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Wednesday, February 13,2013

Sell BWL?

Exploring an unpopular solution to Lansing's budget deficit

by Andy Balaskovitz
When Lansing Mayor Virg Bernero says “everything is on the table” to fix the city’s budget problems, it’s not entirely true.

An idea that’s surfaced from the mostly Bernero-appointed Financial Health Team as a long-term budget solution — privatizing the publicly owned Lansing Board of Water and Light — was rejected by the mayor more than a month before the team makes formal recommendations. The team has even stopped exploring the idea because of the lack of support, both from Bernero and members of the City Council, and it’s unlikely the recommendation will be made in the final report. It feels like this sacred cow can’t even be discussed.

Indeed, only one person interviewed for this story — a city employee who’s also a local union steward — supports considering the idea. Neutral parties say publicly owned utilities have positives and negatives compared to privately owned utilities. And a wave of public officials, BWL officials and union representatives join the mayor in saying, “It should be off the table” because it’d be a one-time cash influx at the expense of superior customer service and lower utility rates.

BWL’s assets are valued at over $1 billion and increasing. Most of its liabilities are made up of long-term debt of nearly $400 million. How much of that $1 billion would actually go to the city’s coffers in the event of a sale is uncertain because the Financial Health Team has stopped short of a detailed analysis in light of the opposition. 

Simply put, supporters have an uphill battle to convince the administration and the Council to sell the utility to private investors. Lansing voters would also have to approve a City Charter amendment, the document that gives BWL “the full and exclusive management of the water, heat, steam and electric services and such additional utility services of the City of Lansing.” Opponents fear rate increases, loss of local control over BWL policies and diminished customer service should the BWL be sold.

“You could do a lot of stuff for a billion dollars,” said former Lansing Mayor David Hollister, who heads the Financial Health Team. What it can’t do is solve the $9 million deficit the city faces next fiscal year, as something so complicated could take years to negotiate. Hollister declined to give his personal opinion of the idea, saying it would “prejudice” the recommendation process. He could only deliver the pros and cons. 

“Then again,” Hollister says, stating the chief con, “it would be a real loss: We’d lose control of rates and hometown pride would be diminished. It’s a trade-off.”


In support

Paul Dykema, manager of forestry and grounds for the city’s Public Service Department, spoke in support of considering the idea at a Jan. 31 public forum held by the Financial Health Team.

Dykema, a union steward for Teamsters Local 214, said while it’s “understandable” that people may not want to give up local control of board policies, “a billion dollars in the coffers is awfully attractive.”

“Please consider it,” Dykema said to members of the Financial Health Team. “I know it’s not popular. But you’re not here to do something popular. You’re here to make very difficult recommendations.”

As for possible rate increases, Dykema reminded opponents that privately owned utilities’ rates are regulated by the Michigan Public Service Commission, whose members are appointed by the governor. BWL commissioners are appointed by the mayor and are subject to Council approval. 

Several opponents claim that BWL’s rates are some 20 percent lower than its investor-owned competitors. Rates fluctuate depending on the time of the year. BWL General Manager Peter Lark said that in December, BWL’s rates were roughly 13 percent lower than the nearest investor-owned utility. For a snapshot of electric rates this month for investor-owned utilities, cooperatives and cooperatives, see page 10.

Still, the Financial Health Team is backing away from the idea due to lack of support. Hollister said last week, “I don’t know anybody who’s promoting” the idea. He’s “not sure of the value in putting it in the recommendations,” given the political backlash already.

While he was mayor, Hollister said a utility company in California expressed interest in acquiring the BWL from the city. “We weren’t facing the same financial difficulties then. We decided not to do it — we weren’t in a crisis. It just wasn’t rational,” he said.

Steven Liedel, an attorney who leads the Financial Health Team’s subcommittee on long-term solutions, said the subcommittee is not “going to spend any more time considering” the idea. “It’s not something that is likely to occur, and given the mayor’s position, it’s not something we’ll focus on further.” He said the team “never proceeded beyond” the question of whether the choice would be a “cost or benefit to the city.”


In opposition

Shortly after the Lansing State Journal listed privatizing the BWL in a Jan. 27 story on the Financial Health Team’s recommendations, Bernero rejected the idea wholesale at his State of the City speech the next day. “Not on my watch,” he told the audience.

Lansing City Council President Carol Wood is on the same side of the issue as Bernero.

“I absolutely do not support selling it whatsoever,” Wood said three days later after Bernero’s speech. “I see this as a one-time influx of money into the General Fund and what comes with that in terms of rate increases. I just don’t see this as an option whatsoever.”

Wood and others also believe that the BWL is an important economic development driver via its rates.

Jim Weeks, executive director of the Michigan Municipal Electric Association, said, “I don’t really see any pros” to the proposal. He predicts rates would increase, lowering the amount of money residents contribute to the local economy; customers would have less interaction with their electric regulators if they have to go before the Michigan Public Service Commission instead of the BWL Board of Commissioners; and that profit motives for private utilities solely benefit shareholders.

“Sometimes public policy for a municipal utility is not going to be driven by profit or a bottom line, it’s going to be driven by the community,” he said. “I think you would lose that voice.”

Weeks pointed to the lengthy public process that led to BWL’s decision to build a new cogeneration electric and steam plant in REO Town as an example of serving the public, not necessarily shareholders. It will run on natural gas that will reduce the utility’s greenhouse gas emissions by 50 percent.

BWL and union officials are also resisting the idea. Sandra Zerkle, chairwoman of the BWL Board of Commissioners, said while the board has not taken an official position on the idea, she is “personally strongly opposed to the idea.”

“Our main concern is maintaining adequate services at reasonable prices,” she said. “If it’s a private entity, they might have some of those, but the main goal would be profit. That profit would not end up being the profits of the city.”

In the last fiscal year, the BWL paid just over $12 million to the city in lieu of taxes. The City Council approved a 1 percent increase of those payments in June, which was not enough for Council members Brian Jeffries, Jody Washington, A’Lynne Robinson, Derrick Quinney and Wood, who approved a 1.5 percent increase that was ultimately vetoed by Bernero. The administration estimates the five-year agreement will bring in an additional $3.5 million for the city. Wood said she’s “absolutely” interested in revisiting the issue of raising the return on equity payment to the city.

Ron Byrnes, business manager for International Brotherhood of Electric Workers Local 352, shared the concerns of Weeks and Zerkle.

With so much opposition built against the idea, under what circumstances would selling the BWL look attractive? How bad would the city’s finances need to get for it to be considered, if at all? Weeks said that when customers feel they’re no longer receiving an affordable product, or if the company becomes less responsive to their needs, they may have an argument to privatize the BWL.

“That could happen,” Weeks said. “But it’s not happening here today.”


‘Very rare’

While not unprecedented, it’s very rare for private investors to acquire public utilities. Weeks said that of over 2,000 public utilities in the country, three have gone to investor-owned utilities and 10 were bought by cooperatives in the past 13 years, he said. Or, about one a year. There are also examples of investor-owned utilities going to municipal owned, he said, and he’s heard some interest of doing so in Michigan.

In June, voters in Hercules, Calif., northwest of San Francisco approved, 77 percent to 23 percent, selling its municipal utility with the net proceeds paying off debt and going into the city’s General Fund. Unlike BWL, though, the Hercules Municipal Utility was hemorrhaging hundreds of thousands of dollars a year, which was made up by the city’s general fund. It was also a much smaller and younger utility than BWL.

Jan Beecher, director of the Institute of Public Utilities at Michigan State University, said she’s “generally agnostic” on the issue of privatizing public utilities. 

“You have to be aware of the tradeoffs. There are advantages and disadvantages to each model,” she said. Privatization “can be enticing, especially in times of fiscal stress as a one-time windfall depending on the value of the assets. But that’s always going to be a matter of determination and can be rather complex to decide.”

One of the “perceived advantages” of privatizing is “infusing private capital into the utility,” which is particularly attractive if infrastructure improvements are needed.

“At the same time, cities often perceive that they’re giving up some amount of control over their utilities.” 

And doing so “would definitely be a very substantial shift,” she said — not to mention “very rare.”

For now, selling the BWL is off the Financial Health Team’s radar. It will instead focus on which city services the city continues to provide, the management of recreation facilities and pension and health care costs, Liedel said.

“There’s no practical way for the proposal to advance,” Liedel said, adding that it could take a place like Lansing a “multi-month study” to figure out true costs and savings.

So, it appears not everything is on the table to solve long-term budget deficits?

“We’ve heard the first exception to the mayor’s general rule,” Liedel said.

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