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ELECTRIC INDUSTRY RESTRUCTURING

Federal electric industry restructuring should not impose a mandate on states or allow market abuses and needs to address "private use" restrictions on tax-exempt bonds for consumer-owned or public utilities. Reliability also should not be jeopardized (accompanying paper).

Platte River Power Authority is a public power agency, owned by the four cities of Estes Park, Fort Collins, Longmont, and Loveland. To provide for anticipated growth into the 21st century, the cities pooled their federal hydropower allotments in the 1970s and built Rawhide power plant north of Fort Collins. Rawhide is recognized as one of the cleanest coal-fired plants in the U.S. Platte River also owns an interest in the power plant at Craig, the Yampa Project, which also employs state-of-the-art technology.

PUBLIC POWER HISTORY

"Public power" in other countries typically means a nationalized monopoly with little or no private competition. However, in the U.S. 75% of the electric industry is investor owned. Since the early 1880s, U.S. voters have chosen public power as a way to inject competition. In Colorado, power is supplied to about 35% of the Colorado population by consumer-owned utilities (municipal and rural electric cooperatives) --- but 80% of Colorado geographically. Colorado enjoys some of the nation's lowest power rates due to the concentration of major loads along the Front Range, proximity of coal, and competition between private and public power.

STATES' RIGHTS

Platte River Power participated in Colorado's legislatively established Electric Advisory Panel. The 29 member panel was asked to address two questions.

• Is restructuring in the best interest of all Colorado consumers?
• If the legislature proceeds with restructuring, what issues need to be addressed?

For the panel's final report in November 1999 a strong majority (17 of 29 members) of the panel voted restructuring is not in the best interests of all Colorado consumers at this time.

Platte River has adopted the following principles regarding restructuring.

• Local decision-making: within public power communities, ensure local citizens retain local decision making authority over their municipally owned utilities.
• Duplication of facilities: ensure wires and meters are not duplicated to individual customers, and local distribution entities (municipal electric systems) are appropriately compensated for use of their systems.
• Reliability and quality: electric system reliability and power quality must not be degraded.
• Taxes and open meetings/public records: ensure tax, open records, and public meeting issues are resolved so no utility has an unfair competitive advantage.
• Market power: protect against any one energy supplier gaining "market dominance" and controlling the price of electricity above reasonable costs and profits.
• Joint planning: ensure rules, systems and incentives are in place to promote cooperative planning and participation in joint generation resources and transmission infrastructure.
• Bond holder protection: Platte River has significant outstanding debt secured by "all requirements" contracts with its owner municipalities. The customer base must be sustained for the debt secured by a non-bypassable charge to the connected customer.
• Opt-in: municipal electric systems must have the right to "opt-in" to a restructured environment. If the municipal electric system is a member of a joint action agency, the agency must have the right to compete for retail customers to the extent its members have opened their service areas to competition.

MARKET ABUSES

Market power abuse is the biggest hurdle to competition --- control of generation and transmission is going to an increasingly small number of players. Federal restructuring of the electric industry should have a high probability of benefiting all classes of customers with no degradation of reliability of service.

An effective market structure largely could police itself, with FERC pursuing any companies abusing customers rather than FERC acting as a regulator of the entire industry's operations.

Another argument for a market structure and against "letting the market structure evolve" is the market already is evolving into a system of large, private, regulated monopolies. Those larger investor-owned utilities (IOUs), with their vertical integration and economies of scale or scope, already should have resulted in lower rates, yet public power still has lower rates.

In an area where economies of scope would help --- the formation of regional transmission organizations (RTOs) --- IOUs are lobbying hard for language allowing single-utility RTOs. RTOs should not simply create or maintain the market power of participants, but ensure open transmission access, policies to maintain reliability, and eliminate market power in generation and transmission by providing for neutral management of the grid.

TAX-EXEMPT BOND RESTRICTIONS AND COST DIFFERENCES

Platte River supports revising the current Federal Tax Code "private use" restriction on tax-exempt bonds for state and municipally operated utilities to enable participation in competition.

Cost differences do exist between public power and IOUs. Data for the last fifty years show public power rates are notably lower than rates of IOUs.

What would happen to customer rates if public power systems did not have tax-exempt bonds, lack of federal taxes, and access to federal hydro power? IOUs declare consumer-owned power's lower prices are solely the result of such subsidies. However:

• Tax-exempt bonds: only one-fifth of an overall 17% rate advantage can be explained by public power's access to tax-exempt financing. Further, any federal tax advantage enjoyed by public power is equaled by IOUs' federal tax advantages (deferred taxation, investment tax credits, tax-exempt bonds).
• Taxes: when all taxes and contributions of public power utilities to state and local governments are taken into account, the median net payment as a percent of electric operating revenue was virtually identical between public and private power --- approximately 5.7% to 5.8% for both.
• Access to federal hydropower: calculating rates as if federal hydropower were spread equally over all customers of all utilities in states where federal hydropower is marketed, on average, public power's rates would increase from this reallocation only 1.78% (although some individual systems might experience severe rate shock, such as a small town's).

Taken together, these reasons alleged for lower public power rates fail to explain about 70% of the 17% difference between consumer-owned and IOU power rates. The factors explaining why public power can and does supply less expensive power:

• rates set by citizen boards with local cost scrutiny;
• open records and open meetings;
• lower administrative costs, such as lower management salaries; and
• public power systems are nonprofit and do not pay dividends.

Attached is a comparison of public power and IOU tax benefits.

FEDERAL HYDROPOWER

Lower prices typically enjoyed by public power are not due to "cheap, subsidized federal power" as opponents to public power claim. First, power from federal hydro projects, such as the Colorado River Storage Projects (CRSP), typically is only part of the mix of power sources for a community (23% for Platte River Power). Second, customers of federal hydropower pay not only its way, but other federal costs. For example, regarding CRSP:

• municipalities responded to the federal government's request to help develop costly hydro facilities years ago when coal-fired power was cheaper;
• since then, municipalities and other preference customers have built significant equity in these transmission and hydro projects -- e.g., for CRSP facilities, customers:

• repay hundreds of millions of dollars federal investment in those facilities;
• pay all annual operating and maintenance expenses;
• fund a number of system enhancements; and
• repay about 98% of irrigators' costs --- hundreds of millions of dollars for irrigation costs beyond the ability of irrigators to repay; and

• customers fund extensive environmental impact studies, for example, the $100+ million EIS regarding Glen Canyon Dam.

ELECTRIC SERVICE IN ANNEXED AREAS

Municipal electric systems have the Colorado constitutional right (Article XX) to provide service to all citizens within their corporate limits. As a city or town annexes new land, electric customers on that land receive city services, including electric service. Agreements are in place to compensate the prior electric provider, either a rural electric cooperative or an IOU, for loss of these customers. These arrangements are made by mutual agreement of the parties or, in the case of the cooperatives, a state law (CRS 40-9.5-201) exists to fairly compensate them for loss of customers.

SOURCE: Platte River Power Authority, January 28, 2000.

 

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