based Centerior Energy Corp. “I’d hope that individual communities look at it very seriously, because, if they don’t, they could go into debt for millions of dollars.”
Toledo Edison is worried about municipalization because Clyde, Ohio, a small town in rural northeastern Ohio, is building an electrical distribution system that will compete with Edison for customers. Half a dozen other small towns in Ohio also are considering municipalization, according to Clyde City Manager Nelson E. Summit.
In Chicago, Commonwealth Edison, with 3.1 million customers, is making this argument against municipalization: Cheap power is disappearing, municipal systems might not be as reliable as investor-owned systems, and utility departments eventually will compete with social agencies for already-strained municipal funds.
Commonwealth Edison spokesman John Hogan suggested that a “handful of bureaucrats and activists” are misleading Chicago’s public by lacing the debate with inaccurate data.
“The city paid $400,000 for a study that we found to be terribly flawed,” Hogan said. “One of the biggest problems was the suggestion that industrial customers would reduce their consumption by 50%” to help finance a 17% average rate cut for all customers.
“We think it’s totally unfounded to make assumptions like that,” Hogan said. “But that’s how they’re figuring the rate decrease.”
Taking Case to Customers
Commonwealth Edison, whose franchise expires in 1990, is taking its case to ratepayers with a mailer bearing this bold headline: “Candle, Candle, Burning Bright, Could Be Chicago Every Night.”
In its late-November mailing, Commonwealth Edison described municipalization as “a bad idea that would stress to the breaking point a city already laden with crisis after crisis.” It also claimed that nearly one out of three Chicago-based companies--accounting for 250,000 jobs--would leave town if the takeover occurred.
The mailing also suggested that rates would rise, dependability would fall and Chicagoans could find themselves “sweltering or freezing in the dark.”
Investor-owned utilities “historically have fought municipalization things tooth and nail,” said Gregg Ottinger, a natural-resources attorney with Duncan, Allen & Talmage, a Washington-based law firm that specializes in natural-resources issues. “It’s a battle that’s been going on since the invention of the incandescent light bulb, when small towns were deciding if they wanted to take service from the private investors or city-owned and -operated systems.”
Butler, Mo., created the first nonprofit utility system in 1880. But most municipal districts faded away during the early 1900s, when governments sold off their power companies to for-profit, investor-owned systems.
Today, investor-owned utilities supply power to 75% of Americans. Municipal systems and rural electric cooperatives account for the rest. Municipals vary in size: The largest, the Los Angeles Department of Water and Power, has 1.5 million customers, and the municipal system in Radium, Kan., serves just 32.
Simpler Systems
In recent years, only smaller towns have actually taken over the local, investor-owned utility’s distribution and generation systems. Rural towns have simple electrical distribution systems, and, for them, it is comparatively easy to pull the plug on an investor-owned utility.
But a successful takeover in a larger town or a major city is more difficult, and more expensive, according to Ottinger.
Municipal systems “are not for everyone,” according to Ottinger, whose firm helped several smaller towns lay the legal groundwork for their takeovers. “We’ve probably advised more (cities) not to do it than we advise to do it,” he said.
Interest in municipalization has spread because rates are going up dramatically. Those rates are almost always linked to the construction of expensive nuclear generating plants that were planned in the 1970s. A decade ago, utilities fully anticipated that growth would easily absorb the new capacity.
But the utilities’ forecasts were wrong, largely because Americans responded to the Arab oil embargo by learning to conserve energy.
Consequently, utilities were hit with a double whammy: The cost of electricity produced at nuclear-powered electrical generating plants has skyrocketed because of huge and unanticipated construction costs. At the same time, demand for more electricity softened.
Bumping Up Rates
Around the country--at the Grand Gulf nuclear plant in Louisiana, Shoreham on Long Island, the Byron and Bradewood plants in Illinois and the Perry in Ohio--nuclear plants are generating a glut of generally high-priced electricity.
Consequently, utilities are bumping up rates to pay for those plants.
But, even if a city could prove that rates would go down with a takeover, the move could be difficult to finance. And utilities and governments generally don’t agree on the value of the system to be acquired.
When tiny Kanab, Utah, last year tried to sell bonds to cover the $3.5-million cost of buying a distribution system from Utah Power & Light, bond-rating companies at first doubted that Kanab’s bonds were credit-worthy.
“It was a difficult process, but we were able to issue the bonds,” said Scott Robertson, a Salt Lake City-based investment banker with Kirchner & Moore. “One difficult ingredient in these deals is that the municipality has no track record in operating a utility, and the investor-owned utility is very reluctant to open its books for a look at the operating costs,” Robertson said.
“And the political process becomes much tougher in a large city,” he said. “If a large city in Utah tried to (municipalize), Utah Power & Light would do anything in their power to keep it from happening, because (distribution) is their business.”
