Big Risk, Small Reward
Why States Should Say No to Power Authorities
Prepared by the
PJM Power Providers Group (“P3”)
March 3, 2008
I. Executive Summary
Facing an array of big problems, and pondering a need for big government solutions,
some state legislators and regulators have decided it may be time
The challenges of to create another big bureaucracy - the public power authority. increasing energy demand,
rising infrastructure costs
Power authorities establish government control over and environmental
concerns are faced by many
states. energy markets through newly created agencies or publicly owned
utilities. The notion is that only aggressive government oversight can ensure system reliability,
advance renewable energy development and, most importantly, usher in a new era of low energy
prices for consumers.
The approach is well-intentioned. Policymakers and office holders have been buffeted by
a host of intractable challenges related to energy, the environment and the economy. They’re
under intense pressure to lower energy costs while simultaneously upgrading reliability and
environmental measures, a nearly impossible task. One appeal of the power authority concept is
that it brings this complex and politically thorny problem in-house. Government experts, under
government authority, will administer a host of government-approved solutions.
This paper will argue, however, that the power authority approach, no matter how well-
intentioned, is fraught with peril for energy consumers and regulators alike. It represents a
flawed and tarnished model, one that has the great potential to increase the price of energy, stifle
investment in renewable innovation and compromise system reliability. The financial burden
energy customers face today would be dwarfed by A power authority that constructs, owns or
operates generation resources should not be the commitments associated with a state government considered a silver bullets for states’ energy
infrastructure challenges. agency overseeing all aspects of power generation
construction, operation and transmission. History suggests these bureaucracies would be
inefficient, understaffed and poorly suited to managing real-time transactions in the global
Unless they are severely limited in scope, power authorities do not represent a policy
solution. This paper will illustrate they represent a high-stakes policy gamble…one policymakers would be wise to avoid.
Power authorities, also known as “publicly owned utilities,” are common in the United States. In 2005, there were more than 2,010 publicly owned utilities in operation, 883
cooperatives and 9 federal power agencies. While the ranks of these entities is nearly 3,000
strong, many are quite small. Approximately 1,400 serve communities with populations of
10,000 or fewer. There are far fewer investor-owned utilities – 217 in 2007 – but this model
1covers 68.8 percent of the US customer base, as opposed to 26.8 percent for power authorities..
Several models for authorities exist:
(1) An energy efficiency utility (EEU) or power authority to facilitate the
development and delivery of energy efficiency in the residential, commercial
and industrial sectors, replacing current energy efficiency delivery
mechanisms. This model relies upon Efficiency Vermont (EV) as a model.
(2) A more “traditional” state power authority based upon established federal
models such as the Tennessee Valley Authority (“TVA”). This model would
encompass a broad range of responsibilities, including potentially owning
and/or operating generation and transmission infrastructure.
1 See American Public Power Association, January 2007 newsletter, http://appanet.files.cms-
(3) An authority focused on research and development of emerging technologies,
such as the NYSERDA (“NYSERDA”).
The remainder of this paper examines the question of whether a state should form a
power authority. The central question
addressed by this paper is ? Section III defines a power authority and whether states should
form power authorities. offers a comparison of major power authority
? Section IV addresses the question of why a state would consider forming a
? Section V addresses the question of whether power authorities are exempt
from the challenges facing private companies.
? Sections VI and VII address whether power authorities have met their stated
Detailed overviews of several existing power authorities can be found in the Appendix to
III. What is a Power Authority?
Originally, power authorities had limited scope and
Power authorities were
originally developed for rural responsibilities. The first were used for rural electrification or to develop
large natural resources such as electrification or to protect and develop large natural hydroelectric power.
resources such as hydroelectric power. Over the years, however, the role of some agencies
expanded, and they branched into new areas of the policy arena, such energy efficiency and
renewable power. Others took on the full responsibility for owning and operating generating
facilities and serving load.
The breadth of authority of state power authorities is quite divergent. Only 9.5 percent of
electric generation in the United States, in megawatts, is A variety of power authority models
exist ranging form large federal owned by publicly owned utilities, 4 percent by power authorities such as the
Tennessee Valley Authority to 2cooperatives and 6.8 percent by federal power agencies. smaller public benefit corporations
such as the New York State Energy
Research and Development Agency.
The matrix on the following page provides a comparison of some features of these
various types of power authorities. The Appendix to this paper provides an overview of existing
2 See http://www.appanet.org/files/PDFs/nameplate2005.pdf, American Public Power Association, 2007-2008 Annual Directory & Statistical Report compiled from Energy Information Administration Form EIA-861 and EIA-
906/920 and EIA-860. Data does not include U.S. territories.
Comparison of Power Authority Types
TYPE CREATED FUNDING RESOURCES
3Federal power 1933 to provide electric Self-funding 30,000 MW of Tennessee Valley Authority
authority power to Tennessee Valley generation resources
State public benefit 1931 to develop New York Bond sales to private 8,000 MW of generation New York Power Authority
corporation State hydropower resources investor resources
State public benefit 1925 to focus on energy Systems Benefit Does not own generation New York State Energy
corporation R&D Charge resources Research & Development
Joint action agency 1979 to buy & sell Through member Owns & contracts for Vermont Public Power
wholesale power municipalities ~120 MW. Supply Authority
Non-profit 2005 to provide efficiency Charge on utility Does not own Efficiency Vermont
services customer bills generation, transmission
or distribution resources
3 Although self-funded since 1959, TVA still makes annual payments to the U.S. Treasury to pay back the U.S. government’s initial financial investment.
IV. Why Form A Power Authority?
Although specific reasons may vary, the prime objective for forming a power authority
typically has been to provide for electrification, develop natural resources, or fill a perceived gap
in utility services or competitive market outcomes. Historically, policy makers have faced a
basic question: how best to ensure that needed utility services are provided to customers in a
reliable manner and at a reasonable price. The answer Supporters of power authorities
contend that a governmental agency, has generally taken one of two approaches – direct with no stockholders, will be able to
simply flow savings from not needing government services through an entity such as a power to turn a profit straight to the citizenry.
authority, or state regulation of private utility companies whether fully regulated or lightly
regulated in competitive markets. Those that have taken the direct government approach have
done so under the premise that the benefits would flow directly to the citizens. In the electricity
supply business, customers would theoretically enjoy lower rates as the government-owned
utility harnessed economies of scale and increased sales to greater numbers of people and
businesses. This approach presumes that since government has no stockholders demanding
dividend payments or returns on investment, savings could be simply passed through to citizens.
Some states believe they can better manage the energy needs of their constituents than
private companies. Government often examines the barriers faced by the private sector and
considers whether it can minimize those barriers for the public good or fulfill the role better than
private entities that operate in a regulated scheme. One particular focus of late has been with
respect to the ability to capture price benefits through long-term contracting. Another focus has
been to seek to retain the benefits of local natural resources such as renewables for local
Other reasons that have been cited as the basis for forming a state public power authority
include: promotion of energy efficiency, development of renewable or other specific types of
generation supply, economic development and job development
V. Are Public Authorities Truly Exempt from the Challenges Facing Private Entities?
While some state public power authorities have the benefit of having access to low-cost
financing and bonds through guaranteed taxpayer backing,
The recent escalation in
construction costs is a risk faced in all other respects they face the same challenges as private
by both power authorities and
private companies. entities investing in the energy industry. Where a power
authority is formed for limited purposes, for example to stimulate investment in areas such as energy
efficiency, a power authority can have some benefits. Where a power authority is formed for larger
purposes, such as building generation at a low cost, the risks are significant. It is questionable
whether government can improve upon the private sector approach and it unquestionably saddles
ratepayers with significant price risk.
The recent escalation of construction costs in the power industry illustrates the risks inherent
in building and/or contracting for new generation. Prices of materials needed to build generation
plants have increased substantially, with some estimating that prices of materials have increased 25 –
430 percent over the last 18 months. The effect is significant on developers. Duke Energy recently experienced the impact of these increases when constructing coal-fired generation in North Carolina.
In 2005, Duke estimated that it would cost $2 billion to construct two coal-fired 800 MW generation
plants. Eighteen months later, Duke increased the estimate to $3 billion. In early 2007, it was
announced that Duke would build only one of the units at an estimated cost of $1.83 billion – an
increase of more than 80 percent from the original estimate. Id. These price increases are impacting
all generation types from nuclear to wind.
4 Costs Surge For Building Power Plants, New York Times, Mathew Wald, July 10, 2007.
Other challenges faced by both private industry and potential power authorities include:
? Portfolio management – In order to be successful, a state power authority must properly
manage its portfolio whether the portfolio is limited to energy efficiency or broader in
scope to cover energy supply. State power authorities such as NYPA and LIPA must
engage in full “portfolio management,” which includes the full range of measures that a load-serving entity may employ to satisfy ever changing load-serving obligations in the
most economical manner. Portfolio management may include hedging of congestion and
fuel costs but it also includes other measures such as choosing the optimal sources for
energy transactions to maximizing FTR values, choosing the most economic sources for
energy and capacity purchases (while balancing the impacts of those choices on FTR
values), and making the decisions for self-scheduling or bidding into markets of
generating units. Actively managing a portfolio involves making a myriad of decisions
in a dynamic market context and the exercise of judgment over many complex issues. It
is not an activity that can be performed well or consistently by an organization without
substantial resources, knowledge and experience and that participates in the market on a
daily basis. Governmental agencies do not always
Players in the industry face a have the necessary depth of resources to perform
myriad of challenges including this function. portfolio management, regulatory strategy, risk ? Regulatory Strategy - Power authorities do not management, environmental operate in a vacuum. Just like private entities, concerns, long-term contracting power authorities are impacted by federal and questions, and risks associated
regional energy policy and activities. Power with direct generation ownership.
authorities that provide traditional utility services
such as LIPA and NYPA are active participants in regional power pools such as the
NYISO and PJM and are active in legal and regulatory proceedings at the Federal Energy
Regulatory Commission and Department of Energy. Managing these proceedings is
resource intensive and expensive. Activities such as participation in RTO/ISO
stakeholder meetings and the submittal of filings before regulatory agencies are
additional responsibilities of full-fledged state public utility companies. The depth of
resources necessary to fully and adequately staff these functions are significant.
? Risk Management and the Assumption of Risks – Value (price) of the portfolio is not the
only consideration that must be managed. The risk (volatility) of the portfolio is an
additional consideration. The predicted lowest cost mix of supply options may pose
unacceptable volatility. The state agency (or the commission that oversees it) must
identify and measure supply risks and then make a determination of the proper level of
risks for ratepayers to assume. Again, this takes a significant amount of resources and
significant expertise in risk management and energy markets.
? Environmental challenges – Any state power authority would be subject to the same
environmental restrictions/requirements as private entities. To the extent a state power
authority is used to develop new generation for example, it will need to address numerous
federal and state environmental requirements. All new power plants whether owned by a
private developer or a power authority would be subject to stringent air pollution
standards. There is also the challenge of quantifying the risk of federal legislation on
emissions – these risks and challenges apply equally to private and public investors.
Generation plants located in Regional Greenhouse Gas Initiative (“RGGI”) states face the
challenge of operating economically and meeting RGGI goals. Again, meeting these
environmental challenges will take a significant amount of resources and expertise.
? Long-term contracts – Some power authority models focus on long-term contracts with
suppliers to acquire “low-cost” supply. As history with PURPA contracts have illustrated,
there is significant risk to entering into long-term contracts. Locking into a price based on
inadequate information or poor market timing can lead to years of above-market prices
and pain to consumers. Again the necessary amount of resources and expertise in risk
management and energy markets to manage these contracts is significant.
? Risk/Reward of Financing or Direct Ownership of Generating Resources. Financing or
direct ownership of generating resources can, in theory, result in lower costs to
consumers. State agencies could have access to low cost capital and do not earn a return
on investment. This option, however, also exposes ratepayers to an array of risks they
can be insulated from under full service procurement models. Notably, financing or
ownership of plants by a state agency would expose ratepayers to construction and
operational risks. In the private sector, these risks are borne by stockholders. Ratepayers
also assume the risk of stranding the asset at some remote future point after its
construction if prices do not materialize as predicted. Finally, and perhaps most
importantly, the impact of financing or direct ownership of generating facilities by a state
agency on competitive markets must also be considered. If the state power authority
constructs plants under this model, the willingness of the private sector to construct will
likely be adversely affected. Any savings to consumers associated with the state-owned
or state-financed plants may well be exceeded by the additional returns required by the
private sector to invest. Again, managing this risk/reward equation will require a
significant amount of resources with expert knowledge of the industry.
VI. Do Power Authorities Deliver What They Promise?
The appeal of a power authority structure is the premise that through government control
– not private control – consumers will get a better deal. The rationale has been that without a profit motive and the need to show a profit to shareholders, a power authority could operate at
less cost and return some of the savings to consumers. As states ponder the creation of a power
authority, the question must be answered – have power authorities been a better deal for