City Utilities’ Model Trumps Deregulation

In a move that reflects a renewed focus on local control of electric power, the city of Burbank is building a 250-megawatt generating plant and sharing its $200-million cost--and the electricity it will produce--with Glendale, Pasadena, Cerritos and San Marcos.

This unprecedented pooling of resources by medium-sized cities is a reaction to the chaos that electric power deregulation has brought to California’s power system.

And it is a demonstration, industry experts say, of the fact that big is not better in electricity and that political control is necessary for the supply of an essential commodity like electricity.

Conventional wisdom has been turned on its head. Only three years ago, as deregulation got into full swing in California, expectations were that investor-owned utilities such as Southern California Edison Co. and Pacific Gas & Electric Co. would become so competitive (as deregulation lowered their costs) that they would drive city-owned power plants out of business or acquire them to save them from bankruptcy.

But today, Edison is fighting to stay out of Bankruptcy Court, and PG&E; is already there.

The municipal utilities, by contrast, are prosperous, producing power for their communities and facing no rolling blackouts.

They now offer a vision of locally controlled, relatively small power companies playing a key role in future electricity systems for California and other states.

Meanwhile, the original vision of an electricity marketplace served by nationwide trading companies and commodity futures markets is effectively dead.

Federal regulators are expected this week to increase control over California wholesale power prices. Financial markets are questioning the outlook for electric power suppliers--many of which are under state and federal investigation--and for deregulation in other states, which have been frightened by California’s troubles.

“The California power market turned out to be a flawed commodity market,” says economist Philip K. Verleger Jr. of Brattle Group, which advises companies and government agencies on energy matters. “If the Commodity Futures Trading Commission had been regulating this market, they would have stepped in to stabilize prices as they do in markets for corn and T-bills every day.”

But the Federal Energy Regulatory Commission believed incorrectly that free markets were operating here, Verleger says.

This is a good day to be a municipal utility, says Ron Davis, general manager of the Burbank Public Service Department, which runs the city’s electric power and water system.

The city of 107,000 saw trouble coming in electricity. In the fall of 1999, needing to replace aged generators in its existing power plant, Burbank commissioned a study of California’s power outlook. The study found shortages and dramatic price rises ahead, reports Fred Fletcher, the city utility’s assistant manager.

So Burbank decided to build an efficient 250-megawatt plant on the site of its existing facility, recruiting partners to share costs and power among its fellow members in the Southern California Public Power Authority, or SCPPA, an organization of 11 municipal utilities, including those of Anaheim, Azusa, Vernon, Los Angeles and Imperial County. The new plant should start producing electricity by 2004.

Cerritos, which is supplied by Southern California Edison, and San Marcos, supplied by San Diego Gas & Electric Co., asked to invest and share in the power plant too.

“We’re buying a share in this plant to obtain secure, affordable and reliable power for residents and businesses in Cerritos,” says Katie Wilson, environmental services manager of that city in southeast Los Angeles County.

Cerritos also is applying to join SCPPA. In Northern California, the cities of Davis and Fremont are applying for membership in the Northern California Power Agency, a group of 15 city-owned power companies that stretch from Ukiah to Palo Alto to Lompoc.

However, it’s not easy for a city to “municipalize” its electric power, Wilson explains. “The city would have to buy the local distribution lines, meters and other equipment that Edison owns,” she notes. And the city would have to hire skilled people and organize a local company.

So there is unlikely to be a stampede of cities to embrace municipal power. But existing municipal companies, many dating to the late 19th and early 20th centuries, possess an undeniable appeal thanks to “local control and the reliability that comes from having power in reserve,” Burbank’s Davis explains.

Burbank’s existing local power plant gives the city about 35% of its annual electricity. The rest comes from the Intermountain Power project in Utah and the Palo Verde project in Arizona, in which Burbank has part ownership through its membership in SCPPA.

Local generation offers the lowest costs because there is an 8%-to-10% loss of power from transmitting electricity over long distances, explains Davis, a 22-year veteran of utility management in the Pacific Northwest who came to Burbank two years ago. “That surprised me because it contradicts the supposed economies of scale.”

In Azusa, for example, the local generating plant normally produces power at 4.5 to 5 cents a kilowatt-hour, says Joseph Hsu, director of utilities. High natural gas prices have forced that price up recently, but it still is a far cry from the 19 cents to $1 per kilowatt-hour that California has been forced to pay in the open market through most of this year.

One reason for the low prices is that municipal utilities pay no dividends, although they do pay into the city’s general fund, Hsu explains.

Generally, municipal utilities are modest companies, regulated by their individual city councils. Even L.A.’s Department of Water and Power, the nation’s largest city-owned utility, has less than half the annual revenue of Southern California Edison.

Investor-owned utilities historically were able to finance larger operations because they could raise money on public stock markets. Under traditional regulation, such utilities earned a rate of return on their plants and equipment, which included reserve capacity to keep power available in emergencies.

Burbank maintains a 40-megawatt, or 13.3%, reserve over and above the 300 million megawatts of power it uses at peak times in summer air-conditioning season. The city’s average power use is 160 megawatts. So keeping 40 megawatts of generation in reserve is relatively expensive. It’s “a cost of keeping the lights on,” Davis says.

But a principal promise of deregulation was that California could save that cost of keeping reserves. National energy marketing companies, such as Enron Corp., said that reserve power in emergencies would be supplied by a nationwide network through which electricity could be obtained by trading in commodity markets.

But that access came at a cost because “commodity markets always lead to times of price peaks and supply squeezes,” says economist Verleger. In any event, the cost of power reliability in California this year and last has been very high.

What lies ahead? Davis, like many electric power experts, believes that today’s problems will be solved over the next two years as new power plants and transmission and distribution lines are built.

The new systems for power, whether investor-owned or city-owned, are sure to emphasize “reliable power at affordable rates,” says Rick Cole, city manager of Azusa.

And in the creation of those systems, the municipal utility model of local generating plants under local control is sure to play an influential role.

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James Flanigan can be reached at jim.flanigan@latimes.com.