Public Power: Bucking the Trend

As a result of the early failures of deregulation in the United States, we have
learned two critically important lessons about the balance of private enterprise
and public interests.

First, it is now very clear that the process of deregulation is more corruptible
than the process of regulation. California alone has alleged that these practices
cost the state nearly $10 billion in electric overcharges. Some estimates exceed
$20 billion.

It is impossible to identify any failures of traditional utility regulation
that have cost consumers even a fraction of that amount. The process of deregulation
is corruptible where policy-makers abdicate their responsibility to establish
rules in the public interest, either through their own inaction or by allowing
market participants to make the rules. And the process is corruptible if regulators
don’t effectively regulate deregulation.

Second, deregulation (at least successful deregulation of existing monopolies
that delivers on its promises of lower rates, better service, and greater innovation
for consumers) is a government project. It doesn’t happen through the simple
elimination of regulatory constraints.

It is, in fact, hard work. Smart people — public servants who act in the
public interest — must design a deregulated environment. That environment
must have very clear rules. Such rules are difficult to devise because of the
unique characteristics of our industry and because smart people will push the
limits and shift the rules to their own financial advantage.

Strong and effective regulators must enforce these rules. Again these regulators
must be public servants employed by the government with a clear vision of what
is in the public interest as well as effective sanctioning powers.

The Role of FERC

In America, I believe we are beginning to understand these lessons. The Federal
Energy Regulatory Commission, for example, has become much more aggressive in
monitoring the market. It is beginning to develop rules that will provide greater
transparency of market information. It appears to want to punish those who have
abused their power in the marketplace in the past, and prevent such abuses in
the future.

It is less clear whether our Congress has learned these lessons. The United
States is very much a capitalist society. There is a very strong resistance
to government interference in business. Many still hold an almost religious
belief in the virtues of free markets totally unrestrained by government regulations.

At the outset of debates on utility deregulation, many industry observers predicted
the rapid demise of public power. It was argued that public power systems simply
couldn’t survive in a deregulated environment because they were too small to
capture economies of scale in generation and distribution, and because they
were too unsophisticated to deal with the complexities of a deregulated environment.

These predictions, of course, fit well with the ideological belief that government
had no business in the electric utility business. As it turns out, none of these
predictions has come to pass, and public power is stronger than ever.

Almost half of our 50 states enacted retail deregulation legislation. In every
case, the self-regulating, publicly owned electric utilities were allowed to
opt out of the deregulated environment. They fought for this right to chart
their own course; it was part of their tradition of local control.

Today, they and their customers are extremely glad that they prevailed. In
some states that enacted retail deregulation, most notably in California but
in others as well, the privately owned, vertically integrated electric utilities
were required to divest their generation resources. Publicly owned utilities
were exempt from this legislation and decided to retain their generation. The
wisdom of these decisions has been borne out by their experience.

California — Public and Private

California’s three private power companies sold 50 percent or more of their
generation. When the energy crisis hit the state in the summer of 2000 and continued
through the first half of 2001, the privately owned utilities had insufficient
generation to meet demand. They, and their customers, were at the mercy of the
dysfunctional wholesale market.

However, the state-restructuring law prohibited these utilities from passing
along these higher costs. (Remember, these utilities helped draft this law,
so they bear much of the blame for this provision.) As a result of this crisis,
California’s largest privately owned utility filed for bankruptcy, and the second
largest private utility was pushed to the brink.

In contrast, California’s public power systems had sufficient reserves to meet
the needs of their communities. They maintained their rates based on cost-of-service
principles. In some cases, they had surplus power that they could sell to others.
As a result, these systems today have fiercely loyal customers and are financially
sound. Their ownership of generation and their control of their own destiny
helped them weather this storm.

Figure 1: Ownership of Electric Utilities in the United States
Courtesy of: American Public Power Association

Public Power Becomes a Goal

Public power’s record of success in California has been noticed. This success
has been a catalyst for community leaders in other California cities and throughout
the country to take a new, hard look at the public power option. In fact, the
interest in public power is higher today than at any time in my 25-year career
with the APPA.

High electricity rates, poor service, and a desire for local control are motivating
factors for cities and towns to explore the public power option. Voters in Clark
County, Nevada, approved a non-binding referendum that gave the Southern Nevada
Water Authority a boost toward its goal of purchasing Nevada Power Company.
At the same time, the city of Corona, California, announced plans to take over
electricity service from Southern California Edison. The city of Portland and
surrounding counties are preparing a proposal to purchase Portland General Electric,
currently owned by the bankrupt Enron. Fifteen towns in Iowa are considering
municipalizing their electric service, as are a number of communities in Florida.

People are gaining a new appreciation for the fact that electricity is not
just another commodity. It is an essential service. More than that, it is a
local service. The way it is generated, transmitted, and distributed can be
subject to local control, and local control can provide protections against
volatility in supply and price.

There is also the recognition that publicly owned electric utilities are more
than able to manage their business affairs in a complicated and rapidly changing
environment. There is nothing anachronistic about today’s public power systems.
They have demonstrated that they can handle the challenges of today and tomorrow.

Adverse Impacts

Despite these success stories, many publicly owned electric utilities have
been adversely affected by deregulation. Most of California’s publicly owned
utilities are part of the integrated utility system within the state. Very few
operate their own control areas. Therefore, when rolling blackouts were instituted
to protect the integrity of the system statewide, they were affected even though
they had adequate generation to meet their own needs.

A few publicly owned utilities in California, and many more in the two states
to the north — Oregon and Washington — were short on generation because
they rely on hydropower, and the region was in the middle of an extended drought.
These systems were forced into transacting in a volatile and dysfunctional wholesale
market. They were forced to pay several times the actual cost of production
for power to meet their loads.

Some incurred huge debts, were required to implement rate increases of 50 percent
or more, and now must deal with these financial and public relations problems
for the next few years.

Even here, however, public power’s virtues are apparent. Those publicly owned
utilities that were adversely affected, for example Seattle City Light, acted
quickly to deal with the crisis. Local control and public support enabled the
utility to borrow money as needed and to raise rates immediately to cover costs.
The credit rating agencies recognized local control as an important attribute
of public power.

Today, these rating agencies are expressing their confidence that publicly
owned utilities are financially sound and can weather whatever storms they might
face in the future. This is a tremendously important vote of confidence in public
enterprise from America’s financial community.

Figure 2: Location of Community-Owned Electric Utilities in the United States
Courtesy of: American Public Power Association

New Generation

Yes, some industry participants and observers predicted deregulation would
be the end of public power. Indeed, many publicly owned utilities felt the best
and safest route was to become nothing more than a wires company, distributing
power to their citizen-owners but disengaging from the power supply business.
The experience in California changed all that.

Today, more and more publicly owned utilities believe that the only true hedge
to market volatility and instability is the ownership of generation. So individually
or collectively, publicly-owned utilities are reevaluating their future power
supply plans, and more and more are looking at or actually developing new generation.
As a result, their presence in the market will increase, not decrease. This
is exactly the opposite of what many predicted just a few years ago.

Publicly owned utilities are a minority player in America’s electric utility
industry. We are and will remain dependent on others for our transmission needs,
and we are likely to remain dependent on others for at least a portion of our
power supply needs.

Diversity of power supply resources, some owned and some purchased under power
supply contracts, is a prudent way to manage risk, and publicly owned utilities
quite clearly are prudently managed local enterprises. However, because of our
dependence on others, including private power companies, independent power generators,
and power marketers, it is clear that we cannot isolate ourselves from the rest
of the industry.

We have a vested interest in how the industry will be restructured, because
its structure will affect our future and our ability to continue to provide
low-cost, reliable service to our customers. For that reason, we have been and
will continue to be very active participants in debates over the future of our