Municipalization
Municipalization is the process by which a city or county acquires ownership and assumes responsibility for operation of a utility system that serves its residents, such as electrical transmission or natural gas distribution.
Most municipal utility systems were created decades ago when federally subsidized power was available and a host of other financial advantages existed.
Today, the energy landscape is vastly different, making municipalization a less viable and extremely unattractive choice for communities.
The simple truth is that municipalizing is a lengthy, complicated process . It has a high price tag - typically millions of dollars, including legal and consulting fees. Ultimately, there are no guarantees for financial benefit to communities.
Brochures and fact sheets:
Municipalization in Iowa: Understanding the Risks [PDF]
Municipalization in Iowa: Questions & Answers [PDF]
Municipalization in Iowa: Myth vs. Fact [PDF]
Questions and answers about municipalization
What is municipalization?
The process by which a city or country acquires ownership and assumes responsibility for operation of a utility system that serves its residents.
Why would a community choose to take over the incumbent utility?
Municipal proponents believe they can generate additional revenue for their local government. However, history has shown those promises are not always fulfilled.
For example, the last Iowa community to attempt municipalization was Sheldon in 1988. During the process, the city's consultant found Sheldon would lose $357,000 over the first 10 years of operation.
That would have been after spending an additional $449,000 on consultants and lawyers just to pursue and research municipalization.
How long does the municipalization process take?
The takeover process - from the initial pre-feasibility study through the final decision by a court and the actual date the property changes hands - typically takes years.
For example, the takeover by the Sacramento Municipal Utility District from Pacific Gas and Electric Company in California took eight years.
Does participating in a feasibility study cover the entire cost to municipalize?
No. Following the preliminary feasibility study, a valuation study is done. This study determines the precise details of the utility property and equipment to be purchased. Such a study can easily cost hundreds of thousands of dollars.
In addition to those costs the community will face other fees for such things as attorneys, engineers, accountants and employees to supplement existing staff.
The end result could be a community deeply in debt.
What do Iowans think about municipalization?
When asked the question “Would you favor or oppose your local city or town taking over electric service and being the provider of electric service for local residents and businesses?”:
Seventy-two percent of Iowans polled said they oppose municipalization and are uneasy about the risks and negative impact it could have on their community.
Are there other expenses a community can expect to incur?
The community will be responsible for reconfiguring the stranded costs associated with the incumbent utility's poles, wires, substations and generation facilities devoted to that community.
They also will be responsible for making up lost taxes and revenue the incumbent utility previously supplied to the community.
How will the city pay for municipalization?
Several options are available to the community. They can raise local taxes, tap into municipal bonds or use money already allocated for other city projects, like improvements to local schools, hospitals and roads.
Does the Iowa Utilities Board have jurisdiction over a municipality?
No. Cities can raise rates whenever they see fit. Unlike investor-owned utilities, city-operated systems are unregulated by any state or federal agency. Iowa's consumer advocate and the Iowa Utilities Board are powerless to challenge the increases.
How will the city purchase power?
Newly municipalized electric systems have to turn to the open wholesale markets to purchase electricity needed beyond their own generating capacity.
This pits the municipal against others vastly more experienced in managing risk and trading energy commodities. The alternative - building new capacity - is a costly, time-consuming and risky process in which most cities and towns have no proven expertise.
Under a municipal utility system, the risk of buying power is transferred to local residents and higher power costs are immediately reflected in utility bills.
Will new municipal rates be lower than what I pay now?
That is unlikely. New municipals would not have access to federally subsidized power. In Iowa, 70 percent of the municipal systems that do not have federally subsidized power have higher overall rates than Iowa investor-owned utilities.
New municipal rates will have to reflect all upfront costs, equipment purchase costs, power supply costs and employee salaries, making it very likely rates will actually go up.
Municipalization: Myth vs. Fact
Myth: A city-run utility will save residents money. The rates of municipal utilities are lower than Iowa's investor-owned utilities.
Fact: This is a case of government utilities using an average to mislead. Some city utilities have higher rates, and some have lower.
Most of these utilities were formed more than 50 years ago when things were different. New city government utilities would not have access to federally subsidized power.
In Iowa, 70 percent of the city utilities that do not have federally subsidized power have higher overall rates than Iowa investor-owned utilities.
Recently, many city utilities have announced rate increases because their contracts to purchase power are being renewed at significantly higher costs.
Myth: A city utility will take the pressure off our cash-strapped local budget. On average, city utilities in Iowa transfer six percent of operating revenues to other city funds, reducing property taxes or paying for swimming pools, community centers and other projects.
Fact: A city taking over an established utility system and operating it would likely have the opposite effect.
When you take into account the large startup costs, the millions in long-term debt, ongoing operating and maintenance costs, future capital expenses, and the legal requirement to replace property taxes; it is unlikely any money would be left over.
It is very possible that a city may have to divert funds from other activities to cover these costs and debt.
Myth: Service will be better and more responsive when we have local control.
Fact: This is hard to grasp. It is doubtful the city will have the money and the expertise to hire and manage skilled line crews, buy and maintain a fleet of special trucks, dispatch enough employees to rapidly repair downed lines after a major storm, provide a call center and billing service, along with a control center and meter readers. It's a big, tough job.
Myth: After a storm, the city will be able to get mutual aid from other cities with their own utilities.
Fact: Severe storms often cause damage over a wide area, and other nearby government utilities are likely to have their own problems.
But assuming that the city could get mutual aid from another government utility, the city would have to pay extra for this outside help. Often this comes as an unexpected expense.
Investor-owned utilities, however, are much larger and have crews already available. The costs of the emergency restoration are spread across the entire Iowa system of the investor-owned utility.
Myth: After mergers and consolidation, private utilities have closed many small-town service centers. To get good service, cities need local offices and utility employees living in town.
Fact: Many functions that once required a person on the scene now are monitored and controlled by computers and can be repaired quickly on a remote basis.
Investor-owned utilities take advantage of technology to increase productivity and hold down costs. Iowa investor-owned utilities have hundreds of line workers across the state and advanced dispatching technology to get them where they are needed in a very short time.
In an ice storm or other emergency, the call centers of Iowa investor-owned utilities can handle hundreds or thousands of calls simultaneously.
Myth: Investor-owned utilities are fighting the establishment of more city utilities because of all the profits they are taking out of our community and sending out of state.
Fact: Iowa's investor-owned utilities value their customers and want to keep them. They do not believe that, when the risks associated with cost and reliability issues are taken into account, forming a new city utility is in the best interests of their customers.
The earnings as well as the rates of investor-owned utilities are regulated by the state - though city utilities have no such regulatory oversight. By far, most revenues of Iowa investor-owned utilities stay in Iowa and in the communities they serve.
Investor-owned utilities have a payroll of about 7,000 employees in the state, pay annual property (replacement) taxes of $127 million, purchase millions of dollars in equipment and other overhead, provide community support and have invested nearly $340 million in local energy efficiency programs.
Myth: Long-term electricity contracts are available that will allow a new city utility to lock in low prices.
Fact: The long-term contracts that some government utilities have for power supply have been expiring and more will expire in the next few years.
New contracts will reflect today's market prices and will be for shorter duration because of current market volatility. Many municipal utilities are now raising their rates as a result of these new market conditions.
If long-term contracts are available with attractive pricing, they come with higher risk, such as an interruptible clause. This means the supplier can shut off power during periods of peak demand. Those contracts are feasible only for cities that own generation facilities.
Myth: A city utility would be more able to provide renewable energy.
Fact: This is false. The opposite is true. Incumbent utilities offer customers many more options in regard to renewable energy than do city-owned utilities.
In fact, under Iowa law, municipal utilities have no obligation to provide any electricity generated from renewable resources. The renewable energy purchases and projects of Iowa investor-owned utilities have made Iowa one of the nation's renewable energy leaders and one of the largest wind energy producers in the world.
Myth: A municipal utility provides local control over rates, policies and generation resources.
Fact: Actually, unless a new government utility builds generation of its own, which is unlikely, it will have little control over rates or generation resources.
A new government utility can make all the policy it wants, but it likely will depend on an outside energy provider to set contract terms based on market prices. The city will have a limited choice of providers as determined by transmission line connections.
Furthermore, city utility customers will no longer have the state's oversight of rates, leaving the city to raise them whenever it wants.
Myth: Public power would encourage economic development by keeping money in town.
Fact: A government takeover of the utility system would thwart efforts to bolster economic development in the community.
Business today increasingly depends on technology and needs a highly reliable power supply. Iowa investor-owned utilities have a long track record of providing reliable energy service.
In addition, it is quite common for municipal utilities to subsidize residential rates by charging companies higher prices. Rates may very well increase in a new city utility because of the need to replace property taxes and other costs associated with the startup.
All of these factors will discourage new businesses from locating or expanding in the city and could even drive existing jobs away.
Information courtesy of the Iowa Utility Association.