Nuclear Bailout or Grassroot Alternative

Austin is not the only publicly owned electric utility which has bought into nuclear technology. Under mounting attack from the private investor-owned utilities which supply them with electricity, consumer-owned power companies — municipally owned systems and rural electric cooperatives* — have sought to buy their own power supply and thus become independent of the private companies. Unfortunately, the most accessible power supply has too often been a share of the private companies’ nuclear reactors. Municipals and coops in eight Southern states have already bought shares of nuclear reactors, and are currently negotiating further purchases. These investments have provided financial stability for the private companies’ massive construction programs — and left the public utilities in an even more precarious situation, facing further manipulation by the private utilities and leaving them severely vulnerable to any further quirks in the already unstable nuclear reactor industry. 

Municipals and rural electric cooperatives have historically provided a workable, competitive alternative to private utilities. Municipal systems have traditionally offered low rates and plowed their income back into the city governments to finance other municipal services; they first arose in the 1910s and 1920s. Rural electric cooperatives organized in the 1930s when private utilities refused to extend service into rural areas, leaving potential customers in these areas powerless. The creation of the Tennessee Valley Authority (TVA) in 1934 and the Rural Electrification Administration (REA) in 1936 sparked the formation of numerous rural electric cooperatives in the South and also led many towns to vote in their own municipal systems, most of which are still in operation today. 

Few of these systems generate their own electric power. Larger municipalities like Austin and Jacksonville, Florida, do own generating stations. However, in most instances the forming municipals were too small to build their own power stations and were not allowed to pool their resources on joint projects under then-existing state laws. Rural electric cooperatives received REA loans for distribution but little for generating and transmission; therefore, they generally lacked the resources to build their own power plants. These systems have received power from TVA and from federal hydroelectric projects operated by the Southeastern and Southwestern Power Administrations. For the most part, however, municipals and coops have had to purchase their power wholesale from the private utilities. 

Private utilities have long opposed municipals and coops, complaining that such institutions were examples of “creeping socialism.” They criticized the supposed subsidies available to public power — municipals can issue tax-free municipal bonds, and REA loans to cooperatives have carried interest rates as low as two to five percent — conveniently neglecting to mention that they too have received funds from REA. They have bought out any systems they could, and aggressively fought to protect their turf against municipal takeovers. 

A typical example of this pattern occurred in 1938 when Chattanooga voters went to the polls to vote on establishing a municipal utility. The prospect of receiving low-cost TVA power was a major incentive to vote yes. The Tennessee Electric Power Company — a defunct subsidiary of Commonwealth and Southern Corporation (now the Southern Company) — illegally contributed $20,000 of the $22,000 raised to fight the proposal and had its employees hand out liquor at the polls on election day. Nevertheless, residents still voted for the municipal system 19,000 to 8,000. 

Such skirmishes have continued ever since. In 1954, private utilities — under the leadership of the Southern Company and Middle South Utilities — successfully blocked a program to build a number of federally owned nuclear plants which could have supplied wholesale electricity to public systems. In 1962, Georgia Power paid the city of Rome, Georgia, $50,000 not to establish a municipal electric system. Other utilities bought out municipals and coops and began distributing retail electricity to the public systems’ old customers. Many of these practices were essentially unregulated until 1966, when the Supreme Court ruled that the Federal Power Commission had the authority to regulate the wholesale rates of private companies. The municipals and coops prepared to protect themselves against further abuses by taking their complaints to the commission. 

However, the Nixon administration was not sympathetic. Under the leadership of Donald Cook, chairman of American Electric Power Company, the private companies promoted the concentration of the utility industry under the control of a dozen or so companies, all connected by a national grid. Municipals and coops had no place in this new order. Nixon’s newly appointed FPC chairman, John N. Nassikas, became a staunch ally of the effort. At the same time, the Nixon REA cut back on funding generating and transmission cooperatives (“second-degree” coops formed by a pooling of small coops to finance and operate power plants and transmission equipment), a move which weakened the cooperatives’ bargaining power in obtaining wholesale power from the companies. 

With federal support in place, the private companies systematically worked to drive wholesale power rates through the ceiling. Virginia Electric Power and Georgia Power both applied for 33 percent wholesale rate increases in 1970; other companies quickly followed suit. American Public Power Association director Alex Radin describes the resulting situation: “Private utilities in recent years have filed an increasing number of wholesale rate increase petitions, at a much faster rate than the Federal Energy Regulatory Commission [formerly the FPC] has been able to review them. After a five-month period, the requested increases automatically go into effect until such time as FERC can reach a decision on them. In many cases, the waiting period and review process have lasted for years. The result has been a stacking up – a ‘pancaking’ – of successive wholesale rate increases. This practice of pancaking has greatly increased the power costs of hundreds of small publicly owned utilities – and in many cases, it has placed them in an extremely difficult, if not impossible, competitive situation.” 

As the wholesale rates rose, public power institutions looked less and less attractive to the public. Searching for a way to fight back against the private companies, municipals and coops undertook a new campaign: purchasing shares of nuclear reactors. In a little-noticed amendment to the Atomic Energy Act of 1970 by Vermont Senator George Aiken, a long-time supporter of public power, Congress required the Atomic Energy Commission to consider the antitrust implications of a private company’s nuclear reactor construction. Starting with the AEC hearings on Georgia Power’s Hatch reactor, municipals and coops pursued antitrust proceedings on numerous reactor projects, claiming they were denied the opportunity to participate in the project and were thus placed at a competitive disadvantage in providing power to their customers. 

The private companies, still interested in eliminating public systems, fought back aggressively, challenging the antitrust actions and in some cases filing countersuits against the municipals and coops. They were unwilling to sell their reactors and were prepared to take the battle as far as necessary. However, the 1973 oil crisis drastically altered the private companies’ approach to public power’s interest in nuclear reactors. In the face of a shrinking supply of finance capital and the plummeting demand for electricity, the companies welcomed the opportunity to get low-interest capital from the municipals and coops. 

Several changes took place to aid this development. First, the REA altered its policies and began offering loan guarantees to generating and transmission cooperatives. Previously, only the distribution coops had received these guarantees. Loan guarantees from REA decrease interest rates on borrowed capital by providing a surer return for the investor. 

The municipal systems also set up new financing structures by pursuing state-by-state legislation to enable the formation of joint municipal power agencies — a pooling of municipals similar to that of a G&T cooperative which could issue tax-free revenue bonds to finance joint action construction projects. In the past, private utilities had opposed such agencies for fear they would provide cheaper service and entice other towns to set up similar municipal systems, but now they welcomed these laws. Georgia and North Carolina passed joint action laws in 1975. Since that time, South Carolina, Virginia, Mississippi and Texas have passed joint action legislation, and municipalities in Louisiana, Arkansas and Florida are seeking similar authority.

With this combination of low-interest financing available, private and public power have now entered a friendly if uncertain alliance. Coops in Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Texas and Virginia have bought or are negotiating for shares in joint action nuclear projects. The same applies to municipal power agencies in Florida, Georgia, North Carolina, Texas and Virginia. 

 

The case of Georgia provides a good example of how these changes have worked for public and private power. In May, 1970, the Georgia Power Company applied to the FPC for a 33 percent increase in wholesale rates to 39 rural coops and 50 municipalities. The executive manager of the Oglethorpe Electric Membership Corporation (a state-wide coop organization) declared, “It means all-out war, and we shall do our utmost from a professional and legal standpoint to defeat this undertaking.” 

In the summer of 1972 the Oglethorpe EMC and the Georgia Municipal Power Agency intervened in the AEC’s hearings on Georgia Power’s Hatch nuclear reactor, and the Justice Department filed an antitrust action under the 1970 Atomic Energy Act. Then, early in 1973, Georgia Power applied for a construction license for the Vogtle nuclear reactor, and again intervention and antitrust proceedings ensued. 

Initially, Georgia Power fought back aggressively. However, their resistance weakened rather quickly, perhaps because of the nosedive in available finance capital. “In 1974 when we went to the bond market, there was no one there,” says Grady Baker, senior vice-president for the company. “Raising money on our own would have been a tremendous burden.” Suddenly the tax-free municipal bonds and low-interest REA loans the companies had criticized so harshly began to look like an enticing prospect for construction financing. 

In May, 1974, the company negotiated a deal to sell part of the Hatch and Vogtle plants to the municipals and coops and to arrange more equitable wholesale rate structures. Then the municipals and coops went to work on securing the necessary capital for the purchases. The municipals successfully lobbied for a new law enabling joint action financing. The Georgia Supreme Court upheld the constitutionality of this law on November 30, 1976, clearing the way for the newly formed Municipal Electric Authority of Georgia (MEAG) to float $1.6 billion in tax-free bonds by 1985. During the same period, the Oglethorpe EMC arranged $1.4 billion in loan guarantees from the REA. 

Finally, the contracts were signed guaranteeing that the municipals and coops would own 20 percent of Georgia’s electric capacity by 1985. The Municipal Electric Authority of Georgia bought 17.7 percent of the two-unit Hatch and Vogtle nuclear reactors, and 15.1 percent of the four-unit Scherer and two-unit Wansley coal plants. The city of Dalton (not part of MEAG) bought 2.2 percent of Hatch, 1.6 percent of Vogtle and 1.4 percent of Scherer and Wansley. And the Oglethorpe EMC bought a 30 percent share of each of these generating plants. 

Georgia is not the only state where public power systems have invested in coal plants. Coops in Arkansas, Florida, Kentucky and Louisiana are all purchasing or negotiating for shares of investor-owned companies’ coal units. 

The 1970 antitrust provisions, in conjunction with a 1966 antitrust decision, have provided additional benefits to public power. For years, Louisiana Power & Light had refused to wheel electricity from federally owned Southwestern Power Administration hydroelectric plants to Louisiana’s municipals and coops. By intervening in the construction license hearings for LP&L’s Waterford Three nuclear reactor, these agencies forced LP&L to deliver power from SWPA; the municipals will get 50 megawatts in 1980 and the coops 100 in 1981. Alabama coops used the same law to win a new power distribution agreement from Alabama Power during licensing proceedings for the Farley reactor. 

 

What does the new alliance mean for the utilities? For the private utilities the most obvious advantage is the supply of construction capital. While Wall Street flounders, the underwriting and trading of tax-free bonds is booming. Last $5.9 billion worth of public power bonds were sold (compared to $750 million in 1970), and joint action bond sales rose from $611 million to $2.2 billion in only three years. The amount of government-backed REA loan guarantees to rural electric cooperatives has increased by 500 percent since 1973, and in 1977, 40 percent of these guarantees went to coops participating in nuclear projects. By the end of 1979, REA will have committed approximately five billion dollars in loans and loan guarantees to nuclear projects. In testimony before Congress on cooperatives and alternative energy development, the Environmental Policy Institute’s Jack Doyle stated: “By the year 2000, REA financing may account for as much as 20 percent of all electric utility industry financing.”

Public power funds now go a long way toward maintaining the private utilities’ gigantic construction programs. In its 1978 annual report, Duke Power vice-president William Grigg noted: ‘The sale [of the Catawba reactor] would help us financially in two ways: First, we would receive a substantial cash payment for the investment that we’ve already made in the agency’s share of the unit, plus a reasonable profit. That money would be applied to our other construction, thereby reducing our outside financing requirements.” In the case of Georgia Power, the three billion dollars from public power allowed it to resume construction on the Vogtle reactor, which had been postponed for 18 months. Had the company cancelled construction altogether — a move it had seriously contemplated — it would have incurred $100 million in cancellation penalties. 

The irony of this situation — private utilities depending on the same public agencies they had so long opposed — is not lost on the companies. Grigg’s fellow vice-president Douglas Booth notes about the Catawba sale, “The deal made a lot of sense in terms of economics — if not ideology.” Forbes magazine comments: Even 15 years ago, the private utilities were spending millions on ads warning against the evils of public power. One advertisement, particularly chilling, showed a young man standing next to a barbed-wire-covered wall with this message: ‘. . . when government owns business, it has in its hands both political and economic power. . . . Isn’t it time to call a halt to the expansion of government-in-business?’ Strange bedfellows.” 

But not strange enough to convince the private utilities to keep their hands off the capital available through public power agencies. 

On the other side of the coin, public power officials clearly desire a source of stability against the continuous wholesale rate increases they have faced in recent years and the occasional threats that private companies will not renew contracts for generating power. Louisiana Power & Light has already driven five municipalities out of business in the past two years by offering to supply their retail customers’ electricity cheaper than the municipals can provide service and by advertising that they would not renew contracts with those municipal systems once they expire. By purchasing their own source of power, the municipals and coops can bolster their defense against such raids. 

In addition, the private utilities continue to pancake rate increases, demanding more money from their wholesale customers without exacting similar increases from their industrial customers. In one particularly grating example, on December 30, 1977 — shortly after their joint action programs were finalized — Georgia Power filed for a $28.4 million wholesale rate increase. The rate hikes have brought hardships to municipals and coops throughout the South. As Charles Tolley, manager of North Carolina’s French Broad Electric Membership Corporation, notes: “One of the big problems with [buying power from] Carolina Power & Light is that a big industrial customer can buy cheaper retail from CP&L than we can offer the power wholesale.” Many private utilities’ wholesale rates now exceed their retail industrial rates. Industrial customers shun the areas served by municipals and cooperatives. Of course, in many areas, federal power — usually in the form of low-cost hydroelectricity — can balance out the public power rates; this is especially true in the case of TVA. But the emerging trend is for the long-standing competitive advantage of public power to erode even further. 

Purchasing a piece of a nuclear reactor will theoretically prevent this state of affairs. Obviously, since private utilities average the costs of new plants in with the costs of older ones, electric costs from the public utilities’ new nuclear plants will be more expensive than the rates offered by private power. However, as Tolley notes, “There’s gravy out in the 10- to 15-year period in the lifetime of the plant.” Private utilities’ rates will begin to soar, especially the wholesale rates, so investment in a reactor today should ultimately produce lower rates for the public power systems. 

However, several problems remain unresolved concerning joint action projects. The higher prices public power will face over the first decade of the nuclear plants’ operation could be a threat to their own existence. Certainly, the private companies will use their rate advantage to entice large industrial customers away from the public systems. The suspicion lingers that once the private utilities have used the low-interest capital to bail out their own construction programs, they will seek to buy out municipals and coops on the basis of offering lower rates and of being able to bring large industry to the public systems’ service areas. 

Private utilities have the upper hand in deciding how to operate the plants. Tolley comments: “In the truest sense, that’s not being a generating and transmission coop. The [Catawba] plant would be taken off-line at Duke’s convenience, not ours.” In essence, the public power agencies will still depend on the private utilities, rather than having their own generating facilities which they can manage to suit their own needs; and they will have to offer the private utilities a profit for operating their generating capacity. 

The long-term agreements binding the public utilities to joint action projects offer little substantive protection to these systems. North Carolina’s generating and transmission cooperative is asking the distribution coops to sign 48-year contracts requiring them to purchase all their power from the G&T coops’ generating facilities — which will most likely involve Duke’s Catawba reactor and VEPCO’s Surry reactors. “To commit our membership for 48 years is like writing a blank check,” says Tolley. Municipalities enter into similar long-term arrangements (at least 30 years) in their own nuclear purchases. Maintenance outages, or — in the case of nuclear reactors — temporary or long-term shutdowns because of safety concerns, could prove disastrous for the coops’ and municipals’ power supply. 

In fact, the lingering uncertainties surrounding nuclear power pose more serious threats to the smaller public utilities than to the oft-complaining private companies. “Most tax-exempt municipal bonds are secured by ‘hell or high water’ contracts made between the joint action agencies and the cities they serve,” notes Forbes. “The cities have to pay whether or not the power is delivered.” With regard to the potential shutdown of the Seabrook site, Forbes asks, “Who pays for the incomplete structure? Ratepayers in the cities that now own 20.5 percent of the installation will be liable.” 

Even if the plants are completed, any cutback in their operations could be devastating to public systems. The costs related to an accident like Three Mile Island — repairing the facility, purchasing replacement power, and the like — could put many small power systems out of business. “We are a very small operation,” emphasizes Charles Tolley. “That [contract] represents a tremendous monetary liability for us. To become party to that kind of liability — even for a non-life-threatening accident — could wipe us out.” Tolley recalls that at the North Carolina EMC meeting to discuss buying into Duke’s Catawba plant, he asked, “What is our liability should Catawba have an accident? The answer was that an accident was too unlikely to worry about. Then Three Mile Island happened three months later.” 

Now some public power systems are taking a second look at nuclear power investments. For instance, municipals in Louisiana are currently negotiating with Gulf States Utilities on a joint action project, but, says Lafayette Utilities System director Sylvan Richard, “We’re not interested in nuclear power right now.” Tolley’s French Broad EMC has decided not to participate in any nuclear ventures until it receives stronger guarantees against substantial losses in the event of an accident. 

However, most public power officials have leaped to the defense of nuclear power, in some cases more extremely than have the private utilities. A recent poll by Public Power magazine, for instance, found overwhelming support for nuclear power from municipal systems managers across the country. Support was strongest in the South, where 90 percent of the officials affirmed their strong support for the continuation of the nuclear power construction program. 

Coops have also not been swayed by the emerging controversy about nuclear power. The July, 1979, issue of Rural Georgia, the magazine of the Georgia Electric Membership Corporation, editorializes: “Nuclear power generates electricity economically and has caused no fatalities. Its existence and future well-being, however, seem to be in question even though any logical analysis of the nuclear power industry would reveal the public’s interest is being served. If Jerry Brown, Ted Kennedy, Jane Fonda and others want to save American lives, it would seem they should look into those areas where lives are already being lost. This does not include the nuclear power industry!” 

Even more disappointing, these systems have not taken an active role in developing alternative energy sources. As Jack Doyle noted to Congress: “The involvement of G&T systems with investor-owned utilities in joint ventures and regional power pools, and their recent orientation toward large-scale power development and planning, have made many coops less inclined to pursue energy conservation and more localized alternatives, despite the fact that they are in an ideal position to capitalize on small-scale alternatives.... For the most part, rural electric cooperatives are more often found resisting and/or avoiding conservation and renewables than they are promoting them.” 

 

Despite the already strong commitment municipals and coops have to nuclear power, it is important for utility reformers and anti-nuclear activists to work against further proposed purchases and concentrate on developing innovative energy delivery structures through public power. The very nature of private utilities makes significant change in their structures and policies — particularly the implementation of alternative energy sources — nearly impossible. Instead, activists must repeatedly seek minor concessions through their state utility commissions, rather than create a fresh approach to solving energy problems. 

In contrast, the customers themselves control municipals and coops, and therefore can shape the management of these institutions. As Public Power's editor Vic Reinemer emphasizes, “You’ve got the mechanisms to make the changes local people want to make.” In most municipals, the city council directly controls the electric system, so a well-organized campaign to elect an alternative slate of candidates can lead to radical policy changes. In many coops, a quorum of only three to five percent of the members elects a board of directors at the annual meeting; organizing a small percentage of the coops’ members can bring in a new board and a new outlook on energy planning. Members of the Arab, Alabama, cooperative managed to elect two board members from the floor in 1978 and get a fresh voice in coop affairs. And members of the Joe Wheeler EMC in Hartselle, Alabama, flocked to their annual meeting to vote in a reform board which immediately took action against the corrupt practices of the previous board. 

Equally importantly, most municipals and coops have a very low system demand which can be met in ways other than investing in centralized power plants. Over 90 percent of the coop systems in the country have a peak demand of 50 megawatts or less (one-twentieth the size of the average nuclear reactor). Many municipal systems have similarly low demand; for instance, the 19 municipalities which have bought 75 percent of one of Duke’s Catawba reactors will share approximately 760 megawatts of power, an average of 40 megawatts each. 

The range of possibilities for power supply are endless. Says Jack Doyle: “The use of passive solar design features, active solar systems for agricultural and residential use, wind systems, methane systems, maximum weatherization standards, all in combination with small-scale generation facilities, could enable many local coop systems to meet their annual energy needs with some measure of efficiency and considerably more local control than they have now. Moreover, for some local systems, a mix of local generation and on-site strategies for meeting local demand may improve reliability through diversification since no one source would control the whole system’s supply.” 

Already such projects are underway in the South. The city of Greenville, North Carolina, has undertaken a comprehensive energy conservation program through its municipal utility. The Baldwin County, Alabama, EMC — which actively involves its members in coop decisions — has one solar water heating and one solar space heating monitoring project in operation. The coop is also studying alternative energy sources and is seeking to meet other service area needs by providing group insurance and low-cost housing. Similar programs are flourishing in the East Mississippi Electric Power Association. Municipalities and coops in Louisiana and North Carolina are studying the restoration of abandoned low-power hydroelectric facilities. And recently the North Carolina Electric Membership Corporation announced it was considering the construction of four 150-megawatt peat-fired plants which could be fueled by the inexpensive peat abundant in northeastern North Carolina. 

By further developing alternative energy plans, the coops and municipalities can provide themselves with a sounder defense against the continuing assaults of the private utilities — and reassume their role as the primary innovators in electric energy supply. 

 

*In the truest sense of the term, coops are not publicly owned; they are private non-profit corporations with each customer owning an equal share of the coop. However, they are publicly owned in the sense that their customers do control them. Municipal systems are publicly owned and operated by municipal governments in the same fashion as water and sewer systems. To simplify terminology, coops are lumped with municipal systems as public power agencies.

Much of the material on coops contained in this article is derived from an excellent new book entitled Lines Across the Land by Jack Doyle. It is available for $12.50 (plus $1.50 postage and handling) from: Nancy Davis, Environmental Policy Institute, 317 Pennsylvania Ave. SE, Washington, D.C. 20003. Useful reading on the history of the fight between public and private power can be found in Richard Heilman’s Government Competition in the Electric Utility Industry (Praeger, 1972). For more information on municipal systems, see Public Power magazine, published by the American Public Power Association and now edited by Vic Reinemer, a long-time crusader against utility abuses. Also check the monthly magazines of your state’s municipal power association and electric membership corporation.