LOS ANGELES Frustrated by high electricity rates charged by Southern California Edison. officials in Palm Springs, Calif., are considering issuing $74 million of taxable revenue bonds to acquire the investor-owned utility's distribution system located within the desert community's boundaries.
Palm Springs is one of a handful of cities and towns nationally that are in varying stages of planning to set up municipal utility districts that-would take over service now provided by investor-owned utilities.
On Nov. 8, voters in four Maine towns will consider referendums that would allow the creation of municipal utility districts that would replace Central Maine Power. In September, voters in Las Cruces, N.M., approved a referendum that cleared the way for the city to replace its existing electricity supplier with a municipal utility.
The move to municipalization, prompted by passage of the National Energy Policy Act of 1992, "is a trend, but a lot of it is posturing [by the municipalities] to try to get better prices from the existing supplier," said Alan Spen, a managing director of Fitch Investors Service.
In Palm Springs, the decision on whether to hold a referendum vote "is further down the road," said Palm Springs aviation director Allen Smoot, who is in charge of the municipalization project.
If the takeover becomes a reality, it is projected to generate annual surplus revenues between $4.3 million and $11.8 million that "could go into the general fund or into a reduction of electric rates," Smoot said.
The revenue projections are based on a preliminary feasibility study prepared for the city by R.W. Beck & Associates, a consulting firm based in Sacramento, Calif. The study, released in September, said the acquisition would cost $68.1 million, but the cost of bond issuance would force the city to size the bond issue at $74 million.
However, Southern California Edison disagrees with Beck's assessment on how much it would cost Palm Springs to ac-. quire the distribution system, said Ralph Hitchcock, an Edison project manager who is working on the issue.
"We have reviewed the methodology of the Beck report, analyzed what might have been an error or omission on which they based their assumptions, and in fact the figure is closer to $254 million for acquisition," Hitchcock said.
The gap between the two estimates -- the city's $68.1 million and Edison's $254 million -- refers to "the valuation process for establishing values of property, and their assumptions on the equipment and facilities that would have to be purchased," Hitchcock said.
The utility would prefer a solution that would allow it to remain in Palm Springs, Hitchcock said. A takeover would require the city to terminate a $600,000 annual franchise fee now paid by Edison.
"We have said to the city council that if our mutual objective is to reduce costs to our customers and their constituents, then we feel that that is best served through working together in protecting all of the customer interests in this new deregulated industry," he said.
A move to a more competitive electricity market is currently being discussed by the California Public Utilities Commission in a series of hearings that are expected to conclude in November. Last April, the commission, which regulates investorowned utilities but not municipal utilities, invited public comments on its proposal to open the California electric utility market to more competition among electricity providers.
"There will be a number of state and federal legislative and regulatory decisions to be made to create this deregulated industry, that we don't know definitively how much of that may impact municipal utilities and particularly a fledgling utility in that environment," Hitchcock said.
Palm Springs' Smoot said the takeover effort might not proceed until the state utilities commission concludes its hearings.
The next step, involving spending about $2.5 million in pre-acquisition costs, "is going to cost us a lot of money and the council does not want to demand taxpayer dollars to do it until we see" what the public utilities commission recommends. Smoot said.
The council also recently decided to explore a regional solution to the utility rate problem by asking six other cities in the Coachella Valley desert region to consider participating in the municipalization effort.
"We're just going to be generally exploring the concept with the cities," Smoot said, adding that an unrelated proposal by seven Los Angeles County cities to create a joint powers authority to demand lower rates from Southern California Edison is being closely watched.
Palm Springs is in "a total rate revolt," Smoot said. "We have a whole community up in arms with the utility."
We see summer rates upwards of 14 cents per kilowatt hour. which is some of the most expensive in the country," he said. "Since we are m such a hot climate, a $350a-month electric bill is not unusual for a single-family house."
The rates are "driving away business and it is tough on our residents," he said. "Restaurateurs and hotels have a difficult time to keep open."
Smoot said the city has yet to hire a financing team. but he noted the Beck report speculated that the taxable bonds would mature in 25 years with an average interest rate of 8.5%.
The city is considering issuing taxable bonds because federal legislation enacted in 1987 makes it very difficult to issue tax-exempt bonds to set up a municipal utility that would take over of the facilities of an investor-owned utility.
"Our understanding of the federal legislation is that it precludes the utilization of tax-exempt bonds for new systems." Hitchcock said. "If a municipal utility is already in business they can use tax-exempt bonds. but a new utility could not use them to acquire the existing utility system." he said.
Tax legislation enacted in 1987 placed most bonds issued by states and localities to purchase existing facilities of investorowned utilities under the private-activity bond volume cap. Although the law did not prohibit the use of bonds for that type of activity, such a takeover would be virtually impossible to finance because the high cost of utility buyouts could use up most or all of a state's volume cap