Municipalization

What is municipalization?
Municipalization is the legal process by which a community assumes the control of its electrical generation distribution, purchasing and/or generation, usually from an investor-owned utility.

It is the opposite of the "privatization" process, in which public assets are sold to private companies. The process can involve all forms of public infrastructure, such as sewer, water and natural gas systems, but municipalizations of electric utilities in recent decades, especially to promote green power and move away from coal, have made municipalization highly controversial.

Currently 15% of US electrical generation is sold through publicly owned municipal power systems, and another 10 percent is sold through rural electrical cooperatives, according to the US Energy Information Administration. (see chart)

Controversies over municipalization in recent years have included San Francisco, CA;  Marin County, CA;  Boulder, CO;  Auburn NY; Winter Park, FL;  and many others.

In 2008, California passed a law allowing municipalities to set up renewable energy corporations and recover costs directly.

Public municipal power in the US electrical grid
Notes: Utility type = number of incorporated organizations; GW = gigawatts of summer capacity; # Customers in millions; QF = Independent qualifying facilities selling to commercial power grid.

Source: US Energy Information Administration, 2007.

History
The structure of electrical generating systems has been controversial for as long as there has been a power grid. In the 1890s, as the very first electrical systems were under construction, some cities had a dozen power plants. Chicago had 20 at the time, and when one of Thomas Edison’s companies absorbed them all in 1907, the company was renamed Commonwealth Edison.

Legally, electric utilities were considered “natural monopolies” where competition seemed impossible because they were too capital-intensive to have effective competition. Progressive reformers like Teddy Roosevelt and others wanted an electrical system without the abuses that are typical of monopolies. Reformers came up with two answers -- public (municipal) power and utility regulation.

• Public power involves a municipal or “public” utility owned by a city, county or other municipality. The first was built in 1882 in Wisconsin. Today, over 2000 public utilities  generate part of their power needs and buy the rest on the market from investor owned utilities or independent QFs. Most of these were formed between the 1920s and the 1950s, but municipalization of investor-owned utilities is an increasingly attractive option in the 21st century.

• Regulation of investor owned utilities takes place through state and federal agencies such as the Federal Energy Regulatory Commission. Corruption at the municipal and state levels tended to thwart reform. For example, the Raker Act of 1913, which allowed the construction of the Hetch Hetchy dam in Yosemite National Park, stipulated that the electric power would be sold to a municipal San Francisco power agency at the cheapest possible rate. But over the years, San Francisco abandoned the municipal power concept.

During the 1930s, two other kinds of utilities were created to bring electricity to rural America. These were the federal power agencies, such as the Tennessee Valley Authority, and also rural electrical co-operatives, which were created under the New Deal to reach less profitable areas.

By the 1940s, each of the four types of utilities operated as monopolies in their territories, and no other power generators were allowed to compete.

A fifth kind of electric producer emerged in the 1970s after the oil crises of the 1970s --   the independent generator, also called a qualifying facility (QF). These were encouraged   under the 1978  Public Utilities Regulatory Policy Act - PURPA.

In the beginning, PURPA made few inroads for competition within the electric utility industry. The law only required utilities to pay the cost they avoided for fuel, which usually worked out to about one or two cents per kilowatt hour. Reforms at the state and federal level have made QFs of all kinds economically attractive -- from waste industrial heat cogeneration to stand-alone renewable energy facilities.

Advantages and disadvantages of municipal public power
Customers of publicly owned power utilities paid average rates that were 14 percent lower than those paid by customers of publicly owned utilities, according to a 2006 APPA study.

The advantages of municipalization include lower rates, greater reliability and competitive bidding, according to the Citizens for Boulder’s Clean Energy Future (CBCEF), which is promoting the takeover of the Xcel Energy power supply contract by the city of Boulder, CO.  The city of Boulder agrees, and notes the following advantages of municipalization:


 * Greater flexibility and local control
 * The ability to reduce local carbon emissions
 * More opportunities to target investments in a manner consistent with local priorities.
 * After the initial investment in acquisition of the distribution system is repaid the city, residents and businesses could see long-term economic benefits, the creation of a more competitive industry and greater energy innovation.

On the other hand, 51 North Carolina municipal power companies are "under water," having made costly investments that have not paid off. A joint legislative Municipal Power Agency Relief Subcommittee is looking into the refinancing or restructuring of power agencies. Debt load taken on by the municipal utilities since 1982, mostly to help finance construction of nuclear power plants, has meant that municipal utility assets are worth less than their outstanding debt. Power rates are 20 to 50 percent higher in these municipalities than elsewhere in NC.

Recent municipalizations and attempts
During the 1980s and 90s, over 40 proposals for municipalization were made in 17 states, according to a Northwestern University study.

Since 2000, thirteen communities have switched from investor-owned to municipal utilities, according to the American Public Power Association. Most were small communities of 10,000 or less.

City of Boulder, CO begins municipal takeover of Xcel in 2011
Voters in the city of Boulder approved a municipalization process on Nov. 1, 2011, in which the city will take over Xcel Energy utility lines and power generating equipment. The city is the home of the University of Colorado, the National Center for Atmospheric Research and the National Renewable Energy Laboratory. Over 70 percent of voters supported the initiative according to polls in the fall of 2011, although Boulder Question 2C, which allows for the creation of a municipal utility, passed with 51.8 percent of the vote. XCel spent $950,000 fighting the initiative, while four groups that campaigned in favor of municipalization raised about one-tenth of that amount. The process could take as long as five years, and many questions remain about the value of Xcel's generating and transmission equipment. The project began in 2004 with a decision to study municipalization. One study commissioned by the city showing that direct startup costs were in the neighborhood of $28 million for the city's 96,000 residents.

Although city staff noted many uncertainties in the municipalization process, by 2009, Boulder officials concluded the city couldn't meet its goal of reducing emissions of greenhouses gases to 1990 levels by 2012. During 2009 and 2010, a volunteer team associated with Citizens for Boulder's Clean Energy Future determined that the city could reduce carbon emissions by 60%, increase the percentage of renewables by 40%, all while keeping our rates at parity or lower than those charged by Xcel. The $300 million start up and infrastructure purchase cost should be seen in the context of Xcel's revenues from Boulder, which amount to $100 million per year. Another feasibility study for the city put the cost at $223 million, excluding "stranded costs."

In August, 2010, the city allowed a contract with Xcel to lapse as municipalization became a more serious option. An August, 2011 poll by the city of Boulder showed that 71 percent of voters supported the creation of a city electric utility. The greatest support was among younger voters, renters, women, and those with an income of less $50,000.

Opposition to municipalization
Private or investor-owned utilities often strongly oppose the formation of new public power systems because it means the loss of customers and profits. New public power utilities also provide high-profile examples of what communities can do for themselves, which may encourage other cities to form public power systems, according to the American Public Power Association. "The most common tactic is to try to discredit public power, and to create doubt and fear about alternatives to renewing their incumbent franchise."

For example, the Edison Electric Institute, a research arm of the investor owned utilities, said in 2005 that creating a new municipal electric system is not realistic or economically viable. "The established publicly owned municipal utilities cannot be replicated today because the conditions under which public power was created in the early years of the 20th century no longer exist."

California opposition to municipalization
Many of the recent battles over municipalization have taken place in California, where reaction to the 2001 Enron Corporation crisis led cities to consider a range of alternatives. "Full municipalization can be a substantial undertaking," according to APPA magazine. "A couple of cities had expensive demonstrations of the power of (existing investor owned utilities)  before scaling back to a greenfield model, serving only new residential, commercial or industrial development in their towns."


 * In 2002, Pacific Gas and Electric Company(PG&E) spent $2.7 million to defeat Proposition D ballot initiative for a San Francisco municipal utility. In 2004, lawyers acting for the company were  fined $240,000 i for violating local and state campaign finance laws in that campaign.


 * In 2004 - 2011, PG&E worked hard to defeat or sidetrack municipalization proposals in  Marin County, CA in the 2004 - 2010 time frame.  "It has been a horrible and vicious experience to go through this," said Marin county's Charles McGlashan. "You have to be ready for a very, very rough experience."
 * In 2008, PG&E reported spending  $11 million "to oppose certain legislation and municipalization efforts."


 * In 2010, PG&E spent $46 million on supporting Proposition 16, a constitutional amendment that would have made municipalization harder in California. The proposition was defeated.

Opposition elsewhere

 * In 2005, MidAmerican Energy spent $527,000 to defeat a ballot measure in Iowa City, Iowa -- 26 times more than municipal utility advocates raised.


 * In 2011, Xcel Energy spent $950,000 to fight the Boulder Co. ballot initiative.

External resources

 * American Public Power Association
 * Appalachian Voices

External articles

 * APPA, "Public Power is Typically Cheaper and Creates Revenue Stream for Municipalities," 2008-09 Annual Directory & Statistical Report, American Public Power Association.


 * APPA, Straight Answers to False Charges Against Public Power," American Public Power Association, 2004.


 * "How It Started,"  Marin Clean Energy, accessed Sept. 2011.


 * History of public power in Colorado Colorado Association for Municipal Utilities.


 * "Municipalization of Electricity: The Allure of Lower Rates for Bright Lights in Big Cities", Natural Resources Journal, 37:43-53, Winter 1997.


 * Smithsonian Institution, "Emergence of Electrical Utilities in America," in Powering a Generation of Change, 1997. (Although this article is sponsored by the Smithsonian Institution, it is not a neutral history. )