Local Governments and Electricty Restructuring
Local governments have been described as the "sleeping giants"
of a restructured electricity market that now allows consumers to
choose their power suppliers. They are just now awakening to the
challenges and opportunities associated with electric utility restructuring.
How can California's local governments expand their role in promoting
cleaner and more affordable electricity products, and how does restructuring
impact local government revenues?
Background:
Local governments are the foundation of California's monopoly-based
electricity service system because most consumers' current service
is based upon local government franchise agreements. These franchises
stem from local governments' traditional control over rights-of-way
for street lights and other infrastructure that impact electric
utility operations.
At the turn of the century, local governments were at the center
of a fast-growing power business that revolved around the awarding
of local government electric service franchises to competing bidders.
According to one study, more than 1,000 cities and towns in 30 states
still hold franchise contracts with existing monopoly service providers.
Most incumbent electric utilities operate under franchise agreements
rendered by California local governments long ago and which periodically
come up for renewal.
Opportunities:
The franchise controlled by a local government represents an opportunity
for leveraging types of services (energy efficiency) or products,
such as renewable energy, when negotiating terms of service in a
world of customer choice.
In a restructured world, local governments have several options
to shape a community's energy plan. The most aggressive step a local
government can take is to municipalize electricity service, which,
in effect, transfers the franchise for electricity service back
to the local government. Under restructuring, however, local governments
can now aggregate their own constituents to obtain the benefits
of bulk purchasing.
Local governments already aggregate accounts for a range of essential
servicessewer, water and waste management, to name a few. Through
aggregation for electric service, consumers may gain greater benefits
and terms of service and contribute to efforts to develop a more
sustainable energy industry.
The easiest way to reduce electricity bills for local governments
is through retrofits of lighting systems, since they represent the
largest portion of their electricity costs.
Challenges:
One of the key issues facing local governments under restructuring
is the continued collection of franchise fees and utility users'
taxes. According to the League of California Cities, Assembly Bill
1890, the legislation passed in 1996 authorizing electric utility
restructuring in California, should not change the ability of local
governments to capture revenue from any supplier selling electricity
to a customer located within a local government's jurisdiction.
Electric restructuring does not directly impact the franchise fees,
or utility tax revenue, currently collected by cities and counties.
Nevertheless, once the transition to a fully competitive electricity
marketplace takes place in January, 2002, the predicted drop in
electricity pricessome predict 30 percent savingscould result in
steep declines in local government revenues. While incumbent utilities
are now required to collect franchise fees from all power suppliers,
local governments are now liable for collecting the utility users
tax from these same power suppliers.
Property tax revenues may also fall. San Luis Obispo County discovered
that as much 17 percent of its annual revenues are at risk due to
a reduction in the asset values of Pacific Gas & Electric's
(PG&E) Diablo Canyon nuclear and Morro Bay fossil fuel plants.
Property tax assessments decline as power plants are devalued in
order to respond to competition. While the County ultimately negotiated
a settlement with PG&E to cover some of the shortfall, the lowering
of electric rates may translate into lower tax receipts for local
governments.
Proposed Solutions:
Local governments should begin doing their homework by reviewing
current franchise agreements with incumbent utilities and their
fees and taxes on electricity. Ask legal staff and procurement and/or
energy managers to meet and discuss what policy goals might be advancedimproved
regional air quality, for exampleusing the franchise as leverage
with an incumbent or new power supplier.
One example of what a local government can do comes from Barnstable
County, located in the Cape Cod region of Massachusetts. The county,
which has developed a community aggregation program based on its
franchise incorporating the electricity needs of residents, is requiring
that any new supplier for the region agree that all new growth in
electricity demand be met through investments in energy efficiency.
When existing franchise agreements were up for renewal, a few local
governments in Southern California banded together under the umbrella
of the Southern California Cities Consortium to explore strategies
to seek new power suppliers. Whether a local government has a non-exclusive
franchiseas is the case with Palm Springsor not, it is free to pursue
community aggregation strategies even though current exclusive franchise
utility agreements may still be intact.
For More Information:
Goldberg & Associates
Lenny Goldberg
926 J St., Suite 710
Sacramento, CA 95814
(916) 446-4300 • FAX (916) 444-6611
e-mail: lga@mother.com
League of California Cities
Yvonne Hunter
1400 K St.
Sacramento, CA 95814
(916) 658-8200 • FAX (916) 658-8240
e-mail: huntery@cacities.org
Ridley & Associates
Scott Ridley
115 Kendrick Rd.
East Harwich, MA 02645
(508) 430-1763 • FAX (508) 432-3788
e-mail: ridley@tiac.net
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