Guest Opinion: "Community Choice and Municipal Aggregation"
by Scott Ridley

We have largely forgotten the role that local governments have played and continue to play in the development of the electric industry. Moreover, we risk losing sight of the options local governments may offer to protect consumers, to advance competition in the marketplace, and to enhance opportunities for technology and economic development.

The future role of local government is one of the most important issues in the restructuring discussion. The basic authority of consumers rests at the local level. The resulting options consumers have to act as more than just respondents to private brokers and telemarketing calls are at the local level. And the ability for consumers to shape the marketplace and standards for what it will offer exists at the local level as well.

Part of what we have forgotten is that local consumer authority regarding electric utilities grows from an earlier era of competition when cities and towns commonly offered electric service to competitive bidding by suppliers. At its core, it is based on the ability of consumers, through direct votes or through their local elected officials, to determine who will occupy or utilize public streets and ways and under what terms and conditions that use will be granted.

Traditionally, this consumer authority has taken two forms. One is the local franchise grant to investor-owned utilities. The second is the choice of local consumers to establish a nonprofit municipal electric system - a form of self-franchise.

It is important that this authority not be diminished or swept aside by blind pressures to "clear market barriers." Otherwise, consumers could become literally "disenfranchised," reduced to responding to marketers without the full ability to determine the competitive terms and standards under which they would be served.

In a new competitive market those fundamental powers that consumers have at the local level could prove vital. Two years ago there was a belief that each individual consumer would enter the marketplace and select a competitive supplier. It is now generally agreed that consumers - especially residential and small business consumers - will have to aggregate in order to gain benefits.

There will undoubtedly be many forms of consumer aggre-gation. But what local governments offer - both public power and non-public power communities - are forms that are publicly accountable, non-discriminatory, non-profit, subject to open meeting and ethics laws, and oriented toward advancing economic development and the public interest.

The opportunities are many and varied:

For competitive power suppliers, community based aggregation under franchises or municipal power systems offers a stable, institutional party who may contract for longer periods or for larger, geographically concentrated blocks of power supply. This stability and size can decrease the cost and risk of financing facilities, result in better savings for consumers and a more dependable revenue stream for suppliers.

For energy efficiency, community involvement would move costs to the customer side of the meter. This can increase consumer benefits, help to overcome cost and information barriers, and shorten payback periods. It could also allow comprehensive approaches rather than cream-skimming and take conflicts out of fuel-switching.

For renewable energy, community aggregation offers a range of opportunities. Portfolio standards for "green power" can be included in power supply contracts. Community leverage in this area could allow consumers to become active "green citizens" rather than geographically scattered would-be "green consumers," who may be unsure of the true nature of what they are paying for and limited in their choices.

For low- and fixed-income consumers these options would assure the opportunity to remain part of a group with all other consumers. State protections for low-income consumers, as well as all consumers, would be written into the contracts with competitive suppliers.

For local government these options and the opportunities they offer provide a chance to minimize the negative impacts of competitive markets and maximize benefits for residents, businesses and municipal budgets. Revenue sources may be enhanced or protected, energy efficiency programs maintained, and planning and economic development improved. In addition, forward-looking communities can consider long-term infrastructure improvements such as integrating telecommunications, cable TV, Internet and energy supply that they might otherwise have little ability to undertake.

How these opportunities might be pursued is tied to the distinct differences between the two basic community forms: municipal electric systems and community aggregation under franchises. The differences center largely on the extent of control and relative liability a community might want to assume. There are several important differences: (1) municipal systems may generate a significant portion of their power supply as well as purchase under contract, while communities that aggregate consumers under a franchise would contract for all supply, with the possible exception of small demonstration or on-site projects; (2) municipal systems own and operate the distribution system and other facilities, while communities aggregating consumers with a franchise would contract for distribution services, or receive them under a tariffed rate; and (3) municipal systems buy and resell power, while aggregation communities only contract for service, and do not buy and resell power.

In many analyses, there is a misperception that the original passage of laws for state regulation of electric utilities abolished local powers for aggregating consumers and for negotiating and granting contracts, and reduced them by statute to narrow police powers. For both public options - establishment of municipal systems and community aggregation under franchises - it is important to examine the nature of local consumer powers and how and whether they have been clouded by regulatory practices, case law, statute, or general misperception.

The current atmosphere is one of high interest and great danger. At least ten states have included an option (in state electricity restructuring) for local government aggregation in legislation that has been filed. However, in some of these states there appears to be a marked lack of awareness of the existing balance of powers between local and state government, or a disregard for the importance of consumer leverage.

Private utilities and others have historically opposed attempts to form municipal systems and to utilize local franchise powers. In debates over restructuring of the industry this has carried over to aggregation of consumers by local government. The common charge is that it will create market barriers and re-regulate or stifle competition. The reality is that it will allow more consumers to participate and gain the benefits of competition. Legislation recently passed in Massachusetts allows for "Community Choice" - citizens can vote to aggregate using their local powers, and those who do not want to participate are allowed to "opt out" and choose any supplier they wish. (Editor's note: See story on page 1: "Massachusetts Legislature Passes Nation's First Deregulation Bill with Community Choice.") Existence of this local government option gives consumers more, and not less choice, as well as leverage they would not have otherwise.

Private utilities who hope to continue to hold a monopoly position through their "standard" offer" do not appreciate consumers having this choice and leverage. In Massachusetts, they lobbied extensively to pull out the "Community Choice" and opt-out language from the legislation. Such blind efforts to wipe out local consumer authority and forms of community choice in the name of clearing "market barriers" can open the way for predatory practices by utilities and others. In what appears to be the same old game, both private utilities and some power marketers still want to "own the customer." For utilities its the "standard offer" form of service, for power marketers it is in "alliances" with local government and private organizations.

For a market to function effectively, it must be balanced between consumer and supplier interests. Options that provide consumers with statutory powers, leverage and autonomy are critical to the ultimate standards and benefits that will emerge from a restructured industry. The loss of consumers' autonomy and their traditional foundation of authority will mean that market suppliers have an opportunity to dominate.

Experience offers cause for hope. Local governments are durable institutions and have a proven track record of service in the electric industry. For more than a century, public power systems have provided aggregated service to consumers in their communities at prices that average 15 percent less than those of investor-owned utilities. Under a restructured industry, consumers should have the choice of voting to aggregate their communities - either as a municipal system owning distribution facilities - or as a franchised aggregation with hard-nosed contracts for service. An increasing number of communities have become interested in these options, but legislation at the state level will need to be watched closely for restructuring provisions that could undermine consumer and community choice. In many states, local governments have yet to take their place at the table in these discussions. The next few years will tell what may become of this sleeping giant.

Copyright (c) 1998 by the American Local Power News