June 26, 2001

M E M O R A N D U M

TO: The Honorable Board of Supervisor

FROM: Clarice Duma, Sr. Legislative Analyst

HEARING: Rules Committee

HEARING DATE: June 29, 2001

SUBJECT: Compare and Contrast: MUNICIPAL POWER AUTHORITIES (MPAs)

AND MUNICIPAL UTILITY DISTRICTS (MUDs)

SUMMARY OF REQUEST

A motion approved by the Board of Supervisors (BOS) requests the Legislative Analyst to study Municipal Power Authorities (MPA) in other jurisdictions and compare and contrast them with the Municipal Utility District (MUD) measure also intended for consideration by the voters in November 2001. Currently, there are three proposals to create locally-controlled power - a MUD ballot measure and two proposed ballot measures introduced by members of the Board of Supervisors. All three proposals are intended for consideration by San Francisco voters in the November 2001 election, as summarized below:

· The MUD Proposal. This initiative, authored by the Coalition for Lower Utility Bills (CLUB), is a citizen initiative that seeks to create a municipal utility district (MUD) with the same exterior boundaries as the City and County of San Francisco and the City of Brisbane. A motion approved by a majority of the members of the San Francisco Board of Supervisors calls and provides for a Special Election to be held in San Francisco and Brisbane on November 6, 2001 for the purpose of submitting to the voters a proposal to form a MUD and elect its initial Board of Directors. This proposed measure does not define the services to be provided by the MUD.

· The Municipal Water and Power Authority (File No. 010597). This proposed Charter Amendment, introduced by Supervisor Gavin Newsom and co-sponsored by Supervisor Tony Hall, repeals charter section 16.103 and amends charter sections 4.112, 9.107, and 13.101. It also adds new charter sections 4.134, 4.135, 4.136, 4.137, and 4.138 to establish a Municipal Water and Power Authority (MPA) which would assume all powers and responsibilities of the Public Utilities Commission (PUC) and have expanded responsibilities related to energy and water. The MPA would be responsible for the generation, sale and transmission of electricity, gas, steam, and other energy. It would also propose ordinances setting energy and water efficiency goals and standards that may become effective without action by the Board of Supervisors. This measure would also remove authority for the transfer of surplus utility funds to the City"s General Fund.

· The Municipal Water and Power Agency (File No. 010957). This proposed Charter Amendment, introduced by Supervisor Tom Ammiano, amends the City and County Charter by repealing sections 4.112 and 16.103. It also adds a new Chapter 8B that eliminates the Public Utilities Commission (PUC) and replaces it with a Municipal Water and Power Agency (the "Agency"). The Agency would assume powers and responsibilities of the PUC, and has responsibilities related to the generation, sale and transmission of electricity, steam and other energy. It would also propose an ordinance setting energy and water efficiency goals and standards to the Board of Supervisors. Charter provisions would also prohibit the transfer of surplus utility funds to the City"s General Fund for a ten-year period following the effective date of this measure.

Also attached, is a nationwide comparison and summary of MPAs and MUDs.

BACKGROUND

Interest in creating and supplying publicly-owned power has generally been driven by a desire to supply ratepayers with reliable electric service at reasonable rates. While governments at the local and state levels have mostly led efforts to provide locally-controlled power, citizens have marshaled similar efforts in many jurisdictions, whether it was to create a water or an electric utility. The high energy costs and shortages affecting many western states are renewing interest among localities in these regions to explore ways of supplying low-cost power to their residents. To illustrate, the Reason Public Policy Institute (RPPI) reports that, whereas 12 new municipal utilities were established in the last decade, there are currently about 150 additional communities that are considering municipalization. If they succeed, they would join the more than 2,000 jurisdictions nationwide that already provide electric services to about 40 million customers or about 15 percent of electricity users, according to the American Public Power Association (APPA). Currently, private utilities still supply a majority of electric power to residential and commercial customers, with municipalities controlling water and sewage utilities.

San Francisco"s Power Needs

The City"s power needs are currently provided by Hetch Hetchy Water and Power ("Hetch Hetchy") - a division of the San Francisco Public Utilities Commission, together with Pacific Gas and Electric Company (PG&E), an investor owned utility (IOU). Hetch Hetchy supplies electric service to City departments, tenants on City property, and quasi-City organizations. According to Hetch Hetchy staff, this agency supplies about 12 percent of the energy consumed in San Francisco, with the remaining 88 percent provided by PG&E, pursuant to a non-exclusive franchise. PG&E provides public utility services under the jurisdiction of the California Public Utilities Commission (CPUC). Although customers now have the ability, under "direct access," to obtain electric power from other energy suppliers, PG&E still remains the provider of so-called "distribution service" - that is, retail delivery of electricity. Hetch Hetchy and PG&E also promote and provide energy conservation and efficiency programs to their customers.¹

PUBLIC POWER: Municipal Power Authorities/Agencies and Municipal Utility Districts

As noted earlier, there are over 2,000 public power utilities nationwide serving about 40 million customers. The California Municipal Utilities Association (CMUA) reports that 30 of these entities provide public power to communities in California. In California, the largest IOUs are Pacific Gas & Electric (PG&E), Southern California Edison, and San Diego Gas & Electric. There are currently two MUDs in California that provide electric service - the Sacramento MUD (SMUD) and the Lassen MUD (LMUD) in Susanville². In other states, these public utilities may be known as public utility districts (PUDs). MUDs are publicly-owned entities, which must be created by voter approval. The creation of a MUD may however, be proposed by citizen initiative or by the legislative body. In contrast, MPAs are either municipally-owned or county-owned systems.

Public power utilities differ in governance and operational structure, purpose, and function. According to the APPA, differences are based on their communities" populations, geography and climate, natural resources, economic and social resources, challenges, and local government structure and goals. In California, Florida, and other states, public power utilities (that is, MPAs and MUDs/PUDs) may provide water, gas, sewer, and electric services, as well as telecommunications and solid waste. While most cities do provide water and sewer service, fewer cities - about 2,000 cities nationally, provide locally-controlled electric service. Many of these cities serve small communities of less than 2,000 people. The largest cities are Los Angeles and Sacramento in California, Seattle in Washington, and Jacksonville, Florida.

The descriptions and comparisons that follow below describe the differences and similarities between municipal power authorities/agencies (MPAs) and municipal/public utility districts (MUDs/PUDs). These distinctions are also summarized in the attached table.

Purpose for Establishing Public Power

A decision to provide public power is viewed by proponents as a way for communities to: gain local control of their power needs; gain access to the wholesale power market; and generate savings for local residential and commercial ratepayers. There is an added expectation that publicly-owned utilities can provide reliable, efficient and cost-effective services. Private utilities, or IOUs, argue that they, as private suppliers, can provide faster and more efficient service than public utilities. IOUs point to their historical role in the energy market as providers of distribution service.

The energy crisis facing California is providing local communities with an opportunity to consider municipalization or public power as a way of reigning in an "out-of-control" energy market. For cities, municipalization offers an opportunity for local control by creating an agency that is accountable to the local legislative body and that has the checks and balances that come with municipal governance. Similarly for MUDs, proponents believe its independent governance structure frees it from political control by the local legislative body, and places it directly under the watchful eye of the voting public.

In many jurisdictions, public utilities are also being urged to participate in environmental protection, including purchasing and distributing green power, as well as providing energy efficiency programs. Many jurisdictions are also considering or establishing joint powers agreements to enable joint purchase and sale options between public agencies. For example, in Florida, Key West"s City Electric System (CES) joined Florida Municipal Power Agency"s All Requirements Project, which allowed CES to enjoy economies of scale in power supply as well as lower costs. New public utilities will likely reflect the interests of communities to not only provide residents with low cost power; they will also incorporate an environmental role and interest in establishing regional partnerships as a way to create efficiencies in energy generation and distribution.

Public Power Services

The services provided by a public power utility are determined by a number of factors, including its relationship with the local IOU and the terms established at inception by the publicly-owned utility and the IOU. Depending on infrastructural and staffing capabilities, a municipal or public utility could supply water, gas, sewer, and electric services, although in most jurisdictions, cities are already providing water and sewer services. Other jurisdictions, including the City and County of San Francisco, also have the capacity to supply electricity, although it may be limited distribution to certain customers, such as city departments.

In general, MPAs are "vertically integrated" utilities owning generation, transmission and distribution systems, which provide base load for their service area. These utilities could however, choose to engage in some but not all of these functions, including utilizing local resources or contracts with outside entities to deliver these services. For example, rather than invest in plants, a public utility may instead, engage in long-term power purchase contracts for generation resources. According to Eugene J. Carron of Orrick, Herrington & Sutcliffe, LLP, decisions to make long term investments in generation resources are determined by estimated customer demand and whether future costs may be lower than the cost of the current investment.

In most instances, a public decision to create a locally-controlled utility, such as an electric utility, forces localities to reconsider their relationship with the local IOU - whether to replace or supplement services provided by that private utility. A decision to replace the private utility (IOU) may involve the acquisition of its property either through negotiated sale or eminent domain powers. If a private utility does not want to relinquish its services to a public utility, it is likely to launch a legal challenge. For example, PG&E successfully challenged efforts to create a municipal utility in Lincoln, CA. Jurisdictions that wish to avoid such legal entanglements may limit their services to supplying power to new developments or seek joint operations with the private utility - e.g. the IOU maintains its facilities which can be utilized by the public entity to benefit local residents. Other arrangements may include join operations among neighboring MPAs.

Authority to Establish a Public Power Entity

Before public utilities can begin operations, they must comply with many state and local laws, which generally determine the types of and the manner in which services could be provided. In California, state and local provisions authorize the creation of MUDs and MPAs - specifically, the California Constitution (Article XI, Sections 5 and 9), Government Code Sections 6500 through 6599.2,, and the Public Utilities Code (Division 6, Section 11501, et seq.) which applies exclusively to MUDs. The Public Utilities Code (Section 10002) separately addresses the acquisition of IOU service territory in the event of acquisition by eminent domain.

In Charter cities such as San Francisco, local Charter provisions also delineate services, which may be provided by a public agency. For example, in San Francisco, the City"s Charter provisions in section 16.101 set forth the City"s current policy for the acquisition and ownership of public utilities. Charter Section 4.112 further gives the PUC jurisdiction over the "construction, management, supervision, maintenance, extension, operation, use and control of all water and energy supplies and utilities of the City."

California state law specifies services that may be provided by a MUD. Division 6 of the Public Utilities Code (Chapter 6 of the MUD Act) addresses the powers and functions of a MUD, as a special district. The MUD Act further authorizes and delineates the services of a MUD, including the acquisition, construction, ownership, operation, and control of commodities or services needed to operate that utility. Provisions in Chapter 6 of the MUD Act further authorize MUDs to supply light, water, heat, transportation, telephone or other communications, garbage, and sewage services. These services may also be purchased from or distributed to outside entities. In addition to the MUD Act, state provisions in the Government Code and in the Streets and Highway Code further authorize electrical transmission and distribution services by MUDs. Outside of state and local regulations, MUDs must also be created and operate through voter approval, which may not be required under municipalization.³ According to the CMUA, this requirement (for voter approval) makes it difficult to create MUDs.

Payments and Financing

When a utility is a municipally-owned entity, it generally makes payments and contributions to the municipality in much the same way as other "enterprise" city departments that generate revenue. These payments are made in lieu of taxes, and include tax equivalents or general fund transfers. Payments are determined by special formula, and may be based on estimated property tax or a percentage of gross electric operating revenue (if the entity is an electric utility).⁴ While these contributions provide an additional source of income for local government if a utility is municipally-controlled, without building in safeguards, this financial arrangement may actually limit a municipal utility"s ability to be financially prudent and equipped to introduce systems needed to deliver service reliably and efficiently. For example, in Florida, the Orlando Utilities Commission (OUC), though intended to generate income for the city, elected not to make general fund transfers to the city until it was fully operational and had retired a substantial amount of its original bond debt. Notably, the OUC"s status as an independent power authority (governed by appointed, independent Commissioners) had much to do with the way its governing board was able to set fiscal policy.

As special districts, MUDs or PUDs operate autonomously compared to municipal utilities. They do not have to make general fund transfers to the municipality. They may however, determine a mechanism for making payments in-lieu of taxes, according to the APPA. Furthermore, as noted by the APPA, PUDS, including those in Washington State, are more likely to pay state and local taxes. Because these entities operate independently of municipal control, they can exercise more budgetary autonomy. However, unlike city-controlled MPAs, which may benefit from city funding, new MUDs or PUDs face a tougher challenge of starting-up operations. They also carry the added responsibility of turning a new organization with substantial debt obligations and infrastructural needs into an income-generating entity. Given these circumstances, MUD or PUD customers are likely not to benefit from low utility costs during the utility"s early years of operation.

Governance & Compensation

Locally-controlled utilities are generally governed by either an independently elected board (MUDs and some MPAs) or a board appointed by members of the legislative body (principally, MPAs). MPAs tend to display a varied governance structure, which largely reflects local preferences. For example, a jurisdiction"s strong preference for checks and balances may be reflected in the creation of a municipal utility, which is essentially a city department with oversight by the legislative body. In contrast, jurisdictions that seek to reduce political control over a utility, may create an independent governing board of elected or appointed directors with decision making authority. Florida"s six municipal utilities, footnoted below, reflect these varied governance structures.⁵

Regardless of a utility"s governance structure, communities are also interested in an entity that is publicly accountable. One safeguard is for members of the governing board - in both municipal and public utilities - to serve in staggered terms, and be subject to term limits. Other safeguards include requiring all mayoral appointments to the utility"s governing board to obtain approval and confirmation from the legislative body.⁶

The APPA reports the national average term for most MPAs at 3.7 years, and about 4 years for public utilities. In California, MUDs have their own unique governance structure. They are governed by a 5-member board of directors, with the exception of SMUD which has 7 directors. Any MUD intending to increase its board membership to 7 directors must seek an amendment from the Legislature. In comparing MPAs and MUDs, it is apparent that in most jurisdictions, the governance structure is designed to provide for continuity (within the utility) with an emphasis on public accountability. However, in jurisdictions with a divided governance structure comprising private citizens and members of the legislative body, critics have charged that such a structure may compromise the utility"s efficiency.⁷

In most jurisdictions, members of the utility board are compensated for their services. Typically, the rates of pay are low. The APPA reports that elected members of municipal utility boards are usually compensated at an average rate of $1,000 to $14,400 annually.⁸ Board appointees are often not compensated, but when they are, they are usually paid an average rate of $3,600 annually. PUDs or MUDs, on the other hand, pay their directors an average rate between $900 and $7,200, according to the APPA. In California, the MUD Act provides for the compensation of utility directors at a rate of $100 per meeting, with a cap of $600 per month, including expenses. SMUD directors may also receive an annual salary adjustment up to 5 percent.

Authority of Governing Board

As discussed previously, there are distinct differences in the manner in which governing boards of MUDs and MPAs exercise authority. Because many municipal utilities operate as city departments, the legislative body, and not the utility governing board, tends to control many of the utility"s functions, including setting retail electric rates, budget approval, and issuing long-term bonds. The LADWP is an entity that operates under such a structure. However, there may also be power sharing between the legislative body and members of the governing utility board. For example, setting the salaries of utility employees may be the joint responsibility of the legislative body and an authorized city official, such as a city manager or an employee of the municipal utility. The APPA also reports that decisions to approve participation in the joint ownership of generation and transmission facilities, and regarding exercising the right of eminent domain may be subject to joint approval by the utility board and the legislative body. Critics have charged that while such such multi-layered governing structures may provide the necessary checks and balances, they also contribute to bureaucratic hurdles, and may actually delay decision making. Such criticism has led the legislative body in Los Angeles to review LADWP operations, with the goal of streamlining the utility"s operations and preparing it for an energy market that is becoming increasingly competitive.

The powers of the governing board largely reflect local values. For example, where public accountability is a shared community value, members of the legislative body may be involved with the utility either in an oversight role, or in a power sharing capacity with members of the utility board. When the desire is to distance the utility from local control, a utility is likely to be governed by an independent and, most likely, elected governing board. Recently, there is interest in some jurisdictions to restructure the governance structures of local utilities in order to achieve efficiencies in a competitive environment. For example, in Los Angeles, there are proposals to restructure the city"s Department of Water and Power from a divided governance structure, which is perceived as bureaucratic, slow moving, and politically driven, to one governed by independent commissioners responsible for all aspects of major decision making.

The 2001 Rand study reports that there are various models of streamlined governance for public power entities. For example, in Austin, Texas and Colorado Springs, Colorado, the utility governing body reports directly to the city council, rather than a multi-layered reporting structure. In Jacksonville, Florida and in Knoxville, Tennessee the utility board is an independent city agency. However, in Toronto, Ontario, and Safford, Arizona, the utility is a city-owned corporation. The Lassen and Sacramento MUDs are also examples of independent utility boards, whereas, the Southern California Public Power Authority is an example of a Joint Powers Agency. In all these examples, it is important to note that the jurisdiction"s size and level of complexity determines the level to which the legislative body can oversee the utility"s operations. As noted by the Rand study, utilities located in smaller cities are likely to have direct reporting to the legislative body, which may not be appropriate for larger and more complex jurisdictions.

Board members of PUDs or MUDs not only decide matters of policy for the public utility; they also exercise authority over all its major functions without the involvement of the legislative body. The utility"s staff administers the utility"s day-to-day operations, and act upon the decisions of the utility board. In addition, MUDs, unlike MPAs, are more citizen driven - the voters elect members of the utility board. The checks and balances found in an MPA, including oversight and review by a legislative body, are absent in a MUD. Furthermore, according to the Rand study, once a MUD is approved by county voters, it "would be more difficult to undo." MPAs, in contrast, are more amenable to restructuring.

Administration and Management

Unlike MUDs, which are structured as special districts with their own independent governing structure, MPAs are usually organized as agencies or departments within city government. In both PUDs and MPAs, members of the governing board appoint utility employees, such as a general manager, who are responsible for the utility"s day-to-day operations and report directly to the utility board. According to the APPA, the utility employee may also be a city employee, such as a city manager serving a dual role. Depending on the size of the city and public utility, having a city employee serving a dual role may be more appropriate in a small jurisdiction, but prove ineffective in a larger jurisdiction that would benefit from having its own utility employee who reports directly and solely to the utility governing board. MUDs do in fact operate in such a manner; they are overwhelmingly administered by an appointed utility employee who also reports directly to the utility governing board. ⁹

Formation and Operation

Because MUDs and MPAs are public entities, they are subject to many regulations and processes involving state and local laws, as well as involvement by voters, who not only approve their formation, but also approve the utility"s ability to provide service, make investments, as well as its financing. As San Francisco voters decide the issue of MPA or MUD formation this November 2001, the entity that receives majority approval will be required to undergo extensive reviews and approvals prior to being operational.¹⁰

If voters approve MUD formation, that entity will be subject to separate reviews and approvals by the CPUC and the Local Agency Formation Commission (LAFCo), before the utility can provide service. According to the City Attorney"s Office, the CPUC must conduct its own review, as well as report its findings to the County LAFCo, which, in turn, must grant authority for the MUD to provide electric service. According to the City Attorney"s Office, provisions in the Public Utilities Code (Sections 56129 to 56131), also require the voters to approve the provision of service.

Even when a public utility obtains all the necessary regulatory approvals, it is still challenged to acquire generation and transmission facilities, which in most cases are the property of an IOU. For example, San Francisco"s power needs are currently served by Hetch Hetchy together with PG&E. Hetch Hetchy currently provides limited service to City departments, tenants on City property, and quasi-City organizations - about 12 percent of the City"s energy consumption, and the remaining 88 percent is provided by PG&E, pursuant to a non-exclusive franchise. Therefore, the City could authorize the transfer of Hetch Hetchy"s generation and distribution facilities to the MPA. The City could also utilize its financial assets to contract out with another public or private utility that operates generation and transmission facilities. The City also has the option to negotiate a sale or use its eminent domain powers to acquire additional facilities from PG&E.

MUDs offer a different operational structure for the creation of a utility. They are generally a utility option for citizens who want greater involvement with an entity they perceive as free from political control by the local legislative body. A MUD would however, face a similar challenge as an MPA, in terms of acquiring transmission and generation capacity, although it too could negotiate a sale or seek a transfer of PG&E"s assets by eminent domain. However, because a new MUD, unlike a municipal utility, does not have ready access to financial and staffing resources, it will probably require a longer timeframe and resources before it could begin full operation as a utility.¹¹ MUDs, like MPAs, also face the likelihood of being challenged by private utilities who may view the public utility as encroaching on its service territory. In the case of SMUD and LMUD, both entities were involved in lengthy processes to condemn facilities owned by their local IOUs as well as to create an infrastructure that enabled full operations.

CONCLUSION

The current energy environment is providing many jurisdictions an opportunity to determine their power needs, as well as consider the feasibility of creating locally-controlled utilities in their regions. Many utility experts warn that decisions to form a publicly-owned utility should take into consideration the local demographics, power costs of the local supplier, and the legal and regulatory climate of the state. In addition, any new public utilities will have to contend with the challenges facing California utilities - i.e. living with the effects of deregulation which are largely blamed for the crisis in the state"s energy market. Other future challenges involve reviewing the public utility"s readiness to offer its customers more choices through "direct access," and thus, invite competition with other electric suppliers. In coming years, cities will be under increasing pressure to allow more choices for their customers, according to the Rand study. Through streamlining of services and operations as well as cost containment efforts, public power entities will be able to withstand competition in the energy market.¹² These are policy issues many jurisdictions, including San Francisco, will be grappling with as they decide the issue of providing public power.

¹ Since 1998, IOUs such as PG&E are required to open up their markets to competition by providing their customers with access to other electricity suppliers. Municipal utilities may, however, decide whether or not to provide such access to their customers.

² SMUD, the fifth largest publicly-owned electric utility in the nation, was organized in 1923. LMUD was formed in 1986 and serves 10,000 customers.

³ As currently proposed, the creation of a municipal power authority would also require voter approval.

⁴ Article XIIIB of the California Constitution limits charges to those reasonably related to the cost of providing service.

⁵ In Florida, municipal utilities may provide water, electricity, sewage, natural gas, and internet services. A majority of the utilities" governing board members are appointed; however, some of these entities, including the Orlando Utilities Commission and Key West"s City Electric Systems, operate autonomously with a high level of public accountability. In contrast, New Smyrna Beach Utilities Commission and Fort Pierce Utilities Commission are less independent - members of the legislative body have oversight over appointments and utility operations.

⁶ MUD directors in California are not subject to term limits.

⁷ A 2001 Rand study of the Los Angeles Deparrtment of Water and Power (LADWP), "Governance in a Changing Market," suggests that divided governance in a publicly-controlled utility "complicates and slows down commission and DPW decisionmaking...(and its) ability to take timely action."

⁸ APPA 1995 survey.

⁹ In California, MUDs are administered by a general manager appointed by the independent utility board.

¹⁰ It is conceivable that San Francisco voters may approve more than one proposal to create a publicly-controlled power utility.

¹¹ The Lassen MUD, which had a negotiated sale with its local IOU, required about 3 to 5 years before it could be fully operational, according LMUD staff.

¹² In preparation of future competition, the Los Angeles Department of Water and Power has adopted measures to reduce its operating costs and retire its long term debt, should the City Council vote to open the local market to other electricity suppliers.