Toledo Public Power’s First Customer
Originally published July 15, 2013
Toledo Public Power has the distinction of being one of the newest and by every measure the smallest municipal electric utility in the United States. It began operations in August 2012, with one supplier, one substation and one customer.
Establishing a municipal utility was not the city’s original intent; in many ways, Toledo backed into the utility business in its decade-long drive to counteract high rates.
“Toledo suffered immeasurably under high rates due to nuclear construction costs and the costs of stranded assets,” said Leslie Kovacik, general counsel for the city of Toledo and for the utility. “At the time of deregulation, we had the highest rates in the state of Ohio, and aside from New Jersey and Hawaii, some of the highest in the nation.” Kovacik writes contracts for the utility and, since there is no electric department, serves by default as both management and staff, right down to preparing the monthly bill for OmniSource, the utility’s sole customer.
“Our goal has always been—whether through our initial aggregation efforts or the formation of TPP—to reduce rates. Rates shaped our frame of mind, and lowering rates became our mission,” she said.
OmniSource, a scrap metals recycler that might have left Toledo area without the rate relief provided by the municipal utility, is now saving tens of thousands of dollars a month on its electricity bill. Where Toledo Public Power goes from here is anyone’s guess.
“We may branch out with another customer or two, but we have no master plan for expansion, and no appetite for condemning the distribution system. We simply don’t have the money,” Kovacik said.
The origins. The creation of Toledo Public Power goes back to 2007, five years before it’s power began to flow to Omni. The Toledo City Council passed an ordinance authorizing formation of a utility and added a chapter on the utility to the city’s code. But it was a utility in concept only.
Motivations were mixed: economics, civic pride and retaliation. “It was in many ways a backlash against what we had been seeing for a decade or more from our local electric distribution utility,” said Kovacik. “Of course, the [city-owned] utility was only on paper. We couldn't actually flow any electricity, but we had established our ability to organize.”
Toledo Public Power sat on a shelf for two years, but was pulled off in 2009, when Kovacik received a call from OmniSource looking for a new supplier. The company’s long-term contract with First Energy had expired, along with the favorable rates First Energy had for years provided to Omni and many other mid-sized firms. While large firms, such as the Chrysler assembly plant, were allowed to keep the low rates, Omni was facing a big jump in its monthly power bill that put 200 local jobs at risk.
Omni approached city officials and said, “You have this thing on the books, this public utility. Can you sell us power?” Kovacik recalled.
Thus began the process of bringing Toledo Public Power to life. “I got the mayor on board and we brought in some consultants,” Kovacik said. “We needed facilities—a technical presence—so we bought Omni’s on-site substation and distribution lines. We also needed a wholesale power supplier with favorable rates, so we sought out and became the 128th member of American Municipal Power, headquartered in Columbus.”
Everything was falling into place, but before the utility began operating, the city executive staff turned over. In 2009, a new mayor and new set of directors wanted to take a fresh look. They authorized $15,000 for an electrical systems study with First Energy. Finally convinced of the municipal utility’s feasibility and value to the local economy, the new city leaders gave the go-ahead. Contracts with AMP and Omni were finalized in the summer of 2012, and on the first day of August, 6 MW of power began to flow from AMP’s wholesale resources through the substation to Omni’s scrap metal plant.
The sole customer. “It took longer than anyone imagined but it was worth it,” Kovacik said. “Omni hung true with us through the delay, and [is] now competitive again. They were going to add a third shift but had hesitated over the cost of power. Now they can manage the power flow the way they want. They don't have to worry about First Energy’s peaks and whether it is going to be more expensive. Omni is our one shining little light.”
OmniSource is one of North America’s largest processors and distributors of scrap and secondary metals. The Toledo facilities are centrally located and employ about 10 percent of OmniSource’s workforce. Collectively, OmniSource facilities process 7 million tons of ferrous scrap per year and more than one billion pounds of nonferrous metals. They also maintain a national brokerage and trading service for metal buyers and sellers, providing market intelligence and insights needed to optimize transactions.
Grass roots aggregation. The roots of Toledo’s energy activism go back to the feverish days of deregulation in 1999 and 2000. As city attorney, Kovacik was told to take the lead. “When I started, I didn’t know much about the business, but electricity was hot, deregulation was happening and someone said you have to go to the [Public Utility Commission] and intervene in these cases, because we have such high rates. We had decades of legacy-debt hanging over us from Toledo Edison’s construction of the Davis-Besse nuclear plant.”
The most logical path to rate reduction, and the one arising from the structural freedom of deregulation itself, would be to create a consumer aggregation pool and go out for bid. “I reported our position to council, that we had by far the highest rates in the state, and said to them, ‘This is why you have to let me do aggregation.’” The council agreed, and Toledo became the first city in Ohio to apply to be a governmental aggregator.
The city automatically enrolled Toledo residents into a pool. Residents conveniently had to do nothing, but could opt out. The city encouraged neighboring suburbs to enlarge the pool, then went out for bid, searching for an alternate supplier who would sell power below tariff.
Initial reactions in the community to the idea of aggregation were mixed. Many went along, encouraged by the city’s efforts to lower their bills, but others were surprisingly angry. “The first time we did the aggregation opt-out, I got phone calls calling me a socialist and a communist,” Kovacik said. “How dare I think I had the right to say that if you want to join the city’s aggregation program you don't have to do anything, that after 21 days you are going to be rolled into the program, and you are going to get your power from a third-party provider, which will be cheaper than tariff.” Distrust in some circles was so high that 15 to 20 percent of the residents opted out in the first round, even though it meant they would pay more.
“I fielded those calls for a year or two, but slowly things calmed down,” Kovacik said. “After they realized they were paying less, the lights didn't go off, and there was no communist plot in Toledo, the opt-out rate dropped. Right now our opt-out rate is really low, and people now call to ask how they can get into the aggregation pool.”
For more than a decade, Toledo intervened in nearly every PUC suit regarding rates and aggregation with First Energy. First Energy appeared to dislike aggregation in the beginning. Company officials came to Toledo City Council meetings and worked the political angles, trying to tamp it down. Then they switched gears. “Instead of fighting it, they just created a subsidiary to gobble up all the aggregators’ business by providing rates cheaper than any other power company,” Kovacik said. “In the end they got the business. After all the contentiousness, it was difficult to contract with the utility’s subsidiary, First Energy Solutions, but our residents’ needs came first. They are now saving 6 to 7 percent off their bill.”
Kovacik continues to run the city’s aggregation program and enjoys her role as the city’s de-facto consumer advocate. Her activism paid off in numerous ways for customers. “We held firm, and we got rid of the 30 years of Davis-Besse costs and we got rid of the five years of stranded-asset costs. As a result, we no longer have the highest rates in the state. We are safely in the middle to the lower end of the pack.”
She also works in close partnership with the Ohio Consumers Council, a state entity that serves as a utility watchdog, along with a large aggregation pool from the Cleveland area. “We unofficially call ourselves the Northwest Ohio Aggregation Coalition. NOAC in turn coordinates utility efforts with the Ohio Consumers Council, a state entity that serves as a utility watchdog, along with a large aggregation pool from the Cleveland area. A few years ago, we realized that we really have the same goals, and now we join together to write briefs and undertake as much activism as we can.”
One key area involved the state’s renewable portfolio standard. “NOAC was very involved in Ohio Senate Bill 221 a few years ago. We argued to get the carve-outs for solar and wind,” Kovacik said. The mandatory standards in Ohio now call for 25 percent of the electricity sold by each utility or electric services company to be generated from alternative energy sources by 2025. At least 12.5 percent of it must be generated from renewable energy resources, including wind, hydro, biomass, and solar. The remainder can be generated from advanced energy resources, including nuclear, clean coal and fuel cells. The Ohio RPS requires that at least half of the renewable energy be generated from facilities in the state itself.
The future. For a utility with only one substation and one customer, Toledo Public Power has nowhere to go but outward. The utility’s expansion may be incremental or large-scale, taking on substantial segments of the distribution system.
As much as the city might like to grow the public power utility’s customer base, the financial resources and legal battles make it difficult, if not impossible, said Kovacik. “I just don't know how we could pay for condemnation. First Energy is a massive, multistate utility, and my sense is that they would never sell willingly, nor sell reasonably.”
The more likely course is to find a more organic growth process, where technically, legally and financially, the utility can remain on solid ground. “Knowing we have to take condemnation off the table, the next project will likely be an offshoot from where we are presently, branching outwardly from our first substation,” Kovacik sad. “Another option would be to have a company spring up and form a partnership with us to develop a power connection.”
She expects First Energy to keep a watchful eye, protecting its domain, but here the city has new resources to fall back on because of its membership in AMP. “We feared First Energy would fight us when we began the process with Omni, but we made the decision to go to FERC if they denied us the right to interconnect. AMP was very supportive of Toledo’s decisions, and we were encouraged by their reputation for being willing to go to the mat for their members.”
In the end, First Energy did not obstruct the utility’s launch. Among commercial and industrial customers in Toledo, word of Omni’s success in lowering rates has gotten around.
“I did have lots of random calls when we first passed the ordinance in 2009,” Kovacik said. “Then the mayor held a press conference and we got more calls. Repeatedly, I was asked, ‘Can you do for us what you did for Omni?’ The interest is out there, but it will be a difficult feat to recreate the Omni experience. Things sort of fell into place with them, with our ability to purchase their substation.”
Toledo has created a fund that could be used to spur at least small-scale expansion. “Public power gets a fee every month, which is slowly accumulating. This gives us a small fund that we can hopefully use to purchase infrastructure for the next customer. We’ll need a handful of customers before we start adding staff.”
A couple of possibilities for interconnection have been cited in the local news; there is speculation, but no real commitments. One involves a $28 million landfill gas generation project now under development that can be used to generate power. In addition, there are some proposed solar fields and wind turbines at Collins Park that could be use to generate green power for the city.
With little money, no experienced engineering staff, and a large utility determined to keep the new public power utility as small as possible, expansion will almost certainly have to come from the bottom up.
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