Public vs. Private: The Debate Continues

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In the September issue of POWER, I wrote about a public utility (JEA) that is exploring privatization, and in October, I looked at a city (Boulder, Colorado) that is exploring municipalization. While I think both of those examples are interesting, there are several other cases I could have written about. For instance, the South Carolina Public Service Authority, known as Santee Cooper, and the Puerto Rico Electric Power Authority (PREPA) are two additional public power utilities that have been exploring privatization, while San Francisco, California, and Pueblo, Colorado, are two more cities contemplating municipalization.

San Francisco and Pueblo Consider Public Options

In early September, San Francisco Mayor London Breed and City Attorney Dennis Herrera sent a letter to Pacific Gas and Electric (PG&E) offering to purchase the company's power lines and other related infrastructure serving the city for $2.5 billion. The San Francisco Chronicle reported that city officials had been "closely considering such a purchase since PG&E decided to file for bankruptcy protection in January." However, PG&E rejected the offer in October, saying it was too low and would "unnecessarily and unfairly pass a large amount of costs" to remaining customers.

In an op-ed piece published by the Chronicle on Oct. 11, Breed and Herrera wrote that they were "proceeding carefully," but that they are "committed to this endeavor over the long term because it is in the best interests of all San Franciscans." The two men claimed that a recent poll showed nearly 70% of San Franciscans support public power. Furthermore, they said the $2.5 billion offer "was the result of nine months of extensive technical and financial analysis conducted by city experts and outside advisers, including specialists in asset appraisal, financial feasibility and engineering." If the deal does ultimately get done, it will create California's third-largest government-owned electric utility, behind the Los Angeles Department of Water and Power, and the Sacramento Municipal Utility District.

According to the City of Pueblo, its residents have indicated they are unhappy with the services being received from Black Hills Energy (BHE). The city asked EES Consulting Inc., and Fairfield and Wood P.C. to evaluate the financial, engineering, operational, and legal feasibility of forming a municipal utility to serve electric customers located within and around the city's legal boundaries, and possibly all of the BHE facilities in Colorado.

On Oct. 10, Phase 2 of the Pueblo Municipal Electric Utility Feasibility Study was released. Among the findings was that "municipalization could provide current BHE electric customers with significant retail rate savings in the range of 10-14%." The report also says "forming a municipal utility has other benefits such as local control over power supply resource type, rates, local programs and key decision-making." While there is likely to be considerable debate before a final decision is made, Pueblo could exercise its right to provide electric utility service within the territorial boundaries of the city as early as 2020.

Santee Cooper and PREPA Mull Privatization

In the case of Santee Cooper, the Public Service Authority Evaluation and Recommendation Committee was tasked with providing recommendations to the South Carolina General Assembly regarding the future role and operations of the utility. The committee hired ICF as an independent, third-party consultant to conduct an exploratory process, the main objective of which was to collect relevant information on potential sale, management contract, and other options for Santee Cooper, particularly related to the feasibility and advisability of a sale.

The process revealed that there was strong interest in the utility. Specifically, a total of 15 proposals were received from 10 parties including small and large electric utilities, large private investment firms, and industrial firms. Seven of the proposals were for the potential acquisition of the full utility. The remaining proposals constituted a variety of offer types ranging from long-term asset management agreements, to long-term power supply arrangements, to partial acquisitions.

According to a report submitted to the committee by ICF, all proposals had prices near the firm's independent valuation range. Furthermore, all would "result in decreases in average customer electricity rates, ranging from 2% to 14% over 20 years" relative to the business-as-usual projection. The reduction was in spite of three adopting the investor-owned utility (IOU) structure, which, the report says, "all else [being] equal, can create upward price pressure relative to public power."

Josi(C) F. Ortiz Vizquez, executive director and CEO of PREPA, was a witness at a U.S. House of Representatives Natural Resources Committee hearing in April. In his written statement, Ortiz said, "Puerto Rico has embarked on an historic effort to transform its energy system." Ortiz noted that Puerto Rico law provides for the privatization of PREPA's transmission and distribution system. "The current expectation is that this will be done through a public-private partnership arrangement under which the system will be operated, maintained and improved by a third-party operator," he said.

According to Ortiz, PREPA also anticipates that the development of new generation resources-and perhaps the ownership and operation of some existing PREPA generating facilities-will generally be undertaken by private parties. Duke Energy, Exelon, PSEG Services, and Quanta Consortium have been shortlisted for PREPA's privatization, according to a report released Sept. 20 by Inframation, an Acuris company.

The author of the Inframation report, Power and Energy Research Analyst Daniela Urias, told POWER that the trend toward privatization is being driven by the desire of IOUs to expand their service territories. Urias said the number of U.S. investor-owned electric and gas utilities has decreased by about 60% since 1996. She said that means there are fewer potential acquisitions, but when a utility does become available, "there are going to be several big players that are going to be interested." a-

-Aaron Larsonis POWER's executive editor.

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