Wednesday, December 17, 2014
Can municipal electric utilities cut our electricity bills?
By Peter S. Cohan WALL & MAINThis week, I learned that many towns in the state — including the nine Worcester County towns of Ashburnham, Boylston, Holden, Paxton, Princeton, Shrewsbury, Sterling, Templeton and West Boylston — have their own municipal utilities, from which residents buy their electricity.
If you are fortunate enough to live in these places, you are probably shaking your head at those of us who are customers of the investor-owned utilities in Massachusetts.
That's because the Massachusetts utility industry violates a basic precept of economics: The bigger you are, the greater your bargaining power with suppliers.
Thus, if you are a customer of a big utility, you should pay the utility less, because that utility exercises its negotiating leverage to demand a volume discount on power and pass the savings along to its customers.
But according to a Lexington-based expert on the Massachusetts utility industry, the opposite is true.
The expert, Patrick Mehr, is a native of France who is "a former manager of a marketing unit of the French National Coal Board in Paris [who] graduated from the Ecole Polytechnique and the Ecole des Mines de Paris," according to the New York Times.
In a December 15 interview, he told me that he has been studying the utilities industry for 30 years and was a consultant at the Boston Consulting Group. Mr. Mehr operates Plunkett Lake Press, that bills itself as publisher of "eBooks of literary non-fiction, including biographies, memoirs, essays and accounts of historical events."
He also runs the website of the Massachusetts Alliance for Municipal Electric Choice (http://massmunichoice.org/). MAMEC "is the alliance of municipalities and organizations supporting legislation to allow new municipal electric utilities in Massachusetts (the "Muni-Choice Bill" H2927) – beyond 41 municipal electric utilities that already exist – so that cities and towns have a choice for electricity distribution."
Mr. Mehr introduced to me the concept of the municipal utility in Massachusetts and their significant benefits to consumers.
As he explained, "85 percent of Massachusetts residents get electricity from investor-owned utilities such as National Grid, Unitil, and NSTAR. But the other 15 percent live in 41 communities across the state that operate municipal utilities. In general, municipal utilities offer considerable benefits to consumers including lower electricity rates, fewer power outages, shorter outages, faster response to questions and complaints, quicker resolution of problems, and undergrounding the system."
Municipal utilities charge consumers less than the investor owned-utilities, and they have increased their rates much less in the last year.
According to MAMEC's analysis of data from the Massachusetts Municipal Wholesale Electric Company, for the average household that consumes 500 kilowatt hours of electricity each month, National Grid charged $85 — 19 percent more than the average municipal utility that billed consumers $71 for the first nine months of 2014.
Going back to 2003, the MAMEC data indicate that municipal utilities consistently charged consumers lower monthly amounts. Moreover, municipal utility rate increases have been much lower than for investor owned utilities in the last few years.
For example, MAMEC data indicate that municipal utilities charged an average of $68 a month in 2012 — a figure that has increased 4.4 percent to $71 for the nine months of 2014 during which time National Grid's monthly charge rose 23.2 percent from $69 to $85.
While MAMEC does not supply data for how much rates will increase for municipal utilities in 2015, we know that National Grid's rate is up 37 percent.
Among three large Worcester County municipal utilities — those in Shrewsbury, Holden, and West Boylston — none expect rate increases as big as National Grid's. Shrewsbury saw its rates rise November 1 from $87 to $101 for the same amount of electricity that National Grid charged $121 in October. Holden's electric customers started paying a 7 percent rate increase in July, but Holden Municipal Light Department general manager James Robinson told the T&G that it expects "no further increase, unless the upcoming winter is as bad as last year's." And West Boylston's electricity rates are not increasing and have stayed about the same since 2009.
Why this huge difference in rates? Thanks to utility deregulation in 1997, electric utilities have had to buy their power on the open market rather than owning generating capabilities. And Massachusetts does not allow investor-owned utilities like National Grid to buy power for long-term contracts of between 10 and 30 years as municipal utilities can.
Instead, state regulators allow them to lock in power prices for at most six months.
This means higher prices should shorter-term power prices rise and lower ones should they fall. MAMEC's goal is to make it easier for cities and towns in the state to create municipal utilities by letting them buy the assets of the investor-owned utilities that serve the local communities.
As Mr. Mehr explained, "The state law on municipal utilities was created over 100 years ago. The way that old law works has the effect of making it very difficult for a town like Lexington, where I live, to buy the electric utility assets from NSTAR so it can use them to operate a municipal utility. Lexington might decide that the substations and other assets are worth $50 million, whereas NSTAR might set their value at $150 million. The Massachusetts Department of Public Utilities might decide that the right price is $75 million. NSTAR won't sell at that price, and Lexington can't start its own separate system because distribution is a natural monopoly — that is, it makes no sense to have multiple sets of poles and wires for each utility."
Although MAMEC has tried seven times to change the law — most recently this March — there does not appear to be a good chance that it will become easier for cities and towns to create their own municipal utilities.
"Our current State law includes century-old, obsolete language that gives investor-owned utilities veto power over new municipal utilities: no Massachusetts community has formed a muni since 1926," said Mr. Mehr. To be sure, even if a city were to get the green light to buy the local utility assets of an investor-owned utility, the cost would likely require a major financing. But given the consumer benefits of municipal utilities, it seems as though local communities should have the option of considering whether such an investment would pay off.
Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.