Currents

An Energy Newsletter for Local Governments

Bay Area Economic Forum Municipalization Study

The Bay Area Economic Forum, a partnership of the Association of Bay Area Governments and the Bay Area Council, in October released its analysis of the economies of creating new municipal utilities for electric power. The report, The Economics of Electric System Municipalization, examines the historical record of California’s municipal utilities in delivering low cost power to consumers, and the issues that cities in the region and the state must address when considering that option. It examines in detail the determinants of consumer rates for municipal utilities (MU) and investor-owned utilities (IOU), and the tradeoff between infrastructure acquisition costs and power production costs that will ultimately determine whether municipalization of power will produce consumer benefits. It looks only at the economics of electrical power municipalization, and does not address other possible social or political benefits.

The report determined the key cost components that will determine whether a new MU’s system average rate will be higher or lower than the incumbent IOU rates are:

1. the combination of the income tax exemption and debt-only capital structure of a MU which lower MU rates relative to an IOU;
2. the premium over book value paid for the distribution assets which will increase MU rates relative to IOU rates; and
3. the MU cost of generating or purchasing power, which could be higher or lower than IOU costs.

The report applies its model in a case study that looks at municipalization in San Francisco, including what would be necessary for consumers to break even.

To download the report, visit the Bay Area Economic Forum’s web site at http://www.bayeconfor.org/baefpubl3.cfm.

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