The push to reduce the economy’s dependence on fossil fuels has spurred a drive to electrify sectors from transportation to heating. Although distributed generation—electricity generated from sources near point of use, like solar and wind power—will play an increasing role in an electrified economy, centralized power generation and distribution is not going away.
The utilities that manage the flow of electrons coming from distant generators to your wall socket are irreplaceable today and will remain so for the foreseeable future.
Who controls these utilities? Given their centrality both to daily life and to a carbon-free future, can we trust these functions to private firms? Or should active management and control move to a public entity rooted in the local community?
Much of Western New York’s electrical power is provided by Rochester Gas and Electric, one of eight electric and gas utilities owned by Avangrid Networks, which is majority owned by Spanish firm Iberdrola S.A. RG&E provides electricity to customers in Allegany, Cayuga, Livingston, Monroe, Ontario, Wayne and Wyoming counties. It serves 385,900 electricity customers and 319,000 natural gas customers, and owns 8,900 miles of electric distribution lines and 1,100 miles of electric transmission lines.
Against a background of billing errors and customer service lapses (acknowledged by RG&E President Trish Nilsen in this Rochester Beacon post), there has been renewed interest in a change of ownership and control. Led by Metro Justice, activists are lobbying elected officials to fund a study of a public takeover of RG&E. (See Rochester Beacon stories “Power struggle in Rochester” and “Inside the public power fight in Rochester.”)
Advocates of public ownership and management, as expressed in the Democracy Collaborative’s “The Power of Community Utilities,” argue that management and control vested in citizen democracy will hasten a “transition to a genuinely democratic, equitable and clean energy system.”
Investor-owned utilities respond that their pricing and operating policies are governed by policies, regulations and assessments passed by the democratically elected state Legislature and implemented by the state Public Service Commission under the direction of the executive branch.
We all want to spend less on power
The popular appeal of an RG&E takeover is partly about cost. I live in Irondequoit. For the month of July, my wife and I were billed about $95 by RG&E for 611 kWh of electricity. My friend and Beacon editor, Paul Ericson, lives in Fairport and pays about $30 for the same amount of electricity. Why? He receives his power from Fairport Electric, a municipal utility serving the Village of Fairport and part of the Town of Perinton.
Presented as something as straightforward as a change in ownership structure, the RG&E takeover idea is appealing. Would my bill be cut by two-thirds if some kind of public authority or local government took over the utility?
What determines how much we pay for electricity? Can RG&E charge any price it likes?
Public utilities are monopolies
Entities that provide the public with services like electricity, natural gas and water are called “public utilities” by public policy analysts. This includes investor-owned utilities like Rochester Gas & Electric. For the sake of clarity, I’ll use Democracy Collaborative’s “community utility” phrase to refer to a public utility that is controlled by an entity like a public benefit corporation or a local government.
Public utilities are described as “natural” monopolies by economists. These are industries, products or services in which the initial investment needed to open the business is high, yet the cost of serving an additional customer is relatively low. Consequently, an established provider has a massive cost advantage over competitors—and can set very high prices for its customers.
In the early years of electrification, for example, anyone could enter the market. Every competitor would run its own power line down the street. As the cost of wiring a given block was nearly the same to serve one customer as it was to serve 20, the firm with the most customers was able to underprice the competition and eventually capture the entire market. Unregulated, a monopolist can earn significant profit by keeping its prices above its own cost but below the cost of entry for potential competitors.
To capture the cost savings accruing to a single provider while protecting consumers from monopoly pricing, natural monopolies are typically regulated. A government entity awards a single firm an operating license for a particular product or service within a specific geography. The price charged to consumers is negotiated with a government regulator with the intent of covering the provider’s cost plus an “acceptable” profit.
In theory, this gives customers the benefit of efficiency but prevents price gouging. The provider can be a private company, a publicly controlled entity of some form that operates at arm’s length from the elected government (such as a public benefit corporation or public authority), or a unit of government under the direct control of the elected government.
RG&E is an investor-owned utility, or IOU, a private firm that has been awarded an exclusive license to provide electrical power within a specific geographic area. (While the same regulatory framework applies to natural gas, in this post we’ll focus on electricity.)
Regulation strives for efficiency without monopoly pricing
Regulated utilities are intended to capture the efficiency of private ownership and management while protecting consumers from predatory pricing and ensuring that the utility pays attention to community values such as conservation and environmental protection.Yet the negotiated prices and service levels emerging from the dance between New York’s IOUs and the state Public Service Commission will not satisfy every constituency. Without the information provided by a competitive market, firms and regulators are constantly negotiating. Given the sums involved, regulated firms can afford to engage highly skilled staff (or consultants) to build and prosecute a rate case.
As the RG&E rate case records reflect, the Department of Public Service process of reviewing a regulated firm’s rate filing is arduous and extensive. Given that the process is public, stakeholders are invited to contribute to the deliberations. The current proceeding involves 49 active parties and attracted nearly 8,000 public comments.
Given the cacophony of voices and their disparate perspectives, the decisions of the regulators will always have detractors. Nor do the regulators control every action of the regulated firm. A newly-created community utility replacing the status quo would confront the same conflicts in perspective and purpose.
Deregulation empowers competitive pricing
Given the challenges, cost and complexity of regulation, the energy sector was significantly deregulated in the 1990s.
The electricity business relies on power generation, transmission and distribution. Generation converts a source of energy into electricity; transmission employs high voltage lines to bring that power to substations; the distribution network reduces voltage at substations and brings it to the user.
Interconnection of transmission lines across franchise territories improved system reliability by allowing different regions to share power when needed. The federal Energy Policy Act of 1992 forced further integration by requiring owners of transmission lines to allow generators of power access to their lines. The map below displays the state’s transmission system. The New York Power Authority (NYPA), established in 1931 by Governor Franklin Roosevelt to develop the state’s abundant water power, is the most significant owner of transmission in the state with 1,400 circuit miles. NYPA transmission includes a 765 kilovolt (kV) line bringing Canadian hydro to Central NY and almost 1,000 miles of 365 kV lines connecting sources and uses of power across the state.
Once power generators were able to use any transmission lines to bring their energy product to market, most states (including New York) forced investor-owned utilities to get out of generation altogether. The utilities were required to sell nearly all of their generating assets to energy service companies (ESCOs) and to offer their customers a choice of energy providers. As of 1997, RG&E operated 17 power plants with a capacity of 944 MW, the largest being the Ginna nuclear facility (517 MW). Today, RG&E operates only seven small hydroelectric plants with a capacity of 56 MW, according to the Department of Energy.
Since deregulation, the IOUs still own transmission lines and retain a monopoly over distribution within their franchise territories. The prices the utilities charge consumers to deliver power from the energy providers to the final consumer are regulated by the PSC. But consumers are free to buy energy from energy service companies that compete with one another over price.
Retail prices for energy vary considerably based on fuel source (fossil fuels, nuclear, hydropower, wind, solar, etc.), location and other characteristics. The 154 ESCOs operating in NYS supply energy to about 900,000 customers. The rest of the state’s electric customers (7.2 million) rely on the IOUs to purchase energy on their behalf.
The IOUs purchase energy through a wholesale market (of mind-numbing complexity) managed by the New York State Independent System Operator, an independent nonprofit operating under the authority of the Federal Energy Regulatory Commission. Prices in the wholesale market vary by date and time of day, how the energy is produced, the location of the generator and many other factors. The IOUs must also contract with generators for backup power they do not expect to need to ensure reliability.
IOU delivery charges are regulated by the PSC
Although prices for energy (the electricity itself) are determined by market competition, the prices IOUs can charge consumers to bring the power to the consumer are negotiated with the PSC. RG&E has a pending request for a 19 percent rate increase, for example, which would result in a 15 percent increase in the total bill for a customer using 600 kWh of electricity per month.
“Delivery” may be a misleading title for this charge. Included in delivery is pretty much everything the utility does: repairs and improvements to existing networks, computer systems for managing customer accounts and power distribution, reliability upgrades, property taxes, vegetation management, economic development program contributions, and spending mandated by New York’s Climate Leadership and Consumer Protection Act. It also includes taxes, payments to shareholders in the form of profits and dividends, and assessments supporting the state’s energy efficiency and climate agendas.
Comparing and contrasting the Rochester area’s IOU with one of its community utilities, Fairport Electric, is instructive. The chart illustrates the difference in size—yet the differences go far deeper, as we explore below.
I have reproduced our most recent RG&E bill and a mockup of a Fairport Electric bill for the same amount of power. As noted above, our $96 bill would be $30 in Fairport.
The electrons cost less in Fairport
Fairport Electric was established in 1901 and served 40 homes and a dozen streetlights with a single steam-powered generator. In 1925, it ceased producing its own power and began distributing electricity to its 1,305 customers from a company that became part of the Niagara Hudson Power Corp. in 1929, renamed the Niagara Mohawk Power Corp. in 1950.
Fairport Electric is one of 51 municipal and cooperative electrical systems receiving very inexpensive energy through a fixed allocation of hydro power from the Niagara Power Project. The 1957 Federal Power Act awarded a license to the state Power Authority to build a “power project with capacity to utilize all of the United States share of the water of the Niagara River permitted to be used by international agreement.” The allocation of the power is stipulated in the law, specifically that “the licensee in disposing of 50 per centum of the project power shall give preference and priority to public bodies and nonprofit cooperatives within economic transmission distance.” Moreover, the law required that the power be made available at “lowest rates reasonably possible.”
Half of the Niagara dam’s power is 765 mW. New municipal systems and cooperatives were added to the total in the early years upon approval of the incumbent, as power to new entrants had to be drawn from the fixed 765 mW allocation. The last system to be added was Massena in 1984. The incumbent munis have a contract with NYPA that extends to 2040.
Fairport Electric pays NYPA just over a penny per kWh for the energy. The cost of transporting the power from Niagara Falls brings the total cost to 4.1 cents per kWh.
Make no mistake: The price of power paid by NYPA’s municipal and cooperative customers is a bargain. Only a handful of U.S. utilities offer lower rates (U.S. Energy Information Administration).
By way of comparison, the Gardner family in Irondequoit has a contract with an energy service company (NOCO) to receive power through RG&E for just over 6 cents per kWh, nearly 50 percent higher than what we would pay in Fairport.
RG&E’s delivery charge is much higher
The big difference in the bills, however, is in the delivery charge. RG&E’s tariff—the rate approved by the PSC—permits the company to charge a flat rate of $22 per month plus 5.3 cents per kWh. The delivery charge is also subject to a 2 percent tax. Fairport Electric’s delivery charge is a flat rate of $4.67 per month (and no tax).
The municipal and cooperative electric utilities—like Fairport, Bergen and Spencerport in the Rochester area—are exempt from state tax and the state’s various assessments. Nor do the muni customers pay the systems benefit charge that supports the Clean Energy Fund. They do pay local property taxes, just as does RG&E, but avoid paying state assessments.
Other differences loom larger. The density of the two service territories differs dramatically. Fairport serves an urban/suburban market that includes the village of Fairport and much of the town of Perinton. Very few roadways have only a handful of customers.
RG&E’s service territory is sprawling and encompasses seven counties, six of which are predominantly rural. Reliability is about keeping the power system up to date and involves maintaining and replacing aging equipment from poles to cables to transformers. RG&E’s rural transmission and distribution lines have fewer customers per mile than Fairport, making system maintenance more expensive. Storm outages often result from fallen trees and limbs. Vegetation management—a key factor in system resiliency, thus reliability—is a greater challenge in rural areas.
Delivery includes profit. Supporters of the proposed RG&E takeover note that RG&E and its parent firms, Avangrid and Iberdrola, are profitable and that the profit leaves the community.
Public utilities have long been favored by institutional investors like pension funds as they offer returns that are strong and more consistent than other industries. Regulated monopolies are prevented from earning profit that is either vastly greater than other sectors, but they are also guaranteed the “reasonable” profit negotiated with their regulators. What qualifies as an expense chargeable to ratepayers is the core of a periodic negotiations with the regulator.
Differences with a community utility
It is unlikely that converting RG&E to a municipal utility would give it access to any of the cheap hydro enjoyed by Fairport customers. This fixed amount of power is already allocated through a contract between the 51 municipal and cooperative systems and NYPA, a contract that runs through 2040. Customers of a Rochester community utility would purchase energy through the competitive generation market, just as RG&E customers do now.
Most of the price difference between RG&E and Fairport is in the delivery charge. If my bill is representative, 58 percent of the cost of electricity to the consumer is in the delivery charge negotiated with the PSC.
■ The profit to RG&E’s owners is included in the delivery charge. It is tempting to think that this money would stay local were the company to simply change ownership. Yet that change in ownership must happen through a purchase from Avangrid, Iberdrola and their shareholders. The Fifth Amendment to the U.S. Constitution mandates that if the government takes private property for public use, the government must provide “just compensation,” a provision that has been refined through Supreme Court decisions dating back to 1876. The owners would expect to be compensated for giving up anticipated future profits. Servicing the debt incurred to take over RG&E would likely leave the delivery cost in nearly the same place. Annual debt payments are likely to be roughly equal to the anticipated future profits to the present owners.
■ There is no reason to believe that a community utility would be run more efficiently than a private firm. Addressing many of the complaints leveled at RG&E by Metro Justice—improving reliability, increasing employee pay and benefits—would drive up cost for ratepayers, not reduce it.
Let’s take a closer look at the potential impact of a community utility.
Would a community utility provide more generous support for government?
Metro Justice suggests that support for state and local government would be greater from a community utility. It references a report from Power to the Public that states the following:
“Public power utilities make greater financial contributions to state and local governments than investor-owned utilities. In the most recent year for which data are available, the median amount contributed by public power utilities was 5.6 percent of electric operating revenues. Over the same period, investor-owned utilities paid a median of 4.2 percent of electric operating revenues in taxes and fees to state and local governments.”
This does not describe the status quo in New York. The state and New York’s local governments have long looked to utilities to pay a substantial share of state and local taxes. Taxes paid by RG&E to the state and local governments in 2022 totaled $178 million, 15 percent of total operating revenue—three times the rate cited above for national IOUs.
The property tax bill is particularly significant for the IOUs as each owns and maintains extensive corridors hosting distribution and transmission lines, and substations. RG&E paid $65.5 million in property taxes to Monroe County and its towns, villages and school districts in 2022.
These costs are included in the delivery charge. Converting RG&E to a tax-exempt community utility would shift the state tax burden from ratepayers to taxpayers, although ratepayers would still pay property taxes.
Would a community utility adopt a more aggressive climate agenda?
A community utility might embrace a different climate vision. The state’s IOUs (and their ratepayers) are compelled to support New York’s Climate Leadership and Community Protection Act, which mandates a zero-emission electricity sector by 2040, including 70 percent renewable energy generation by 2030. The system benefit charge on our bills finances the $5.32 billion Clean Energy Fund.
Funds supporting climate action from a community utility may be spent differently—perhaps more productively—within the region. Among many laudable projects and goals, the Clean Energy Fund may support “projects or investments in housing, workforce development, pollution reduction, low-income energy assistance, energy, transportation, and economic development”—which leaves a lot to the imagination of an agency executive. (See NYSERDA 2023-24 Budget & Financial Plan.)
Would a community utility be more supportive of local economic development?
State and local economic development agencies look to the IOUs for financial and in-kind support. There are very few significant economic development projects that do not receive discounted power or financial assistance from the project’s IOU franchise holder.
RG&E reports that it spent $11.6 million in economic development grants from 2019 to 2022, supporting a range of programs with its sister utility, NYSEG. One specific program awarded a million dollars in $25,000 grants to 40 entrepreneurs selected by NextCorps.
Would a takeover satisfy Metro Justice aspirations?
Righteous anger over RG&E’s billing errors prompted Metro Justice and others to call the utility to account, prompting hearings and a recently announced PSC audit of RG&E and NYSEG. Metro Justice has suggested that the community should consider a more radical response: a takeover of the investor-owned utility by a community utility controlled by local people.
The Rochester City Council recently approved spending $500,000 on a study. Advocates are seeking an additional million dollars from Monroe County. In response, County Executive Adam Bello issued a press release opposing the takeover, arguing that the entire process of taking over the utility is beyond the scope of the county and could have “billions of dollars of implications for taxpayers.”
Ratepayers and citizens want affordable and reliable power and a public power utility that is committed to a sustainable future. Were it possible to start over, many of us might choose a community utility over the current structure of ownership and management. But that is not a realistic option today. Even if it were, a community utility might not achieve the goals we wish to achieve. Direct public control of critical infrastructure has a mixed track record.
In summary, what would be the net effect of a takeover?
■ The cost of energy (the electrons that power our toasters, air conditioners and, to an increasing degree, our cars) would be unchanged as consumers would continue to buy energy on a competitive open market, as we do today through RG&E.
■ As for the other costs of running a utility ( the delivery charge on our bills), a tax-exempt community utility may help ratepayers by shifting cost onto taxpayers; support for climate action might shift dollars from state to local control but not reduce this spending if the activists’ aspirations are fulfilled; spending on economic development might shift in focus but not disappear.
■ Reliability is achieved by a combination of effective management and additional spending on equipment and corridor maintenance. Community utilities have no natural advantage in either over the incumbent IOUs.
■ The profit earned by RG&E would not simply come home to the Rochester area. Iberdrola and Avangrid shareholders would be paid for giving up their rights to this profit and the burden of such an expense would be borne by some combination of ratepayers and taxpayers. The U.S. Constitution does not permit the kind of unilateral expropriation that has occurred in other countries, most recently in Latin America.
Finally, the complexity of such an endeavor guarantees that the $1.5 million proposed for an implementation study would be but a meager downpayment on a lengthy and expensive process.