• Public takeovers of electric utilities may backfire financially, as generation and transmission face growing competition while distribution assets risk losing value amid market changes.
• High electricity prices are driven mainly by volatile natural gas costs, not by utility ownership, meaning municipalization does little to address the root problem.
• Shifting investment toward renewables offers a more effective long-term solution

There are at least two places, San Francisco and the mid-Hudson Valley in New York, where political activists are currently advocating for a public takeover of the local investor-owned utility. Pacific Gas and Electric is owned by utility holding company PG&E Corporation and the service territory of the former Central Hudson Gas & Electric Company is owned by Fortis Inc, a Canadian holding company with varied utility interests. We have no views on the respective merits of either municipalization movement. What we find interesting is that in the current circumstances, a public takeover of an investor-owned utility could be a recipe for financial disaster.

There are three functional components to any legacy electric utility: generation, transmission, and distribution. Competition to this utility model, which is no longer theoretical, could come from residential or commercial customers with solar/batteries/generators. Competition could also come from distributed renewable resources, including batteries financed by local or regional entities. Competition and deregulation have been eroding profitability in the power generation business for decades. A switch to more local or distributed power generation would also hurt the economics of transmission assets. Only utility distribution assets have emerged relatively unscathed from decades-long efforts at utility deregulation. The question, at least for advocates of utility municipalization, is whether or not these supposedly low-risk utility distribution assets will retain their value. Our answer is a definite no.

In essence, a utility distribution system is a pipe that moves energy to end users—but it doesn’t control the price of that energy. That means the electricity consumer pays for two distinct services: the pipes and wires distribution system maintained by the utility and the actual energy consumed. Our concern here is simple. If energy prices skyrocket, and we are certain they will as the US exports more LNG, the distribution utility gets blamed for high prices even though the high prices are not even remotely its fault.

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Now, let us add another problem. Electricity prices in unregulated states are set, basically, by natural gas prices. That’s all electricity prices not just of electricity generated by burning natural gas. The British have the same market pricing problem because the same consultants designed both markets. Rising gas prices will push up the price of nuclear power?  You got it.

In this context, the municipalization movement is to us a waste of time because it doesn’t address the real source of consumer pain, persistently high and volatile commodity gas prices. What municipalization would accomplish is to remove equity from the utility’s balance sheet and replace all the financing with low-cost, municipally backed debt. Not that there’s anything wrong with that. It’s just irrelevant to the problem at hand, which is likely gas commodity volatility. To be fair, though, municipalization would provide modest financial savings over a longer time frame.

What would we do? Whatever sums the municipalization advocates could raise, we would instead invest in renewables. The only way longer term to ultimately lower consumer costs is to shift the generation mix away from high cost inputs such as natural gas. Anything that fails to address this is missing the point.

By Leonard Hyman and William Tilles for Oilprice.com

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