Benefits of Municiplization, or Has LIPA Already Decided to Remain the Same?


The Brattle Group completed its analysis of alternatives of what the “New” LIPA structure going forward should be.   The analysis was performed under the direction of LIPA itself and subsequently presented to the Public on July 21st.

The end result recommendation, from a practical ratepayer cost standpoint, was inconclusive between LIPA essentially staying as is or changing to a Full Service Public Municiplization. The third option of privatization was discounted as being too costly.

Unfortunately, the Analysis itself was presented to the public as a Power Point presentation which is devoid of any meaningful detail or background.

Since the existing LIPA structure has proven itself not to be workable, let alone a sustainable option municiplization benefits must be explored and understood. The following piece was Published by the American Public Power Association explaining the myths and truths of a full service municipal public utility.

After reading the article please vote in the poll of what you want the “new” LIPA to be:

LIPA Poll

 

The Benefits of Public Power

A. Local Control Over Utility Policies

Public power is about serving the local community.  While IOUs measure success by the profits they send to often distant stockholders, public power utilities measure success by how much money stays in the community.  Public power utilities provide benefits to the citizens of their communities through lower rates, responsive service, payments in lieu of taxes, economic development and other programs that benefit the community.  Decisions about the pricing of services, building power plants, purchasing wholesale power and setting service policies are made locally for the benefit of the community.  In addition, unlike IOUs, these systems operate publicly, subject to open meetings and public record laws. 

This local control distinction has never been clearer than in recent years with all the financial scandals in the energy industry.  There are many examples of private corporation executives getting rich at the expense of electric consumers.  Public power is distinctly different from IOUs because it is fully accountable to the people it serves. 


False Charge:

Municipalization means more bureaucracy and less protection for consumers.   – Edison Electric Institute


The Truth:

Just the opposite is true.  With IOUs merging with other companies at an increasing rate, many are closing local customer service offices and moving their headquarters across the country or even the world. (Such as the case with National Grid)

In public power communities, citizens direct the activities of the electric utility through their utility governing boards, made up of elected or appointed officials.  In addition, many power utilities appoint citizen panels to advise them on services, reliability, rates and other issues.  Questions are answered and decisions are made in public.  Citizens have access to meetings and records and, if they disapprove, they can vote the elected officials out of office.  In many public power towns, if you have a question about your service, you can walk downtown and ask the general manager, or wait until you bump into him or her at a local restaurant.  Customers of private power companies have little, if any, access to information or influence over the CEO or other top officers at private utilities. 

Examples of abuses by private power companies further show how public power utilities actually offer more protection to their citizen-owners.  Compare public power’s protection to that of customers of Enron or Pacific Gas & Electric (PG&E) Corporation.  Enron was incredibly complex: it had over 1,000 affiliates and its books were a mystery to the outside world (and some would claim even to its own top executives and auditors).  The PG&E Corporation of California drained the assets of its IOU operating company and put billions of dollars into unregulated affiliates in order to achieve its ultimate objective of becoming one of the largest unregulated power generating companies in the nation, according to California Attorney General Bill Lockyer.  


False Charge:

The people with authority over our utility service would be politicians.  There is no requirement that board members have any experience or expertise in utilities.  – Coalition for Affordable Public Services – a group against forming a municipal utility in San Fransisco, Calif.


The Truth:

Public power utilities make good business decisions each and every day, as demonstrated by their consistently lower rates, reliable service and solid credit ratings from Wall Street.  Many of these decisions are made through local democratic processes, thus preventing major errors that would threaten the future of a business and its customers.

Political pressure on public power officials, when it occurs, is pressure to provide consumers with low-cost, reliable electric service, not profits for stockholders.  The elected officials who oversee public power utilities are accountable to the ratepayers, as opposed to the board members of an IOU who are accountable to shareholders outside of the utility and who are judged not on their ability to provide low-cost, reliable power but on their ability to maximize profits. 

For the day-to-day operation of the utility, public power utilities hire competent, experienced managers.  These managers come from the same pool of qualified electricity industry professionals as IOU managers do.  In fact, over the years many public power chief executive officers have come to public power utilities from IOU distribution or power supply departments.   Moreover, many cities and their local officials also have experience owning and maintaining a water, sewer or gas utility when they decide to provide electric service as well.  


False Charge:

Cities can raise rates whenever they see fit.  Unlike investor-owned utilities, city-operated systems are unregulated by any state or federal agency.   – Alliant Energy


 

The Truth:

Given the proximity of public power utilities to their customers, they are under more intense scrutiny than IOUs.  Public power utilities are governed and regulated by their consumer-owners through locally elected and appointed officials.  This form of governance takes place at the ballot box and by participation in city council and utility board meetings, public hearings, citizen advisory committees and other public forums.  Business is conducted in the open and is subject to local scrutiny.  Citizens have access to public meetings, planning alternatives, reports, and cost estimates.  Public participation in public power governance, including decisions on rates, budgets, facility siting, power supply reliability, and customer services, is a core attribute of public power.  If citizens feel their rates are unreasonable they can attend any of these meetings to express their discontent.  In a few states public power also is regulated by the state public service commission.

 

Whereas public power is regulated by its consumers, IOUs are regulated by state and federal regulatory commissions.  Customers have the right to place complaints with the state public service commission, for example, but because their customers are not the owners, they have no direct relationship to utility management and cannot participate in board meetings.  Customers of IOUs therefore have less influence on rates, service and policies than public power utility customers.

 


False Charge:

Shareholder-owned electric companies pay taxes and franchise fees; government agencies do not.  This loss of revenue is permanent and not a one-time cost…   How will this revenue be made up – new taxes? –Edison Electric Institute


The Truth:

In fact, public power utilities make as great or greater financial contributions to state and local governments, on average, than IOUs.  Public power utilities contribute to local governments through payments in lieu of taxes, transfers to the general fund, and free or reduced-cost services to the local government.  The level of support and how the dividend is returned to the community is a local decision and another advantage of the local control of public power.

When all taxes, tax equivalents and contributions to state and local government are considered, the median amount contributed by public power systems in 2000, the most current year for which data are available, was 14 percent higher than IOUs (5.7% vs. 5.0% of electric operating revenues).  Not only is the IOUs’ contribution rate lower, but their median amount contributed has recently declined 16% (from 5.8% in 1998 to 5.0% in 2000).[1]

And while charging that public power utilities do not pay taxes, IOU proponents neglect to mention that IOUs enjoy huge Federal tax breaks in the form of accelerated depreciation, investment tax credits and even their own use of tax-exempt financing.  A 2001 report by MSB Energy Associates, Major Federal Tax Breaks that Lower Investor-Owned Utility Costs and U.S. Treasury Revenues, finds that IOU costs and revenue requirements would have been $7.5 billion higher in 1998 had it not been for the benefits IOUs received from just these three major tax breaks.

B. Reliable Power

Public power utilities have a strong record in terms of power reliability, quite logically because customers care about this and their utility focuses on core operations and takes care of its own assets. 

PA Consulting Group’s annual reliability study calculates the SAIDI index for IOUs and for public power and cooperatives combined.  SAIDI – the System Average Interruptible Duration Index – measures the average length of time, in minutes, each customer can expect to be without power during a year.  The PA Consulting Group’s study consistently shows that customers of consumer owned utilities are without power less than half as many minutes each year as are customers of IOUs.


False Charge:

As part of National Grid, Mass. Electric has a depth of resources to help assure reliable service, with access to hundreds of line crews from its sister companies across New England and New York in the event of a major storm affecting your community.   – Massachusetts Electric, in a letter asking cities to oppose a bill that would make it easier for communities to pursue municipalization.


The Truth:

Public power systems can respond quickly to emergencies because local crews live in the community and are accountable to local officials, as well as to their friends, neighbors, and probably family members.  Repair crews that are local possess expert knowledge of the system, allowing the problem to be identified quickly and allowing pre-emptive measures to be taken prior to extreme weather conditions.

In the event of a major outage, public power utilities coordinate with other nearby utilities for assistance.  Public power utilities have access to hundreds of line crews from fellow public power utilities in the form of mutual assistance programs.

For example, when Hurricane Lili roared through the state of Louisiana and battered the city of Lafayette on October 3, 2002, six public power utilities from across the South assembled and deployed 85 workers and more than 75 vehicles to Lafayette to restore its generation capabilities.   Their collective efforts quickly restored Lafayette Utilities System’s generation facilities, allowing the municipal utility to “serve as the anchor for the region.”   In fact, Cleco Power, the local IOU, requested a transmission link to the Lafayette utility’s power grid to help support its system.[2]

C. Responsive Customer Service

Local control promotes outstanding customer service since the focus is always on service, rather than profits.  Since they are part of the community, public power utilities maintain a close relationship with their customers, and as a result, are very successful in meeting their customers’ needs.


False Charge:

Municipalization can lead to higher electricity rates and poorer customer service.  – Edison Electric Institute


The Truth:

Public power systems’ first and only purpose is to provide efficient, reliable service to their local customers at the lowest possible cost. 

Public power utilities get high marks for customer satisfaction – no matter what their size – because their focus is always on service rather than profits.  They use the same technology and hire from the same pool of labor talent as the IOUs.  Public power’s advantage is in its local presence.  Service quality is not compromised by mandates from a company headquartered hundreds of miles away, which may result in staff reductions, closed service centers, deferred maintenance or delayed tree trimming.  Public power systems are able to match local service needs with local resources.

According to a national study of electric utilities conducted annually by J.D. Power & Associates, the community-owned Salt River Project (SRP) in Phoenix earned the highest ranking for customer satisfaction among big Western utilities.  This is the fourth time in five years SRP has clinched the top score.  Among medium-sized utilities, Colorado Springs Utilities in Colorado and Omaha Public Power District in Nebraska, both public power utilities, tied with the highest rankings.[3] 

One of the primary reasons municipalization is often explored is because the local IOU is not providing service that meets the community’s standards.  Hermiston, Oregon, formed a municipal utility (HES) in 2001 following a four-year effort that began because the IOU closed its local customer service office and citizens determined that the company’s service level was declining.  Since HES took over, rates have decreased and customers can now pay bills and address service concerns in person at the local office. 

Regarding electricity prices, public power utilities lead the way in providing their communities with low-cost and reliable energy year after year.  In general, communities that have formed public power utilities in recent years have been able to offer significantly lower rates to their communities.  

D. Lower Rates

Across the country, publicly owned electric utilities continue to lead the way in providing customers with low-cost energy for homes and businesses.  However, public power opponents continue to make allegations questioning public power’s record on providing lower cost service.  


False Charge:Blanket statements that municipal systems charge less for electricity are simply not true.   – Reddy Communications


The Truth:

Year after year, for over 50 years, the data from the U.S. Department of Energy demonstrate that IOUs, on average, charge more for electricity than public power systems.  In the most recent data year of 2002, residential customers of IOUs paid average rates that were 13 percent above those paid by customers of publicly owned systems.  In addition, commercial customers of IOUs paid 8 percent more for electricity than public power customers in 2002.  There was essentially no difference in the average rates paid by industrial customers of publicly owned and investor-owned utilities.

The following chart compares the national average revenue per kilowatt-hour paid by residential, commercial and industrial customers of publicly owned and investor-owned utilities in 2002:


 

False Charge

 

The city makes an unsupported claim that you will save 15 percent on your electric bill if you allow it to take over the utility.   In reality, there is no way the city can guarantee any long-term reduction of your rates. – Carol Evans, Vice President, California Taxpayers’ Association 

 


 

The Truth:

 

While there is clearly no guarantee of anything, experience does indeed support such claims.   Communities that have formed public power utilities in recent years have been able to offer lower rates, among their other benefits, to local residents and businesses.  For some, the savings have been substantial.

 

A feasibility study done by a qualified consultant can help determine reasonable estimates of how much an individual community can save on electric rates by forming a public power system.   The consultant would examine the factors (wholesale power costs, system acquisition costs, etc.) that help determine the short and long-term savings that would be possible with public ownership.  These savings can be passed on to customers in the form of lower rates.

 

Consumers pay for the cost of utility operations through the rates paid in their electric bills whether service is provided by a public power system or an IOU.   But through public ownership of the utility, the consumer-owners have greater control over prices and service, and they don’t pay profits to others as one of those costs.  A public power utility is directly accountable to the people it serves.  Many communities find it worthwhile to make the change because they determine that public power can deliver responsive, reliable electric service at the most reasonable rates. 

 

For example,Hermiston,Oregon, Energy Services (HES), one of the newest public power utilities in the country, was designed to run at cost.   The city is not in business to make a profit.  HES already has residential rates 3 to 9 percent lower than they were under the IOU, and after paying back a line of credit that helped with the system purchase and lawyers’ fees, HES will lower rates even more or invest in system upgrades. 

 

Newly created public power utilities, just like those which have been operating for up to 100 years or more, have lower electric prices because they:

 

  • Are accountable to the consumer-owners they serve;
  • Are not-for-profit and do not pay dividends to often distant stockholders;
  • Have lower administrative costs and are more efficiently managed;
  • Have rates set locally by citizen-controlled boards that operate publicly;
  • Do not pay federal income tax because they are entities of state or local governments;
  • Are eligible to issue revenue bonds that are exempt from federal income tax for capital expenses; and
  • May have access to lower cost hydroelectric power marketed at wholesale by federal and state agencies.

 


 

False Charge:

 

It is important to note, however, that the city of Massena was successful in its municipalization effort mostly because it had access to inexpenseive hydropwer and could finance the acquisition with tax-exempt bonds. These advantages are not normally available to a city trying to municipalize today. – UtiliPoint International Inc.

 


 

The Truth:

 

IOUs often falsely charge that the only reason for public power’s lower rates is the combination of its use of tax-exempt financing and its preferential access to federal hydropower.

 

However public power’s rates are explained only in part by its access to tax-exempt financing and access to federal hydropower.   They are in large part due to the very nature of its not-for-profit, cost-scrutinized, locally controlled operations.

 

While there are restrictions on local government’s use of tax-exempt financing to buy privately owned assets, feasibility studies take these financing costs into account.   In addition, with today’s low interest rates, the difference between tax-exempt and taxable financing rates is relatively small.   In most cases, forming a public power system still makes economic sense, even with the use of taxable bonds.  

 

Furthermore, while a federal hydropower allocation is beneficial, many public power utilities provide low rates without this benefit.   In fact, if federally generated hydropower were spread equally over all customers in states where federal hydropower is marketed, on average, public power’s rates would increase from this allocation by 2.6 percent, a small proportion of public power’s rate advantage. 

 

Massena did have access to hydropower and tax-exempt bonds, but that is not the sole reason they have been very successful.   Massena Electric Department formed in 1981 and dropped its rates 28%.   Total savings to Massena’s customers from 1981 to 1998 have exceeded $90 million.  In 2002, residential rates were 62% below the IOU’s. 

 


 

False Charge:

 

Even the best new efficient gas fired generation units will not produce power cheaper than the hydro and nuclear units retained by the IOU’s.   And, it will be a risky challenge for the new MU’s [publicly owned municipal utilities] to buy cheaper power in the wholesale market.  –  “The Economics of Electric System Municipalization,” Bay Area Economic Forum, October 2001.

 


 

The Truth:

 

Not true.   There is no reason to believe that new public power utilities would not have access to these sources of power.  More than 2,000 public power utilities across the country take care of the power supply needs of their customers each and every day.  They build power plants and purchase power in order to supply electricity at the lowest possible cost.  

 

Many public power utilities find it beneficial to work in partnerships with each other through more than 60 joint action agencies to jointly own power plants or purchase power supplies.   This is an option for most new public power utilities as well.

 

E. Efficient Local Operations

 


 

False Charge:

 

Utility businesses are most efficient when operated on a larger scale, and small cities like Mitchell would “be about as inefficient as you can get in our business.” –Gary Drook, President and CEO of NorthWestern Corp.

 


 

The Truth:

 

Of the over 2,000 public power utilities in theU.S., 1,400, or about 70 percent of the total, serve communities with populations of 10,000 or fewer. 

 

Public power utilities find that their smaller size can be an advantage in electricity distribution.  Relatively smaller public power utilities have done an outstanding job with reliability, price and service during the recent turbulent times in the electricity industry.  They have been able to adjust quickly to changes in the marketplace while keeping their focus on their core utility mission – providing low-cost, reliable service to their consumer-owners.  Also, municipal utilities provide their own advantage of community economies in billing, metering, 24-hour emergency call centers, and other customer service operations when they provide more than electric service to homes and businesses.

 

Electricity distribution, as opposed to large scale generation and high voltage transmission, is local.  Public power utilities keep costs down through local scrutiny of operations.  With their local presence they are more responsive to customers’ needs.  They use strategic partnerships and joint action with other public power agencies to obtain the advantages of size in wholesale supply matters without taking on the disadvantages of merging into larger, more bureaucratic institutions. 

 

The most likely reason for public power’s efficient performance “appears to be that retail distribution may be performed better by enterprises rooted to the customer community,” Professor John Kwoka, Jr. concluded in his comprehensive book, Power Structure: Ownership, Integration and Competition in the U.S. Electric Utility Industry.   “Such proximity may yield greater knowledge of local customer needs and a greater sense of responsibility for addressing those needs.”

 


 

False Charge:

 

Local governments should leave this specialized business to the existing electric companies and instead should focus on providing the public those services that they are uniquely equipped to handle. – Edison Electric Institute

 


 

The Truth:

 

Communities across the country have decided that they can best serve their citizens by offering essential services such as water, gas, sewer and electricity as a not-for-profit service to their citizens.  The formation of early public power utilities was for the most practical of reasons: the communities wanted the benefit of electric lighting and the quickest way of getting it was to do the job themselves.  Subsequently, municipal utilities were formed in order to escape the price gouging at the hands of private operators.  Now, as then, public power utilities are a reasoned, pragmatic solution to a civic need.

 

Public power has an excellent record of performance, not just in the last few years, but through the industry’s 120 year history.  There are more than 2,000 public power utilities operating throughout the U.S. and nearly 500 of them have been in operation for over 100 years.  Their very existence provides a yardstick against which the rates and service of IOUs can be compared.  Many cities with public power systems also have experience owning and maintaining water, sewer or gas utilities and obtain even greater efficiencies by operating these additional services. 

 

F. Local Economic Development

 

A public power utility spurs economic development in the community by meeting the interrelated needs of residential, business and industrial customers, thereby making the community a more pleasant place to live and allowing it to compete more successfully in attracting business and employment.  Public power utilities are able to focus on the overall needs of the communities and provide efficiencies in achieving the overall community goals. 

 


 

False Charge:

 

A government takeover of the utility system would thwart efforts to bolster economic development in the community.  Business today increasingly depends on technology and needs a highly reliable power supply…   In addition, it is quite common for municipal utilities to subsidize residential rates by charging companies higher prices…   All of these factors will discourage new businesses from locating or expanding in the city and could even drive existing jobs away.   – Alliant Energy

 


 

The Truth:

 

On the contrary, localcontrol allows a community and its utility to work together to achieve their economic goals.  A public power utility stimulates economic prosperity, translating to better living conditions for the entire community.  Besides offering the advantage of lower rates and hence lower business costs, public power communities have taken a leadership role in preparing their communities for the future by pursuing new technologies as an integral part of community growth.  They serve as information sources in a variety of technology fields such as environmental stewardship, high-speed Internet capability, safety, and community technology development.  Some public power communities have begun offering telecommunications services, which encourage economic development, because private companies would not offer them to smaller towns at competitive prices, if at all.

 

The public power utility, with its skilled managerial and engineering staff, offers many opportunities for efficiency gains through integration of electric operations with the operations of other city services.  A locally controlled utility is part of a public service community team that cooperates on public works projects, downtown renovations, extension policies, business development, industrial parks, and energy efficiency programs.  Public power utilities work with their larger customers, offering them power quality, demand-side management, alternative pricing structures, special communications during outages, and other customer-defined and focused programs.  Businesses enjoy the streamlined “one-stop shopping” customer service that public power towns offer.

 

Public power stimulates the local economy.  Lower electric prices allow consumers to spend more money on other goods and services, in addition to attracting business and industry to the community.   Local dollars stay at home in public power communities.  They are not sent to companies and shareholders out of the city, state, or in some cases country.  The public power systems do business with local financial institutions and make purchases from local businesses.  Salaries earned by local utility employees are spent in the community for housing, groceries and other services.  Payroll dollars multiply in value to the community as they are spent locally by businesses and their employees.  Economists estimate that based on the multiplier effect, each payroll dollar circulates through the local economy five to ten times.

 

Finally, public power utility rates are set by the local governing body which is often limited in its ratemaking authority by bond covenants and by its obligation to base rates upon the cost of serving the different customer classes.  Regardless, public power utility boards are very responsive to all their customers – residential, commercial and industrial.  Large power users are often integral to the community’s economic vitality, and their needs would undoubtedly be heard by the utility’s governing board during the local ratemaking process.  In establishing a public power utility, the city would have greater flexibility to offer incentives to large businesses that could promote the expansion of business and attract new business, while still protecting residential and commercial customers.

 

  [1] Payments and Contributions By Public Power Distribution Systems To State And Local Governments, 2000 Data, American Public Power Association, June 2002.

 

[2] “Utility Crews Flock to Lafayette, LA, in Storm’s Wake,” Public Power Weekly, October 14, 2002.

 

[3] Public Power Utilities Receive High Rankings in Customer Satisfaction Survey, Public Power Weekly, August 11, 2003.

 

 

 

 

 

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About lipaoversight

LIPA Oversight Committee was created to analyze the rates and practices to determine if it is working in the best interests of the Suffolk County ratepayers
This entry was posted in brattle, customer satisfaction, jd powers, lipa, long island power authority, municipal power, municipalization, privatization, servco. Bookmark the permalink.

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