Ken Silverstein EnergyBiz Insider Editor-in-Chief

About 100 cities in the recent past have examined the possibility of forming municipal utilities. But, the results are often disappointing for the potential acquirer because the costs tend to add up and the complexities of such a task are sometimes underestimated. Investor-owned utilities put up a fight and court battles often prolong the efforts. At the same time, various factors such as stranded costs, engineering expenses and fuel prices are often misgauged and eventual price tag can be more than what buyers intended.

"Typically a municipality must answer one question before it can determine whether it would be successful running a utility: How well does the city manage the businesses it is already in?" says Bill Collet, with investment banking firm Christenberry & Collet in Kansas City, Mo. And if the answer is positive, "then at least it has some credibility for a municipalization of an electric. If the citizens are willing to sell the full faith and credit of their municipality, they can borrow 100 percent of the financing needed."

In the case of Winter Park, it paid $49 million for Progress' transmission and distribution assets. At the same time, Progress will continue to supply the generation. The final price is the byproduct of an arbitration in which the city had initially offered $17 million while the utility had wanted $100 million. The whole deal is the direct result of a "franchise expiration" -- something happening in other parts of the country and something that is forcing other cities to determine if they want to stay with their current providers.

Meantime, Hermiston, Ore., Page, Ariz. and Massena, N.Y. were able to reach settlements with their respective investor-owned utilities. Hermiston negotiated with PacifiCorp in 2001 while Page and Massena worked with Arizona Public Service and Niagara Mohawk in the 1980s. More recent efforts have failed, such as ones in San Francisco that would have given the public utilities board there the right -- but not the obligation -- to take over PG&E's local distribution system.

The reality is that the great majority of these efforts lose steam along the way. Cities learn the takeover costs are higher than originally expected and public sentiment can change. NorthWestern is hoping for that and is trying to fend off a takeover challenge from Montana Public Power -- a bid officially rejected on June 30, 2005. The genesis of the effort is Northwestern's 2002 buyout of old Montana Power's transmission and distribution assets. While that venture has worked out, NorthWestern's foray into unregulated enterprises did not and led to the company's bankruptcy in September 2003.

NorthWestern's Showdown

While the company was in bankruptcy in May 2004, Montana Public Power formed and made a $1.18 billion bid plus the assumption of $825 million in debt for NorthWestern Corp. By November 2004, however, NorthWestern had emerged from bankruptcy and was well into the process of selling its non-utility assets. At the point in time of its emergence from Chapter 11, the company's debt holders became its shareholders when the company distributed new shares.

According to Roger Shrum, spokesman for the Sioux Falls, S.D.-based utility, the company has been performing extremely well and is ahead of schedule in terms of anticipated debt reduction. At the same time, customer service has never been better. To prove the point, he says the company's stock stood at $24 when it emerged from bankruptcy and today it is about $31 a share.

Montana Public Power offered $32.50 on April 28 when NorthWestern's stock was priced at $28 a share. NorthWestern formally rejected that offer in June. In a statement, however, Montana Public Power says that the decision is not in the best of either NorthWestern's shareholders or the communities it serves and says that the buy-out efforts will continue. The electric rates it would offer would be competitive, it adds, because the bonds to finance any deal would be tax-exempt. At the same time, the entity needs to just recover a slight margin beyond its cost of debt.

Opponents counter, however, that the takeover costs are higher than what would be permitted to pass on to customers. Furthermore, if Montana Public Power would be successful in its takeover attempt, "its debt would be owned by New York bankers and not by the people of Montana," says Shrum. "The ratepayers would have no holdings. All the increased debt to pay for the business would be on their citizens' shoulders." If the bid is approved, Standard & Poor's says that the entity's bond ratings could be reduced from its current BB level.

While some high profile municipalization efforts have made the news, there is not a wave of such announcements across the United States. The driving impetus behind the recent spate of hostile takeovers is that the municipalities have questioned whether their incumbent utility providers have been doing a good job, says Barry Moline, executive director of the Florida Municipal Electric Association. If electric rates, customer service and reliability are in question, then any hostile bid may be a natural off-shoot of that.

Many Complexities

In many cases, Moline says that resolutions are possible if the stakeholders feel their needs are going to be met. That's true whether it is cities examining a buy-out of investor-owned utilities or whether it is investor-owned utilities trying to take over a municipality. The vast majority of both municipalities and investor-owned utilities excel at servicing customers, he says, but sometimes such service is considered substandard.

"There are anecdotes and isolated incidents involving all different types of aggressive bids," says Moline. "It's not a trend. It's a warning shot. You need to make sure you are within the range of good customer service for every aspect of your operation."

Competition, of course, creates efficiencies and usually leads to better prices and superior customer service. By contrast, complacency can do irreparable harm. It's a free country and any entity has the right to make a bid for another. And such forays do keep companies and their boards on their toes -- something that has the potential to create a healthy result. Toward that end, municipalities have every right to look into whether it is possible and in the interest of their citizens to buy out an investor-owned utility.

But, if history is any indication, the results of such endeavors are long and costly and the burden of that falls to the citizens of those communities. As cities come to realize the true price tag as well as the complexities of such take-over efforts, the enthusiasm to carry them out oftentimes wanes.