Policy Note. Key Findings. by Brandon Houskeeper Policy Analyst September Introduction. History

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1 Policy Note Key Findings The current utility, Puget Sound Energy (PSE), has a consistent record of providing reliable power to customers and at regulated rates. PUD rate increases are not subject to review and approval by the state Utilities and Transportation Commission. Ratepayers under a PUD are exposed to more political risk and financial burden than ratepayers of a private utility. Start-up costs for a new PUD, including eminent domain taking of Puget Sound Energy s property or building new infrastructure, litigation costs, consultant fees and feasibility studies, would be high. Costs to ratepayers of acquiring PSE s property in the three counties would be between $353 million and $447 million. New PUDs would not have guaranteed access to Bonneville Power Administration power at the best rates, and the new PUDs would have to wait three years before they could apply to receive BPA s best rate. Moving to Government-Owned Power A review of ballot proposals to create new Public Utility Districts in Jefferson, Island and Skagit Counties by Brandon Houskeeper Policy Analyst September 2008 Introduction This November, citizens in Jefferson, Island and Skagit Counties will vote on whether to continue receiving their electric service from a regulated, privatelyowned company or from a public utility instead. Puget Sound Energy (PSE), a privately-owned utility, has been the longtime provider of electrical services in these counties, but the announcement that PSE might be purchased by an overseas investment group has caused many people to ask whether it would be better to set up a local utility district to provide electrical services. The push to create a public agency for electrical services in these counties has sparked a vigorous debate between advocates of local government control and supporters of private, regulated utilities, like PSE. At the center of the debate is the question of which approach would provide the best rates and service to the citizens. Each side has commissioned feasibility studies to promote its view, and these studies have come to different conclusions regarding the cost and availability of power. This paper provides a brief history of both public and private power in Washington, and gives a detailed review of the benefits and failings of publicly owned and operated systems. It also summarizes the conclusions of the feasibility studies provided by both supporters and opponents of creating new public utility agencies, so readers can judge for themselves what the true costs might be. History The earliest electrical networks were built in Washington by private companies, which used money from investors to raise the large amounts of capital needed to build the first utilities. Private utilities started providing electricity to Seattle homes and businesses in Similar service soon spread to communities throughout the state. In the early 1930s, the Washington State Grange sponsored a citizens initiative that allowed the creation of public utility districts, or PUDs. Grange members were motivated by the inability or unwillingness of private power Page 1 1 Company History, Puget Sound Energy, at

2 companies to provide electricity to the sparsely-populated rural regions of the state. The new law allowed voters to approve, by a simple majority vote, the creation of a public utility that could construct, or purchase, a local power utility. PUDs operate locally as monopolies using the monthly revenue they collect from customers to fund capital projects and day-to-day operations. Private utilities operate as local monopolies too, with their financing and rate structure subject to regulation and approval by the Utilities and Transportation Commission. In an effort to support public utilities, Congress created the Bonneville Power Administration (BPA). The purpose of BPA was to provide low rate electricity to the struggling rural areas at the cost it took to generate the power. The creation of BPA and the policy of delivering power at cost to public utilities provided an economical way to bring power to rural areas, eliminating the challenge that private utilities had in servicing the rural areas. Since its creation in 1937, BPA has grown to be the largest electrical generator in the Northwest. Today BPA is a substantial power supplier to PUDs across Washington and other states in the region. 2 In 1939, citizens in Jefferson and Skagit counties created limited PUDs which do not operate electrical delivery systems. The Jefferson County PUD provides sewer and water services, and the Skagit County PUD provides water services. Now, almost seventy years later, citizens are being asked to consider ballot measures that would expand the functions of these existing county PUDs to include delivery of electrical services to homes and businesses. Today, there are 28 PUDs serving some 1.7 million citizens across Washington. Presently 23 of the 28 PUDs provide electric service; 14 provide water or water and sewer service, and 13 provide wholesale broadband telecommunications. At the same election this November, citizens in Island County, which does not have an existing PUD, will vote on whether to create a new PUD for the purpose of providing electrical services to the Whidbey Island portion of the county. In both Jefferson and Island counties, PSE provides electrical services to only portions of each county, while other areas are serviced by neighboring PUDs. In Skagit County, PSE is the sole electrical provider. The ballot measures in Jefferson and Island counties, if passed, would only allow their PUDs to acquire control over areas currently served by PSE. The areas of these two counties served by neighboring PUDs would remain unaffected. How Public Utility Districts Work Public Utility Districts are governed under Title 54 of the Revised Code of Washington. Under the law, a PUD is a local government agency that may provide electricity, water, wholesale telecommunications and sewer services within a defined area, to the exclusion of all other providers. Today, there are 28 PUDs serving some 1.7 million citizens across Washington. Each PUD is governed by board of elected commissioners. Most boards have three commissioners, although some have five. Commissioners serve six-year terms on a nonpartisan basis. A manager hired by the board is Page BPA Facts, Bonneville Power Administration, at BPA/Facts/FactDocs/BPA_Facts_2007.pdf, accessed September 25, 2008.

3 responsible for daily operations. The total number of electricity customers served by PUDs in Washington is 831,660, the majority of these (730,127) are private residences. A PUD s rates are set by the commissioners and are based on the cost of providing electrical service. PUDs are not subject to the regulations of the Utilities and Transportation Commission. Presently 23 of the 28 PUDs provide electric service; 14 provide water or water and sewer service, and 13 provide wholesale broadband telecommunications. The total number of electricity customers served by PUDs in Washington is 831,660, the majority of these (730,127) are private residences. 3 Private Utilities Private utilities are owned by shareholders whose stock is usually listed and traded on stock exchanges. These utilities are for-profit and the rates they can charge customers are subject to state price-control restrictions. Requests for rate increases are reviewed and approved by the state Utilities and Transportation Commission (UTC). The UTC s mission is to ensure that utility and transportation services are fairly priced, available, reliable and safe. 4 As publicly traded companies, utilities owned by shareholders have access to capital markets, allowing them to raise private money for technology upgrades and service improvements. Washington has three private utility companies, Avista, PacificCorp and Puget Sound Energy, which together provide power to just under two million state residents. Ballot Measures Although circumstances that led to consideration of creating a PUD vary from one county to the next, there are several common points that supporters use when urging voters to take this step. The most common arguments given are: To secure local government control over the power system; To provide more reliable services; To provide power at lower rates, and; To create jobs and promote economic development. A further argument that proponents of PUDs are making in Jefferson, Island and Skagit counties surrounds the pending sale of PSE to a foreign led investment group. Proponents of government-run utilities say the proposed buyout of PSE will erode the company s ability to provide service to customers. They also say a private company is more interested in making a profit to shareholders than in providing customers with reliable, low-cost services. This view neglects two important facts about private utilities. First, as noted private utilities are heavily regulated by a state agency. Prices are controlled and levels of service are mandatory, so even if utility managers wanted to seek Page 3 3 PUD Fast Facts, Washington Public Utility District Association, 4 Mission Statement, Washington Utilities and Transportation Commission,

4 profit at the expense of their customers, a powerful third party, the state UTC, is in place to prevent it. Foreign investment or ownership of a local utility company does not change this arrangement. Foreign investors must comply with the legal restrictions and rate limits imposed by the state UTC. A new PUD would have to first establish the necessary infrastructure to distribute power, and second would have to either generate its own power or purchase it from someone else. Both requirements might be met smoothly and at little cost, or expensive unforeseen obstacles could arise. The prospect adds to the complexity and uncertainty of creating a new PUD. Second, proponents of government-run utilities ignore the real-world experience the people of Jefferson, Island and Skagit counties already have with private utilities. Puget Sound Energy has successfully provided electrical power to the people of these areas for years, at equal or higher levels of service as a typical government-owned utility. There is no evidence that the cost or level of service would change if PSE were shifted from the ownership of one group of private investors to another. However, there are costs associated with setting up a new governmentowned utility. A new PUD would have to first establish the necessary infrastructure to distribute power, and second would have to either generate its own power or purchase it from someone else. Both requirements might be met smoothly and at little cost, or expensive unforeseen obstacles could arise. In any case the prospect adds to the complexity and uncertainty of creating a new PUD. Cost of Doing Business The first obstacle that a new PUD would be presented with is how to provide power to its customers. State law allows a PUD to condemn private property and take it for a public purpose. This condemnation power has been further expanded by the U.S. Supreme Court s Kelo decision. A new PUD would probably condemn Puget Sound Energy s existing infrastructure while paying fair market value for it. As in most cases of a complicated government taking, the precise value would probably be determined through litigation. A new PUD s other alternative would be to build new infrastructure. This option, however, is highly unlikely because of the high costs. In each of the feasibility studies that have been commissioned by PUD proponents, the conclusions assert that the most likely option would be to use condemnation authority to take ownership of PSE property. Additional costs would be incurred by the newly formed PUDs to cover general operating and start-up costs, plus the legal and consultant fees involved in the condemnation process. These costs would be passed on to homeowners and businesses in the form of higher electricity rates. There is no agreement over how much taking PSE s property might cost ratepayers. Naturally PSE s owners would seek the highest price they could get, while it is in the interest of PUD proponents to estimate a low cost. The following table shows the difference between the feasibility costs in acquiring the power infrastructure from PSE based on the individual reports. Page 4

5 Cost to Take PSE Property County Proponents Estimates PSE Estimates 5 Jefferson $47.1 million 6 $77 million Island $98.6 million 7 $130 million Skagit $208 million 8 $240 million Total $353.7 million 9 $447 million Based on these estimates, the total cost to ratepayers of acquiring PSE s property in all three counties would range from $353.7 million to $447 million. Regardless of which path executives of a newly-formed PUD choose for developing infrastructure, the process will add cost to the system. This is an important consideration because under a PUD, ratepayers are ultimately responsible for the debts incurred. The borrowing authority of PUDs is similar to that of towns and cities. PUD commissioners can issue tax-exempt bonds to secure funds for the purchase or construction of needed infrastructure. As an alternative, PUDs can issue general obligation bonds at favorable rates of interest. In contrast, private utilities seek new investors when in need of funding to pay for land acquisition or infrastructure improvements. These new investors, as well as current stockholders, are ultimately responsible for the new debt and must shoulder much of the risk. Under a government-owned utility, ratepayers carry all the risk of new borrowing. Bonneville Power Administration requires a three year waiting period after ownership is achieved before it will provide power at preferential rates. During the three-year waiting period a PUD may only buy BPA power at market rates. Energy Costs A further obstacle facing a new PUD would be the problem of finding affordable power on the open market. PUD proponents cite the Bonneville Power Administration as the best source. Under BPA s federal charter, PUD s receive preference and receive lower power rates than private utilities. It is unclear, however, that this would work out as proponents predict. BPA may not be able to supply all of the new PUD s needs, or to provide power at the favorable rates that it gives to existing PUDs. BPA must meet its costs as well, and the rates paid by PUDs and private utilities are its only source of income. Acquiring BPA power at favorable rates presents other problems. Before a new PUD can buy power from BPA, its executives must first gain full ownership of the delivery system. The looming legal challenges that surround the condemnation proceedings would likely delay the time that it would take to acquire a complete delivery system. In addition, BPA requires a three year waiting period after ownership is achieved before it will provide power at preferential rates. During the three-year waiting period a PUD may only buy BPA power at market rates. BPA s long range plan includes setting aside 250 megawatts of generating Page 5 5 Municipalization, Puget Sound Energy, accessed September 17, Preliminary Feasibility Study Public Utility District No. 1 of Jefferson County - Electric System Acquisition, page 17 by D. Little & Associates, Inc., September 15, Feasibility Study Electric System Acquisition, by People for Yes on Whidbey PUD, September Preliminary Feasibility Study Public Utility District No. 1 of Skagit County - Electric System Acquisition, page 25 by D. Little & Associates, Inc., June 23, Ibid.

6 capacity to supply new government-owned utilities at the Tier 1 rate, the lowest rate BPA offers. Of this amount, 40 megawatts is set aside for government-owned utilities operated by Indian tribes, leaving 210 megawatts at this price available for new PUDs within BPA s regional service area. How much of this limited Tier 1 capacity might be available to new government-owned utilities in Jefferson, Island and Skagit counties depends on how much they require compared to the demands of other new PUDs in the region. The following table shows the estimates by PUD proponents and by Puget Sound Energy of the peak demand in average megawatts that each new PUD in Jefferson, Island and Skagit counties would require. The unknown cost and availability of power would leave a new PUD vulnerable to the volatile price swings of the national energy market. Given these uncertainties, it is possible PUD rates may be higher than the current private utility rates in Jefferson, Island and Skagit counties. Peak Average Megawatt Demand per New PUD County Proponent Estimates PSE Estimates 10 Jefferson Island Skagit Total The total average demand for all three new PUDs would range between 427 and 561 megawatts. Even the low range of these estimates is more than twice the amount of power available at BPA s best price for PUDs. If the ballot measures to create new government-owned utilities pass in all three counties, the newly-formed PUDs would find themselves competing for the limited amount of low-cost power BPA has set aside. Even if the available low-cost power were divided proportionately among the three new PUDs, there is not enough to go around, so at least part of the electricity these PUDs supply to customers would have to come from higher-cost sources. Also, since BPA is required to consider the requests of other PUDs that may be created within its service area, it is unlikely BPA executives would allow the three in Jefferson, Island and Skagit counties to lay claim to the full supply available at the low Tier 1 rate The three-year waiting period, litigation costs, consulting fees and lack of power available at the Tier 1 rate makes it unlikely that a new PUD s rates to homeowners and businesses would be much different than the PSE rates already in place. The unknown cost and availability would leave a new PUD vulnerable to the volatile price swings of the national energy market. Given these uncertainties, it is possible PUD rates may be higher than the current private utility rates in Jefferson, Island and Skagit counties. Page 6 10 Author interview Gretchen Aliabadi, Puget Sound Energy, September 16, Preliminary Feasibility Study Public Utility District No. 1 of Jefferson County - Electric System Acquisition, page 12 by D. Little & Associates, Inc., September 15, Feasibility Study Electric System Acquisition, by People for Yes on Whidbey PUD, September Preliminary Feasibility Study Public Utility District No. 1 of Skagit County - Electric System Acquisition, page 17 by D. Little & Associates, Inc., June 23, Long-Term Regional Dialogue Final Policy, Bonneville Power Administration, July 2007, page 16.

7 Conclusion In the past, voters created government-owned utilities when experience showed that private companies were failing to provide reliable electrical service at a reasonable price. In the modern regulated environment, however, the power provided by private utilities is highly reliable and favorably compares with the prices charged by public utilities. PUDs come with political risks for ratepayers that do not exist in areas served by private utilities. Often Washington citizens have accepted public power based on promises from public officials that they would receive low-cost power from a non-profit public agency, only to find they are paying about the same as their neighbors who are served by a for-profit private company. The case for creating three new Public Utilities Districts is far from clear cut. Staying with the private utility company would likely result in a continuation of current levels of power service at roughly the same rates. A further concern is that higher utility rates bring a financial benefit to local officials. Because utility bills are taxes, each time a PUD raises rates, local officials reap a windfall in increased tax revenue, without having to go on record as voting for a tax increase. Taking all the considerations discussed in this study together, it appears that creating new PUDs in Jefferson, Island and Skagit counties would not result in significant cost savings to homeowners and businesses. It is possible that rates could increase, as the new PUDs take on the costs of litigation, property acquisitions, consultant fees and securing wholesale power sources. It is also possible residents in the three counties could receive lower-quality service, at least in the initial years, as managers of the new county PUDs get their operations up and running. This view is summarized by the Co-Facilitator of Jefferson Citizens for Local Power, who finds that even with a transition to government-owned power, county residents may end up paying a little more or a little less than they are paying now: Brandon Houskeeper is a policy analyst with Washington Policy Center, a non-partisan independent policy research organization in Seattle and Olympia. Nothing here should be construed as an attempt to aid or hinder the passage of any legislation before any legislative body. When one crunches the numbers using total meters x avg monthly kwh x 12 months x 30 years (bond life) divided into the cost (even using the high end of UtiliPoint s study), the resulting payment is less or slightly above a couple of cents per kwh. In other words, negligible. Then you add in staff, real property, maintenance, insurance, and power costs - after achieving Tier One power - and we re paying about what we re paying now, maybe a little more or maybe a little less. 146 Despite local concerns over foreign ownership of the long-existing private power company, the case for creating three new Public Utilities Districts is far from clear cut. Staying with the private utility company would likely result in a continuation of current levels of power service at roughly the same rates. Taking the evidence as a whole, it appears unlikely that shifting to government-owned utilities in Jefferson, Island and Skagit counties would result in improved service or reduced costs for residents and business owners. Page 7 14 Author interview with Steve Hamm, Co-Facilitator, Jefferson County Citizens for Local Power, September 17, 2009.