Powering Strong Communities
Community Engagement

Going local: municipalization empowers communities

Boulder, Colorado is America's top-ranked city in overall well-being and quality of life, according to a 2010 Gallup-Healthways poll. Yet the city laments that its energy supply is one of the most carbon-intensive in the nation," and it has been exploring options to deliver clean, reliable, low-cost, local energy to the community. Currently, the city's preferred option appears to be municipalization — the creation of a locally owned electric utility, operated through the local government, that would take over the role of power provider from Xcel Energy, a large for-profit investor-owned utility (IOU).

In May 2014, the Boulder City Council gave final approval to an ordinance creating a city-owned utility that can explore takeover of Xcel's electricity distribution system. Xcel filed a suit on June 3 challenging the city council's unanimous vote to form a municipal electric utility. The suit contends that formation of the utility was premature and the city failed to meet requirements that it show it can provide electric service at similar or lower rates than Xcel with comparable reliability.

The battle in Boulder is typical of a community that decides to municipalize the retail provision of electricity.

Of the nation's 3,200 electricity providers, just over 2,000 are publicly owned utilities, serving 14.5 percent of all electricity consumers. A total of 59 public power utilities were formed in the last 30 years, 17 of which spawned in the last decade alone.

Municipalities across the country continue to show interest in public power. Like Boulder, dozens of cities and towns are evaluating the option of forming a public power utility. The local officials who are spearheading these efforts know that it takes considerable money, time, and effort, but know the benefits of public power are enduring.

What are some of these benefits? Public power utilities are owned by — and accountable to — the people they serve. Because they are not-for-profit, public power utilities often offer lower electric prices. U.S. Department of Energy data show that average electricity rates for residential customers of public utilities are 14 percent less than rates paid by customers of IOUs (for more on rates, see our paper, Public Power Costs Less).

Public power utilities also invest any profits back in the local community. Decision-making is brought back to the local community, where the public power utility carries out the community's goals, such as investing in the local infrastructure, investing in economic development, and generating local employment opportunities in addition to ensuring service reliability, energy conservation, renewable energy, environmental sensitivity, and safety.

Local tax revenue can be preserved because public power utilities typically make financial contributions to the local government in the form of payments in lieu of taxes, transfers to the general fund, and/or free or reduced-cost services to the city. An American Public Power Association survey comparing the financial contributions of public power versus IOUs showed that the median amount contributed by public power utilities, as a percent of electric operating revenues, was 33 percent higher than those made by investor-owned utilities.

A quick look at three public power utilities formed in the 2000s reveals why communities choose to municipalize and the benefits they reap.

Winter Park, Florida formed a public power utility in 2005 to overcome persistent problems with its incumbent IOU, Florida Power Corp. City leaders were barraged with complaints about outages. The private utility's franchise was coming to an end, and the franchise included an unusual clause allowing the city to buy the distribution system at the end of that period. In 2003, residents turned out in droves and nearly 70% voted in favor of the city's plan to form a municipal electric utility. The city contracted with ENCO Utility Services Inc. of California to operate the utility for the city under a 12-year contract and committed to use all of the revenues from its electricity sales — except for a contribution to the city's general fund — for capital improvements. The city committed to undertake a strong program to improve the reliability of electric service. This included, but was not be limited, to putting significant portion of the power lines underground.

Hermiston, Oregon formed a municipal utility in 2001 following a four-year effort. The municipalization effort began because the IOU closed its local customer service office and citizens determined that the company's service level was declining. Citizens approved a plan to take over the IOU's distribution system. The IOU fought Hermiston's condemnation proceeding in court, but the court ruled in favor of the city. After the decision, the IOU agreed to sell the system to the city for $8 million, approximately twice its appraised value. The city-owned Hermiston Energy Services reduced customers' rates in its first year of operation, and the utility's average rates for both residential and commercial customers remain well below the average rates that the IOU charged.

Clyde, Ohio, Light & Power constructed its own distribution system in 1989. When Clyde, Ohio, a town of 6,000 people, decided to pursue formation of a municipal utility, the initiative was entirely supported by the Whirlpool, the town's largest industrial employer. Citizens voted "yes" in a referendum and the town borrowed $11 million to install its own poles, wires, transformers and electric meters to compete head-on with the IOU in the community, as is allowed by Ohio law. Five years after the municipal utility began operations, its electric rates were 30 percent lower than those of the IOU and most people in town (except the IOU's employees) had switched to public power.

Not every effort to municipalize electricity is successful. Communities may abandon efforts to form a public power utility because the IOU responds to the competitive pressure and offers lower rates, improved service, performance standards for reliability, investment in the community, and/or a settlement fee.

However communities receive significant benefits simply from exploring the public power option. Here are just two examples.

In the 1980s Brook Park, Ohio, a suburb of Cleveland, looked at forming a municipal utility to achieve lower rates for its citizens and its major employer, the Ford Motor Co. The IOU could not cut its rate for Brook Park residents (without doing so for all of its towns in its service area), but it did agree to give Ford a considerable rate cut because of the municipalization initiative. Ford agreed to turn over a portion of its savings to the city each year ($1.6 million), and the city agreed to drop its public power initiative for the time being. The city of Brook Park planned to distribute the money from Ford directly to its citizens.

The city of Casselberry, Florida negotiated with its IOU for two years on the renewal of its franchise agreement. The parties could not come to an agreement, and in April 2003, the Casselberry city council voted to begin buyout proceedings. In August, the city accepted a new agreement that included a franchise fee of 6 percent, reimbursement of expenses incurred, and a requirement that the IOU fix any problems identified in reliability studies to be conducted by a consultant every five years.

While municipalization is certainly not for everyone, the demand for locally-owned products and services is on the upswing. A recent working paper from the Governance Studies program at the Brookings Institution examining the characteristics of the millennial generation points out that millennials are socially conscious and prefer to shop with entities that prioritize social causes that align with theirs. They distrust big companies; and are more favorable to government regulation. This generation is more disposed to support clean energy, wants more choice in its energy decision-making, and may favorably view government intervention to achieve these goals. All these factors increase the growth potential for public power as a business model, and a way of life, in communities across America.