Hermiston's shift shows challenge, rewards of utility ownership

Seven years ago, PacifiCorp shut down many customer service operations in Hermiston and replaced them with a toll-free telephone number.

That didn't go over well, and within a few years, the town of 14,000 had acquired the company's poles and power lines and opened a city-owned utility, Hermiston Energy Services.

Today, about 4,000 customers pay rates 2 percent or 3 percent lower than they were under PacifiCorp, even when counting debt payments on the $8 million purchase price.

'If you can pay less to buy your house than you would to rent it, why wouldn't you buy it?' said Ed Brookshier, Hermiston's city manager.

A combination of events, among them increasing electric rates and decreasing customer service, are creating fertile political conditions for local acquisition of the local power company. And not just in Hermiston or Portland Ñ where the city is trying to buy Portland General Electric in the wake of parent Enron Corp.'s bankruptcy Ñ but all over the country.

In the last year, similar efforts have taken place in California, Florida, Montana, Massachusetts, Nevada, Wyoming and South Dakota. Circumstances were different in each town, and, for their own reasons, not all efforts succeeded. But the acquisition attempts all began as part of a search for lower rates and better service.

During the last year, the American Public Power Association saw a jump in the number of queries it received from local governments trying to learn how to own a local utility, said Deborah Penn, the association's vice president.

More than 100 such inquiries came to the group, which represents publicly owned power companies. It doesn't know how many of them actually led to a transaction, but the number of queries went up after the collapse of Enron and the Western power crisis of 2001.

Nonpublic customers pay more

Here are some quick numbers about publicly owned and investor-owned utilities:

• There are 232 investor-owned power companies serving 73.5 percent of all U.S. electricity customers

• The 2,008 publicly owned utilities Ñ both municipally owned and public utility districts, or PUDs Ñ serve 14.4 percent of customers. The majority of them, about 1,200, are found in towns of 10,000 people or less.

• The 889 rural electrical cooperatives serve 11.9 percent of customers.

• Oregon is home to 19 electric cooperatives, 12 municipals, 11 PUDs and three investor-owned utilities: Portland General Electric, PacificCorp and Idaho Power.

• The three private companies operating in Oregon serve 73.1 percent of the state's electricity customers.

Many cities own utilities, among them Seattle, Eugene and Tacoma, and Sacramento and Los Angeles in California, with some of the operations dating to the late 19th and early 20th centuries. McMinnville opened Oregon's first city-owned utility in 1889, only 10 years after invention of the light bulb.

Many municipals and electrical cooperatives sprang up a century or more ago, most commonly in remote areas ignored by private companies. Public power operations took off in earnest in the 1930s when Congress gave them preferred rates from the Bonneville Power Administration to ensure that electricity reached rural areas and the general public.

These days, public power can be controversial.

Publicly owned power companies say they can usually offer lower rates, don't pay federal income taxes, can issue tax-free bonds, operate locally and can put profits back in the operation and not toward big salaries or stock dividends.

Residential customers of investor-owned power companies paid an average of 16 percent more for electricity than customers of municipals or PUDs, according to the Public Power Council, based in Portland.

Investor-owned companies say public ownership may have made sense a century ago, but such utilities lack the skills and acumen needed to operate in today's complex and competitive power market.

Volatile market surprises

'Today's newly deregulated wholesale electricity markets are difficult to navigate,' said a September report by the Edison Electric Institute, a trade association for investor-owned utilities. 'Even experienced players have been fooled by the fluctuations in the market.

'While it may seem like a good option on the surface, creating a new municipal electric system is not realistic or economically viable in today's new energy environment. Local government should leave this specialized business to the existing electric companies.'

Sometimes, voters agree.

Last year, Montana voters decided by a 2-to-1 margin not to allow the state to buy 13 hydroelectric facilities from private companies. In October, voters in Wagner, S.D., decided against creation of a municipal power company. And in November, San Francisco voters rejected a public power agency for the second time.

Then again, voters sometimes like the idea.

Residents of two Florida towns in the Orlando area, Longwood and Casselberry, approved a municipalization effort last fall. In Clark County, Nev., home to Las Vegas, voters last November approved a ballot measure 57 percent to 43 percent asking the Nevada Legislature to let the county set up a public power authority. And in Massachusetts, the adjacent cities of Arlington and Lexington appointed committees to study buying out the local electric company.

Shift barely passes

What happened in Hermiston illustrates the pressures that communities feel in the shifting sands of the power industry.

In 1996, PacifiCorp replaced many of its storefront customer service facilities with a toll-free phone number in order to save money. The company rejected city requests to restore the services, and the city asked the nearby Umatilla Electric Cooperative to buy out PacificCorp's Hermiston operations, said Jim Deason, the attorney representing the city in the process.

But PacifiCorp refused, and the cooperative, which serves about a quarter of the Hermiston electricity customers, didn't have the legal authority to condemn the assets. The city, however, did and set about using eminent domain to acquire the company.

The city thought that a municipally owned utility could offer better customer service and bring rates down, Brookshier said.

City voters approved a 1998 authorization vote but only narrowly. The measure passed, 52 percent to 48 percent, with a margin of just 105 votes. A judge eventually authorized the city's effort, and the city and the company agreed to an $8 million purchase price.

It opened for business Oct. 1, 2001, becoming Oregon's first new municipally owned utility in 53 years.

Power objectives achieved

The Hermiston City Council oversees the utility, which operates under a contract with the Umatilla Electric Cooperative. The electricity comes from the BPA, and nobody pays much attention to who owns it anymore, Brookshier said.

'It's been successful,' he said. 'We are in this because of local service and rates, and we've been able to achieve our objectives.'

Rate increases always spur a jump in interest in forming municipally owned utilities, said Keith Voight, spokesman for the Edison Electric Institute. He said it's a way elected officials can allay voter fears about higher costs.

'With privately owned companies, you have a third party Ñ the state public utility commission Ñ that determines the rates and handles grievances,' Voight said. 'With a city- or county-owned utility, government is regulating itself.'

But Penn of the American Public Power Association said people want control of their utility.

'You're all pulling in the same direction, whatever the community's directions are,' she said. 'The citizens set the policies, and the utilities carry them out. The consumer and owner are one and the same.'

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