Charged up over rates, cities may buy electric plants

Higher costs for electricity and growing competitiveness in the electric utility industry have prompted many communities to think about abandoning their private utilities and turning to public power. Chicago; New Orleans; and Long Island, N.Y., are all weighing the idea of taking over private electric facilities. Dozens of smaller communities around the United States, according to the American Public Power Association, are also looking into buying the generation, transmission, and distribution facilities of investor-owned electric companies. The communities hope to provide their citizens with electricity at lower costs.

In releasing a recent report on electric power options for Chicago, Mayor Harold Washington called Commonwealth Edison Company's six rate increases over the past 10 years and the utility's pending 27 percent rate increase ``a tidal wave threatening to wash this city's economic foundation out to sea.''

City officials contend that Edison's retail electric rates are among the highest in the country, and got that way not by escalation of energy prices, but by the company's investment decisions, especially in currently unneeded nuclear plants. Chicago buys its electricity from Edison under a franchise agreement that expires Dec. 31, 1990. The options report, prepared for the city by R.W. Beck & Associates of Indianapolis, sets out three alternatives to a renegotiated franchise agreement.

First, a municipal utility could be formed by acquiring all of Edison's distribution facilities, as well as two old power plants that are within city boundaries. Under this option, the city would meet most of its energy needs through third-party utility suppliers, many of which have excess capacity. These purchases would be augmented by conservation and energy efficiency and by cogeneration, a technology that uses a manufacturing company's production of steam to produce electricity. Estimated savings for this option run to $12.5 billion over 20 years.

Second, the city could form a municipal utility by purchasing an ownership interest in the entire Edison electric system. Because Chicago draws about one-third of Edison's total load, a proportionate interest in the utility's facilities is contemplated. The report calculates that this option would save up to $18 billion over 20 years.

Third, the city could form a municipal purchase power authority to function as a conduit for electricity purchased from suppliers other than Edison. This electricity would be for municipal services only, and not for use by the general city population, as is the case in the first two options. Savings could be $1 billion over 20 years.

The franchise agreement and Illinois law provide for municipal acquisition of private utility facilities.

Edison has been quick to challenge the preliminary conclusions of the Beck study. Howard Axelrod, a consultant hired by the utility to examine the report, said it is ``riddled with faulty thinking and highly improbable assumptions.'' Dr. Axelrod, of the Albany, N.Y., firm Planmetrics, said it was ``unrealistic'' for the city to expect electricity conservation to be as extensive as that contemplated in either of the two main options, and he doubted whether Chicago industries would be willing to make adequate investments in electricity-producing cogeneration plants to substantially reduce the city's need for outside electricity supplies.

``Put the Beck study on a shelf and cut your losses,'' Axelrod advised city officials. ``You're being led down the garden path.''

On Oct. 16, the city of New Orleans released its final version of a strategic plan for municipalization. Here, too, the initiative is traceable to nuclear plant construction costs - specifically, the two-unit Grand Gulf plant built by Middle South Energy Inc.

In 1980, New Orleans Public Service Inc., the investor-owned utility serving virtually the entire city, informed the City Council it was entering a contract to buy a percentage of Grand Gulf's output. But when construction costs for Grand Gulf Unit 1 rose from an estimated $600 million to over $3.6 billion, the city balked at the large rate increases.

While cities like Chicago and New Orleans have become the focus of attention for electric municipalization, similar efforts are under way in Iowa, Utah, Maine, and many more communities around the US, the Public Power Association reports. ``There has been a noticeable pickup in the past couple of years,'' says Paul Fry, the association's deputy executive director.

There are currently about 2,200 publicly owned electric utilities in the US serving about 13.5 percent of the population. In contrast, 210 investor-owned utilities serve about 75.5 percent of the population. The remaining 11 percent of electricity consumers are served by about 930 rural electric cooperatives.

Municipalities are authorized to issue tax-exempt revenue bonds, which can be used to finance a takeover of private utility facilities. Principal and interest payments would come from the municipal utility's net revenues.

This financing method was thrown into doubt when the US House Ways and Means Committee approved a budget reconciliation measure that would deny tax-exempt status to state and local governments that want to issue bonds for financing the acquisition of private utility facilities. The fate of the tax-exempt bonds won't be known until budget negotiations are concluded.