Can a utility be owned by its customers? -- Maine’s upcoming historic vote

 

Gordon L. Weil

Maine will hold a rare and possibly historic vote in November.

The U.S. is increasingly focused on the role and rights of consumers, who drive the economy.  The upcoming vote on the future of the state’s largest electric utilities will not only affect Maine but could send a message across the country.

Voters will decide whether to transfer the property of two electric utilities from ownership by their investors to ownership by their customers, who would gain ultimate control of their own electric service.  Votes like this referendum occur across the country from time to time, but seldom on this scale

The transfer would be from investor-owned utilities (IOUs) to a consumer-owned utility (COU).  The difference between the two is significant.

IOUs are financed by investors and borrowed funds.  They are responsible to their investors.  Customers pay both their investors’ profit and their lenders’ debt service.  Regulators balance the company’s financial needs and customers’ service needs.  Most news reports about electric rate cases and consumer issues relate to IOUs.  

Non-profit COUs are generally either municipal utilities or cooperatives.  They raise all their capital by borrowing and their customers are responsible for debt repayment from rates. There are no investors.  Because the customers bear responsibility, they own the utility.  COUs are subject to regulators, but they also self-regulate.

The difference between the two is illustrated by their management. Top IOU executives report to a board chosen by shareholders.  COU managers report to boards chosen, directly or indirectly, by their customers.  Maine’s existing COUs are governed by publicly elected boards.  They are either cooperatives or municipals.  The proposed COU would be akin to a municipal.

The combination of the investors’ profit and the market cost of debt are part of the rates paid by IOU customers for utility property.  In COUs, the equivalent cost is usually the tax-exempt interest rate for their borrowing.  The costs to be passed on to COU customers are lower than the IOU costs, producing lower rates. 

In Maine, IOUs and COUs own the wires but do not own power supply, which is provided by others.  Customers may choose their own power supplier.   Residential delivery rates, the utility charges for the wires service, are lower for COUs.  For example, CMP’s rate is 11.4 cents per kilowatt-hour, while Madison Electric, operating in the same service area, has a 5.8 cent rate.

An IOU like CMP serves a large area, including rural reaches.  The Eastern Maine Electric Cooperative serves a vast, sparsely settled area and its delivery rate is 9.0 cents.

Are COUs as competent as IOUs?  There are over 2,800 municipal and cooperative COUs and 179 IOUs in the U.S.  The COUs supply 25.8 percent of electric customers nationally.  The largest is Los Angeles.

Overall, using service outages as the measure, the COUs are more reliable than the IOUs.  Reliability matters when residential customers use electricity for lighting, heating or cooling and for business and industry that depend on steady power for their operations.

COU municipals and cooperatives have national and regional organizations that provide them support services in common. As a result, even small utilities have access to full services that meet the same industry standards as the larger IOUs.

Because no electric utility in Maine relies on its own generation but transmits power provided by others, each could transmit power from the same resources, especially renewable. 

A comparison between the existing IOUs – Central Maine Power and Versant – and the proposed Pine Tree Power COU reflects the recognized differences between the two forms of utility ownership.  However, the proposed acquisition of the IOUs’ property in Maine raises two important issues.

First, would PTP operate competently? To reassure Maine customers, the legislation requires it to operate in much the same way as the IOUs and with all the current operating personnel who wish to continue to work under their existing labor agreements.  PTP would be subject to enhanced PUC COU regulation.

Second, would PTP customers have to pay a high price for the acquisition?  The IOUs seek a premium above the actual value of facilities.  The amount will finally be set by a court.  The last major transaction in Maine, the sale of Emera Maine to create Versant in eastern and northern Maine, was priced at the existing value of the property plus only a minor premium.

Today, paying the cost of the existing property of the two IOUs is already included in electric rates that are being paid by their customers.  Thus, the actual premium above that cost, if any, is what would matter, not the balance transfer. It would be far less than what is claimed and could be offset by lower COU costs.

The voters’ decision could affect Maine’s electric rates and influence the push for consumer choice across the country.

Disclosure: I have advised and represented electric customers and COUs since 1973 and support the PTP proposal.