Anaheim Fears Lights Out for Lucrative Utility

ANAHEIM — It is this city’s treasure chest, a municipal utility that has held a lock on the county’s biggest, most lucrative power market for more than a century--and funneled millions of dollars a year into city coffers.

But now the Anaheim Public Utilities Department, born in 1895, when the city’s then-new electric power plant first bathed the downtown in light, faces a challenge to its very existence. If the utility folds, the city could lose a major source of money for police, fire and other services.

And while rates would probably drop for businesses that use a lot of power, electric bills for residents could go up.

With a vote this month by the California Public Utilities Commission to deregulate California’s electric market, Anaheim and 37 other California cities that have held monopolies over power in their territories suddenly find themselves competing with private power companies.

The potential impact on Anaheim, whose venerable utility born at the dawn of the electric era makes it the only Orange County city to produce its own power today, is enormous.

“People think ghost towns are in the past, but the fact of the matter is that throughout history some cities have thrived and others have become ghost towns, and it can happen today,” said Edward Aghjayan, general manager of Anaheim’s Public Utilities Department. “I think people will look back 100 years from now and say, ‘This was the pivotal point.’ ”

Although the PUC ruling does not specifically apply to municipal utilities, as the market opens up city utilities will have to compete to keep their customers. If Anaheim’s biggest electricity customers choose to buy their power from private companies, the city could lose the estimated $120 million a year in revenue it gets from supplying industrial users.

For Anaheim’s 150,000 residential customers, chances are that they will be saddled with paying higher rates to the public utility, and won’t be able to switch to a private company, according to the PUC. That’s because while all customers would be able, at least in theory, to choose their power supplier, private companies are unlikely to find it worth the cost to install electrical lines for all but major commercial and industrial users, say industry experts.

And if the city’s utility is privatized, profits will go to shareholders, rather than to the city, where the power business has long helped Anaheim pay for police and fire protection, road improvements and city parks.

In Riverside, which along with Anaheim, Glendale, Burbank, Pasadena and Los Angeles provides city-owned power, Southern California Edison approached city leaders last month with a proposal to take over the municipal utility. Last week, the Anaheim City Council voted to spend $150,000 to study whether it should entertain similar offers.

“Over the last three or four years we have made a lot of adjustments and changes, positioning ourselves for deregulation, but we honest to God don’t really know what could happen now that it’s here,” Anaheim City Manager James D. Ruth said. “The real fear is that people will buy their power somewhere else, and we won’t have the revenue, which would have a major impact on the services the city provides.”

In many ways, Anaheim’s utilities department is on much more solid ground than those of some other California cities.

With Disneyland, Anaheim Stadium, the Anaheim Convention Center and an industrial belt of factories including Delco and Boeing in its territory, the utility serves a power market that is more than twice as large as that of any other city in Orange County.

Anaheim’s utility reaped more than $300 million in revenue in 1996. More than $11 million of that went to the city’s general fund, helping to pay for police and fire protection and road building, among other city services. In addition, the utility paid the city another $3.8 million in what is called a right-of-way fee to reimburse the city for its use of streets and facilities. It paid other city departments another $7.6 million for their services. The remainder of the total revenue went for overhead and toward the utility’s debts.

As a public nonprofit, the utility has also contributed to installing street lights in crime-ridden neighborhoods and planted trees around the city to reduce residents’ cooling costs in the hottest months of the year.

With rates up to 28% below what the rest of the county pays to Southern California Edison, Anaheim’s utility is a bargain for residential customers. But the city subsidizes those low rates for city taxpayers with much higher charges to industrial users.

While industry uses more than 40% of all the electricity provided in Anaheim daily, the city’s rates to those industrial customers are only about 1% less than Edison’s.

Anaheim has seen the problems of deregulation coming for several years and has moved to keep its competitive edge. It has cut its utilities work force 13% since 1991 and these days the utility aggressively buys cheap power on the market.

But like other municipal utilities, Anaheim’s is also heavily in debt. Spurred by the oil crisis of the early 1970s, municipal utilities in California and across the country invested heavily in nuclear and coal power plants, and in other alternative sources of energy, then cheaper than what could be had on the power market.

In 1980, Anaheim invested $214 million in the San Onofre Nuclear Generating Station, near San Diego, making it a 3% owner of the plant. Five years later, Anaheim invested $704 million toward the Intermountain Power Agency, a $4-billion coal plant in Delta, Utah, it owns jointly with Burbank, Glendale, Los Angeles and Pasadena.

Those investments, combined with others in various generation plants, electricity transmissions lines, and the money the utilities department borrowed to build its own office building, leave the Anaheim utility today more than $1 billion in debt.

Major investor-owned utility companies such as Edison are also heavily in debt from the costs of building power plants and the like. But they have been using the profits from charging higher rates than city utilities to buy down their debt for years.

Anaheim and other city utilities have long operated as nonprofits, turning their money over to their city governments and using surpluses to keep rates low, rather than to pay off debt fast.

“We haven’t had that extra cushion of cash that Edison has had from higher rates. But now that we’re competing with Edison, we’ll have to catch up,” said Dave Wright, assistant utilities director for finance and administration at Riverside’s utility. Riverside is a joint investor with Anaheim on several major projects, and is similar to it in size and structure.

“We’ll need to raise our rates for a few years to pay off our debt, which makes us very vulnerable. But it’s not clear that Edison, by taking over municipals, can make rates lower over the long term.”

Aware of what was coming, Anaheim restructured its debt on the San Onofre and Intermountain projects last year to pay off more quickly the loans it took to finance the projects. Even so, city officials and outside observers say, it could be hard for Anaheim to keep its electricity rates low enough to compete.

“Over time the city could get in pretty deep trouble if it tried to ignore what’s coming. It clearly is a profound change for the industry, fundamental and profound,” said Stuart Wilson, assistant executive director of the California Municipal Utilities Assn., a Sacramento trade group. “The rules of the game are changing, and the way the city responds to that change could be crucial to the future of the city.”

The last time the rules of the game changed as much, it was the 1890s, when city officials looked around and saw that Santa Ana and surrounding towns were using electric lights to draw business from Anaheim.

On a clear night in 1895, a long-ago Anaheim mayor put an end to all that, turning on the lights at the city’s first power plant and filling a gilded downtown opera hose with light.

“Progress--movement--is life, stagnation is death,” an account the next day in the Anaheim Independent quotes a speaker identified only as Mr. Melrose as intoning to more than 3,000 citizens gathered to witness the technological marvel.

“This is true of municipalities as well as mankind . . . [cities] too must be ambitious, or decay, ruin and material death will be their portion.”

With the window on Anaheim’s electricity monopoly closing, city officials say they have not been approached by private utility companies looking to dig a stake in Anaheim. But they said they expect they will need to privatize the utility department at least in part to compete, most likely through an alliance with an investor-owned utility company.

“Our strategy is to look out over the horizon and see what other opportunities are out there and how we can be a part of that,” said Michael Bell, assistant general manager for finance and administration at the Anaheim utility.

“There are a lot of threats, and we have to protect our territory. But in an industry experiencing this type of change, we believe there are opportunities out there.”

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Utilizing Funds

It is anticipated that Anaheim’s municipal utilities will contribute $22.5 million to the city’s $137 million budget which, in part, is used to pay police and fire departments, and retire debts. How utilities contribute to the budget, in millions of dollars:

Category: Amount

General fund transfer: $11.1

Reimbursements to city: $5.2

Right-of-way fees: $3.8

City administration: $2.4

****

MONEY TRANSFER

During 1995-96 fiscal year, electric and water utilities transferred more than $22 million to the general and other funds:

*--*

% of Total General Amount Fund Revenue Electric utility transfer* $9,491,000 6.04% Water utility transfer* $1,288,000 0.82% Electric right-of-way fees** $3,171,401 2.02% Water right-of-way fees** $458,151 0.29% Total transfers and fees $14,408,552 9.16%

*--*

* Based on 4% of gross utility revenues

** Based on 1 1/2 of net utility sales

****

Transfers to other funds: Amount

Telephone rent: $58,976

Insurance premiums: $576,356

Reprographics and mail: $247,402

Auto & equipment rental: $1,605,460

Facility rental: $990,662

Data processing charges: $1,863,860

General fund support costs: $2,393,226

Total rent and support: $7,735,942

Source: City of Anaheim

Researched by ESTHER SCHRADER / Los Angeles Times