Michael Giberson
Vero Beach, Florida, could become a hothouse of dynamic competition in retail electric power, if only the city would follow the recommendations of economist Dom Armentano.
According to the Vero Beach [Florida] Electric Utility, they aim to provide “reliable, cost competitive electrical energy and services to our customers in a manner that exceeds their expectations.” They aren’t meeting this standard. Dom Armentano reports that his local municipal power monopoly offers rates that are “an incredible 58 percent” higher than rates available from the state-regulated monopoly serving the surrounding area.
Most of this economic nonsense started back in 1979 when state and federal agencies stopped a referendum-authorized city sale of the electric utility to [Florida Power & Light]. Then in 1981 a notorious “territorial agreement” was crafted to divide up the electric grid between the city and FPL. Finally, in 1983, the state Legislature removed the bulk of the PSC’s regulation of Vero’s electric system, including rates.
Since then, customers of the city’s utility (61 percent of whom live outside the city) have been at the mercy of whatever service and price structure the utility determines is appropriate. As one could predict, this has proven to be a recipe for inefficiency and price gouging.
Armentano recommends several possible ways forward:
One way is to simply require that the city of Vero Beach sell its utility operations to any willing buyer. A second alternative would be to force the city utility to charge “competitive” rates or, third, allow customers to switch to a competitor. This latter proposal would create “competition” between utility providers and would tend over time to lead to lower rates generally.
In addition, in order to encourage non-traditional suppliers of electric power, any and all supply restrictions on the sale of electricity in Indian River County should be removed.
The first option would likely result in a sale of the utility to FPL and prices equal to that available in the surrounding area.
The second option would likely gain the same lower price level, but leaves the city with significant cost management issues.
The third option, depending upon just how it is implemented, could result in FPL competing for customers by building new distribution wires, eventually producing duopoly like Lubbock, Texas; or, by unbundling the city’s wires and power supply businesses, could allow for a “retail choice” environment. I’m not aware that anyone has tried retail choice in such a small market. Even many large states pursuing retail choice have had difficulty finding the right mix of policies. But the city’s current rates do offer a lot of “headroom” for potential competitors, so maybe this approach could work.
Armentano’s last suggestion is most radical and offers the most potential for consumer benefits. Simply by removing “any and all supply restrictions on the sale of electricity,” Vero Beach would become a hothouse of dynamic competition in retail electric power. FPL could wire neighborhoods to offer duopoly distribution capability. Retailers could negotiate for delivery of power over city or FPL wires (though negotiating with monopolies is fraught with dangers). Most importantly, local businesses or real estate developers could invest in microgeneration and bypass the city grid, likely contracting with the city for backup power or building a wire out to FPL. Likely, several distributed power businesses would link up to self-supply backup power capability. Obviously, smart grid-based coordination would be vital to such an effort.
Even though these developments may take some time to emerge, the very possibility of competition emerging would motivate the city to reduce costs and cut rates.
Moves in this direction would be strongly opposed by both state-regulated and municipal power utilities. The prospects of significant consumer value are likely no match for the status quo political interests that would rise up to defeat it. Still, it would be interesting, even educational, to watch the parade of industry lobbyists pretending to be the consumer’s friend even as they argue against giving consumers the ability to escape monopoly suppliers. I’m in favor.
I’m not quite buyin’ it. In the most recent 12 months available, FP&L’s average residential rate was 11.9 cents/kWh. So, what, is Vero Beach’s rate is almost 19 cents? Some of the utilities in the Northeast are that high, but I’d be surprised if any rates in Florida are that high *unless* they have highly seasonal rates and he’s quoting a summer rate. FP&L does not have highly seasonal rates, so that wouldn’t be a fair comparison.
In the most recent year (2007) for which public data are available for both entities, FPL’s residential rate was 11.4 cents while Vero Beach’s was 13 cents. With that rate, Vero Beach was among the highest munis in the state, but was by no means the highest. Certainly that could have changed, but did it really change that much? Without spending the rest of the evening doing this guy’s research, a preliminary look at the budget over the past 3 years makes me doubt that they’ve gone up to 19 cents.
Maybe the guy would have more credibility if he sounded more like an economist who knows something about utilities, rather than like some guy pissed off about his power bill. He assumes that the price difference is monopoly pricing, but doesn’t say anything about the utility’s cost structure or whether the city extracts “surplus” dollars from its utility. (It does.) And with public power, there is no alternative to cost recovery other than bankruptcy, so his competitive scenario could have some ugly results for the city. The people pay one way or another (except that some customers are outside of the city).
What is it with you, D.O.U.G., are you just trying to spoil my fun by gathering facts and doing math?
I thought the column was entertaining, it advocated ideas that I like, and so I spread the word without trying to verify claims or otherwise thinking too critically.
As it happens, Vero Beach is not in the EIA 826 monthly survey, so I don’t have current data handy.
Having customers outside the city means that the normal checks and balances for rate regulation, such that they are, are further attenuated. In effect, the city can “tax” these citizens that reside outside of their border, but these outsider-citizens can not vote on the taxers.
It is an entertaining article, and it spawned some useful thinking/discussion.
Right. Vero Beach can be found only in the EIA-861 Annual Database, which currently runs only through 2007. But EIA-861 contains interesting data that 826 doesn’t. For instance, it breaks out delivery and energy sales to customers who buy from a supplier other than their distribution company.
Aside from the factual problems, I didn’t intend to cast doubt on the competitive concepts that he was talking about, at least not in general or in the long term. In the short term, though, there’s not much hope for municipal customers actually saving money by stranding cost with the entity they pay taxes to. Of course, we both made mention of the fact that not all customers of this utility are taxpayers to the city, and those customers might have something to gain through competition. But gains from competition would be available to those customers only if the current high costs are related to power-supply costs, and not distribution costs. Otherwise, they’d have to physically bypass the city’s distribution system. Perhaps those customers should petition for escape on the grounds of taxation without representation! 😉