On this lesson, we're going to tackle utility types and rates. What we're going to do is we're going to cover the different types of utilities because that's really critical when you think about rate making. There are actually three major buckets of utility types. Number one, public power systems, or munis, as they're called. The second is rural electric cooperatives or coops. And then there are finally investor-owned utilities or IOUs. In this lesson, I'm just going to jump in to public power and coops, and then I'll address the IOUs in more detail in the next lesson because it can be a little bit more complicated. Let us first talk about the public power systems or the munis. First of all, there are a lot of them. There are couple thousand of them, and they are government owned. They serve local customers, which means that they're not transporting electricity of high voltage across long distances, so there's no transmission, which means that they're not going to be regulated by FERC. They focus on distribution. They might or they might not generate their own electricity. Now, if they don't, they enter a contract with another company to provide that generated electricity, and that's called a power purchase agreement or PPA. They have some benefits, and that is they are tax exempt from financing for certain projects because they are government agency. And also, they don't pay federal income tax. Now, the other thing about them that's really interesting is the folks who work there have government salaries and government salary bands. And that can be much different than what you see in the corporate space. They tend to offer other services, too, so electricity is not the only service they provide. They could offer things like cable or even water. >> PPA, being in the utility industry, being an engineer, we like using the acronyms, but a PPA is a power purchase agreement. And so here we are in a field. It's a 13-megawatt solar field that is owned by a different company, corporation, and a utility. In the power purchase agreement is we've agreed to buy all the output of this plant for a set period of time frame, and this particular plant, it's been for the next 20 years. So we have all the rights of buying all the power out of this, but we didn't have to put up the investment upfront to be able to build this. So it's a win-win scenario. We get a value because we're buying power at less than what we can get on the grid, and they're getting value because we're paying them more for what the power is, so they're making their money, so it becomes a win-win-win situation. So the member owner benefit is that it actually brings down our wholesale power cost >> The fact that we are owned by the citizens of Tacoma, we have one customer to serve, and that is the customers we serve. We don't have both stockholders and rate payers that we're trying to balance our decisions on. >> When franchise agreements had been running out for investor-owned utilities, you're seeing a lot more cities that are actually looking to take over electricity. You're hearing more talking about it. You're not necessarily seeing a lot acting on it, though. The reason why they do this is for environmental reasons and control reasons. I will tell you that often, what happens is, it's very complicated to run a grid, and sometimes these cities determine that it's not a route they want to pursue. Now, we're going to take a look at how they're regulated. There's a lot of variation, state-by-state, in terms of how these groups are regulated. Sometimes PUCs govern in whole, or in part, over the operations, or over the rates. Now, in most states, though, they're regulated by local governments, or they're even selft-regulated. If it's a municipality, it means they're usually governed by a local city council or an independent board, and that would be voter-elected. Or it could be appointed by city officials. I had the fortune to talk with Dan Hodges, and he is the executive director that represents an Association of Municipalities. Let's hear in his own words what this world is all about. >> Municipal utilities are not for profit enterprises, and we're owned by the cities we serve, which puts us in a really unique position compared to our brother and any investor owner in the coop world. We primarily serve within the city limits of our constituent communities with the exception we may serve just the outside area. But you're talking about very small, very defined service territories. So our rates are structured to recover our cost of doing business, which makes our drivers a lot different. We're not looking to deliver a return on investment to shareholder, so our motives are different. A municipally owned utility is governed by the city councils, or city council appointed utility boards, which means the voters have direct access to the governance of their utility. Rates are set at a municipal utility by the utility boards, so it would typically be the city council. And the utility will present a rate case, what they need to recover their cost for the coming year, what they anticipate their fuel cost to be or the purchase power cost to be for the coming year. >> So now, I'd like to take a deeper dive into coops. Typically, they function in a rural environment. Now, like a municipality, they also make a profit, but it gets reinvested right back into the business. They are privately owned, but unlike an investor-owned utility that would be owned by a stakeholder or a stockholder, they're controlled by what's known as members. A member is basically a customer, someone who uses the electricity. They might, or they might not actually generate their own electricity as we saw with the other group. I talked with Dean Hubbuck from the United Power Coop as I toured their new, very impressive, 13-megawatt Silicon Ranch facility. You'll notice that he really reiterates the importance of member-ownership on the decisions that a coop makes. That includes operations as well as rate-making. And then he also goes on to describe the nuances of a coop. An IOU will often report to the Public Utilities Commission, Public Service Commissions, for any rules, or tariff, or rate changes, so it is going back to city council. Cooperative, we are owned by our end users, what we call members or set of customers. So when we're trying to satisfy one person, or one party, we're satisfying both our owner and our member. And since our board is elected by our membership, by our owners, they become our regulatory bodies. So we meet monthly with them. What's going on? And they helped give us the direction. They were wanting to follow, and we come up with the solutions to be able to meet those goals. >> How does how a coop is governed impact its financial decisions and its technology decisions? >> Well, one of the things, especially, cooperatives are generally going to be smaller than an investor owned utility, the decisions can be made a lot quicker within that environment. If we were wanting to make a change or add something to our budget, it's just a matter of a meeting that happens once a month and a 30-day notice the time frame or period. So if we are seeing a technology that is attractive, that makes sense, we can go ahead and offer that up, and our board are able to make that decision and say, yeah, let's go ahead and proceed. Can you tell me how a coop makes money, how they measure profitability? >> So coops are classified as not-for-profit, not non-profit but not-for-profit. And so when we set our budget, we will set in what we call a margin, which is for an IOU would be the profit. And that's just a good business sense on how we do that. And at the end of the year, if we make more margin than what our costs are, we actually will return that as capital credits, basically in the sequential years. And each coop may have different policies to be able to do that, ours is basically a 25-year time frame. And so if you had a 100 dollar bill, a little over 70% of that cost is all transmission and generation cost, it has nothing to do with the distribution cost. We're roughly just right under about 30%. And so if we're able to help manage some of that 70%, and that's by bringing down these costs with these power purchase agreements, it becomes a much bigger benefit for our members or our end users. >> Do you pass along fuel cost to customers without markup? >> Our wholesale power is just, say, is a pass along where we're looking at our margins or profit, if you want to call it that. Is it just on basically our plant, our wires? It's the poles in the air, the green cabinets all around. Wires and all the other equipment manage that. >> So this wraps up our discussion of public power companies and coops. In the next lesson, we're going to tackle investor-owned utilities. What you're going to see is that IOUs face many of the same challenges and obstacles that we're faced by the public power companies and the coops. But because of their structure, and regulation, and sometimes even size and scope, they face some nuances on their own.
