Under current state law, municipal electric utilities can take territory and consumers away from electric cooperatives and investor-owned utilities after a municipal annexation, compromising the operations of cooperatives and raising expenses for the remaining members.

By law, electric cooperatives and investor-owned utilities must collaborate and agree to any changes in service territory. However, municipal governments have the authority to expand their boundaries and seize territory without consulting incumbent electric providers.

Your electric cooperative and all of Indiana’s electric cooperatives need your help today.
Take action now at Senate Bill 309 – Preserving Co-op Members and Territory.

THE PLAYERS

Three types of utilities provide electricity in the state:

• Electric cooperatives. Independent, democratically governed not-for-profit businesses owned by individuals and businesses to which they provide power. Indiana’s 38 electric cooperatives serve members in 89 of the state’s 92 counties. Electric cooperatives serve approximately 80 percent of Indiana’s geographic area but less than 20 percent of the state’s population. Electric cooperatives serve an average of eight members per mile of line.
• Investor-owned utilities. Owned by shareholders that include institutional investors and individuals, including many company employees. The state is served by five IOUs in 91 of the 92 counties. IOUs nationally average 34 customers per mile of line.
• Municipal utilities. Owned by local governments, Indiana has 72 municipal utilities that serve their designated city or town. Municipal utilities nationally average 48 customers per mile of line.

THE HISTORY

• 1980. The Indiana General Assembly created electric service boundaries to “encourage the orderly development of coordinated statewide electric service.” This state law allowed municipal electric utilities to take territory and consumers from others, but they were required to justify the benefits of such actions in a hearing before the Indiana Utility Regulatory Commission before receiving approval.From March 1980 to June 2002, there were 74 cases in which municipal electric utilities took territory and consumers from electric cooperatives and investor-owned utilities.

• 2002. State law is changed to remove the requirement to justify the appropriation of territory and consumers. Changes also include compensation consideration for loss of revenue and consumers based on a five-year formula. At the time, annexation activity was believed to be occasional and the loss of service territory was expected to be minimal. Since June 2002, there have been 85 cases in which municipal electric utilities have seized territory from cooperatives and investor-owned utilities.

Electric cooperatives and IOUs have lost more than 23 square miles of electric service territory to municipal electric providers, most of which was primed for economic development opportunities.

Indiana Code (state law) is available at the state’s website: http://iga.in.gov/legislative/laws/2014/ic/titles/008/articles/001/chapters/2.3/#section-6

THE IMPACT

When municipal electric utilities seize territory and households, they force a higher portion of a cooperative’s expenses on every remaining member. Because they can choose what they take inside a newly annexed area, municipal electric utilities often cherry-pick large commercial and industrial members and areas already primed for development by the local cooperative.

Cooperatives and members are shortchanged in many ways by this arrangement.

• Higher costs. Remaining members must bear a greater share of the fixed operating costs. Fewer members are available to cover infrastructure and generation costs when a territory is reduced in size. This is especially detrimental to members of not-for-profit electric cooperatives.
• Future uncertainty. It is difficult for the incumbent utility to wisely plan for economic development in areas neighboring a municipal utility because the territory is so easily seized.
• Inadequate compensation. The current compensation formula is insufficient to offset the losses incurred. It does not meet fair market value for the lost potential revenue and the capital already invested in infrastructure.

The compensation is calculated using three factors:

• Value of the facilities taken, with no premium.
• The greater of two amounts on the seized territory:
  • Value of the utility’s facilities, or
  • 2.5 times one year’s current annual revenue in that territory.
• Payment for each additional member (customer) added to the seized territory within the first five years following annexation. The compensation is based on the amount of the average monthly bill and is limited at $170 per month, regardless of the type of customer (residential, commercial or industrial).

An example:
A medium-sized manufacturing facility locates in a newly-taken territory. Its average monthly bill is $10,000, or $120,000 per year. The maximum compensation to the co-op under this formula is $170 per month, or $2,040 for each of the five years –- $10,200 over the five-year period. However, that compensation is less than one-fifth of the revenue that is now going to the municipality – an annual difference of $109,800 or $549,000 over five years.

This represents the impact of just one industrial user.

THE SOLUTION

Indiana law should be amended to preserve existing electric service boundaries, regardless of future annexations. This legislation will be considered in the Indiana General Assembly during the 2015 session.

Currently, municipal electric utilities have the unique ability to take territory and consumers from electric cooperatives and investor-owned utilities after an annexation. Removing this advantage is the only way to preserve affordability and protect the investments of cooperative members.

Outcome of service territory preservation

• Preserving electric cooperative and investor-owned utility territory encourages utility providers, municipalities and community partners to work together to reach outcomes that promote fairness and affordability for every ratepayer in Indiana.
• Every electric utility could more wisely and safely plan for economic development and infrastructure investments without the threat of losing territory and investments to municipal electric utilities.
• Most importantly, the preservation of electric service territories protects the affordability of electricity for all Hoosiers.

Effect on economic development
Indiana’s electric cooperatives support economic development and a community’s ability to grow.

• In most areas outside cities and towns, economic development and business growth are dependent on access to water and sewer services. The areas being taken under this law already have access to electric service through their local cooperative or investor-owned utility. It is not necessary for the electric service territory boundaries to change following an annexation.
• Preserving electric service territory by changing this law does not impair a municipality’s ability to annex or extend any other services.
• Any growth experienced by the electric cooperatives and investor-owned electric utilities is the result of wise economic development work within their own service areas. These investments in economic development and infrastructure should be valued and preserved under state law.

Many will benefit
Every cooperative member in Indiana is affected by this law, including members of the generation and transmission cooperative, which is owned by local electric cooperatives to generate, transmit and sell electric power wholesale to its members. Wabash Valley Power, based in Indianapolis, serves 19 member cooperatives in Indiana. Bloomington-based Hoosier Energy serves 17 Indiana cooperatives.

View the map of local electric cooperatives at risk of losing territory. 

Four of the five investor-owned utilities in Indiana also are at risk. Duke Energy, NIPSCO, Indiana Michigan Power and Vectren share territory boundaries with municipal electric utilities.

Contact your legislator
This legislation will be considered in the Indiana General Assembly during the 2015 session. Please contact your local legislator and encourage him or her to support the amendment to preserve existing electric service boundaries, regardless of future annexations. Find your local legislator online at District.IGA.IN.gov.

Other resources
Power Grabs: Municipal electric utilities pounce on primed and promising co-op territories, January 2015 Electric Consumer
Service Territory Preservation Fact Sheet