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Delusions of Power 

Is it smart to jump into the Bay Guardian's version of public power, without even studying whether it will save money?

Wednesday, Apr 4 2001

Page 6 of 8

In other words, if voters created a MUD, and if the new public power entity sought to buy the power plants and the electric distribution system, the MUD would need to sell, at least, $1.2 billion, and perhaps well in excess of $2 billion, in revenue bonds that would need to be retired through charges to electric consumers.

And there are other capital costs awaiting a MUD-based public power system.

Last October, the California Independent System Operator, the state agency that operates the electrical grid, released a reliability study of San Francisco's power flow. "The study results indicate that without new transmission or generation facilities, system performance would be unacceptable [by 2009 and] subject to thermal overloads and multiple outages," wrote the ISO, which then suggested a range of remedies for the electrical system's deficiencies, each of which would cost in excess of $100 million.

The bottom-line feasibility problem for a San Francisco MUD is figuring out how to pay the operating and maintenance costs of serving the 334,000 residential and commercial electrical customers in San Francisco, who, in 1996, paid about $483 million to PG&E, while also covering the debt service associated with borrowing and then paying out at least $1 billion (and possibly far more) to purchase electric delivery and supply facilities from PG&E and other energy firms.

A real feasibility study would subtract total electric operating and maintenance costs for San Francisco (currently a PG&E trade secret) from the total revenue PG&E takes in from the city. The difference would be the amount of money available to service debt taken on to purchase the electric poles, lines, and plants. The amount of debt payments that could be made would set a definite ceiling on the amount of money a MUD could afford to borrow to purchase assets.

But nobody knows what that spending ceiling might be -- that is, no one knows whether a MUD would have a prayer of being able to acquire PG&E's assets in San Francisco -- because no feasibility study has been done.

Experience has shown that, given the right circumstances, a well-run municipal utility can provide electricity to consumers at lower rates than private utilities charge. That is to say, public utilities have inherent financial advantages over private electric providers, from a consumer's point of view. With public ownership, for example, profits are not distributed to shareholders, but passed along to consumers in the form of lower rates, or put back into the business. Municipal utilities do not pay income and property taxes. Some of their capital costs can be met via tax-free municipal bonds, which carry lower interest rates, and cost less to retire, than the debt instruments private firms must issue.

These advantages assume, of course, that the publicly owned utility will operate at least as efficiently as a profit-driven corporation.

Even if a MUD-type system proves to be technically and financially feasible, there is at least one other major obstacle to making it happen, says Richard Geltman, general counsel to the American Public Power Association. MUDs are the "most difficult" path to public power, according to Geltman, because they are, typically, invitations to enormously expensive lawsuits mounted by private utility companies whose assets are being seized by the government. Such lawsuits have been known to tie up municipalization in court for as long as 15 years.

If San Francisco wants to have a public power system, however, buying out PG&E is not the only way to go.

Most government-owned power systems in the United States do not physically generate or deliver electricity. According to the American Public Power Association, the majority of municipal utilities serve fewer than 3,000 customers, with rates that average 18 percent lower than the private companies. And most public power utilities are "aggregators," i.e., they maximize economic clout by purchasing electricity in bulk for groups of customers. In the Bay Area, for instance, the Association of Bay Area Governments aggregates cheap power buys for 56 municipalities.

Aggregation became a money-saving tool when deregulation opened up the state's privately owned wires to all energy providers. Under what is called "direct access," San Francisco consumers can buy electricity from a variety of suppliers, paying only delivery charges to PG&E. Aggregators can enter into long-term contracts on behalf of millions of consumers. They can and do deliver electrons to consumers' wall sockets at a savings that ranges from 10 to 40 percent vs. retail electricity rates. On its Web site, the American Public Power Association says it "believes that aggregation of small-load customers is essential, and that municipalities and local governments ... are well suited for the job. [Aggregation creates] a more robust market and therefore lowers electricity costs for all consumers."

National consumer advocate Wenonah Hauter of Public Citizen, the consumer group formed by Ralph Nader, agrees. Hauter recommends the municipal aggregation route "because local governments are existing public institutions over which consumers have control." In addition to cheap rates, Hauter says, aggregators, which own no physical assets, avoid the headache of maintaining electric plants, poles, and wires. Billing can be left to the utilities, too. Local governments merely use the power of mass purchase to acquire electricity at low rates, and pass on the savings to consumers.

Laurie Parks, chief of the Hetch Hetchy system, says that she is prepared to become a bulk buyer of cheap energy on behalf of San Francisco residents at a moment's notice. Such a move could be made, Parks says, as soon as the Board of Supervisors voted to approve it. The city already trades in the forward energy market for municipal needs, Parks remarks. To buy for the entire city, Parks would have to hire more commodity traders, but that would be a relatively small cost.

And if studies showed that moving beyond aggregation is wise, the city seems better positioned than a MUD to do so.

About The Author

Peter Byrne


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