Public Power Pt. 3: Ingredients For Success — Episode 166 of Local Energy Rules

John Coyle:

It’s easy to lose sight of progress in terms of administrative or judicial proceedings that drag on that are not fully transparent to the public, because nobody wants to dig into the minutiae of what the who, and in what process. And so people tend to get frustrated. And that of course is one of the great tools of the incumbent. The more I can delay, the more likely it is that the citizen really will lose heart, and require their elected leaders to go away or stop or leave me alone.

John Farrell:

Welcome to the 3rd episode in a special series of the Institute for Local Self-Reliance’s Local Energy Rules podcast focused on public power; utility companies owned by the cities they serve. This series, called The Promise and Peril of Publicly-Owned Power, responds to an upswell of interest in city-owned utilities. In addition to clean energy, advocates cite local control, lowering costs, and reinvestment in the local economy among the major reasons they want public, instead of private, power companies.

In the first two episodes, we shared why communities are pursuing public power and what specific benefits are found in the public power model. In this episode, we talk about the process of forming a publicly owned utility and why so few cities have accomplished this feat in recent years. John Coyle, an attorney who has represented many cities in their public power pursuits, provides an overview of the barriers to municipal takeovers and explains the four key ingredients for success. You’ll also hear quotes from Ursula Shryver, Vice President of Strategic Member Engagement and Education at the American Public Power Association, and Randy Knight, City Manager of Winter Park, Florida, who we talked to last episode.

I’m John Farrell, director of the Energy Democracy Initiative at the Institute for Local Self-Reliance and this is episode three in our multi-part series, The Promise and Peril of Publicly-Owned Power. It’s a production of Local Energy Rules, a biweekly podcast sharing powerful stories about local, renewable energy.

My interview with attorney John Coyle was wide ranging, but we started off with history and the principle at the heart of public power. Specifically, he explained how President Franklin Roosevelt used a 1932 campaign speech in Portland to reinforce the importance of state and city authority to hold monopoly companies accountable. John included a few examples of U.S. cities that have wielded the power Roosevelt discusses, including by revoking the utility’s monopoly grant to be the sole electricity provider, also known as its “franchise.” Note that Coyle also borrows Roosevelt’s use of the word “sovereign,” to describe the city or state with the power to issue the franchise.

John Coyle:

One of those sort of foundational documents I always point people to is president Roosevelt’s Portland speech from September of 1932, where Roosevelt kind of reviews for his audience in a very compact and folksy way the origins of  grants of monopoly power under common law and the circumstances under which the grants are withdrawable.  Essentially takes his audience through the whole development of the concept of just and reasonable rates. The idea that a utility’s permission to provide utility service on a monopoly basis comes from the sovereign or it’s delegate, which in this case would be the state or it’s delegate the municipality and can be withdrawn for unsatisfactory performance or for any reason the sovereign is allowed to exert under the agreement that constitutes the franchise. In America in more recent years, <laugh> it has other and, and clearer antecedents, on kind of a state by state basis. The town of Mac New York, was one of the first of the modern era. Certainly I can think of a couple of my clients, the city of Kansas city, Kansas, excuse me. And the city of Springfield, Missouri were both, both became municipal utilities. I think Kansas city entered the electric business in the mid 1930s, if I’m not mistaken. And city utilities of Springfield took over an existing utility property in 1945.

John Farrell: John explains that despite the power cities hold, few city leaders seem to realize that public takeovers are available.

John Coyle:

It’s my impression that people generally don’t understand the value of the grant that’s embedded in the franchise. It becomes a matter of, well, this is the way we’ve always done business. And so, you know, when the local electric company comes in, if they bother to come in and sometimes they don’t, for renewal, then we just automatically renew it because state law requires that they have one done.

People tend to overlook the fact that A. it is of value and B. the utility doesn’t own it. There is a lot of misconception I think, built into, certainly a lot of jurisprudence to some extent, state law, certainly federal energy regulatory commission precedent, that there is some sort of inherent continuity in the franchise without the consent of the franchise, or, and that’s, I think not fundamentally correct. It’s really not legally correct. Legislatures influenced as they are by a variety of considerations, tend to be protective of the rights of property, less than perhaps the right of the community to regulate the quality of service it gets for the money that it pays.

John Farrell:

Having covered the legal foundation of public power, I asked John to provide an overview of the common steps in the process of municipalization, or the formation of a public utility. He explains via the example of Boulder, Colorado. That city was engaged in a 10-year effort to take over electric service in the city from the Public Service Company of Colorado, otherwise known as Xcel Energy.

John Coyle:

There are some sort of Prudential components to a municipalization. We always tell people, even before you have a vote, you wanna have a preliminary feasibility study that at least estimates the costs and benefits involved, takes kind of a preliminary look at the cost of acquiring facilities, whether you’re gonna acquire them through eminent domain or not. And just evaluates again, not on a back of the envelope basis, but on a relatively high level, whether you are going to be able to achieve your objectives as a community in an economically sensible way. Now, in Boulder’s case. And I, I speak to this with some level of experience because we were the council for Boulder, they had done a lot of of feasibility analysis.

Once you’ve done the preliminary feasibility, then yes, you need to have a legislative resolution. When I say legislative, I mean, at the municipal level to form a utility, an electric utility, and then typically, although not inevitably a legislative adoption of a plan as to how you’re gonna go about actually implementing the electric utility and where these things, you know, tend first to, to run into obstacles, obviously is the incumbent utility is going to challenge the validity of those enactments. Certainly the Public Service of Colorado [Xcel Energy] did at every opportunity.

Boulder decided to proceed by eminent domain. I think they may well have succeeded in doing that, had they not decided that they were also going to condemn. Public Service Colorado’s certificate of convenience and necessity to serve customers outside their municipal limits. Colorado has a very strong constitutional home rule provision for municipalities, but the force of that provision as a source of municipal power diminishes considerably once you step out of the municipal boundaries. So once Boulder took that decision, Public Service Colorado hauled them into court. Boulder decided then to go litigate the question of whether they could get permission in the Public Utilities Commission. And that took about three years.

And, you know, as these things roll on the communities, ardor tends to dampen somewhat diminish because it’s easy to lose sight of progress in terms of administrative or judicial proceedings that drag on that are not fully transparent to the public, because nobody wants to dig into the minutiae of what the who, and in what process. And so people tend to get frustrated. And that of course is one of the great tools of the incumbent. The more I can delay, the more likely it is that the citizen really will lose heart and require their elected leaders to go away or stop or leave me alone.

John Farrell:

Assuming cities have shown the feasibility and passed a resolution, how do cities exercise their authority to take over? As John Coyle mentioned in his overview of Boulder’s municipalization attempt, a common tool is seizing the electric grid hardware, the poles and wires, through eminent domain. Using eminent domain triggers a legal process where a court determines the fair price the city must pay for the grid infrastructure currently owned by the utility. But it also generates utility resistance, as Ursula Schryver of the American Public Power Association explained in our interview.

Ursula Schryver:

The ​​biggest disadvantage in terms of the municipalization process is the fact that the incumbent utility is not typically a willing seller of the system. So they are, they are going to fight the municipalization effort, 99 to a hundred percent of the time. They’re gonna spend a lot of money on both the communications campaigns to, you know, scare people into not wanting to pursue it and then legal battles as well, just dragging out the process. We’ve seen this in so many of the efforts that we’ve seen. So it’s a time consuming process, it’s costly, but if communities are committed and they have done their research and really understand what their goals are, then it can be very successful.

John Farrell:

John also described how utilities can resist a takeover by obstructing the process of valuing the existing grid system.

John Coyle:

There are a lot of, I wanna say imponderables involved in evaluating the value of an electric distribution system and evaluating the eminent domain value of the franchise. I can get into that in greater detail if you want. The basic problem is most incumbent utilities will tell you that we don’t keep our continuing property records based on the boundaries of your municipal corporation. So we can’t really tell you what facilities we have in there. So then you pay an engineer to go around and count the poles and the transformers in the miles of wire, and you prepare an eminent domain filing on that basis. And then the utility immediately steps in and tells you, no, you were wrong. You forgot about this. Wait, I thought you didn’t keep your records on that basis. I don’t have to tell you that.

John Farrell:

Beyond the ways that utilities can play games, as John Coyle suggested, there are other issues with establishing the cost of buying out the incumbent utility.  In theory, it ought to be a simple matter of taking the original value of the poles and wires and then deducting for the age of the equipment, sometimes called the “depreciated original cost.” I suggested as much to John and got more than I paid for. He explained how the concept of depreciated original cost originated when the Federal Trade Commission and Congress stepped in to address utility abuses that contributed to the onset of the Great Depression. Today, utility regulators commonly use depreciated original cost to set rates and value utility infrastructure, except — notably — in the case of municipal takeovers. He also explained that one city, Winter Park, Fla,. found a method to make this question of cost much easier.

John Coyle:

The notion of depreciated original cost comes to us as a result of the causes of the Great Depression. Okay. And those of us who have become old and bald and fat and gray haired in this business, the way I have, will remember that one of the causes of the great depression was the public utility holding company system that had been promoted, developed in a lot of ways by Samuel Insel, uh, who was Thomas Edison’s secretary, and figured out if you created these utility holding companies and they sold assets back and forth, and each time the asset was sold, you marked up the value, right? So that the fair using in quotes, the term “fair value of the facilities devoted to the public service” kept increasing well, ultimately that leads to a situation in which utility returns and therefore utility rates are based largely on air or water in, in, in the term that they used in Insull’s day in terms of “watered stock.”

And eventually, you know, the market may, may not be prescient, but it’s pretty smart <laugh>. And when the market realized this about the electric utility holding company structure, and it’s not me talking, this is the Federal Trade Commission in its investigation of the causes of the great depression. And one of the problems that led to the great depression was that the market got wise to the fact that a substantial component of the investments was in fact, based on valuations that were not supported by realistic asset values. So the requirement that depreciated original cost be used as basis for setting utility rates actually grew out of the preamble to the public utility holding company act of 1935, which was a response to all this. And it has been embraced by regulators throughout, except in the context of a condemnation of utility facilities.

What should happen is you should be using depreciated original cost as a benchmark. And if you’re writing a franchise, you heard it here first, gang: If you’re writing a franchise, you should write your franchise the way Winter Park did and say, if I’m not happy at the end of this, you are gonna sell me those facilities and you’re gonna sell ’em to me at depreciated original cost.

John Farrell:

In my interview with city manager Randy Knight, I learned about Winter Park, Florida’s success with its acquisition of the utility hardware and how Randy felt like they could have gotten an even better deal. But how did Winter Park win? Let’s cut to my conversation with Randy about their effort.

I’m intensely curious about the fact that you succeeded because the landscape I feel like is littered with attempts for public power that have failed, you know, Boulder, Colorado was at it for 10 years. A lot of other places got no further than the feasibility study. I was amazed from reviewing what of the presentations you’ve given, like in other places, the utility outspent local advocates 10 to one, a very, very common ratio, unfortunately, in terms of this. How did you succeed up against that?

Randy Knight:

Yeah, so it was a perfect storm, is the way I put it. You know, there were 106 franchises with this one utility in Florida and they were all pretty much up for renewal in a five year window. And we were kind of in the beginning to early to the middle part of that renewal process. And they had renewed, you know, dozens and dozens before they got to us. So when we started looking at it, we saw some of our neighbors that were a little bit ahead of us in the exploration, the city of Castleberry, which is next door to us, a city of Almont Springs, which is near us and a couple of other cities were a little bit further ahead of us and, and starting to explore municipalization. And so we, when we jumped into it, uh, you know, I’ll say that that’s when the politicing began, right.

They started supporting certain candidates in elections and those type of things that was very, very successful. And what we saw happen in other cities is they would take out somebody that was supporting moving forward with the effort and replace ’em with somebody that they helped get into office. And then the franchise was renewed and that one was out. And we saw that, you know, I mean, Castleberry actually ended up with a better arbitrated price than we ended up with. And yet, even though they went all the way through that level of the process, there was a change on their commission and they changed their mind and renewed the franchise. And then the city manager went to work somewhere else. And in our case, I say it was a perfect storm because we had a commission that was committed to it.

They didn’t lose in those elections. The reliability was so bad in Winter Park. People were fed up and we have the Orlando utility commission right next door, who runs one of the best utilities in the country. And so to, for the investor owned utility to say Munis can’t do it, we had the best example in the country right next door that was doing it and doing it very well. And then you couple that then with a very educated community of people that don’t, or aren’t used to being bullied and the bullying tactics that they used during these campaigns didn’t work here. And so I, it is, to me, it’s all those things that, that combined that made it work here where it didn’t other places.

John Farrell:

I’m kind of curious if you have meetings with folks from some of your neighbor cities like Castleberry, you know, since that decision was made and do you ever sort of poke them and say, well, look what you could have.

Randy Knight:

Well, they say it to me, you know, they say it to me that we wish we’d had done it when we had the chance. So I try to be nice once in a while. But, it is a point of pride that our city was able to pull it off.

John Farrell:

My entire interview with Randy was about 30 minutes, and we’ll release the full audio in the coming weeks. In the meantime, let’s get back to my conversation with John Coyle about municipalization. In some instances, staunch utility resistance has pushed cities to explore alternatives to seizing utility infrastructure in order to create a public electric utility, as John explains.

John Coyle:

In the late 1980s, early 1990s, I was involved in a situation with the city of Clyde, Ohio, which had operated a municipal utility from the late 19th century until the early 1960s, when they sold their electric distribution system to the Toledo Edison company. Flash forward to the late 1980s and the exploration of their franchise to Toledo Edison, which was, you probably don’t recall. You were probably still in grade school anyway, was burdened with very high rates because of investments in nuclear power over a relatively small service area. And so the citizens decided to form an electric utility and reclaim their electric distribution system.

And that activity was met with, what was George Wallace’s expression, massive resistance by Toledo Edison, obviously ultimately what the city of Clyde ended up doing was building about 10 miles of 69 KV transmission line to a lower cost power supplier, and then rebuilding the entire electric distribution system within municipal limits. And after they did that, the rates were still 35% lower than Toledo Edison rates.

John Farrell:

John explains that while paying lawyers to pursue eminent domain is a relatively low cost investment compared to building an entire electric grid, it can also have a low probability of success. If a city invests in its own power lines or other grid infrastructure, on the other hand, it actually owns a valuable asset. You can hear more about this in the full interview with John Coyle, to be released later this year.

John Farrell:

We’re going to take a short break. When we return, John shares the four key ingredients for public power campaigns to succeed and we discuss whether there’s a role for the federal government in helping local public power efforts. You’re listening to episode 3 of the Local Energy Rules special series on public power with guest John Coyle, discussing how communities can form municipal, locally-owned utilities.

Hey, thanks for listening to Local Energy Rules. If you’ve made it this far, you’re obviously a fan and we could use your help for just two minutes. As you’ve probably noticed, we don’t have any corporate sponsors or ads for any of our podcasts. The reason is that our mission at ILSR is to reinvigorate democracy by decentralizing economic power. Instead, we rely on you, our listeners. Your donations not only underwrite this podcast, but also help us produce all of the research and resources that we make available on our website and all of the technical assistance we provide to grassroots organizations. Every year ILSR’s small staff helps hundreds of communities challenge monopoly power directly and rebuild their local economies. So please take a minute and go to ilsr.org and click on the donate button. And if making a donation isn’t something you can do, please consider helping us in other ways. You can help other folks find this podcast by telling them about it, or by giving it a review on iTunes, Stitcher, or wherever you get your podcasts. The more ratings from listeners like you, the more folks can find this podcast and ILSR’s other podcasts, Community Broadband Bits and Building Local Power. Thanks again for listening. Now, back to the program.

John Farrell:

Having asked John to provide the context for how cities can municipalize and some of the most common barriers, I went straight to the heart of the issue and asked what the key ingredients are for success. His answer was in four parts, a formulation developed (as he put it) over a six-pack of PBR on a stopover in Astoria, Ohio one night many years ago.

John Coyle:

we always say that the secret sauce for a successful municipalization involves basically four things, the spread, the bread, the head and the lead, and what those elements really mean is the spread is, do you have a viable economic alternative to present to your community? Because nobody undertakes this level of effort, as a matter of principle, if they, or if they do, they don’t undertake it as a matter of principle for very long. So you have to be able to present a plausible and compelling economic alternative to your community. The bread — it’s gonna cost you. So you need to have some means of financing the effort on an ongoing basis.

Whether that’s some kind of a tax, Boulder levied an occupancy tax on Public Service of Colorado, once it’s franchise had expired in 2010 or 2011, I forget which, but the population voted on occupancy tax. Now, of course, Public Service passed the tax through to its ratepayers in Boulder, but the political cleverness of that was that people saw the tax on their electric bill. So they, even though there were funding an effort to oust Public Service Colorado, it didn’t feel so bad because you could see where your money was going. Anyway, so that’s the bread, the head is critical. You need to have committed local leadership with continuity, and it has to be at the local level.

You cannot guide an effort like this from outside. You know, someone in my position cannot sitting at a desk in Washington, DC inspire people in Ohio or Colorado or Arizona, or any of the other places where we’ve done it, Minnesota, to put in the effort that needs to be put in to keep the community cohesive on its objectives. And finally the lead, you need good lawyers and good engineers, because you will have to engage in some level of controversy, in order to make this happen. And you need competent, experienced, committed professionals on the outside, working for you in order to make that happen. In my experience, if you lack even one of these ingredients, your chances diminish remarkably, and there’s no guarantee that having all four of them will get you there. But they’re kind of an irreducible minimum of what you need to have to succeed

John Farrell:

Knowing the four ingredients, I was particularly curious whether John felt it would be appropriate for the federal government to help cities with their pursuit of public power, knowing that they’re often outspent 10 to 1 by the incumbent utility and that the federal government did provide some aid during the Roosevelt administration. He didn’t think so.

John Coyle:

I don’t think that the federal government ought to be in the business of picking winners and losers in these fights because fundamentally, the existence of the utility franchise isn’t a federal issue. It’s a state issue. And more appropriately in my view, a local issue, to the extent that the federal government wanted to provide grants or was in the position to provide grants in this day and age, it probably wouldn’t be for the construction of distribution facilities, but it might well be for things like battery storage or community solar or things like that, then yeah. That, that, that may be appropriate. At the state level, I think it is well past time for reappraisal of the locus and the nature of the power to award a franchise to an incumbent utility.

I think state legislatures and certainly state judiciary have been blinded by the notion that the investment of an incumbent utility in its facilities gives it some right to continuity, an inherent right to incumbency that somebody has to pay to dislodge. And I honestly don’t see that as the intention of the franchise system, and I’ll go all the way back to Roosevelt’s Portland speech say, I think he got it right in terms of what the legal antied of the franchise are in this country. And I think Scott Hempling is also correct about his assessment that the role of the consumer, right? The role of the host community, in controlling the right to serve within that community is substantially undervalued in most states jurisprudence in this country, and almost inevitably by state regulatory agencies, who, again, going back to Roosevelt might more properly view their role as consumer protection rather than as umpire. My own view is that what the federal government needs to do is, is to adopt more of a neutral position on the question of municipalization.

John Farrell:

While John didn’t support federal intervention to help cities pursuing public power, he did suggest that the Federal Energy Regulatory Commission (or FERC) had a role to play. Specifically, he suggested that FERC needed to fix the issue of so-called stranded costs, the concept that utilities use to (as he says it) bludgeon communities considering municipalization.

John Coyle:

One of the biggest obstacles to a successful municipalization these days is the notion of stranded costs, which is a construct that FERC, Federal Energy Regulatory Commission, imported into its open access rule back in 1980, 1996, when the federal energy regulatory commission said, okay, all of you investor owned utilities who own transmissions facilities need to make those facilities available for all comers. They’re what are called antitrust essential facilities. Mm-hmm <affirmative> in order to prevent the exercise of market power by incumbent investor-owned utilities FERC directed them to open up their transmission systems. Now, FERC had done something similar with natural gas pipelines somewhat earlier. And the US court of appeals for the DC circuit said, well, wait a minute. You’re creating a situation where the more agile will jump off the incumbent system and or, and take advantage of this while those who are not quite so nimble will end up stuck with the bill. So you need to find a way, federal energy regulatory commission, and more, fairly apportion the costs of supporting the sunk cost of incumbent.

I say this by way of saying that FERC did not itself come up with the idea of stranded costs for in their open access rule. Mm-hmm <affirmative>, their antied for it, but FERC embraced it as what they then called a transitional mechanism. That was 26 years ago, and we’re still transitioning, you know? I would like to see that notion of stranded costs eliminated or constrained in a more reasonable and less inclusive way. It’s been used as a club, a bludgeon in every municipalization I’ve ever been part of, since 1996 and, and the investor owned incumbent are very quick to trot it out and say, if you try to get rid of me, you are gonna be in my debt for 30 or 40 years, and I’ll stick it on your transmission bill itself.

John Farrell:

My final question for John Coyle was whether the rising interest in renewable energy, affordability, and racial and economic equity changes the likelihood that cities can be successful with public power takeovers.

John Coyle:

I would’ve said yes until I ran into Boulder <laugh> I honestly, you know, the limitation of my own intellect and I’ll acknowledge it. I didn’t see why anyone would take on the burden of trying to do this unless there were a tangible economic reward on the other end of it. And then I ran into a community, Boulder, where the community as a whole believed sufficiently in decarbonization as an objective that they were willing to pull together and take on as a community, the risk and the burden of attempting to establish a municipal electric utility. They didn’t exactly succeed in that.

But I think if you asked them, they would say, we, you know, while we didn’t get our own utility out of it, at least not yet, we did change the trajectory of Public Service of Colorado as decarbonization. I’m not sure you’d get Public Service in Colorado to admit that, but I, I think experientially, I believe that that’s true. So, um, there are considerations other than straight up economic, um, those considerations are inherently local.

John Farrell:

John, with all the experience that you’ve had helping communities that are considering municipalization, you know, following the legal gyration of this, what advice would you give to public power advocates and to cities like Ann Arbor, Michigan; Decorah, Iowa; Louisville, Kentucky that are considering municipalization?

Well strap in, you’re gonna be in for a fight. Remember the four key ingredients, make sure you got ’em. And to the extent that you don’t succeed at first, consider that your franchise grants you a very powerful tool to change the tilt of the playing field the next time. Yeah. If a future generation comes along that shares your determination for local self determination, then if you have not, in fact, succeeded in wresting control of the electric system from the incumbent yourself, you could at least make it easier for your, you know, children, grandchildren to do that. And I think that’s an important consideration.

That brings me to a final sort of suggestion about what people ought to do if they’re thinking about this, is to get the best information that you can and immerse yourself in it. See who you believe, don’t take anybody’s word for a necessary outcome on anything, without being able to validate the conclusion on a common sense basis that is important to you and to the values that your community shares as a community.

John Farrell:

Ursula Shryver from American Public Power Association agreed that sticking by community values is essential to successful municipalization efforts.

Ursula Schryver:

We see communities succeeding in the municipalization process, you know, maybe not every year, but every couple years, there’s a new public power utility that has formed. There’ve been about 18 in the last 20 years. So there it is possible, but you just, it comes down to really being committed to the vision that you have for your community, you know, understanding what the community wants and making sure that all the stakeholders have buy-in on that. Cuz you’ve gotta be committed if you’re gonna succeed in it.

John Farrell:

Thank you so much for listening to this episode of Local Energy Rules, the 3rd in our multi-part series, The Promise and Peril of Publicly-Owned Power. To learn more about cities that have tried or are trying municipalization, check out an article on ILSR’s website entitled “Spreading Like Wildfire” as well as the Taking Over Your Utility section of our interactive Community Power Toolkit. On the show page, look for links to Local Energy Rules podcast interviews with leaders from other public power communities, as well as additional ILSR resources on municipal electric utilities. You can also find every existing city-owned municipal utility on our Community Power Map.

Our next episode in the public power series, in two weeks, explores the answer to a pointed question about municipalization efforts: what happens if you lose? We share results from Decorah, Iowa; Boulder, Colorado; Minneapolis, Minn.; and other communities that didn’t get the public utility they’d hoped for, but that won more than the status quo.

Local Energy Rules is produced by me and Maria McCoy, with editing and sound production by audio engineer Drew Birschbach. Tune back into Local Energy Rules every two weeks to hear more powerful stories of communities taking on concentrated power to transform the energy system. Until next time, keep your energy local, and thanks for listening.