Andrew Maykuth Online
The Philadelphia Inquirer
December 27, 1993
A jolt of competition for electric companies
Some public systems are becoming powerful foes for utilities.

CLYDE, Ohio - This tidy town near Lake Erie once called itself the sauerkraut capital of the world. Now it proudly boasts that it is home to the nation's largest washing-machine factory.

It's not a hotbed of revolution. "People here think things out and don't make decisions willy-nilly," said Patrick E. Wadsworth, a farmer and former Clyde mayor.

So it seemed a bit out of character a few years ago when the town of 6,000 voted to divorce itself from the Toledo Edison Co., the investor-owned utility. Toledo Edison had faithfully served the town for a generation.

The problem: Toledo Edison's rates had spiraled to become the highest in Ohio. And more rate increases were on the horizon.

And so the newly formed Clyde Light & Power Co. borrowed $11 million and installed its own system of wires, transformers and electric meters to compete head-on with Toledo Edison. The upstart municipal operation arranged to buy its power wholesale from another utility.

Despite Toledo Edison's warnings that public power would cost more, Clyde's rates came in much cheaper. Today, almost five years later, they remain 30 percent lower than Toledo Edison's rates. A typical Clyde homeowner pays about $20 less a month than a resident outside the city limits.

Almost everybody in town, except employees of Toledo Edison, has switched to the municipal system.

The only apparent drawback from having two electric systems going toe to toe is that every street in Clyde has a lot of overhead wires.

"Electric poles are ugly enough, so double poles are double ugly," said city manager Dennis Albrinck.

Clyde long has been a curiosity within the electric industry. But lately it has become more of a case study for utilities facing an onslaught of competition unlike anything the industry has seen since its free-wheeling early days.

Towns from Defiance, Ohio, to Evanston, Ill., long the captive customers of high-rate utilities, are exploring whether to declare their independence and municipalize their electric systems.

And many of the nation's 2,000 public power systems, emboldened by federal deregulation of the industry, are beginning to shop around for cheaper sources of power.

Rates will drop 25 percent on Jan. 1 in Butler, N.J., a Passaic County public power system that serves 10,500 customers in five towns. The reason: Butler will begin buying its power in bulk from Pennsylvania Electric Co. rather than nearby Jersey Central Power & Light.

In some cities, a fierce door-to-door competition has broken out between the municipal system and the investor-owned utility. Cleveland Public Power, the municipal system that covers about a third of the city, is rapidly expanding and signing up 50 residential customers a day from Cleveland Electric Illuminating Co., the investor-owned utility.

"It's retail competition, like two gasoline stations on the same corner," said George S. Pofok, the commissioner of Cleveland Public Power. The municipal system charges about 30 percent less.

In the early days of the electric industry, competition was just as keen. In 1920, there were 6,500 electrical systems in the country - about 3,000 were municipal, according to the American Public Power Association in Washington.

Nowadays, the industry is dominated by about 200 investor-owned utilities that serve 75 percent of the nation. Municipal systems and rural cooperatives serve the rest.

The investor-owned utilities gained the upper hand because they could produce power less expensively at their big generating stations. Municipalities and small private utilities found it was cheaper and easier to simply turn their systems over to the private utilities.

Now, several fundamental changes in the industry are conspiring to make life uncomfortable for the large investor-owned utilities.

Most municipal systems are buying power in bulk and receiving it over transmission lines rather than building expensive new generators. Cleveland Public Power is supplying its new customers by buying wholesale power from 21 outside sources.

While municipal power companies have always been free to shop around for bulk suppliers, in practice, their choice has been limited to one or two nearby utilities they could reach with a transmission line.

The federal Energy Policy Act of 1992 has touched off a resurgence of interest in municipal power because it now forces regulated utilities to allow other power suppliers open access to their transmission lines. (Utilities still have exclusive access, however, to the distribution lines leading to their residential and commercial customers.)

The law is expected to make the nation's electrical grid an open highway rather a series of private roads. Municipal power companies will have more ability to leapfrog the neighboring utility and sign a deal with a more distant electrical supplier.

"Logic would tell you that with transmission access allowed under the Energy Policy Act that municipals would be inclined to at least shop around and see if they can get a better deal," said Harold R. Piety, a spokesman for the Pennsylvania Electric Association, which represents the state's private utilities.

Some powers suppliers are already knocking on doors.

Torco Holding Co., a Chicago energy broker, has purchased 1.4 megawatts of surplus electricity from Niagara Mohawk Power Corp., the utility in Syracuse, N.Y. Torco is selling the power to utilities several states away. The most promising prospects are Midwestern municipal utilities, said Michael J. Pryor, a senior vice president of Torco.

"In this process, some utilities are going to be winners and some are going to be losers," Pryor said. "We're past the days when utilities will be rewarded for inefficiency."

Deregulation is expected to have a positive effect on customer rates, although the growing competition for municipal contracts could damage some high-rate utilities. (Philadelphia Electric Co. is considered vulnerable because it has some of the highest rates in the nation.)

"This is going to cause a lot of the big guys to tighten their belts," said Gary Webb, borough administrator in Butler, N.J., whose customers will save $2.9 million a year - an average of $286 each - from the town's new wholesale contract.

In many cases, investor-owned utilities are reducing their rates to municipalities just to keep them as satisfied customers.

Butler's deal with Pennsylvania Electric caused so much interest among the state's eight other municipal power companies that most were able to negotiate new contracts with the utilities that supply them, said Jim Jablonski, president of the Public Power Association of New Jersey.

Some towns need only to talk about doing a public power feasibility study to get a response from their local utility.

"To be honest, we just talk to communities and suddenly deals get cut," said John T. Courtney, a public utility consultant in Findlay, Ohio, who worked on Clyde's move to public power.

Such was the case in Brook Park, Ohio, a Cleveland suburb that a couple of years ago began to explore establishing a municipal power system.

Cleveland Electric Illuminating Co. became so alarmed it made an unusual deal in April to keep Brook Park as a customer. It could not cut residential rates in Brook Park without offering the same discount to residential customers in other towns, so the utility cut $8 million from the rate it imposed on Brook Park's largest customer, Ford Motor Co.

Ford, which operates three engine plants in Brook Park, agreed to turn over a portion of its savings - $1.6 million a year - to the town.

"The city then just passes out checks to the residents at the end of the year," said Courtney.

Experts believe that such special arrangements may be more practical for many towns than the difficult process of establishing a municipal power system.

"It's not always as simple as saying we're going to condemn the power system and run it ourselves," Jablonski said.

Not every town is a good candidate for municipal power. Experts say it requires strong leadership, unwavering public support and access to a power supply that is cheap enough to justify spending millions of dollars to build a separate system. It also requires good utility managers.

"While municipal power companies have inherent economic advantages - they don't pay taxes and don't need to make a profit - you can also take a city into bankruptcy if you don't know what you're doing," said Pofok, of Cleveland.

Officials in Clyde said they considered all the consequences of public power when they began their campaign in 1987. If anything, they were surprised by how little resistance they got from Toledo Edison.

"It was only at the last minute that Toledo Edison seemed to take it seriously," said Gregg D. Ottinger, the Washington lawyer hired by Clyde.

In the weeks preceding the election, Toledo Edison attempted to woo Clyde's biggest customer, the sprawling Whirlpool Corp. washing-machine factory, with a special deal. Whirlpool, which consumes 80 percent of the electricity in Clyde, turned down the utility.

Toledo Edison ran advertisements to magnify the negatives of a municipal power system. It said Clyde would have to pay $22 million to build a separate system, more than double the city consultant's estimate. It said that municipal electricity would cost more. It estimated that Toledo Edison rates would go up only about 5 percent a year.

"Municipal-owned utilities are an idea that has come . . . and gone," Toledo Edison said.

Sixty-nine percent of the voters approved the creation of Clyde Light & Power Co. The city's estimates of the costs for building the system, $11 million, proved remarkably accurate.

A few months after the election, Toledo Edison filed to increase rates 30 percent to pay for two new nuclear power plants.

Some things, however, never change. Even though Clyde Light & Power remains more affordable than the competition, its customers - like customers all over - believe that electricity can never be too cheap.

"After a couple of years," said Wadsworth, the former mayor, "people start complaining about rates again." home page   
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