Municipal Electric Utility Business Model Review Needs New Process

Clearwater, Florida; Louisville, Kentucky; Pueblo, Colorado; Rochester, New York Among Other Cities Wading Through Discussion to Change Electric Utility Business Model As Concerns Remain About Resiliency; Rates; and Pathway to Clean Energy

The US electric industry goes through periods of change like starting in the 1980s the deregulation of electricity service caused many city-owned electric utilities to raise concerns about the business model they were operating under and whether they could compete. Few privatized electric service but the debates were at times fierce. 

Today as extreme weather and decarbonization has established fears about the reliability of service and whether clean energy objectives can be met, many cities are challenging the business model for electric service that now exists in their communities. From Clearwater, Florida to Louisville, Kentucky and Rochester, New York among others, city leaders are asking questions about whether the local government should takeover electric service from the private sector utility and operate as a municipal electric utility.  

The problem is that in many of the cases, rather than addressing the fundamental strengths and challenges of such a change and on how it will benefit customers, opposition to the consideration of the question is mired in misinformation about the cost of a city's acquisition of the private utility's assets and the cumbersome process to even reach a fair decision on what is best for the customer. 

As an example, the consulting firm hired by San Diego estimated the acquisition cost of the private utility’s assets  to the city far in excess of the correct data. A major inaccuracy was the claim that the city would lose the corporate property tax revenues from the San Diego Electric and Gas. On the face of it the claim is correct, but it fails to incorporate that the city would require a General Fund transfer from the new municipal electric utility to the city which would more than equal whatever corporate property taxes were lost. Typically, US city-owned electric utilities transfer 8% of their revenues to the city General Fund as a "dividend" for the city owning the utility and thus getting a fair return.

In the case of San Diego, the inaccuracy of the impact of the city losing property taxes was permitted to linger as fact. 

The inaccurate claim about acquisition costs was carried in major media outlets and included words like the acquisition was unaffordable to taxpayers. But taxpayers do not pay the cost of the acquisition as if it is a new item. Investor-owned utilities have fixed costs for the facilities and systems they own,  which ratepayers pay for. For that the investor-owned utility gets a rate of return and can take those funds out of the city and use them for corporate and shareholder purposes. If taxpayers thought of the rate of return as taxes being taken out of the city, would they then be alarmed as well.?

Another major area of opposition to the creation of a municipal electric utility is the claim that the city has trouble collecting trash or managing other services, how can it operate the more complicated electric service. When it is pointed out that there are over 2,000 municipal electric utilities in the US operating well including  Los Angeles, Seattle, Orlando and Memphis, the claim  withers but the stated as fact description that poor service would result  is often a headline.

It remains to be seen how future municipalization discussions will take place. Such discussions are necessary at  franchise agreement renewal time given the importance of some of the major issues being faced from electrification plans; to resiliency projects to affordability to meet the new demand. 

In most cases, the case for municipalization is not successful, but the franchise agreement extension process becomes an opportunity to find new approaches to meet city needs including on resiliency, affordability and a pathway to cleaner energy. There is no room for misinformation, only honest consideration. States need to intervene and establish a process whereby the review of the business model  is done in a way that keeps customers top of mind.