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To sell or not to sell? Managing public power takeover attempts

While they might not be as high-profile as the Wall Street mergers and acquisitions that make the headlines — or provide fodder for binge-worthy legal dramas on streaming services — Main Street has had its share of takeover attempts for community-owned electric utilities run by the local (or sometimes state) government.

Sellout and buyout attempts on public power utilities date back to the very inception of public power. The first public power utility, formed in Wabash, Indiana, in March 1880, was later sold to a private company. However, the public power model quickly became popular, and by the early 1920s, there were more than 3,000 public power utilities. With acquisitions and buyouts, that number plunged to 1,900 by 1930. Then, a growing wave of resentment against private utilities reversed the downward spiral, and by the late 1930s, there were approximately 2,000 public power utilities (or “munis” — short for municipal utilities), roughly the same number as today.

From 1980–2018, 82 public power utilities were privatized. In the past decade, 10 public power utilities across the country have been sold, while four new public power utilities have been formed.

Old threats haven’t gone away

1950sPrivatization proposals in recent years have been directed at public power utilities in Anchorage, Alaska (sale pending); Eagle Mountain, Utah (sold); Lafayette, Louisiana; Jacksonville, Florida; Mount Pleasant, Utah; Puerto Rico; South Carolina; and Vero Beach, Florida (sold). However, there is no discernible industrywide trend, according to Mike Mace, managing director of the consultancy PFM, who spoke at the American Public Power Association’s Joint Action Conference in January 2019.

“It’s a lot of smoke, but also a little fire,” Mace said. Each of the privatization efforts reflects unique circumstances, and there is no common thread yet, in his opinion.

However, Mace noted that investors in private utilities crave and reward growth. For investor-owned utilities in a “buy or be bought” world, acquisitions provide growth opportunities. But there are fewer targets among their own kind every year. Will these companies start to look more toward public power as they contemplate how to grow their rate and asset base?

A large public power utility — especially one with several hundred millions worth of rate base assets, a low debt-to-asset ratio, and solid free cash flow — is quite an attractive target for IOU takeovers. This, says Mace, makes many of the top 100 public power utilities potential privatization targets.

“Municipal utilities that are smaller than the top 100 are probably not IOU targets but could be co-op consolidation targets,” he said.

It is, of course, possible that a community might prefer the privatization option. Sue Kelly, CEO of the Association, noted that public power utilities sometimes consider a sale in response to specific proposals or simply as part of periodically evaluating their future options. “Every community must be allowed to decide what is best for itself after knowing the facts,” she said.

Tom Heller is CEO of Missouri River Energy Services, a joint action agency that provides wholesale power and a suite of business services to public power utilities in North Dakota, South Dakota, Minnesota and Iowa. He said sometimes a sellout is considered when a new city council takes over in a smaller community or new policymakers come on board who don’t understand the value of public power.

“Sometimes they see things that they need to have done in their city — like downtown renewal or economic development — and somebody gets the idea, ‘Well, let’s just sell the electric utility. Look at all the cash that we can have to do all these things.’ That’s happened several times in the MRES membership but is relatively easy to fight.”

Often a buyout attempt is not about better rates or reliability. It’s about the contender’s bigger plans. But if local policymakers are educated about the value the utility brings to the community in the long term, they are less likely to capitulate.

1959In the Association’s guidebook, Positioning Your Utility to Succeed in a Sellout Evaluation, authors Ursula Schryver and LeAnne Sinclair note that “If a sellout attempt or buyout offer emerges, you may be called upon to decide if the utility should be sold or leased and, if so, at what price. The sale of such a valuable asset, which reflects the investments of its past and present customer-owners over many years, is a complex issue and deserves careful consideration. … The community needs to be kept fully informed of the formal process for considering such a sale and the citizens’ role in the ultimate decision. The sale of a public power utility is a drastic measure, and those who propose selling should be required to demonstrate clearly how the community would benefit from the change.”

While it’s not uncommon for public power utilities to consider a sale, it is rare for them to be sold. Kathy Masterson, senior director of Fitch Ratings, noted in a news release issued on Feb. 22, 2018, that “few utility sales persist through to completion in the public sector.” As she explained, “potential transactions must consider the impact to ratepayers and are not compelling unless ratepayer benefit can be credibly anticipated.”

New threats loom large

Clearly, threats to the public power business model are not new. However, buyout offers are coming from new sources. In 2018, we saw the emergence of a new kind of contender, a private equity management firm in the Deep South.

Jim Bernhard, founder and partner of Bernhard Capital Partners, a Baton Rouge, Louisiana-based company, made a bid to manage Lafayette Utilities System in Louisiana under a 40-year agreement. The Lafayette City-Parish Council eventually voted to oppose the possible sale, lease or third-party management of LUS.

During Bernhard’s solicitations, local news outlets in Lafayette reported that he envisioned acquiring LUS and building up a Fortune 500 company, possibly headquartered in Lafayette. “We would be the largest utility — larger than Entergy — at the end of five years,” Bernhard said.

Before the council vote, Bernhard said in a speech to the Rotary Club, “We are going to invest about $15 [billion] to $20 billion in municipal utilities throughout the Southeastern part of the United States.” His company formed a subsidiary, NextGen Utility Systems, “to manage public power systems.” At that time, Jeff Baudier, a director of NextGen, said that if the LUS takeover did not go through, “We are going to get on our horse and ride to the next town.”

Is Bernhard’s reported plan for the Southeast a foretaste of things to come? While there is no clear picture, many industry veterans warn that no public power utility is immune from privatization attempts.

Community-powered is community supported

Veterans of buyout wars emphasize that a public power utility that wants to foil any potential takeover attempts must address three key local groups — policymakers, people in the community, and the press.

Shane Ward, power superintendent of Mount Pleasant City Power in Utah, says that when his public power utility received a buyout offer from the investor-owned utility, Rocky Mountain Power, in 2016, the city’s then-mayor did not understand the value of public power. “The biggest thing was to educate our council members and the people in charge. We let them know the value that we bring to the city, and I think this actually opened their eyes,” he said.

The best time to step in to meet with policymakers is when there’s turnover, according to Heller. “When you’ve got a new city council, a new utility commission, a new city manager, or newly elected or appointed council or board members, you need to get in there right away and educate them on the value of the public power system.”

If the utility manager is a nuts-and-bolts person, this might not be his or her favorite thing to do. But not building relationships with policymakers will cost the utility.

MRES helps member utilities with policymaker education. The agency hosts an annual day and a half Municipal Leadership Academy to which it invites new mayors and council members. MRES staff are appointed as member service delegates who stay in touch with utility managers and track local election results. As soon as there is turnover, the delegates try to meet with the new leaders and get information packets to them.

“We want to make sure our members understand we’re here to help them educate their city council and their mayor. It’s their community, and we’re a resource,” said Heller.

“The best defense you can have is not the one that comes from the utility itself, but from the people and the leaders in the community,” said Terry Huval, retired director of Lafayette Utility Systems in Louisiana. “If your customers are saying, ‘Look, public power’s been a great thing for our community, so we’re not at all interested in selling it,’ that carries a lot of weight.”

Throughout his 23-year tenure as director of LUS, Huval paid special attention to engaging with the community. He joined various civic clubs and business organizations at his own cost to develop relationships with community leaders. He always made himself available to present information to these city organizations about what was going on with the utility and its plans for the future. Sometimes it was just a garden club wanting to discuss the utility’s tree-trimming practices. “Those interactions worked out very well and earned us a great deal of trust and respect by the citizens of our community,” Huval said.

Utility staff can always engage with customers and address small group meetings to provide useful information about a variety of topics, such as energy efficiency or developments at the utility, he suggested. Transparency and dialogue by Huval and his staff helped to build strong relationships in the community that really came in handy when Bernhard’s management proposal was presented.

Ward concurred. “It was actually the citizens that shut this whole thing [Mount Pleasant takeover attempt] down. It wasn’t the power department, though we gave our message.”

The council meeting that voted to turn down the offer from Rocky Mountain Power was packed with residents. The utility told people, “Hey, this is your system. We need you to come and support it.” And the people did. “The citizens actually spoke up and said, ‘Hey, this ain’t right.’ Because they’re the ones that own the department,” said Ward.

Now, Mount Pleasant is regularly engaging with the community. The utility has programs in elementary schools and educates council members “so they’re aware of the decisions they’re making,” Ward said. The utility also does a biannual column in the paper titled “Your Local Power Department at Work” to describe upcoming projects and benefits to the community. Ward does not have a dedicated communications staff. He and his billing clerk manage all media and community outreach.

Heller said MRES helps member utilities educate larger industrial and commercial customers. As part of the joint action agency’s energy efficiency program, Bright Energy Solutions, agency staff meet with the utility’s manager and its bigger retail customers on energy efficiency. “And we also talk about the value of public power whenever we can insert that into the discussion,” he said.

MRES also helps member utilities instill pride of ownership in residential customers. The agency partially funds energy efficiency kits for fifth-graders in local schools. The kits include information the students can take home and work on with their parents to save electricity, and the kits spell out the benefits of public power. “We think it’s good to start to educate kids at an early age, and that’s a great way to educate their parents as well,” said Heller.

1969Huval found the local media to be an unsolicited ally in LUS’ battle against the Bernhard takeover attempt. “Our local press had trust in us just because of the many years that we had worked with them, whether it was on stories that were critical or complimentary of us. Through the decades, I consistently made myself available to them to help them so they could feel comfortable writing their stories. When they had questions, I was able to give them precise responses to put everything in proper perspective.” This mutual trust went a long way in helping tell the LUS story to the community.

“Sometimes, the media doesn’t know who to trust. You have to develop your reputation with them to build that trust so they feel confident you’re giving them the straight scoop. Always be available for them,” Huval said.

Good relationships make it easier to reach out to the media in bad situations and say, “Look, we have a situation here and we just wanted to let you know.” They can take it from there.

If utilities aren’t connecting with the community, they’re already behind the eight ball, said Huval. “Public communication needs to be part of the culture, just like reliability and safety,” he emphasized.

Huval also advises utilities to look for “natural opportunities” to toot their horn. Whenever LUS went before the city council each year to present the utility’s budget, it gave a presentation on the state of the utility and its plans for the future. The meetings were an open forum and were even televised. “So, when you’re having this important conversation with the council members, you’re also giving a chance to the public to hear this, giving them an opportunity to weigh in. As a public power entity, it’s our responsibility to find effective, innovative ways to effectively communicate with the public we serve,” Huval explained.

While the effort to move to private management may be behind LUS, it’s more important than ever for the utility to remain engaged with the community, to tell its story, and to be involved. Give customers and stakeholders confidence in the utility, Huval urged.

Show me the value

Kelly pointed out that when communities have conducted sellout evaluations, they have often found that “the utility is worth far more to the community than it is to a potential buyer.”

Ward provided further perspective: “You wouldn’t sell a family car to pay for a family vacation. Why sell the municipal utility that provides long-term benefits to the city for a one-time financial windfall? Once it is gone, that’s it.”

MRES offers members a Municipal Power Advantage Study that Heller described as “retail rate comparison on steroids, where we come in and we look at all the benefits that a municipal utility provides.”

The study tries to quantify all services a muni provides — joint meter reading and shared services with other city utilities, donated labor and free electric service to city buildings, economic development, street lighting, and more. “We put that into a report for the city council that they can send to their local newspaper and to all their citizens to say, ‘Hey, if the municipal utility didn’t exist, it would cost you $300 a year more in electric rates, and we also have local control with elected or appointed representatives making decisions in the best interest of our community.’”

Ward concurs about sharing the value of the utility. He recounted that Rocky Mountain Power offered to buy out Mount Pleasant City Power for $8 million. However, valuations currently under way show that the public power utility is likely worth more than $25 million.

Ward’s joint action agency, Utah Associated Municipal Power Systems, provides member utilities with a Municipal Value Toolkit which suggests that utilities get their systems evaluated to know what they are worth. Every public power utility should make valuation a priority and do it at least once every five years, counsels Ward.

“We actually hired a company. I budgeted it and hired a company to come in and count poles, sectionalizers and secondary boxes, and actually number and GPS everything on our system.” As a bonus, the valuation also helped Mount Pleasant get good maps, which were missing before, and bring everything up to speed.

The value of a public power utility is more than poles and wires, explained Ward. “Every one of us that worked for the power department here, we live in the city. We buy groceries at the grocery store. We do a lot of electrical work inside the buildings that saves city money. Right now, we’re in the process of changing all the lights in all the buildings out with LEDs to help the city save money and energy. I don’t think the council and the mayor actually see everything that we do.”

Heller reiterates the value of public power utilities, including lower rates, local control and investment back into the city. There is also strength in numbers. “Being part of a joint action agency means that they’re not just this little system out there by themselves. They’re part of a larger network, so they’re just as big as — or even bigger than — some of our private utilities in Minnesota.”

When a small municipal utility in South Dakota faced a takeover attempt by Otter Tail, an investor-owned utility, the muni contacted MRES, and the agency offered to do a discounted rate study for it. “They didn’t have the staff to do such a study, but if you’re a member of a joint action agency, it’s that agency’s duty to come in and help the member. That’s one of the great things about joint action agencies; you’re working together, you’re a part of a bigger system, you have that backup,” said Heller.

Kelly concurs that there is tremendous value in the public power ecosystem. In December 2018, she visited with Austin Utilities and Owatonna Public Utilities in Minnesota and spoke to their business customers. “Austin and Owatonna are local utilities embedded in their communities, but that does not mean they are isolated. Rather, they are part of a larger community of public power utilities, participating in a joint action agency, a state association (the Minnesota Municipal Utilities Association), and our national Association. Together, we provide a full array of resources that allows these utilities to provide very reliable, affordable and environmentally responsible electric service to their communities,” Kelly explained.

Of course, a utility cannot ignore the basics. A strong track record of safety, reliability, customer service and efficiency in restoring power after an outage will go a long way toward deflecting takeover attempts. Huval pointed out that LUS’ significant history of receiving and providing mutual aid after storms earned tremendous goodwill from the community.

A leader’s passion

Often, CEOs and general managers of community-owned utilities have a passion for public power and are willing to go to great lengths to protect the business model. Some have even resigned to support the battle to retain the public in public power.

When one local news entity published a major story on the bid to take over LUS, Huval said, “I decided to retire so that I could properly deal with the issue on behalf of our community. As long as I was still employed by the city, it would have been awkward to properly engage on an initiative being driven by the city administration, like this one.”

He added, “I was nearing retirement age, and although I really wanted to lead LUS for several more years, I was very concerned that our city might very well lose this 122-year-old jewel of a utility system. I decided it was time to divest myself from the city so I could provide the facts to the press and our citizens in order for them to get a better understanding of what was involved.”

At the end of the day, “there are going to be new threats, but I think the fundamentals are still the same,” Heller said.

Utilities that want to keep the public power business model intact must not let their guard down. They must live and breathe the “community” in community-owned and continuously engage with customers, the media and local leaders to emphasize their value.

The American Public Power Association stands ready to help public power utilities preserve your business model. Public power utility members of the Association can request a copy of our free Positioning Your Utility to Succeed in a Sellout Evaluation, which tells you how you can anticipate, prevent, and respond to proposals to sell your community-owned utility. Take a look at this guide even if you see no specific proposals on your horizon right now. It pays to be prepared, and to explain the benefits of public power to your community all the time. Email [email protected] to request a free PDF.