How electric bills subsidize Delaware budgets

A typical residential customer in Newark pays a monthly electricity bill of about $153. But hop across the border to an area served by Delmarva Power, and the same usage generates a bill of $135.

Why the discrepancy?

Because Newark is one of nine municipal-owned electric services in Delaware, an arrangement that gives local officials complete control to set rates without outside oversight.

Clayton, Dover, Lewes, Middletown, Milford, Newark, New Castle, Seaford and Smyrna have a total of about 66,000 accounts, or 13 percent of electric customers in the state. The agencies are part of the Delaware Municipal Electric Cooperative, which produces power for some of its members and buys the rest from other sources, including the PJM Interconnection, an electrical grid covering 13 states.

The power then is resold to customers at a higher rate, generating a surplus. For officials, the system means a steady source of revenue that goes directly into municipal coffers, money that can be used to help general funds and avoid property tax increases, budget cuts or reduced services.

In the current budget cycle, electric bills subsidized about 40 percent of non-utility, general fund needs in Newark and 28 percent in Milford. In Middletown, the amount was 37 percent, with property taxes paying for 8 percent.

This year, Dover tapped $10 million from electricity receipts for budget needs – nearly $1 for every $4 spent on all government services.

The rates are noticeable to Robert Pancake, CEO and operating officer of High 5 Hospitality, which owns six Buffalo Wild Wing restaurants in Delaware and two in Maryland, along with the Stone Balloon Ale House in Newark.

"It is a substantial difference when I look at just that line item on our profit and loss statement," particularly for sites in Newark and Middletown versus others, he said.

Commercial rates in Middletown ranked in the top 5 percent charged by all municipal, investor-owned and rural cooperative utilities nationwide in 2013, with Clayton close behind. Seaford, Smyrna and Newark were in the top 10 percent, according to the most-recent full-year data from the Department of Energy.

Residential rates in Clayton, Newark and Smyrna also were in the top 10 percent, and Seaford, Middletown, New Castle and Dover were in the top 20 percent.

"It is a factor, absolutely," Pancake said. "Are we concerned about it and would we like to see prices stabilize and be more realistic compared to other areas? Yes."

Delaware Public Advocate David Bonar, who represents consumers in front of the Public Service Commission, said the rates are becoming a burden on consumers and the state's economy.

"We still have among the highest retail electricity rates for commercial and industrial customers in the region," said Bonar, who saw the other side of public power as a former Dover City Council president. "As long as they remain high, we're going to have a difficult time attracting new businesses of any consequence to the state."

Gov. Jack Markell in 2012 asked public utilities to rein in charges. Unlike with property taxes, renters and land owners alike pay power bills, and rate amounts and increases often can be overlooked.

"It's been so long since I compared electric bills to any other outside resource that I don't really know what our electric rate is," said Sharon Sedita, 57, one of more than 11,500 residential and business customers in the Newark grid. "I'd say we probably have higher bills."

Clayton is most expensive

Advocates say public electric providers ensure local control and offer lower rates than private companies. Nationally, about 2,000 public power utilities are in operation, with Los Angeles and San Antonio, Texas, being the largest. Maryland has two public power utilities and 22,900 customers. Thirty-six operate in Pennsylvania, serving 26,600, and 37,750 are enrolled in New Jersey's nine municipal providers.

In Delaware, the largest electric provider is Delmarva Power, an investor-owned utility with 276,000 accounts. Parts of the state also are served by the Delaware Electric Cooperative and a number of private, retail utility companies, which in some areas compete for customers searching for the best rate.

Those in the communities with municipal power can't shop around, they must get electricity from the government utility.

Clayton, Newark, Smyrna, Seaford, Middletown and Milford all charged more per residential kilowatt hour than Delmarva Power, according to an Energy Information Administration database for 2013, the most-recent full year available.

Only the Dover system, the largest of the municipal utilities, along with Lewes and New Castle were lower than Delmarva's average revenue per kilowatt for residential service in the same period.

Lewes, which provides electric, water and sewer service through an independent and separate Board of Public Works, defines the transfers to the city as payments in lieu of taxes. The board's charter does not allow the city to collect more than 5 percent of revenues. Board officials in October reported reducing the payments from 2012 levels in a report sent to summarize muncipal compliance with the Markell agreement.

Overall, Delaware's municipal rates occupy spots near the top or in the upper tiers in national comparisons with municipal systems as well as rankings that included investor-owned utilities and cooperatives. According to PJM, the most expensive electricity in the state in 2014, through May, was Clayton, which collected an average 14.893 cents per kilowatt overall, and a state-leading 14.993 cents per kilowatt for residential service.

Seaford led the state for commercial revenues per kilowatt, at 15.156 cents.

Delaware does not limit municipal utility rate increases or how funds are used, unlike other states.

"In some [states], the percentage [reallocated] is capped and regulated, as it would be if it were investor owned. In others, municipalities are pretty much free to do what they choose," said Manuel P. Teodoro, an associate professor of economics at Texas A&M University who has studied and written on the issue.

"Elected officials always find it easier – while they don't enjoy raising utility rates – it's easier to raise a utility rate than a tax, politically," Teodoro said. "It can sometimes take a lot of work, and a very savvy consumer, to trace things and see how much of their energy bill is going into a city's general fund."

Clayton resident Jason Gilliam, 41, was unaware he was paying the highest residential electrical rate average in the state – 15 percent more than the Delmarva average

"Without having a point of reference, the bills seem normal to us," said Gilliam, who lives in south Clayton's Providence Crossing neighborhood. "But then again, we don't know what other people are paying. It's not something we research."

"If our taxes are lower compared to other places and it becomes a wash, that would make me feel a little better that we're not being gouged. But I'd like to know how that money is being used," Gilliam said.

Edward Ratledge, a University of Delaware professor who directs the Center for Applied Demography and Survey Research, said municipal utility operators have come to rely on the revenue stream, which is seen as more tolerable than hiking property taxes.

"It's easier to collect money through electric bills rather than call it a tax, but it's really a tax," Ratledge said.

The system puts those who can't afford energy conservation measures at a disadvantage, he said.

"It hurts poor people worse than anybody," Ratledge said. "It's hardest on the people who can do the least about it. You don't see a lot of poor people putting solar panels on their roof and selling it back to the grid at exorbitant rates."

Newark Finance Director Louis C. Vitola said the city's public utility structure is a public good. He said the fees mean officials avoid increasing property taxes.

"If we didn't have that $10 million to sweep into the general fund, we're talking about a tax increase of $10 million," said Vitola, who previously held the same position in Middletown, "Our [current] property tax is only $5.7 million."

If an investor-owned utility like Delmarva Power provided power for Newark's residents, Vitola said, surplus revenues or profits would go out of town, to investors.

According to Newark's current-year budget document, "our dependence on utility transfers to the General Fund is one that cannot be easily modified without severe service reductions or a great deal of revenue diversity."

Smyrna City Manager David Hugg painted a similar picture. The city tapped $2.3 million from its electric fund for general fund needs this year.

"We try to hold the residential rates, not necessarily the lowest, but not the highest," said Hugg, who also is vice chairman of the Delaware Municipal Electric Corp. "It's no secret that we use our utilities, sewer and electric, as a revenue generator. In most towns, property taxes and transfer taxes just don't cover things like police."

Economic development issue

John Flaherty, president of the Delaware Coalition for Open Government, said municipalities have clear financial and political incentives to lean on electric rates when budgets are tight.

"The more money they can raise from constituencies that might not be aware of what they're paying, the more likely they're going to do it," Flaherty said.

Markell in 2012 told municipal leaders he would oppose legislation that would let customers jump to other electric suppliers, provided utilities agree to control rates and use of surplus revenues. All nine municipal utilities complied with a request to reduce rates.

"The governor had a very candid conversation at the time with several of those municipal leaders," said Mike Barlow, Markell's chief of staff. "They have the exclusive ability to make sales of electricity in their jurisdictions. As a result, there wasn't competition around that."

Barlow said some municipalities still need to provide the Governor's Office with more information about other parts of the deal, including provisions for and use of discount economic development rates, as well as more information about efforts to cap use of surplus electric revenues at 2012 levels.

"For the most part, you have to say, across the board, DEMEC municipalities have done a good job and met their commitments, including, most significantly, to give a residential, commercial and industrial consumer cut in energy costs of 10 percent," he said.

Communities will be asked to provide more information about compliance with the deal, Barlow said, particularly on compliance with the five-year cap on surplus fund transfers to other budget needs.

"We're sensitive to the fact that one of the issues in transferring money is, it's got to come from somewhere," Barlow said.

Seaford Town Manager Delores Slatcher said there are additional costs, presenting new issues.

"We've met the requirements of the memorandum of understanding" with Markell, Slatcher said. "We've lowered our electric rates, which is creating additional costs for us, so we're being challenged with some higher costs as well as reductions in our revenue base."

Bonar and other local officials said that Delaware's rates are pushed up in part by costly regional transmission line bottlenecks that make it harder for public systems to buy and resell lower-cost power.

"We did to some extent try to adjust the rates as much as we could, and I think the city continues to try to work with businesses to make sure the rates are reasonable," Bonar said. "We worked very hard to try to get some movement. The fact remains that industrial and commercial rates are far too high in Delaware."

The same congestion issue now threatens to push Delmarva Power's rates higher under a disputed PJM grid plan to make its customers pay most costs for a $275 million new line that would improve the regional stability of electricity that flows from the Salem/Hope Creek nuclear plant in New Jersey. Markell and others have called the cost-allocation unfair.

Barlow said Markell also recognizes the continuing issue of electricity bills and the risk to discouraging business from locating in the state.

"When they do so expressly to balance the budget, rather than address tax and fee issues [instead], it becomes one of those things that becomes a cost concern for business," he said.

Hugg, the Smyrna official, said there's no question utility bills are a vital source of income. Any change would hurt the community, he said.

"My police budget is on an order of magnitude $4 million a year. We take in $3 million a year on property and transfer taxes," Hugg said. "Just running a police department is a deficit situation if we don't have utility revenues."

Contact Jeff Montgomery at (302) 463-3344 or jmontgomery@delawareonline.com.

Communities with municipal electrical systems