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Know your worth, show your worth: determining the true value of a public power utility

It is a best practice for every public power utility to conduct a periodic valuation of its services and assets, even when the skies are blue and there is no threat of a potential sale looming.

A valuation usually underscores the core benefits of public power — competitive retail rates, a track record of reliability, and a wide range of economic contributions.

However, the real value that public power brings to the table goes beyond dollars and cents and keeping the lights on. Community relationships, local control, and high standards of customer service are factors that add intangible but immense value that sets public power apart.

The traditional methods of valuating utilities have many limitations for public power.

Different approaches to utility valuation

Mark Beauchamp, president and founder of Utility Financial Solutions, a company serving public power for many years, outlined three approaches to valuating a utility. Each method has its shortcomings, he said.

The first approach is depreciated replacement cost. Beauchamp said this method only looks at the asset investments and the age of the assets. It does not consider the fact that a lot of the assets that are depreciated in the books are still in service and working fine. This approach also does not consider the contribution margins generated by customers. “It only looks at the assets, and it doesn’t consider the goodwill that the utility has built up by providing service for a hundred years,” he said.

The second method is discounted cash flow. This method reviews the margins that would be generated by a purchasing entity by buying the local utility and compares those margins with the price that is being paid to determine net present value. But this method is “of little relevance to the local utility. It’s only of relevance to the purchasing entity,” Beauchamp said.

The third approach is to look at what the sale prices have been for other utilities. The problem is that it is difficult to compare utilities because the age of infrastructure, types of customers, density of service territory, and generating resources are different. “That all affects the value, so when you go to compare the sale somewhere else, it may not be relevant to the local utility,” Beauchamp said.

Florida Municipal Power Agency General Manager and CEO Jacob Williams said the fundamental question should be, “What value does a utility provide to the community it serves?” Looking at the book value of assets is the wrong way. One needs to look at the rate advantage, the benefits of local jobs, the utility’s reliability record and how it compares with the competition. Public power utilities tend to have a better environmental footprint as well, noted Williams.

There are other intangibles. Many times, for example, a city has shared services, and the electric utility pays for most of these. “If you take away the electric utility’s contribution, the city’s got to find those shared services from somewhere else because the utility’s not paying for it anymore,” pointed out Williams. Often, public power utilities put up holiday lights, go into the schools, screen movies in the park, and have many other projects that focus on the local community.

What are the other common missteps when public power utilities determine their worth? Beauchamp said that the financial impacts on the city as a whole are often overlooked. “They don’t consider the impacts on other utility services, because when you eliminate the electric utility and you’re still providing water and wastewater, you’re going to have shared services that the electric utility was absorbing, and now it’s going to be going only to the water and the wastewater, so it’s going to increase their costs.”

The same thing happens in relation to shared services for the city. The city general fund is going to have additional costs because it can’t continue to share those costs with the electric utility.

Another common misstep is neglecting to highlight reliability of service. Public power utilities, because of their local presence and proximity to customers, tend to have a far better reliability track record than cooperatives or investor-owned utilities. This can be lost in the mix when a utility determines its worth, Beauchamp said.

Help from joint action agencies

Many public power utilities might not have the expertise or resources to conduct their own valuations. Therefore, some joint action agencies help member utilities conduct such valuations or at least provide valuation templates.

Missouri River Energy Services has 61 member public power utilities in Iowa, Minnesota, North Dakota and South Dakota. MRES offers the Municipal Power Advantage program to help its members communicate the economic value of all the benefits the local electric utility provides to the community.

The program also educates policymakers and staff about their utility’s value to the community and increases the public’s awareness of its public power utility.

The toolkit helps members identify benefits such as local governance and policy-setting, access to tax-exempt financing, a high level of reliability, operational efficiencies through integrated utility operations, local customer service, key account programs for commercial customers, and other benefits.

Karen Olofson, a senior rate analyst at MRES, noted that the primary goal of the MPA program is to educate the community about the total benefits — financial and non-financial — its electric utility provides.

The MPA program does not calculate the value of the utility for a potential sale. It takes a proactive approach to stave off any potential buyout threat and is not reactive, Olofson said. “It is a tool to educate and inform the governing board, utility staff and the customer-owners about the gem the stakeholders have in the community and all of the services and support it provides to help the community thrive.”

Barnesville report catalogs all services to the city

In 2017, Olofson completed an updated valuation report on Barnesville Municipal Utilities for the City of Barnesville, Minnesota.

The report noted that the city received approximately $365,000 per year in financial benefits from the electric utility. The utility makes an annual operating transfer to the city’s general fund, averaging $212,430 per year from 2014 to 2016.

know your worth

 

The report said benefits that might be harder to quantify have real value to Barnesville. MRES noted that the city council has control of the electric rates and the utility’s policies and objectives, making them very responsive to the needs of Barnesville customers. “Other benefits that cannot easily be measured include purchasing supplies and services locally, achieving operational efficiencies by working with other city departments, providing local customer service, and being good stewards of the environment,” the report stated.

Olofson said that some of the non-financial benefits of public power utilities tend to get forgotten or simply taken for granted. 

It might be difficult to attach a dollar value to the in-kind services the utility provides to the city or other utility departments. However, if the community was served by an investor-owned utility or cooperative, the city may need to contract for these services, which might result in higher property taxes or other taxes and fees. The city might not be able to provide certain services to the residents and businesses. 

“In-kind services would include donated labor and electricity for festivals and other local events and shared equipment and staff among other utilities and city departments to reduce overall operating costs,” Olofson said.

She noted that Barnesville’s 2019 residential customers’ bills are now 5.2 percent lower than the average bills of the three Minnesota IOUs and a neighboring rural electric cooperative.

Olofson said customers tend to focus foremost on reliability and a fair and affordable bill that is cost-based. She said that customers also pay attention to the competitiveness of their utility rates compared to surrounding municipal utilities, IOUs and cooperatives.

It is difficult to compare apples to apples when it comes to utilities, so it is important to educate stakeholders on the revenue requirements unique to their utility — given variables such as power supply and transmission service costs, reserve and capital financing policies, transfer levels, and donations to the city and other entities, Olofson noted.

Kissimmee saves customers money

FMPA, in a January 2018 report for Kissimmee Utility Authority, said that KUA provides an estimated $25 million in annual economic benefit.

The report noted that KUA transferred approximately $16.7 million into the city’s general fund in fiscal year 2016, amounting to a 10 percent transfer of total retail revenue.

In addition, the report said that KUA’s competitive rates save customers money. “KUA and neighboring IOU retail sales and revenue data suggest KUA has a residential rate advantage,” FMPA said. Most customers of KUA are residential. “Since KUA has lower residential rates, the net rate savings is positive.”

The report highlighted KUA’s solid reliability performance. KUA outperforms a neighboring IOU in three key reliability indexes.

Intangible benefits provided by KUA include people having a voice in the community, local control, a localized customer service experience, and high ratings on customer service satisfaction.

FMPA, which has 31 municipal member utilities, has done over 20 valuation reports in recent years.

“We’ve given them to the utilities, and the utilities have sometimes presented the material to their board. Sometimes they’ve asked us to come in and assist them presenting to their boards, city councils, and even other community leaders to explain what they are worth and highlight the great things that are going on,” explained Williams.

In January 2019, FMPA completed a valuation report for Ocala Electric Utility and presented the highlights at a meeting for the Ocala/Marion County Chamber & Economic Partnership.

Ocala Electric Utility contributes approximately $19 million in annual economic value to the local economy. Its electric rates are lower than those of neighboring utilities, saving approximately $385,000 for customers annually. The utility outperforms neighboring utilities in keeping the lights on and restoring power faster after storms and hurricanes. The value of more reliable service is estimated to be $913,000.

“In Florida’s case, it’s quite easy to see that during hurricanes, the municipals have put the lights back on one to four days faster than other utilities. That’s because the municipals focus on their city,” Williams said.

He also highlighted the significant financial payments public power utilities make to cities. “In several of our communities, they basically say if we didn’t have the utility, the city doesn’t exist.”

Valuations can help effectively respond to sellout proposals

Valuation reports that public power utilities can pull off the shelf when faced with an attempted takeover are invaluable.

A 2018 guidebook from the American Public Power Association, Positioning Your Community to Succeed in a Sellout Evaluation, says public power utilities should understand and communicate the value they provide to their communities before a sellout question arises.

“The ‘value’ of your utility to the community is much more than the price tag that someone would attach to your poles and wires. It is the cumulative (often intangible) benefits your utility brings,” the report said.

Benefits to consider include financial support for local government, in-kind contributions, savings through more efficient municipal operations, lower rates, and supporting local business. Other benefits to consider include community sponsorships, community engagement and economic development.

The Association also said that public power utilities should not forget the intangibles. “You may not be able to put a price tag on these benefits, but that doesn’t make them any less real,” the report noted.