Power Plays

July 1, 1996
Why America's Cities Are Taking On Local Utilities In ice hockey a power play occurs when one team has been penalized through the loss of a player, giving

Why America's Cities Are Taking On Local Utilities In ice hockey a power play occurs when one team has been penalized through the loss of a player, giving the other team the advantage of an extra player on the ice. In football, a power play occurs when a concentrated mass of running backs and linemen precede the ballcarrier to advance the ball as far as possible. In the electric utility industry, a power play can have several meanings, but in reference to municipalization, a power play involves administrative maneuvering using the force of power.

Last month we detailed the efforts of Palm Springs to become an electric municipal utility. While no decision has yet been made on this proposal, other U.S. communities are considering similar efforts. Twenty-four communities in St. Lawrence and Franklin counties in upstate New York are banding together to create one electric municipal utility in the territory now serviced by Niagara Mohawk Power Corp., an investor-owned utility (IOU) in Syracuse, New York. Each town alone is too small to create its own utility, but together, the communities could create what they say would be a competitive municipal. Working with these communities is The Wing Group, an international project development firm in Houston, Texas, U.S., which was recently purchased by Western Resources, an IOU.

To the communities and Niagara Mohawk, the power play is a battle for survival. The communities have seen their rates steadily climb for the last decade, which is especially difficult for this mostly rural area. For Niagara Mohawk, the power play is a battle to hold onto a part of its service territory at a time when it must live with long-term, high-cost contracts forced on it by the 1978 Public Utility Regulatory Policy Act (PURPA).

The importance of this issue may not be so much in the number of municipalizations taking place, but in the timing of the actions. Any successful municipalization effort could set a precedent for other communities to follow, which, in turn, could affect the rules of the game and exactly who is left standing at the end.

It all started with a visit to Mom's house. With one visit, John Winghad plunged his company into a municipalization effort and had thrown the communities of St. Lawrence and Franklin counties into apower play against Niagara Mohawk Power Corp., the investor-owned utility serving that territory. Two years ago John Wing was visiting his parents in Norfolk, New York, a village seven generations of Wings have called home. As Wing visited with a friend of the family, he discovered that the friend's electric rates were higher _ 11.5 cents per kwh versus 3.8 cents per kwh _ than the Wing family's rates. The friend was served by Niagara Mohawk while the Wing family was served by Massena Electric Department, Massena, New York.

High electric rates had plagued the upstate New York communities for several years, but the towns and villages felt helpless to do anything in the face of a large utility like Niagara Mohawk. Upon the suggestion of his mother, Wing decided to get involved. His company, The Wing Group, had already helped develop power projects in countries all over the world. Why not at home?

"High electricity prices have hurt communities across the state, but the effect has been pronounced in communities like those in the North Country that are predominantly rural," Wing says. "The result has been a severe reduction in the opportunities for those who want to stay, live and work in the community, especially the young. Communities such as St. Lawrence and Franklin counties are faced with losing their greatest resources _ their young."

So, Wing made the village of Norfolk and the town of Norwood an offer they couldn't refuse: His company would pay for all the communities' upfront costs if they decided to break away from Niagara Mohawk and create their own municipal utility.

Municipalization was nothing new to the area. Fifteen years earlier, the town of Massena, Norfolk's larger neighbor to the north, had created its own municipal utility after a long and sometimes bitter battle. Niagara Mohawk fought Massena's municipalization effort and refused to wheel power over its transmission lines to the new municipal until it was forced to by the Energy Policy Act of 1992 (EPAct). The offer of financial help, however, was new. Massena had had to fight its battle alone.

"This was really an altruistic thing on behalf of John," says Mark Gammon, project developer for the Wing Group. "He really wants to help out the community where he's from."

The two communities accepted Wing's offer of financial help and signed a letter of intent with the company in early 1995. Soon, other St. Lawrence communities, as well as communities in neighboring Franklin County heard about the deal and began knocking on the Wing Group's door. As of the middle of June, 24 communities in St. Lawrence and Franklin counties have signed a letter of intent with The Wing Group. Sixteen communities have passed a referendum to proceed with The Wing Group.

Where's the Savings? The power of the movement really lies in the people affected by the high rates. Bob Marshall has been a businessman in Waddington, New York, for 34 years. The last 20 of those years he and his wife have owned the only grocery store in the community of 1500. The store sits in a blue building along Highway 37 away from Main Street, which houses the rest of Waddington's businesses.

Inside Marshall's 8600 sq-ft store, space is limited. Two cash registers sit near the entrance. The fruit and vegetables are stacked neatly in a small corner to the right. The meat department lines the back of the store next to Marshall's office.

Marshall and his wife would like to renovate and expand the store, but the high electric bills from Niagara Mohawk cut into their profits, making renovating difficult. The couple has installed energy-efficient equipment in the store _ the open-front frozen food cases were replaced with cases that have doors. "We were thinking we'd see a savings in our bill," Marshall says. "It never happened."

Marshall's gas bill has remained fairly constant over the years. For that reason, he has been considering installing a gas-powered generator to supply electricity to his store. If he has extra power, he would like to sell the excess to Niagara Mohawk.

"I would love that, even if it was only US$50 a month," Marshall says with a smile.

In 1982, when Marshall first started to track his rising electric bills, his annual bill was US$16,524. In 1995, Marshall's bill for his 8600 sq-ft grocery store was $47,431. Comparably sized stores in New York served by municipal utilities paid as much as US$33,000 less in 1995. A 10,500-sq-ft store in Mohawk, New York had an annual bill of US$15,000 while an 8100-sq-ft store in Philadelphia, New York had a US$14,400 bill. The figures are even more disturbing when compared to the 1995 bill for a 15,000-sq-ft store in Massena, New York, _ US$19,000.

"People in the area know what people are paying in other areas, and they're just flabbergasted by the difference," Marshall says.

A Course in Municipalization The town of Waddington signed a letter of intent with The Wing Group in March, but not until the 11 appointed members of the municipalization committee had thoroughly studied the issue. The members poured over a pamphlet of information about municipalization published by the American Public Power Association, an association for the 2000 public power utilities in the United States.

"We used it kind of as a guide in our dealings with Wing," Gary Wahl, one of the committee members, says about the pamphlet. "We have to look out for the town, too. I mean, as energetic as we are about getting municipal power, we still have to look out for the taxpayers."

Lawyers hired by Waddington have looked over the letter of intent. Wahl and Marshall hope that the lower rates a municipal could bring will attract new businesses to the area. Marshall says two prime pieces of property on the St. Lawrence River are waiting to be developed. One might be a residential development for summer homes.

"If somebody's going to buy a home for a summer home and they have to pay high rates and high taxes, it kind of drives them away," Marshall says. "I think low power is what's needed to set these things free and get the ball rolling."

Banding Together In order to get the ball rolling on the municipalization effort, the communities in St. Lawrence and Franklin counties say that they must band together.

"I don't think we can afford to do it on our own," says Marshall. "I know we can't. We don't have enough customers, and a lot of the other communities up here, because it's rural, are in the same position. But, if we all get together, then I think we'll have something that will really work out."

Even larger communities were skeptical about going it alone. The town of Potsdam, which includes the villages of Potsdam and Norwood, and the town of Canton, which includes the village of Canton, had a feasibility study done with the notion of creating their own municipal independent of the other communities. The town of Potsdam has 16,800 people and is home to a hardwood manufacturer and two colleges, comparable credentials to Massena. However, Potsdam and Canton decided on June 3 to join the other communities and sign a letter of intent with The Wing Group.

"There were some illusions that they couldn't do this without us," says Mike Weil, village administrator for Potsdam. "I think our coming on did close a loophole."

So, after two years of research, debate, letters of intent and referendums, the time seems to have come for the communities to get together and proceed with the next step: a feasibility study on the combined communities. As of press time, the communities planned to meet on July 11 to set a timetable, discuss forming a governing body and decide how to educate the public on the issue. The communities would like to put a public referendum about municipalization on the November election ballot.

The Bill Because the monetary risk is at the beginning of the municipalization effort, The Wing Group's assistance gives the communities a greater sense of security than other communities considering the same effort enjoy.

It takes resources and time to get a municipal up and running. Many communities start the process but don't finish it, some because of loss of political will, others because of promises of coming deregulation or fear of stranded costs. However, many of them quit because of the start up expense, according to Gammons.

The agreement with The Wing Group notes that if the effort fails or the communities back out, the communities are not obligated to reimburse The Wing Group for its expenses. If the municipalization effort is successful, The Wing Group expects to be reimbursed out of the communities' savings. The Wing Group had discussed the possibility of charging a one cent per kwh fee once the municipal is operating, but nothing has been formalized as of yet.

"Every meeting you'd go to, people would be sitting there with their little computers, saying, 'Look, John Wing is going to make this much money,'" Wahl says. "Well, what is Niagara Mohawk making? He's got to get something back for spending his money. And if he can get a profit, that is what business is all about. He didn't come here to do it for nothing _ but he's going to give us one heck of a savings."

Gammons says, "Our motivation in this is that wholesale electricity prices in the northeast are very achievable, yet retail prices are outrageously high. That's the impetus behind what we're doing here."

The Wing Group will pay for upfront developmental costs, such as feasibility studies and design and engineering, according to Gammons. The company will not pick up implementation costs, such as purchasing the system and equipment or administrative costs. These costs would be paid for through bond referendums.

It is those other costs that concern Joe Ash, vice president of special projects at Niagara Mohawk. Ash has been coordinating the utility's efforts in dealing with municipalization and has been to many of the public meetings held in St. Lawrence and Franklin counties. He cites studies by consulting firm RW Beck, Seattle, Washington, U.S., that show that, depending on the size of the community, most municipalization efforts require US$10-30 million of bonding to buy facilities, reconfigure the system, build a distribution system, and buy initial equipment and inventory.

"Of that, only US$1 million-2 million represents legal and engineering fees," Ash says. "So sometimes there's a perception that what Wing is talking about is absorbing all the upfront costs and only getting paid back for their upfront costs if there is savings. Well, their portion of the upfront costs will ultimately only be a small percentage of what the community would be required to spend.

"Our attitude toward this is that we want the communities to make decisions that are in their best interests. We think that when all the facts are understood and when the changes that are coming within the industry become clearer, people are going to see that establishing a municipal utility is not the way to go."

Ash says that the communities should keep in mind the stranded cost issue. At the end of April, the Federal Energy Regulatory Commission (FERC) ruled in Order No. 888 that utilities can charge for stranded costs. Customers that leave a utility's service territory to create their own utilities can be charged a stranded cost fee for the excess capacity left on the incumbent utility's system. The April ruling also allows a utility that wheels power over its transmission lines to another utility to place a surcharge on the wheeling rate.

Wing says, "If retail wheeling is implemented in such a way that yields significantly cheaper electricity prices for all customers in a very short time, then our goal of getting down electricity rates will be fulfilled. If that means that the opportunity for The Wing Group is gone but the community is left in a better position, then I would feel more than satisfied."

Ash says that it is inevitable that individual customers are going to have choices in their electricity supplier in the same way that consumers can currently choose their long-distance telephone service provider.

"What that means is, customers are going to have the option to shop around for power supply anyway, so municipalization, in effect, becomes a wasted effort," Ash says. "The flip side of that is, if you do get into the utility business and you become the local distribution system as a municipal, and this competition comes, then you are exposing yourself to risk. If you make bad supply choices, you may not be able to cover your costs. Customers will leave you, and you may have losses as a result of that. So, the combination of the stranded costs question and the fact that competition and choice are coming anyway, we think make municipalization unnecessary and risky," Ash says.

However, Jim Booth, a principal engineer at RW Beck (which performed feasibility studies for two of the communities that eventually signed on with The Wing Group), says this thinking may be off-base. "Logic would suggest that you wouldn't have a lot of problems with customers leaving because the reason you formed a municipal was to get away from high rates," Booth says. The new municipal's rates would likely be low, which would attract new customers once retail wheeling becomes a reality.

The Power Choice Basics Niagara Mohawk's average residential rates are 12.03 cents per kwh, which is about 9 cents higher per kwh than municipal residential rates. Average industrial rates for Niagara Mohawk's customers are 7.4 cents per kwh, and average commercial rates are 10.6 cents per kwh. Ash admits that Niagara Mohawk's rates are higher than many municipals' rates, but he says the utility has done all it can to reduce them. Ash says that the utility's PowerChoice proposal would help lower the rates.

PowerChoice is Niagara Mohawk's proposal to reform the electric utility industry in New York. The plan, announced in October 1995, would "create a competitive electricity marketplace, freeze average electricity prices, and restructure the utility to meet competition," according to a Feb. 12, 1996 special edition of the utility's Government Action Report newsletter.

The proposal also includes plans to file a traditional rate case with the New York Public Service Commission (NYPSC) under certain circumstances, which is exactly what Niagara Mohawk did on Feb. 12, 1996. The filing seeks an increase of US$223 million (an approximately 10% rate increase over 1995 bills for most Niagara Mohawk customers) for 1997. The utility asked that half of this increase take effect within 30 days as emergency relief from the "financial pressure of rising payments to unregulated generators, weak sales and other factors," according to the newsletter. The emergency relief request was denied by the NYPSC, but a decision on the 10% increase request will not be made until the end of the year.

Wahl says, "When they say a 10% raise, it's like coming along and slapping you in the side of the face after you've been to these meetings where they say you're going to have PowerChoice and freeze your rates for five years. Well, I don't call that a rate freeze by any stretch of the imagination."

William E. Davis, Niagara Mohawk's chairman and CEO, says in the Government Action Report newsletter, "We didn't want to file for a rate increase, but we're under growing pressure from mandated power purchases and weak sales. We need the rate relief to prevent our financial condition from deteriorating, and to maximize our flexibility."

The rate filing lists payments to unregulated generators as the main reason for the increase. The utility was mandated by the 1978 Public Utility Regulatory Policy Act to purchase power from independent power producers (IPPs). The federal law was supplemented by a New York law called the 6-Cent Law, which requires IOUs to buy the power at a minimum of 6 cents per kwh. In many cases, Niagara Mohawk had to sign contracts based on forecasts of its avoided costs, which called for prices higher than 6 cents per kwh. On average, the utility is paying 6 1/2-7 cents per kwh for that electricity. Current payments total US$1 billion a year. That amount is expected to increase by an additional US$195 million during 1996 and 1997. PowerChoice would reduce these payments, according to Niagara Mohawk, by renegotiating contracts and through cost-writedowns of above-market costs.

"If we could buy power on the open market, prevailing market prices are anywhere in the area of 2-3 cents per kwh, and that would be very attractive," Joe Ash says, "but we're not free to do that because we're already buying so much under mandated long-term contracts."

According to Ash, over the last 15 years Niagara Mohawk's load has grown 1000 MW. The utility has added 450 MW of capacity from Nine Mile Two, which began operation in 1988. The IPP contracts Niagara Mohawk was forced to sign amounted to an additional 2700 MW. With these additions, Niagara Mohawk had approximately six times its prior capacity.

"It's well beyond any load growth we've had over the last 15 years," Ash says. Because of the mandated purchases, Niagara Mohawk had to reduce its purchases of other, often more economical, resources.

Niagara Mohawk is looking for help from the state in the form of reductions in state utility taxes. New York utilities are taxed at twice the rate of other utilities in the U.S. Eighteen percent of every customer dollar goes to taxes. The largest of those taxes is the regressive state Gross Receipts Tax. Taxes are applied in New York based on a percentage of the base rate.

"Together, unregulated generator payments and taxes amount to just about half of every dollar our customers pay," Davis says in the newsletter. "Over the past few years, we've done just about everything we can to reduce our internal costs _ the half of the customer dollar we do have control of. We've cut our workforce by more than 25%, more than 3000 jobs. We've cut our budgets dramatically. Our 1996 departmental expense budget is US$100 million below 1995, and our capital budget is US$140 million under 1994. PowerChoice lets us address the other half of the dollar."

PowerChoice would drastically change the organization of the utility by splitting it into two separately owned and managed companies. One company would own all the generating facilities and the other company would be a holding company with regulated and unregulated subsidiaries. The regulated subsidiaries would transmit and distribute electricity and natural gas. The unregulated subsidiaries would market and broker electricity services.

In addition, Niagara Mohawk would create a wholesale power market in its service territory. The utility's generating company would compete with other power suppliers. The wholesale market, once extended state-wide, would be run by an independent system operator. Niagara Mohawk's proposal would expand the market at a later date to include retail sales. The decision on PowerChoice has not yet been made.

The Bottom Line Wahl says he understands that Niagara Mohawk has been placed in an awkward position by the 6-Cent Law. "They're scrambling right now," he says. "I'd hate to be in their shoes." However, the bottom line is Wahl and others in the communities want lower rates.

"We've never had a question about their service," Wahl says about Niagara Mohawk. "What we question is their rate increases and the bottom line is their price. It's astronomical. They shake their heads up and down and say yes, yes, yes, and they talk to you, but it's all rhetoric, as far as we're concerned. We want to see something positive done."

Ash says communities are considering municipalizing because they see the low price of power on the wholesale market and they think they can access the 1 1/2- to 2-cent per kwh power that other municipals in the state have access to. Ninety-five percent of the municipals in New York, including Massena Electric, receive hydropower from the New York Power Authority (NYPA), whose rate for wholesale hydropower is about 1.6 cents per kwh. According to NYPA, all of the hydropower for municipals has already been allocated in contracts that run through the year 2013.

"So there is no more of that power for new municipal utilities for awhile," says Ash. Where the St. Lawrence and Franklin County communities will look for generation still seems to be a mystery. The communities are still in the beginning stages of municipalization, and a supplier will be decided on later, according to Gammons.

The communities are charging ahead with plans for the municipal. Whatever the future of deregulation, stranded costs and retail wheeling, the New York communities and The Wing Group continue playing their hand in a power play they hope will offer them a new future. TDW

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