Will cities defect from IOUs?

Boulder effort moves forward, as do others

Phil Carson | Apr 24, 2012

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Some coverage, including mine, has tended to characterize the nascent efforts of cities and towns across the country to shape their own energy future—and defect from their incumbent, investor-owned utility—as white hats vs. black hats.

If the people in a democracy desire to band together and form instruments or organizations to carry out their shared vision for the future, any effort to thwart that move to self-governance is surely wrong, right? Maybe. 

It would be much clearer and nuanced to observe that cities and towns are exploring municipalization—or other paths to local control over power G + T + D—for a variety of reasons. The drivers for local energy independence range from reliability (cities and towns in Massachusetts and Connecticut that got hammered by storms last fall) to cost (Connecticut's recent efforts towards a state-level energy policy that could restrain price increases) to environmental concerns and local control over one's own energy destiny (Boulder, Colo.). Actually, Connecticut has all three drivers at work.

On the other side, incumbent service providers—the IOUs—understandably have simple business concerns about losing major customers and, thus, significant revenue, and the continued viability of their business model. There's nothing "black hat" about that—it's just business. Unless, of course, the IOU in question uses odious or illegal tactics to enforce its monopoly over its customers—not that that would ever happen.

You can read our coverage of Boulder-related issues in "Boulder Seeks Divorce from Xcel." We discussed Connecticut recently in "Connecticut: In Search of Microgrids" and Massachusetts in "Outages Drive Smart Grid, and Muni Legislation" and "Lexington, Mass.: Another Muni Candidate."  Perhaps more threatening to IOUs' business model is the potential defection of individual customers who pursue alternatives en masse; see "Power Utilities' Morphing Future."

Last time we heard from Boulder, it had hired one law firm to deal with the Federal Energy Regulatory Commission (FERC), which may determine the value of Xcel's stranded assets, should Boulder proceed with a municipal utility. And the city had hired another law firm to deal with condemnation proceedings in state court, in the event it moves forward with energy independence.

The latest development in the saga of whether Boulder gets up close and personal with municipalization was last week's announcement that it had hired an "executive director of energy strategy and electric utility development." That person—Heather Bailey—will begin the job June 7. According to a Boulder press release last week, Bailey has 30 years of experience in both public and private power, having served as a regulator, a utility executive and consultant. She has a master's degree in business administration from the University of Texas at Austin and served as  chair of the American Public Power Association business and finance section in 2001.

From the release:  The new hire will "be charged with establishing an operations and business plan for the successful, potential transition from Xcel Energy operations to city-run operations." The position is a two-year, fixed term position and is not likely to become the person responsible for day-to-day operations of a municipal utility, should the city succeed in forming one.

The battle lines between Boulder and Xcel are being drawn. First, Xcel asked the Colorado Public Utilities Commission to allow it to limit Boulder citizens' access to incentive and rebate programs because all Xcel customers would, it argued, subsidize those incentives and rebates for customers who aren't likely to remain part of the rate base. The Denver Post editorial board agreed, as did consistent critics of Xcel.

Boulder's city manager, Jane Brautigam, and mayor, Matthew Appelbaum, fired back recently in The Denver Post that state law prohibits Xcel's action, which she characterized as discriminatory. The city officials argued that Colorado courts and FERC will determine the value of Xcel investments in Boulder that need to be repaid if Boulder goes its own way.

Condemnation proceedings and determining the value of stranded assets strike me as two issues that could fuel legal battles between the two parties well beyond Bailey's new two-year appointment.

For Boulder, which has declared its interest in reliable, affordable power—as well as ambitious levels of renewable energy and local economic development—independence is about traditional utility values as well as shaping its own energy future. For Xcel, it's about business.

It may not be white hats and black hats, but there's sure to be a slow-motion showdown at high noon that could serve the rest of the country and other local efforts as a cautionary tale.

Phil Carson
Editor-in-chief
Intelligent Utility Daily
pcarson@energycentral.com
303-228-4757

 

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Comments

We'd Do Things Differently Today

One of your recent interview subjects suggested to me that we'd design the electric system differently if we could start with what we know today.  The focus would be on distributed generation and community energy.  From the standpoint of reliability as seen by customers, he's correct.  Today's highly interconnected electric system may leverage the economies of scale inherent in yesterday's base load plants, but it is more vulnerable to operator error, weather and terrorism threats than a highly distributed, highly decentralized system.

Whether community energy makes economic sense depends on a whole host of factors, including where power is sourced (locally, remotely or a combination of the two), market conditions, the availability of low cost distributed generation, administrative costs, and whether community energy providers are required to pay the same public goods charges as  a for-profit utility would be.

There are other, less objective criteria.  Municipal utilities generally, though not always, seem to have better relationships with their customers, who are also their owners.  They can avoid the tyranny of the one-size-fits-all solutions that may work for some customers of an investor-owned utility and may not work for others.

Of course the IOUs will fight, but probably more to maintain their size and scope than because it makes real business sense.   I'd argue that most electric utilities should get out of the retailing and generation businesses because those businesses are not profitable enough to compensate investors for the risks utilities are required to assume.  On that basis, perhaps Xcel should be glad to get rid of its power supply obligation to Boulder and seek instead to provide transmission and distribution services under contract.

Just a thought.

Jack Ellis, Tahoe City, CA

Thanks Jack

Any publicly traded company has a natural antipathy to being challenged in public, thus as you suggest, there may be factors other than revenue base at work here. Uncertainty often wreaks havoc with stock prices.

The irony of the backlash around coverage of this issue -- which we all know IOUs are watching like hawks, as Boulder's success could seriously derail their business model -- is that Xcel can prevail if it really wants to. Not because Boulder cannot create a credible municipal utility but because Xcel has the resources to tie-up the process and run the city's legal bills sky high. Muhammed Ali called it "rope a dope." I'd love to be proved wrong. After all, Xcel outspent Boulder 10:1 on the franchise continuation vote last November, which it lost. So Boulder is not without a solid basis for its effort.

This is probably one of a handful of the top stories in the centralized power industry today, along with parallel efforts in Connecticut and Massachusetts. And municipalization in this day and age absolutely will require  the latest smart grid technology, so that's a neat twist on the SG fog -- technology embraced by IOUs may be their undoing.

How both sides approach it -- and both are backed by industry groups that provide strategic and tactical political advice, i.e., APPA and EEI, to municipal utilities and IOUs, respectively -- will form the blueprint for whether Boulder's effort can succeed and be replicated or how IOUs can squelch these  sorts of initiatives.

The level of fear around this story is high, but it's just another paper tiger created by the crippling fear of entrenched interests whose devotion to the status quo begets brittle mindsets. In the end, the "house"  typically wins. In this case, that means splitting the Boulder community in half; enviros on one side, the business community on the other. That'll be the strategy here. Mark my words.

Regards, Phil Carson