HomeMy Public PortalAboutRpt on Municip of Elect PwrREPORT ON MUNICIPALIZATION
OF
ELECTRICAL POWER
INTRODUCTION
This report will examine options made available to the City of McCall as a result of the expiration of
it's franchise agreement with Idaho Power, as well as actions taken in its last session by the Idaho
legislature that limit the ability of municipalities to bargain in good faith with utility companies.
The electrical utility industry is in a state of flux. Private investor owned utilities like Idaho Power
have enjoyed a monopoly for the majority of this century in this state. However, in response to the
Energy Policy Act of 1992 (EPAct), the Federal Energy Regulatory Commission (FERC) has
promulgated rules intent on opening the industry to competition. This extraordinary shift in public
policy from regulated monopoly to open competition has traumatized Idaho Power. In Idaho it is
tempered by Electric Supplier Stabilization Act.
A normal firm in a competitive market, when faced with a new set of circumstances, evaluates its
strengths and weaknesses, consults its customers regarding their needs and desires, and logically
pursues a new course of action that accentuates their competitive edge, addresses areas of concern,
and seeks a new market niche. When a monopoly is faced with competition, it can assume the same
approach as a normal firm, or it can attempt to ignore the real world and continue to seek monopoly
protection.
Idaho Power has chosen the second route. In order to insure stability for the next 25 years, Idaho
Power has used its significant lobbying resources to manipulate a vulnerable state legislature, extort
municipal governments, and hoodwink the general public. Their expressed concern was not wanting
to act as a tax collector for municipalities. Their tactic was to present themselves as champions for
the common folk who were about to be raped and pillaged by local governments lusting after
additional revenue (see page 8 of exhibit A). In reality, their purpose was to save themselves from
having to compete in an open market, thus insuring a guaranteed rate of return to their private
stockholders.
They do this by offering franchise agreements which guarantee them a reasonable expectation to serve
for at least ten years, and, if conditions change, monetary claim for stranded costs. Their tactic was
extremely successful. They were adept at taking the focus off the real issues and casting aspersions
on local government intentions. They were masterful at exploiting a short legislative session to keep
the opposition from organizing or exposing their real concern. However, the short time frame did
not allow them to fully capitalize on their plot. They left a loop hole in Idaho Code 50-328 through
50-329A. It did not require municipalities to enter into franchise agreements.
AVAILABLE OPTIONS
The City of McCall is presented with several options. First, Idaho Power has presented the City with
a franchise agreement. The basic terms of this agreement pattern Idaho Code regarding franchises,
and asks for a term of 25 years. It also offers to collect a franchise fee of 1 percent of gross revenues
without further negotiation, and allows for an election at any time to raise the franchise fee up to the
legal maximum of 3 percent. No additional negotiation for benefits is available to municipalities
under Idaho Code.
Second, the City may reject the language of this regarding term and opt for a shorter term, but not
less than 10 years under Idaho Code. This would allow the City to review its position juxtaposed
with the electrical industry in a shorter period of time. Since major changes in the delivery of
electrical power are anticipated within that period of time, it would be wise for the City not to commit
itself to any term longer than the statutory minimum.
Third, the City may hold its franchise fee election prior to negotiating with Idaho Power so as to enter
into discussions on franchise length without having to trade additional years for the option to go to
the people at a later date.
A fourth option is to decide not to enter into a franchise agreement. In that instance, Idaho Power
is treated like any other contractor working in our streets. This is the method we are currently using,
and we have not run into any major snags. This will leave all options open to the City and its
residents to capitalize on the competitive changes in the industry that will be upon us in the next five
years. Retail wheeling is a likelihood, where customers can choose their service provider much along
the same lines as customers choose their long distance telephone service provider. The most likely
result will be very competitive pricing for electric consumers.
A fifth option is to exercise our legal option to provide the utility of electricity the same way we
provide any other municipal service, like water and sewer. In fact, sewer is an excellent example of
a situation where we control the delivery of the service, but contract out the maintenance. To
implement this strategy would require condemnation of facilities owned by Idaho Power and used in
the delivery of electrical power to the end user. The practical consideration of this action would be
the cost of acquisition. We have a bargaining chip in this discussion in that we have an expired
franchise agreement. Without the franchise agreement, Idaho Power does not have a reasonable
expectation to serve. In fact, since we have indicated at this point that we do not want to enter into
an agreement, their reasonable expectation is not to serve. Secondly, when a municipality elects to
exercise its right of condemnation, an electrical utility with a franchise agreement can expect to be
compensated for stranded costs associated with its continuing investment in providing service to
franchised customers. The franchise represents the period of time a utility can expect to serve a
community. Once it expires, the utility should have fully depreciated its investment and left the
municipality with no obligation to compensate further.
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The sixth option is to acquire parts of the system as they become available. This strategy is most
easily implemented through the subdivision ordinance. The subdivision ordinance for the City of
McCall requires developers to pay for the installation of certain improvements, including the
undergrounding of electrical service. As has been the case, once these improvements have been
installed, Idaho Power takes them over free of charge. The City could elect to do the same.
Similarly, Idaho Power will not negotiate for the undergrounding of electrical services, and insists that
the cost for doing so be borne by the community, but given, gratis, to them. Should the City elect
to create Local or Business Improvement Districts to fund the undergrounding of electrical services,
the City could then elect to keep those improvements, rather than surrendering them at no cost to
Idaho Power.
The seventh option is to pursue a strategy referred to as "municipal lite". This course of action
involves a contested position in the EPAct that might allow municipalities to own limited portions
of the distribution system (like customer meters), and petition FERC for a wheeling order to transmit
electricity wholesale to end users who are charged retail costs by the City. This assumes certain other
requirements are met.
Other options that integrate parts of the above options may also be constructed, but do not contribute
additional concepts from those already listed.
RECOMMENDED OPTION
In view of the aforementioned information, I recommend that the City pursue some variant to the
sixth option. First, the City of McCall should not enter into a franchise agreement with Idaho Power.
Doing so exposes the City to liability for payment of stranded costs. In fact, the City should outline
in fair detail its anticipated course of action for assuming Idaho Power's customer base.
Second, McCall is in a period of rapid expansion. Developers are required to provide undergrounded
electrical service at their expense, as they are for water, sewer, roads, and certain other amenities.
The City should retain ownership of the electrical delivery system, as it does with other utilities it
provides in both the City limits and in the Area of City Impact. If a Local or Business Improvement
District is created to underground electrical distribution systems, those systems should be retained
and incorporated into a City system and not forfeited to Idaho Power.
Third, the City should then use its retained earnings to implement a programmed undergrounding of
all electrical distribution lines to customers. As these conversions take place, Idaho Power will be
asked to cease delivery, and remove their overhead system.
Fourth, the City should pursue condemnation of current underground systems in subdivisions within
the City whose existence is directly attributable to City subdivision regulation requirements. It is
rational to argue that Idaho Power did not expend any funds to build these systems and that their
franchise agreement has expired. Therefore, the cost to acquire those systems should be substantially
lower than that for a normal condemnation. The point being that the underground system was
obtained free, and it was City action that provided it to Idaho Power.
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Finally, the City has several options for maintaining the newly acquired system. First, the City could
create an electrical utility department and provide funds to staff and supply it. It would contract with
other utilities and contractors to provide emergency services.
Second, the City could provide a limited staff, and contract for the majority of regular and emergency
services.
Third, the City could negotiate with Idaho Power or one of its competitors to wheel electricity to end
customers over our lines, and as part of the wheeling contract, provide a cash payment and an
agreement to maintain the lines.
CONCLUSIONS
McCall is in a unique position to capitalize on current expansion by entering the electrical utility
arena. If market conditions change dramatically, the City could at any time divest itself of properties
acquired, and make a profit. The City would be in charge of its own destiny in dealing with the
undergrounding of the distribution system.
The major costs to municipalities who contemplate condemnation of electrical distribution systems
are those associated with the legal battle over condemnation, and the actual cash settlement to pay
for the value of the system condemned. By using the strategy outlined above, the City could avoid
most of these major costs and make the proposal financially viable.
The benefits to the City would be the ability to finance an undergrounding program, and new revenue
raised by operating a profitable enterprise.
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Kirk and Betsy Hall
Post Office Box 1943
1160 Meadows Road #12
McCall, Idaho 83638
208-634-4785
e-mail: betsyhall@aol.com
1 November, 1995
Some thoughts on your idea about the city taking ownership of new development's electrical
distribution systems.
Given the uncertainty of Idaho Power's future business focus, you might want to consider
approaching them with a proposal like the following:
As a "test", Idaho Power and the City of McCall would agree that the City of McCall would:
1. Assume the ownership of the electric systems serving new developments within or near the
city boundaries (within the impact zone?),
2. The city would purchase wholesale power from Idaho Power to serve these developments,
The City would contract with Idaho Power for maintenance (this might be assumed by the
city), emergency service and technical support for a negotiated price (a fee —for --service would
place too much risk on the city),
4. The City would charge a retail price that was equal to the price charged by Idaho Power (One
issue the city faces is that it would be difficult to charge differently for the power it provides
than that charged by Idaho Power.).
5. This test would be for a predetermined period of time say five or ten years, and
6. At the end of the period, the City could sell the system back to Idaho Power, Idaho Power
could sell the remaining system serving McCall to the City or the City could negotiate with
Idaho Power or others for another term sale to the then existing system.
By this agreement, neither Idaho Power or the City of McCall would be setting a precedence as to
the legal ability of a municipality to own new electric distribution systems installed by developers.
The offer to Idaho Power would be that the City and Idaho Power would present a united front to
other municipalities suggesting that they await the results of the test before they undertake a
similar action. That agreement might remove Idaho Power's potential political response to a
unilateral action by the city.
For the City, such an approach would give you an opportunity to see if being an electric utility is
what you wish to do with the ability to back out without extensive political loss.
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