Alma To Build New Wires System and Compete Directly With Old Utility

Alma, Michigan has completed plans to build a new city-wide electric distribution system to compete with its current investor-owned utility, Consumers Electric (CE). The city's strategy may be promising from the standpoint of protecting consumers from "stranded investment" surcharges levied by utilities for their losses when consumers seek new providers.

Alma, a community of 9000 within 5.75 square miles, has a load of 55MW, much of which serves a refinery and heavy industrial base.

With financial assistance from local industrial customers, Alma hired Ohio-based Courtney & Associates in 1994 to conduct a $25,000 feasibility study on the costs and benefits of municipalization.

Because CE executives promised court battles to stop any city effort to condemn their distribution system, city leaders chose to forgo condemnation and consider building a new distribution system to buy power on the wholesale market and compete directly for customers with CE. The study concluded that local residents and businesses would save 20% in rates, or $61 million over ten years, and that 95% of industrial and commercial customers would switch to the municipal system due to these savings, joined by 90% of residential customers.

The city issued a Request for Proposals to test the market with real bidders, and received 11 different bids. After selecting a short list, the city determined that it could save an additional $11 million, including direct and debt costs of building the $18 million distribution system with 25 year municipal revenue bonds.

But these savings were put into question in 1995, after the Federal Energy Regulatory Commission (FERC) released its "Mega-NOPR" report, Order 888, which provided that a utility's right to impose stranded investment "exit fees" on consumers who choose a new provider would depend on whether the utility had a "reasonable expectation of continued service." Order 888 held that if a monopoly has a reasonable expectation of continued monopoly status, that it can require compensation when customers leave. Upon reading Order 888, CE attorneys announced that Alma's consumers would owe its shareholders $105 million, or $11,700 per consumer, in stranded investment payments, if the town municipalizes. But by the time they faced the FERC, CE attorneys had reduced that figure to between $44.7 and $56.1 million.

If upheld, CE's exit fee strategy could scuttle Alma's effort. But City Manager Douglas Thomas is confident. Alma's franchise agreement with CE expired in 1939. And while CE executives argue that a state law grants them a perpetual franchise - a monopoly to the end of time - the utility's franchise contract is non-exclusive, so even if CE's franchise is deemed perpetual by state law, CE cannot reasonably have ever expected monopoly status.

Otherwise, says Thomas, CE can still sell the power left stranded by municipalization, so it is not properly "stranded." This fact was brought home when it was discovered that CE is seeking state approval in separate hearings to purchase 44MW of new power from an affiliate to meet growing demand. "Either the power is stranded or it isn't; CE can't have it both ways," said Thomas.

The fate of Alma and other municipalization efforts around the country is in the hands of the Federal Energy Regulatory Commission. If the FERC allows recovery by CE, it will possibly eclipse the feasibility of all such efforts. Intervenor comments on Alma were due at FERC on February 14, but no date for a decision is scheduled.

Copyright (c) 1997 by the American Local Power Project.