The Philadelphia Inquirer
December 27, 1993
A jolt of
competition for electric companies
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
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
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
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
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
"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
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."