City lights

CITY LIGHTS

Municipal utilities have been good
investments for their communities.
But they could be endangered
by electric deregulation

Story by Steve Rhodes

In 1899, nine years after electricity replaced kerosene lamps, the tiny town of Naperville bought the Naperville Electric Co. Purchase price: $18,000. The utility is still owned and operated by the rapidly growing Chicago suburb. Replacement value: $200 million.

Like most of the state's 42 municipally owned power companies, the Naperville utility has been a good investment. Residents' electric bills are about $300 a year less than for those living in neighboring towns that rely on investor-owned Commonwealth Edison. And Naperville's citizens enjoy the responsiveness that comes from a utility overseen by local elected officials.

But those benefits to "muni" customers could be endangered if Illinois decides to open its nine regulated for profit utilities to competition. Indeed, the state may have little choice but to give Illinoisans a chance to choose their electric companies. Congress is considering whether to require the states to deregulate. Six states have in some form. Three proposals already are circulating through the Illinois General Assembly, and lawmakers could hammer out a compromise as early as this spring.

Everyone who uses electricity is likely to be affected by the outcome, though the fate of "munis" may be little more than an afterthought in the debate over power monopolies.

Most people buy their power directly from companies like ComEd, once those companies land exclusive franchise agreements with local officials. Think cable TV. If you live in ComEd territory, you have no choice but to buy your electricity from ComEd. In a deregulated environment, several companies would compete for your business, even though the power might still surge through existing lines. Think long-distance phone companies.

People who live in communities with munis also have no choice in electricity providers. They buy their power from the city and that's that. But because munis buy power in bulk on the wholesale market and, as a nonprofit arm of local government, distribute it to residents without a markup, on the whole the check citizens write to their city-owned utility is lower than the check they might write to an investor-owned company. In a deregulated environment, munis would likely get the choice of opting in or out of the marketplace. Opting in would mean that munis could troll for customers outside municipal borders in exchange for opening their towns to competition from other companies. Opting out would mean retaining the service boundaries and monopoly of the muni.

A coalition led by Chicago-based ComEd and Decatur-based Illinois Power would offer competitive rates for industrial customers first, then small commercial enterprises and finally, by the year 2005, residential users. A second proposal by Central Illinois Light Co. of Peoria would deregulate power for all users starting in 1998. In each of these plans, munis would have the option of retaining their customer bases and opting not to compete, or selling their services outside of their communities in exchange for allowing other providers to woo their customers. A plan by the Citizens Utility Board, which also calls for fast-track deregulation, leaves munis out of the mix altogether.

"They don't fit in," says CUB Executive Director Martin Cohen. "Municipally owned utilities already have the benefits of competition in the wholesale market available to their constituents, and they're democratically controlled by their local governments. Effectively, these are citizen-owned utilities. We don't see any reason to upset that apple cart."

Most muni officials agree.

"We don't see any gain or benefit to our customers," says Bill Murray, regulatory affairs manager for Springfield

28 / April 1997 Illinois Issues

City Water Light & Power, the state's biggest muni at more than 64,000 customers. "It would just create problems."

But some muni officials say that opting in to a competitive environment isn't as scary as it may sound; they think munis can still offer the lowest rates and best service. "I don't think we have to fear [competitors]," says Allan Poole, Naperville's public utilities director.

Meanwhile, Dan Miller, chairman of the Illinois Commerce Commission, which regulates investor-owned utilities, believes muni customers have as much right as anyone to have access to an open market. He argues that while munis have the lowest rates now, rates in a deregulated environment could go even lower. And he wouldn't want to see muni customers shut out of such a market. His conclusion: "Munis definitely have a role [in a deregulated environment]. What it is, I don't know at this time."

Even if munis stay out of the competitive market, the changing environment around them could alter the way they do business. With munis no longer the only service provider bidding for large amounts of power, the cost of energy could go up.

"We have to be honest with the public. There's no way everybody wins," says state Sen. Steven Rauschenberger, an Elgin Republican and leading proponent of deregulation.

He would allow users in the marketplace to come together for the purpose of buying power in bulk, just like the munis do now. "That's the model we want to foster," he says. Theoretically, that would bring down rates for many consumers now tied to their providers at retail prices set by state regulators. But Rauschenberger would like to force munis into the market. With more providers bidding for bulk power, he believes, the cost of power on the wholesale market could go up. That would mean lower rates for most consumers, but higher rates for those served by munis.

Cohen doesn't buy that scenario. He says the number of electricity sellers could go up, as well as the number of buyers. And he believes the industry will organize itself into power generators, power distributors and power marketers who will broker customers and services. And with new technology driving down the costs of generating and distributing power, there would be a downward pressure on prices.

"There's no reason to think increased competition will raise rates in the wholesale market," Cohen says.

Even if municipal electric companies stay out of thecompetitive market, the changing environment aroundthem could alter the way they do business. And the cost of energy could go up

And if munis lost out in an open market, all would not be lost.

After all, if another company wins over the bulk of Naperville residents, the power will still surge through the city's lines, for which the city would collect the fees. And muni officials say their goal is cheap power for residents, regardless of who supplies it.

"If they can get it cheaper somewhere else, so be it," Poole says.

"We're not making money off them."

Alan H. Richardson, executive director of the American Public Power Association, the leading national trade organization of municipally owned utilities, says his group has no official stance. "You have a great disparity in approaches," Richardson says. "Some public power companies are saying 'bring it on, we'll take the gloves off, we're ready to go.' Others are looking at the fact that they are in a low-cost state, where the customer has little to gain or a lot to lose."

Wisconsin, for example, is a low-cost state. If Chicagoans started buying power north of the border, not only could costs go up for Wisconsin residents paying for the expanded service, but those residents — whose taxes have helped build the utilities — could end up paying more than Illinoisans for Wisconsin power.

Muni officials are working with the industry's other nonprofit providers, Illinois' 26 rural co-ops, to lobby for protections.

"We have common ground," says Gordon Olsen, director of special projects and technology for the Association of Illinois Electric Cooperatives. "Both of us want to keep control and decision-making within local constituencies."

Investor-owned utilities, however, see muni customers as potential new markets. In fact, officials of investor- owned utilities keep such a close eye on munis that the Illinois Municipal Electric Agency recently awarded a

Illinois Issues April 1997 / 29

Nuclear fallout: Bad utility investments
could become everybody's business

So you think the big utilities that made bad investments in underused nuclear power plants are getting what they deserve? Turns out the fallout from those bad decisions are hitting the so-called little guys, too.

Take the Decatur-based Soy land Power Corp., representing co-ops serving 160,000 rural customers. Soyland takes pride in being a democratically controlled enterprise with a commitment to serving people over profits. But that didn't keep Soyland out of the politically incorrect nuclear power business in the 1980s. And now that decision has come back to haunt the co-op and its member customers.

Soyland invested $100 million in Illinois Power's Clinton Nuclear Power Plant in DeWitt County. But the cost of the plant skyrocketed to $4 billion. By the time the plant came online in 1987, Soyland was in for $1 billion. Threatened with bankruptcy, Soyland cut a deal with the federal government, which oversees the co-ops, to write off $1.2 billion in public debt. It paid a settlement sum of $237 million, according to the U.S. Department of Agriculture.

And then there are all those retirees who favor the safe if unspectacular returns on utility stocks. If utilities aren't allowed to recoup their costly investments — called stranded costs — in nuclear plants once the rules change and markets are opened up, investments once thought safe could go up in smoke.

Traditional utility stocks could already be in for a tough ride in a deregulated environment. The Washington International Energy Group Inc. found in a recent survey that 42 percent of investor-owned utilities expect to reduce the portion of earnings that go to dividends.

Consumer activists, environmentalists and the staunchest deregulators like to take the position that bad investments are bad investments, and customers shouldn't have to pay. Tough luck, in other words. Utilities say the rules of the game are being changed in midstream, and they could be financially ruined if they can't recover costs.

Such stranded costs are estimated to total $135 billion nationwide.

New Hampshire regulators just issued a ruling, sure to be challenged, that won't allow utilities with rates above the regional average to recover stranded costs. California officials are taking the opposite approach and tacking an extra fee onto every citizen's electric bill to allow that state's utilities to cover their wayward investments. "There's a lot wrong with that," says Dan Miller, chairman of the Illinois Commerce Commission. "We'll do something superior here." But Miller has no idea what that will be. It's still early in the game, and no proposal has generated the critical mass necessary to get through the legislature.

There's a lot more at stake for a lot more people than it might seem at first blush. Southern California Edison called upon "an army of blue hairs" to complement its slick and highly paid lobbyists in its fight over stranded costs, according to a recent New Republic report. So the financial fallout from for-profit utility investments could end up becoming our business. Steve Rhodes

Perfect Attendance certificate to a ComEd representative who bird-dogs every meeting.

Munis also are something of a lure to other communities envious of the arrangement. Chicago Heights began studying the option of owning its own utility a few months ago. Evanston has flirted with the idea for years. Chicago came close in the 1980s, and nearly every official interviewed for this story seemed to relish recalling how Dan Rostenkowski carried water for ComEd and pushed a bill through Congress prohibiting municipalities from using the tax-exempt bonds that would be necessary to buy utilities from investor-owned companies like ComEd.

At the same time, Naperville seriously considered opting out of the electric business in the '70s and '80s. ComEd was eager to buy the system. "Maybe if they had offered more money, we would've sold," says Poole. "It would've been a huge mistake."

But that's not to say that over the years Naperville residents haven't faced their share of difficulties that rival those of any ComEd or Illinois Power user.

A string of reliability problems, including blackouts and labor and safety troubles, have plagued Naperville.

The difference is that such issues have become the focus of civic debates that hold elected officials' feet to the fire.

"That's what public power is all about," says Poole. "It's really precious."

Steve Rhodes, who lives in Chicago, writes for Newsweek and other publications.

30 / April 1997 Illinois Issues