During a closed Capitol Hill committee meeting in late November 1987, Dan Rostenkowski, Chicago's most powerful congressman, surreptitiously slipped into a federal budget bill an undebated provision that directly affected the pocketbook of everybody in his hometown.
Political folklore might suggest that Rostenkowski was steering extra federal dollars back here, or aiding some local economic-development scheme. But what "Rosty" was really doing was severely limiting the amount of tax-free municipal bonds that cities could issue to buy private utilities. His provision made an exception for Long Island, and for new municipal utility construction, but it made no exception for Chicago, where then-mayor Harold Washington had announced that the city should consider any reasonable alternative to renewal of Commonwealth Edison's franchise when it expires at the end of 1991, including a city buyout. A city-commissioned study had already suggested that Chicagoans could save $12 to $18 billion over 20 years if the city bought part of the utility instead of renewing its franchise. Rostenkowski's budget provision quietly snatched away a financing tool that would have helped the city accomplish such a purchase.
Rostenkowski said he inserted the provision only to make technical corrections in tax law and block loss of federal tax revenue. But according to a report in the Bond Buyer, a financial journal, Rostenkowski pushed the legislation "at the request of James J. O'Connor, the chairman of Commonwealth Edison and a longtime acquaintance of Mr. Rostenkowski." By one expert estimate, Rostenkowski's move cost the average Chicago residential bill-payer at least $5 a month, or $1,200 over 20 years.
"Obviously in a better world it would have been grounds to have the guy kicked out of office," laments Scott Bernstein, director of the Center for Neighborhood Technology, which specializes in energy conservation research and consulting. But this isn't a better world. This is Chicago.
Commonwealth Edison's franchise to sell electricity in Chicago, last renewed in 1948, expires in little more than a year. Several knowledgeable attorneys and the Mayor's Energy Task Force, after a year's study, argue that the city needs to act decisively before the end of this year to give appropriate legal notice to Com Ed and preserve its best options for getting electric power at the lowest cost.
Yet despite the short time left to consider the complex question of how best to obtain electricity, public discussion of the issue has been limited. There is thus reason to fear that the decisions will be made in closed-door meetings, with little public involvement and heavy-handed influence by Com Ed, just as there was with Rostenkowski's legislation.
The issue is too important to be decided that way. Chicago residents and businesses pay Com Ed around $1.8 billion a year ($600 million more than they would if Com Ed's rates matched the midwest average). Our high electric bills--a combination of excessive usage and high rates--raise our taxes, drain desperately needed resources from the schools and city government, exacerbate the city's continuing loss of jobs, and put a heavy financial burden on every Chicagoan, especially on those who can least afford it.
But Commonwealth Edison's practices under the existing franchise fail to encourage--and often actively discourage--cheaper alternative sources of energy, especially more efficient ways of using energy that can reduce consumption without compromising quality of life.
Under the brilliant but ruthless leadership of Samuel Insull, Commonwealth Edison early in this century became the prototype for the U.S. electrical industry. In nearly all countries except the United States, electricity is provided by publicly owned utilities, and in the early part of this century municipally owned power plants were a popular alternative to private production, which was often chaotic, corrupt, and expensive. Insull greatly slowed the move toward public power by advocating a model of state-regulated, privately owned monopolies.
In most cases the regulation was weak. Guaranteed a profit on their "rate base," utility owners had a stake in expanding that base by promoting electricity use and building new power plants. Insull even hawked new electric appliances at a discount to expand electricity sales. For a long time, expansion led to economies of scale and lower prices, followed in turn by more use. But by the 70s that formula no longer worked. Demand stopped growing as fast as it had been. At the same time, nuclear power plants turned out to be far, far more expensive to build than initially planned, and there arose problems of nuclear safety and waste disposal that still haven't been resolved.
Com Ed has a better record than many utilities with nuclear plant construction and operation, and faced with the industry-wide problems of cost escalation and overestimation of demand, it was more successful than many in forcing through its nuclear projects anyway. It is now the most nuclear utility in the country, with about 75 percent of its power coming from nukes. It also has a very high reserve capacity--about 29 percent over and above what it needed at its greatest summer peak (in 1988), according to Charles Komanoff, a veteran utility analyst under contract to the city. Under normal weather conditions, Com Ed's reserve is nearly 40 percent; 15 percent is generally regarded as prudent.
Increasingly, energy analysts and even many utilities--especially several publicly owned utilities--are recognizing that there are two ways to generate capacity for the future. One way, the Com Ed way, is to build another power plant. The other way is to "produce" electricity through conservation--use what is now being produced more efficiently, so the new plant will never be needed. The second way is far cheaper; some utilities have found that it is even cheaper for them to buy efficient light bulbs and appliances and give them away to their customers (as in southern California), or heavily subsidize their use (as in Wisconsin), than it is even to operate power plants that already exist. Some utilities are spending 4 to 6 percent of their revenues on conservation; Com Ed spends less than 1 percent. Moreover, some utilities are finding that it makes more sense to plan and manage the energy futures of the communities they serve rather than to engage simply in the rarely accurate game of guesstimating future electricity demand. As Florence Levinsohn points out in her accompanying article, the smart and publicly responsible utilities now see themselves as providing a service at the lowest possible cost; the others, Com Ed among them, are still just selling the greatest possible number of kilowatts.
Despite improved energy efficiency in the U.S. since the energy crises of the 70s, there is much room for improvement: Germany and Japan use energy twice as efficiently as we do--that's one reason they have rising living standards and big trade surpluses while in the U.S. real wages slide and the deep trade deficit perseveres.
This brief history is important not only because it helps explain why Com Ed's rates, especially for residences, are among the very highest in the country (the highest in some categories). It's also important because Com Ed's contract with the city obligates the utility to the "serviceable, efficient and economical Provision of Electric Energy." But since the mid-70s Com Ed has rejected "the highest standards and best systems, methods and skills then reasonably available for the provision of electric energy," as the contract puts it, and consequently rates have doubled over the past decade. Com Ed claims that it bit the bullet and planned for the long haul. But a strong case can be made that much of the money spent on its newest nuclear plants would have better provided energy and jobs for Chicago over the long term if it had been invested in energy efficiency, management of demand, and diversification of supplies.
What can the city do now? To some extent it is boxed in. Com Ed has built the plants, and Governor Thompson's appointments to the Illinois Commerce Commission, which oversees rates, have treated the company generously. (The commission did, however, reject a deeply flawed 1986 rate hike and "freeze" that would have exempted Com Ed from much regulation and all pending consumer lawsuits. This plan had the support of Thompson, current Democratic gubernatorial contender Neil Hartigan, and Richard Daley, then state's attorney; Mayor Washington and consumer groups opposed it.) And thanks to a behind-the-scenes power play no less outrageous than the Rostenkowski affair described at the beginning of this article--this one involving Com Ed lobbyists and state House leader Michael Madigan--when the state public utility law was revised in 1985, Com Ed was able narrowly to defeat a provision exempting customers from paying for excessive reserve capacity.
But the city's hands are not hopelessly tied. First of all, the city can decide whether it wants to continue business as usual or it wants a new strategy that emphasizes efficiency and "least cost" provision of the services we all want--light, heat, cooling, transportation, industrial power. It's the functions, not the electricity itself, that we want, and in many cases there are cheaper alternatives to using more electricity.
Then the city can decide whether it wants Commonwealth Edison to continue as the provider; or if it wants to open up competition among many suppliers; or if it wants to buy part of Commonwealth Edison.
The key to getting the best deal is the city's right, as stipulated in the current franchise, to buy the part of Commonwealth Edison that serves Chicago. Even if, in the end, the city decides not to buy, the right to do so gives it considerable clout in the renewal negotiations. That is why Commonwealth Edison is doing everything possible to undermine that right (Rostenkowski's legislation for example) and to block serious discussion of acquisition with threats, scare tactics, ridicule, and a massive propaganda campaign against the "extremists" who promote its use.
The city is in an especially strong position because Section 12 of the franchise--"municipal acquisition"--permits the city to buy Commonwealth Edison facilities for no more than the company's "original investment." Given the inflation since most of the city facilities were built, the purchase price would be an unusual bargain.
The "municipal acquisition" clause, originally proposed by Insull himself, reflects the early history of electric power, when private monopolies had to buck the popular trend toward municipalization. In 1947 the City Council, taking little time to consider the matter, retained the option in the new franchise but never seriously considered acquisition as an alternative to renewal. Because there was no fallback position from which to bargain, reform aldermen at the time maintained, the franchise was written largely on Com Ed's terms to last 42 years.
Municipal power isn't just a historical artifact. Although three-fourths of all U.S. electricity is sold by private utilities, there are 2,200 locally owned public systems, serving nearly 14 million people and providing about 15 percent of the nation's power. Although most are small systems established long ago, some--like those in Seattle, Los Angeles, San Antonio, and Cleveland--are large. In Illinois there are 41 public systems ranging from Springfield to Winnetka (whose wealthy population, which staunchly defends its utility, can hardly be considered "extremist").
Public systems charge residential customers an average of 40 percent less than investor-owned utilities (and usually pay at least as much in taxes to the local municipality). In recent years there's been renewed interest in public ownership as localities fight back against high rates and nuclear dinosaurs. New Orleans is close to completing a municipal takeover and escaping the burden of an expensive nuclear plant. Albuquerque, New Mexico, is seriously considering acquiring its distribution system and buying electricity by competitive bid. Before Rostenkowski's legislation raised the price, the Fund for Renewable Energy and Environment estimated that another 50 attempted takeovers could occur in the next few years. Although Com Ed is trying to nail down as many suburban franchise renewals as possible, Evanston is now also considering municipal ownership. In 1985, Geneva, Illinois, which owns its own distribution system, unplugged from Edison to buy power more cheaply from Wisconsin. The municipal utilities of Saint Charles and Naperville also considered unplugging and buying from Wisconsin, but Com Ed kept them on-line with a 30-percent rate reduction.
It would not be easy for Chicago to buy out some part of Edison, but the idea is neither patently absurd nor wildly radical. It deserves serious examination.
That's what Washington wanted when he opened up the renewal discussion. He approached the idea of municipal acquisition with trepidation both about the potential political flak and the practical difficulty of attempting the takeover. The city commissioned R.W. Beck, an engineering firm, to consider all alternatives, but Beck came back with a limited study, simply posing a choice between Com Ed and municipalization.
Beck argued that if the city bought the transmission facilities and two coal-fired plants within city limits for $1.35 billion, and then supplemented the output of those plants with energy purchased from Com Ed as well as other, cheaper utilities, city rate-payers would save $10 to $12 billion over 20 years. For $4.9 to $6.5 billion, they said, the city could buy the above plus enough generating capacity to meet all its needs, for a saving of $15.5 to $18 billion in the same period. Or it could simply knock about $1 billion off the city government's own electric bill (again over 20 years) by establishing a public power authority to buy electricity on a competitive market.
Despite the alarms from editorialists, business lobbies, and of course Commonwealth Edison itself about the city running the utility (even though it does a reasonable job running its water utility), Washington was willing to do battle with Com Ed. Eugene Sawyer, while committed to Washington's plan, moved more timidly, and many of his advisers urged him to drop any talk of municipalization. Early this year he launched the Mayor's Energy Task Force, a diverse group of about 40 individuals representing a wide range of constituencies and ideologies. (Although at first the two biggest consumer organizations, Illinois Public Action Council and Citizens Utility Board [CUB], were excluded, CUB eventually was brought in.)
During the mayoral election, no candidate made a major issue of the franchise renewal. But Daley, the winner, pledged to be a "tough negotiator" who would consider all options "except using city employees to run the utility." Daley promised to give notice to Com Ed of the city's intention both to terminate the franchise and to acquire the facilities. (The city would give this notice as a legal nicety, in order to keep all options open, even if it had not the slightest idea of what it wanted to do.) Daley also promised to "provide the necessary financial and staff resources to fully assess all of the options." He promised open public review and participation and a policy of "four Cs"--competition, conservation, cogeneration, and cooperation between the city and its supplier on a "least-cost energy plan."
But so far as mayor, Daley has been nearly mute on the subject. He promised to inform the Energy Task Force of how he viewed their status, but he never has, leaving them uncertain and confused. The task force has continued to meet and has received briefings from consultants paid by the city, but it has not been allowed to see any of the consultants' written reports. "We haven't had a definite answer on ways the task force could best be of service to the mayor," said cochair Anne Hallett in September. "The rationale they offer is that they're trying to put all the pieces together and make a decision on the task force at the same time. . . . It would have been nice if we'd heard right away from the Daley administration on how we fit in to their broader picture."
Soon after taking office, the Daley administration canceled all the task force's plans for public participation and education--including meetings, brochures, and a video--and downplayed any news about the task force or the issue. Daley aides were quoted questioning why "rabble-rousers"--public education consultants like the Center for Neighborhood Technology--were being retained.
Even the staff in several city departments concerned with the issue felt they did not know where the administration was heading, and outsiders who maintained some contact reported that people in various offices were frustrated and demoralized. Everything seemed to be on hold. City employees were told not to talk to the press about the issue. Only the mayor's chief policy aide, Frank Kruesi, could make statements, I was told, but Kruesi refused to respond to several dozen phone calls over a period of a couple months. That could reflect either administrative confusion about what to do, or simply a return to the old style of closed government.
In an August meeting with representatives of citizens' groups, Daley was described as "pooh-poohing" the idea of acquisition and committing himself only to sending the letter of intent to terminate the franchise. (Early this week Daley's press secretary, Avis LaVelle, said the mayor would soon begin the process of notifying Com Ed of the city's intent to both terminate the franchise and acquire facilities.) Daley promised public hearings, but nothing has happened. Alderman Keith Caldwell, chair of the City Council's energy and environment committee, is making no moves until he gets more money, even though he earlier promised public hearings by October. There is nothing evident in Daley's proposed budget for funding what will surely be expensive preparations for franchise evaluation and possible municipal acquisition, contrary to campaign promises.
From fragmentary reports of people who have talked with Kruesi and other top aides, it appears that political worries are paramount. One inside source says, "I've heard it described as a bigger bomb with a longer fuse than other issues, like school reform or ethics. They think it could blow up in a bigger way, but it's going to take longer for the issue to jell." Another insider said Kruesi told him that the Daley crew had an election to win in 1991, right after the franchise expires. Commonwealth Edison isn't an issue now, but it would be if the administration cut a deal, Kruesi reportedly said. Others think that Daley is looking mainly for a way to postpone any decision until after the 1991 election. "We've tried to convince [Daley's] advisers that [the franchise debate] is a wonderful opportunity," said Maureen Dolan, director of the Chicago Electric Options Campaign, a public education coalition. "He could come out looking like such a good guy. But I don't think he thinks like that."
Suspicions run high of secret deals or back-room strategies. It may be that Daley is simply looking for the easiest route to a package that will not be political trouble for him. On the other hand, maybe he seriously wants a good deal in line with his campaign promises but doesn't know how to go about getting it. One thing seems clear, whatever motives one attributes to the mayor: without massive political pressure on both him and Commonwealth Edison, he is not likely to attempt a major confrontation. And without that, the city won't get the best possible deal.
No other political leader has made a major crusade of the franchise renewal, and the organizing by community groups has been diffuse and at best moderately effective. Although both CUB and Public Action regularly tangle with Com Ed, and Public Action has endorsed municipal ownership, neither organization is making the franchise a major issue. Both are statewide organizations, and if the city pulls out of Com Ed, communities in the rest of the utility's service area could end up holding more of the nuclear bag, paying for a larger share of the nuclear excess capacity. With potential divisions in their own ranks and no red-hot campaign in Chicago, neither group makes the franchise debate a top priority.
"Our strategy is to bang as hard as we can on public debate, so whatever deal is cut is most favorable," says Public Action political director John Cameron. "Our assumption is when we lost Harold, we lost the battle, unless we can find some new horses with credibility."
The Chicago Electric Options Campaign, a coalition that includes CUB, Public Action, the Center for Neighborhood Technology, National Peoples Action, and various neighborhood groups, has mainly focused on criticism of Com Ed and on opening up public discussion. But because it doesn't advocate a particular alternative, it cannot easily organize a powerful grass-roots campaign. The coalition doesn't have resources for a big-time ad campaign, and unlike school reform, its agenda is not the sort that attracts much help from businesses.
"Why do [the big guys] want to risk political capital by attacking one of their fellow big businesses?" asks Public Action's Cameron. "If they want lower rates, they can go in and negotiate them. If I'm president of Sears or Amoco and worried about my electric bill, there are other ways to approach it than attack Com Ed politically. Besides, they're ideologically uncomfortable with that."
The community groups need a strong political leader to galvanize their cause, but none has emerged. Alderman Larry Bloom sees his colleagues as preoccupied with narrow ward concerns or racial politics. Daley's allies are waiting for him to take the lead--and the heat--since their constituents aren't up in arms. And liberals like Bloom are overwhelmed by the skepticism people have about government running the utility (a red herring issue in large part). Alderman David Orr criticizes Daley for moving too slowly--"frittering away an opportunity"--and calls for more public involvement to create the best climate for the city to bargain. But unlike the city council of Albuquerque, which assumed authority over its franchise and mandated action by the mayor, Chicago's City Council is likely to do nothing.
If the forces challenging a business-as-usual renewal of the franchise are frustrated, underfunded, and lacking powerful allies, Com Ed has no such problems. It spends about $6 million a year on advertising, much of it folksy image-advertising to create a good feeling about the company--obviously political in the context of franchise renewal.
But some of the advertising has a harder edge, like the "Candle, Candle, Burning Bright . . ." brochure mailed to residential customers warning that "a few bureaucrats and activists" were pushing municipalization, "a bad idea that would stress to the breaking point a City already laden with crisis after crisis." The brochure raised the specter of rationing, lost jobs, higher taxes, higher rates, less reliability, and more. "Customers will be inconvenienced," the brochure wrote, "especially when administrations change and new employees are brought in to accommodate political interests." Dredging up tactics left over from the days of Joe McCarthy, Com Ed warned that the whole municipalization campaign was being organized by "a few extremists."
As the accompanying feature by Hank De Zutter and Tony Griff makes clear, Com Ed is well wired to Chicago politicians, business leaders, major media, community organizations, and charities. Although they lack definitive proof, some reform members of the City Council are convinced, from conversations they've had or overheard, that old-guard council members, both black and white, can count on Commonwealth Edison for some patronage jobs for their supporters. According to a source at one local foundation, Com Ed chairman James O'Connor, playing on his connections, called a trustee of the foundation to question (futilely, it turned out, to the foundation's credit) a grant given to the Chicago Electric Options Campaign to encourage public education and debate.
With its aggressive campaign, Com Ed has made it appear that the city is on trial, not Com Ed. But the basic question is: has Com Ed done the best job possible in providing economical power, and is it the best choice for the future?
Com Ed argues that it's done a great job: people love us, we're reliable, we pay fees and taxes to the city, and we're generous to charities. It's a big, complicated job, and nobody else can do it, especially not city government.
But Com Ed's extremely high rates make a prima facie case that it hasn't done such a great job. As for fees and taxes, they can be collected from any supplier (even most municipal utilities pay such fees). And maybe the rest of us could be more generous to charities, too, if we didn't have to pay such high electric bills.
Com Ed commissioned a survey that showed that two-thirds of city residents opposed municipalization (although a slight majority of blacks favored it), but it has so far refused to release the full survey and its methodology (just as the city has refused to release many of its consultants' studies). With so little public information about municipalization, much of it hysterical and wrong, such results aren't surprising or meaningful. In ward referenda on whether the city should consider all alternatives to Edison that might reduce costs, the results ran overwhelmingly the other way: 87 percent of 130,000 ballots in 15 different wards favored considering alternatives.
On the basis of a dubious survey of business leaders, Com Ed claimed municipalization would lead to a loss of 250,000 jobs. In a more valid econometric projection, Chase Econometrics estimated in 1986 that Chicago would lose 85,000 to 112,000 jobs as a result of projected Com Ed rate hikes. And there is a strong anecdotal record of job losses as a result of past rate hikes, such as those reported in a 1987 Wall Street Journal article headlined "Electric Bills Hinder Chicago Rebound."
Com Ed hinges much of its claim for renewal on "reliability," raising the specter of brownouts and blackouts. It shouldn't take much skill for a company to guarantee supply with 40 percent extra capacity, but it sure is expensive. And there is no comparative standard of reliability. The Illinois Commerce Commission doesn't collect any such data, and Com Ed won't release its internal data.
Indeed, Frank Clark, Com Ed's manager of public affairs and chief spokesperson on the franchise renewal, told me, "I don't know how you measure [reliability]." But the company's claims were supported, he said, "by our public opinion surveys and our customer response on our reliability. Generally our customers feel reliability of service is very good." Of course, they have no way of comparing Com Ed to anyone else. Gary Zimmerman, executive director of the Illinois Municipal Electric Association, argues that Winnetka's little publicly owned utility (which he formerly managed) has a better reliability record than Com Ed. Although it's certainly very important, reliability, Com Ed's major claim to competence, turns out to be a will-o'-the-wisp--unverifiable and hardly unique to Com Ed anyway.
I talked with Frank Clark about what Com Ed wanted in a renewed franchise and what it would offer the citizens of Chicago in order to sell them on extending their $2-billion-a-year contract.
"I don't think we have to sell ourselves," Clark said. "Our history speaks for itself. I don't think I could add to that." He had nothing to offer on lower electric bills, except the four-year moratorium already imposed by the Illinois Commerce Commission as part of the last rate hike.
I kept probing in a general way to see if Clark would voluntarily suggest an aggressive Com Ed program on demand management or efficiency. When it was clear that Com Ed was not promoting anything along those lines, I asked directly about efficiency.
"We participate as do other major utilities in research through the Edison Electric Institute and other organizations," Clark said. "We are very concerned with keeping up with the state of the art." First he mentioned cold fusion, which if it existed would be a new means of producing electricity, not reducing use. Then he mentioned energy-efficient light bulbs, but quickly added, "All have costs on them, and some of those are very prohibitive." (In fact, it would be cheaper for Com Ed to give away some energy-efficient bulbs than to generate the electricity they save.) And then he went on to tilt at windmills, literally, as unreliable--again talking about an alternative way to generate power, not a way to save it. He continued to question the possibility of significant consumption savings, and when pressed further claimed, "I don't think other utilities have done substantially more than Commonwealth Edison. We have been a leader in that area."
But Commonwealth Edison is actually far behind many other big utilities in conservation, and as my conversation with Clark vividly demonstrates, the company's executives don't even think in those terms. Mandated by the state to run pilot programs on conservation, Com Ed complied with the letter of the order, but the first draft of an outside audit of Com Ed's program, prepared for the Illinois Commerce Commission, concluded that the company did not perceive conservation as "an urgent need" and that its efforts "failed to capitalize on previous utility experience," "do not reflect the state of the art in the industry, either now or when they were proposed," "lacked clear, measurable . . . goals," and "reflect inadequate recognition of market realities." The audit (whose language was toned down considerably in later drafts, after Com Ed insisted that the auditor had overstepped his mandate) also concluded that "efforts to minimize Edison's expenses for these programs limited their success" and that "system-wide acquisition programs will not grow out of these pilot programs."
Clark, maintaining that the company "would approach negotiations with an open mind," offered only some improved customer services, like getting calls through more quickly during outages, as an improvement on the old franchise.
Com Ed's attitude toward efficiency, or "demand-side management," as it's called, is critical. The Mayor's Energy Task Force concluded early on that whoever ended up providing electricity, a new franchise should pursue "vigorous, cost-effective development of energy efficiency measures, promotion of cogeneration and aggressive exploration of new technologies." Even if we are saddled with Com Ed's overpriced excess nuclear generating capacity, aggressive efficiency measures can reduce all customers' electric bills dramatically. Ralph Cavanagh of the Natural Resources Defense Council, part of Komanoff's consulting team to the city, estimates that even existing technologies could reduce the projected residential and commercial consumption of electricity by 44 percent over the next three decades.
Could a for-profit utility like Com Ed actively pursue a strategy of selling less electricity? In theory, yes, especially if it's rewarded. For example, Com Ed could be paid for the amount of electricity that would have been used had they not pursued the desired conservation measures; or they could be allowed to add efficiency expenditures to their rate base. Such measures already in place in other states reflect the power of utility blackmail: a utility can refuse to cooperate unless paid off. But even such unpalatable agreements can reduce costs.
But "how do you make Com Ed do it?" asks Scott Bernstein of the Center for Neighborhood Technology. "They're just not very good at telling the truth. They've fought funding of conservation and failed to pull off the simplest part of it. How can we be sure Com Ed can be made to comply with a new franchise? Where's Com Ed's proposal to the public to make their product more affordable and palatable?"
If the city bought part of the utility, it could more easily, directly cooperate with the managers of the utility to ensure that conservation was pushed. But equally important, if the city does not take seriously the alternative of municipal acquisition, it loses most of the clout it has to force an obviously uninterested, reluctant, even hostile Com Ed management to adopt efficiency measures.
Conrad Reddick, the city's special counsel for the utility franchise, reviewed Com Ed's history for the Mayor's Energy Task Force, explaining how Edison had resisted real conservation and alternative sources of supply, and had even offered big discounts to prevent businesses and other major institutions from shifting to cogeneration, an increasingly popular technology by which a user can simultaneously produce heat and electric power. "The lesson to be learned from this is that only those with options have obtained discounts," Reddick said.
The same lesson applies to Chicago: only if the city has an option will it have a chance to negotiate successfully with Edison. Competition in supplying electricity is one option, but for that to have a chance Chicago would have to own the municipal transmission and distribution network. Municipal ownership of generating capacity as well as transmission is another alternative that also could employ competition among Com Ed and other suppliers.
The principal city purchase alternative now under consideration doesn't involve politicians running the utility, as Com Ed and a multitude of editorialists have suggested. The city wouldn't even ultimately own the utility. The plan, developed by the nonprofit Chicago Energy Commission, provides for the city to buy some part of Com Ed at its legal bargain price, then immediately resell it at a higher, market value to a private investor group that would buy it with about 20 percent equity investment and 80 percent debt. The city's profit on the transaction would be used to promote energy efficiency and cogeneration.
The buyer--and it's clear that there are large corporate and institutional investors, like GE Credit, that are ready to participate--would lease back the system to a special-purpose public corporation. The lessor-owners, who would be able to carry a higher level of debt than Com Ed does, would be able to take accelerated tax depreciation. This permits the city to partly get around the obstacle created by Rostenkowski's legislation.
The city-created agency would hire an experienced private management firm, employing the Commonwealth Edison technicians and other low-level employees who already serve the city, under a contract that specified expected performance. Electricity rates would be based only on costs, not profit on a rate base. The manager would be directed to obtain power at the least cost, buying from other utilities, from Edison, from cogenerators, or from any other sources.
Savings would come from the tax breaks, a lower-cost capital structure (debt payments being less expensive than stockholders' dividends), competitive bidding for electricity and other needs, and, of course, the commitment to energy efficiency.
It may sound quite complicated to the average person who's not an investment banker, but basically it would create a professionally managed utility independent of petty politicking and more directly responsive to long-term city needs than Com Ed is now.
Could it work? How would it compare to continuing the franchise with Com Ed? Charles Komanoff has made some preliminary calculations showing that municipal ownership coupled with a commitment to conservation could mean lower utility bills than any other alternative, depending on the interest rates for the debt. Even if interest rates were relatively high (12 percent, for example), municipal ownership would be cheaper than having Com Ed continue business as usual. If interest rates were that high, Com Ed could beat the municipal alternative--but only if it adopted an aggressive program of demand management.
And the only way Com Ed is likely to adopt such a conservation program is if it sees that the city is seriously considering the municipal alternative. Otherwise the utility will rightly conclude it has the city by its batteries.
Here are some of the comparative figures. Komanoff has estimated that having the city buy the Com Ed facilities within the city limits (distribution lines plus two coal plants) would probably cost $2 billion, not the $1.35 billion estimated by R.W. Beck. With or without conservation, Komanoff figured that such an alternative would be more expensive than business as usual. To achieve any savings, he concluded, the city would have to buy in addition about one-fourth of Edison's generating capacity (now the city uses about one-third of Com Ed's energy), which would raise the total cost to about $6 billion.
Under this more ambitious plan, the average residential bill over the next 19 years would be in the range of $63.70 to $82.20 if the city pursued demand management and paid 12 percent interest. But Komanoff said it was more likely that the city lease-back venture could now borrow money at 10 percent (possibly less), and in that case the average bills would be in the range of $58.60 to $75.62, possibly lower.
(It's worth noting here that if Rostenkowski hadn't pushed through his bond provision, the city could probably borrow the money now at around 7 percent.)
Renewal of Com Ed's franchise would mean average bills of $66.50 to $86.50 over the 19-year period with business as usual, but $60.20 to $76.50 with aggressive conservation. Efficiency, or demand-side management, makes the big difference, and it produces savings that grow over time, Komanoff said. Without demand management, rates would soar after 2001 as new plants would be needed.
The prospects for competition in supply are not as attractive as many hoped, Komanoff reported. There now seems to be less long-term power available for purchase from other utilities than was assumed in the R.W. Beck study. Komanoff is also doubtful that cogeneration will be able to supply much more than 500 megawatts, which would amount to less than 9 percent of the city's total needs. And it's conceivable that "greenhouse effect" taxes or controls on coal could raise the costs of utilities that rely less on nukes than Com Ed does. But of course there are uncertainties in any forecast, and many unforeseeable events could cut the other way: decommissioning old nuclear power plants could cost several times what Com Ed has allowed; nuclear plant reliability may fall off more quickly with age than expected; technological changes could easily increase the prospects for conservation and cogeneration.
If supply is opened up for competition, Scott Bernstein argues, there will be more actors in the drama--new independent power producers or other businesses producing conservation alternatives. The energy market could change as these businesses proliferate, and in the process jobs may be created. Efficiency investments yield more jobs per dollar than power-plant construction, and most of those jobs would open to semiskilled Chicago residents. With energy efficiency a booming national market, Chicago could become a manufacturing leader in efficiency products. Now, for example, none of 40 lighting manufacturers in the Chicago area makes high-efficiency light bulbs, but Bernstein estimates that producing such bulbs for the local market alone could employ 100 people.
Municipal ownership may not produce the huge savings the Beck study projected, Komanoff concluded, but it is a plausible alternative and conceivably cheaper than Com Ed. More important, it is also the biggest source of the leverage the city needs to get Com Ed to commit itself to efficiency. As Komanoff said, "If I were Commonwealth Edison, my biggest concern would be how can I be kept whole." Keeping that worry alive gives the city power.
But in order to keep that power, according to attorneys who have studied the franchise, like Doug Cassel of Business and Professional People in the Public Interest (BPI), it is essential for the city to give notice to Com Ed, first of its intent to acquire property, then of its intent to terminate the franchise, before December 31 of this year. The Mayor's Energy Task Force has also urged that such action be taken.
This is important not because the city would necessarily lose its rights if it didn't act in this way, but because failure to do so would introduce ambiguity that Com Ed would surely use to fight acquisition in the courts. Com Ed spokesman John Hogan warned in an article about franchise renewal that "condemnation proceedings would be long and expensive. The company would pursue every available legal option to maintain ownership of its property."
Com Ed has also been making barely veiled threats of financial recriminations if the city doesn't quickly sign a franchise. "We're paying [the city] an annual franchise fee of $70 million," Frank Clark said. "I don't know how that will be affected if notice to terminate is given. If negotiations were not resolved in a quick fashion and had to linger, does that mean the city has to come up with billions [to buy Com Ed]? What happens to the franchise fee? Before any action is taken under any scenario, they should take a long hard look at the potential consequences."
Municipal acquisition, or the reasonable threat of it, will undoubtedly involve extensive legal battles funded without limit by a very rich, powerful corporation; it will require much more serious preparation than the city has made so far.
But taking over the utility itself would be relatively simple once the battle was won. "Is electricity a service or a commodity?" asks former utility manager Gary Zimmerman. "I've come to the conclusion that electricity is no different from water, streets, sewers: it's a necessary service, and no one should profit on it. The lights don't go out when there's a change of ownership. It's manageable, being managed, can be managed. The business is not all that complicated, but the people running it don't want anyone to know that."
But even if under threat of municipal ownership Com Ed is willing to strike a reasonable deal, experts like Komanoff insist that any new franchise must continue to include the municipal acquisition option and should be short-term--five years, for example. The utility business is changing rapidly, and the city must be able to respond. Also, the city should get greater competition by winning agreements to "wheel" power over Com Ed lines from other, competitive sources and to promote cogeneration by the city and other large institutions. Com Ed would have to be fully committed to a "least cost" strategy, utilizing both efficiency and cheaper sources, and have records fully open to the public to guarantee its compliance.
The Mayor's Energy Task Force concluded this week that the franchise expiration creates "a rare opportunity to establish new electric energy policies and practices that would make a significant contribution to the well-being of the City, its citizens and businesses." The task force argued that these new policies should aim for the lowest possible cost, reliability, competition, energy efficiency, and economic development through new energy technologies. It also concluded that the city should issue the notice to acquire, then to terminate the lease, before the end of the year. But more than that, the city must take very seriously the possibility of municipal acquisition, leading to an independent, professionally managed utility. "Just simply to wave that right around and say we could do this isn't presumably particularly impressive or persuasive," says task force cochairman Robert Wilcox.
Mayor Daley said many of the right things in his campaign for mayor, but people working on the issue--both within the administration and in the outside pressure groups--have been unsure about his commitments. This week Pat Giordano, a private attorney who advises Daley on utility issues, said that it will soon be clear that Daley intends to investigate seriously the possibility of acquiring Com Ed facilities. "If you give notice to acquire," Giordano said, "you have to be prepared to follow through on it. It's no idle threat." But the city isn't ready to reveal how it will put its muscle behind the notice. "No one said this is an easy issue," Giordano said, "but it's a great opportunity for the city to move ahead in a positive way."
Realistically, the only way the opportunity will be seized is if there is sufficient public education and outcry. Over the years Commonwealth Edison has won too much and wrought too much damage through its power and money in the city's back rooms. The franchise question, with its long-range importance for the city, must be decided in the fullest possible light. Otherwise the shade of Sam Insull, who bought and sold politicians as easily as he did other utilities, will darken the city's social and economic life for generations into the future.
Art accompanying story in printed newspaper (not available in this archive): illustrations/Tony Griff.