Economics Professor Weighs in on Municipal Power

Jane Driscol sent me this article by John Solow, a professor of Economics at the University of Iowa. I took a class with Prof. Solow and while he may not be the most interesting person to listen to, he has some good arguments in this article.

Thursday, October 20, 2005

A 'yes' vote not prudent

During the past several months, supporters of a municipal utility have gone to great lengths to make a political case for a government take-over of facilities of MidAmerican Energy Company, Iowa City's electricity supplier. They have turned what should be a serious public policy question into a referendum on "big business." Now, as citizens face their only opportunity to vote on the issue, Citizens for Public Power claims a "yes" vote allows them to see whether they can come up with a viable business plan.

This is seriously putting the cart before the horse. No intelligent business person would approach a lender or investor without a financial plan, but that is exactly what CPP is doing. Iowa Citians deserve to have the facts in front of them before they decide whether to support this scheme. Yet when pressed for details, CPP's response is, vote "yes" to give us an opportunity to figure that out, trust the City Council to only go forward if the numbers work out, and count on the Iowa Utilities Board to prevent us from making a mistake.

Here are just a few of the biggest questions that ought to be answered before we authorize the City Council to establish a municipal utility:

- What will it cost to buy MidAmerican's distribution system?

The Latham Report assumes it will cost roughly $11 million to purchase the necessary MidAmerican facilities. This is a gross underestimate. More than a decade ago, the Iowa Utilities Board told Sheldon, a town of roughly 5,000, that it would cost residents almost $14 million to purchase the assets they needed to municipalize. How much are we, a city of more than 60,000, going to have to pay?

- Where will Iowa City purchase its electricity, and how much will it have to pay for it?

Iowa City's average load in 2003 was 94 megawatts, and the peak load was roughly 180 megawatts. The companies in the best position to supply this amount of power to Iowa City are, of course, MidAmerican and Alliant. Buying power from more distant utilities is more expensive and less reliable. On hot summer days when power supplies get tight, our municipal utility would lack sufficient secure supply and would have to purchase additional electricity at higher spot-market prices. Or we could build our own peak load generating capacity. What will this cost?

- What other facilities will Iowa City have to build, what additional employees will we have to hire, and how much will that cost?

A municipal utility will need additional facilities, such as a control center and emergency back-up generators. What will this cost? MidAmerican has a staff of 37 people who work around the clock to monitor their power system, a billing department, a customer service department and so on. A municipal utility will have to provide those services as well. How big will that staff be, where will it be housed, what equipment will it require and how much more will this cost?

- Who will provide the service, both on a day-to-day basis and in the event of an emergency?

The IBEW, our electrical workers' union opposes the formation of a municipal utility because its members receive better pay and benefits from MidAmerican than they would as municipal workers. Our local electrical workers have publicly stated they will stay with MidAmerican. Where will a municipal utility find the workers needed to keep our electrical system up and running, and what will it have to pay them? Following the 1998 windstorm, MidAmerican was able to draw workers from surrounding communities and states to restore power, at a cost of more than $1 million, without raising rates. If a similar catastrophe were to occur, how would a municipal utility provide an equally quick response, and at what cost?

Ordinarily, the City Council would study the costs of establishing a municipal utility first. If it chose, the Council would put forth a detailed proposal for establishing a municipal utility, and, under Iowa law, the citizens would vote on whether to "authorize the City Council to establish a municipal utility." By forcing the vote through a referendum, CPP is making the voters use their only opportunity to speak without the facts they need to make an informed choice. CPP says that a "yes" vote is only to allow further study, but we don't need a vote for that. Nothing prevents the City Council from researching the costs of municipal power now.

Starting a municipal utility is not a simple matter. CPP has failed to provide any credible evidence that doing so is in the best interests of Iowa City electric customers. We don't know what we are buying, what we will need to build, what will it cost to buy and operate, and who's going to be in charge.

These fundamental questions need to be answered before we have any idea whether this is a worthwhile endeavor. Until they are answered, it is premature and unwise to authorize the City Council to establish a municipal utility. A "no" vote on Nov. 8 is the prudent course of action for Iowa City voters to take.

John L. Solow is an associate professor of economics at The University of Iowa and a member of the Coalition to Preserve Safe and Reliable Energy.

The article comes from the Iowa City Press-Citizen.