Municipal Utility District (MUD)

Summary: Municipally owned utilities are one model for the provision of public services. Although originally crowded out of the market by privately owned utilities, some municipally owned utilities have begun considering public ownership of their infrastructure in recent years.

Municipal utilities are a subset of publicly owned utilities that are owned by local governments. Other types of publicly owned utilities include public utility and public power districts, state authorities, irrigation districts, and joint municipal action agencies. In contrast to investor-owned utilities, which are private companies driven by a profit incentive, publicly owned utilities are nonprofit entities charged with the provision of at-cost services to their customers. Regardless of ownership, entities that maintain the infrastructure for and provide public services such as electricity, natural gas, water, and telecommunications are referred to as public utilities. Public utility is a general term that can also refer to the public service provided.

According to the US Energy Information Administration, there are about 2,000 publicly owned electric utilities in the United States. Municipal electric utilities typically purchase power on the wholesale market and provide distribution and billing services to customers in their service area, although some of the larger ones also own generation and transmission resources. There are municipal utilities in each of the 50 states with the exception of Hawaii, although the highest concentration is found in the midwestern and southeastern states.

Like other publicly owned utilities, municipal utilities are tax-exempt public entities that have the ability to issue debt in the form of tax-free bonds to finance the construction of public infrastructure projects. They are financed from municipal treasuries. Most municipal utilities are overseen by a board of directors or commissioners, which is elected independently of local government.

A municipal utility district (MUD) is a special type of district that functions as an independent, limited government. MUDs often are established in areas that are remote from public utilities as a way to provide water, sewer, and other utilities to people who live there.

History

Most of the existing municipal utilities were established in the United States in the late 1800s or early 1900s, when the use of electric power first became widespread. At that time, they primarily provided street lighting and trolley services. Initially, electric generating facilities had to be located near the customers they served, and electric power companies—if not municipally owned—had to obtain a franchise from the municipality in which they operated. As technology evolved and electricity could be generated in larger quantities and transmitted over longer distances, regulation of public utilities passed largely to state commissions or departments.

Private electric companies became more efficient and steadily crowded out municipal utilities from the market during the first three decades of the twentieth century. By the mid-1930s, the federal government had begun to regulate private power, largely through provisions described in the Public Utility Holding Company Act of 1935 (PUHCA). During this period, the federal government also began to expand its generation and supply of power to public and cooperative utilities.

Public utilities have historically been understood to be natural monopolies, a term that denotes an industry in which production by multiple companies is more costly than production by a single company. This definition is based on the high cost of infrastructure required to provide the product, in this case electricity, which means a single company has decreasing average costs to serve each customer as its customer base expands. This view was perpetuated during the early growth of the utility industry, in large part by politically powerful utility managers who wanted to protect their industry from competition. This created an effectively closed system of vertically integrated utility companies with the legal right to operate as natural monopolies, also referred to as the “utility consensus,” which remained unchallenged for several decades.

During the 1970s, a number of factors called into question the legitimacy of this assumption, including technological stasis in the equipment the vertically integrated monopolies used to generate power on a large-scale, centralized basis; technological advancements in small-scale power generation; and an increasing public awareness of environmental issues that called into question the fundamental assumption that utilities were responsible only for providing the most electricity at the lowest cost. The 1973 energy crisis led to public support for energy efficiency and conservation on the public side, as well as changed popular belief about how utilities should be regulated.

In 1978, Congress passed the Public Utility Regulatory Policies Act (PURPA), a piece of legislation that required the natural monopoly utilities to purchase power from other producers when it could be supplied at lower incremental cost than what it would cost the utility to produce directly. This resulted in a more competitive electric utility industry that was more conducive to the integration of distributed and renewable electric generation.

Regulation of Municipal Utilities

The activities of municipal utilities are not subject to regulation by the Federal Energy Regulatory Commission (FERC), a responsibility that falls instead to the state. Even at the state level, municipal utilities are generally subject to different laws and regulations from those that apply to private, investor-owned utilities. For example, in Massachusetts, municipal utilities are exempt from many of the clean energy mandates required of investor-owned utilities, such as the state renewable portfolio standard (RPS) or the mandate to invest in all cost-effective energy efficiency opportunities.

In many states, a public utilities commission (PUC) or department of public utilities (DPU) is responsible for oversight and regulation of the rates and services provided by privately owned utilities. These were largely established as a result of PURPA, which placed electric distribution companies under state oversight, placed transmission services under the oversight of Independent System Operators (ISOs), and deregulated generation services, thereby creating a competitive market for power suppliers. PUCs and DPUs represent the public interest and work to ensure safe and reliable service at reasonable rates. Their responsibilities include consumer education, policy advocacy, and market development. They are not always responsible for regulation of publicly or cooperatively owned utilities, although they do regulate rates in areas where competitive utility service is not available, regardless of ownership of the monopoly utility provider. Commissioners of PUCs or DPUs are typically chosen through gubernatorial appointment.

Where state regulation and oversight for municipal utilities are minimal, joint-action agencies often step in to serve a similar role. In Massachusetts, the Massachusetts Municipal Wholesale Electric Corporation (MMWEC) is a joint action agency with 20 municipal utility members. MMWEC provides services such as power supply planning, resource development, and support for regulatory compliance and business management. Each individual member of MMWEC is still responsible for providing services directly to their customers but benefits from participation in MMWEC’s services.

The power to enable municipalities to generate and sell their own electricity is reserved by the states. Some states allow the creation of new municipal utilities, a process also referred to as municipalization. Others, such as Massachusetts, may not allow the creation of entire new municipal utilities but may allow municipalities to engage in municipal aggregation. Municipal aggregation is the process by which municipalities aggregate the load of consumers within their borders and secure contracts to serve that load, with the goal of attracting more favorable rates for their constituents. A municipal aggregator acts as an agent representing the consumers’ interest to choose the most competitive supplier, but the aggregator itself does not supply power. In some cases, state agencies such as the New York Power Authority (NYPA) act as power wholesalers to municipal utilities.

Proponents of municipalization argue that municipal utilities are capable of providing a higher level of service at lower rates. This argument is made complicated by the subsidies paid to existing municipal utilities—which may overemphasize the lower cost burden perceived by customers of municipal utilities—as well as by the fact that the newly created municipal utilities enter a much different market from the one existing utilities experience. Many existing municipal utilities have been around since their municipality began using electric power and had much lower costs of acquiring infrastructure than would a community today negotiating the purchase of distribution assets from an existing private utility provider. In many cases, these early municipal utilities have been grandfathered into exemptions from new regulations, which has kept their operating costs lower than they would be otherwise. However, additional benefits, such as more responsive customer service tailored to a specific community, make municipalization a compelling prospect for many local citizen groups.

Clean Energy

In recent years, municipal utilities have begun to provide renewable energy and energy efficiency services to their customers. Some municipal utilities fund these programs by enacting a small surcharge on their customers’ bills, also known as a system benefits charge (SBC). This money is put into a fund used to finance energy efficiency and renewable energy initiatives led by the utility; it may also, or alternatively, be rebated back to the customers through energy-efficient appliance and retrofit rebate programs. Another option is for municipal utilities to offer voluntary “green choice” programs, in which customers can pay a higher rate in order to purchase renewable energy. These additional funds are often used to finance distributed generation projects that are owned by the municipal utility and feed their power mix.

Bibliography

"Forming a Public Power Utility." American Public Power Association, www.publicpower.org/forming-public-power-utility. Accessed 5 Aug. 2024.

Hirsh, Richard. Power Loss: The Origins of Deregulation and Restructuring in the American Electric Utility System. Boston: MIT Press, 1999.

Public Utility Commission of New Hampshire. “About Us.” www.puc.nh.gov/Home/aboutus.htm.

Public Utility Commission of Ohio. “About Us." puco.ohio.gov/about-us.

"What Are MUD Taxes in Texas? What Homeowners Need to Know About Texas MUDs." Texas Real Estate Source Blog, 28 Nov. 2022, www.texasrealestatesource.com/blog/what-are-mud-taxes/. Accessed 5 Aug. 2024.