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NBSIR 75-721

Economic Objectives of Utility

Companies and Developers in

Evaluating a MIUS

Brit Jeffrey Bartter

Building Economics Section, 463.02

Technical Evaluation and Application Division

Center for Building Technology

National Bureau of Standards

Washington, D. C. 20234

November, 1975

Final Report

Prepared for "division of Energy, Building Technology and Standards

>fflce of Policy Development and Research

department of Housing and Urban Development

k/ashington, D. C. 20410

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NBSIR 75-721

ECONOMIC OBJECTIVES OF UTILITY

COMPANIES AND DEVELOPERS IN

EVALUATING A MIUS

Brit Jeffrey Bartter

Building Economics Section, 463.02

Technical Evaluation and Application Division

Center for Building Technology

National Bureau of Standards

Washington, D. C. 20234

November, 1975

Final Report

Prepared for Division of Energy, Building Technology and Standards

Office of Policy Development and Research

Department of Housing and Urban Development

Washington, D. C. 20410

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U.S. DEPARTMENT OF COMMERCE, Rogers C.B. Morton, Secretary

James A. Baker, III, Under Secretary

Dr. Betsy Ancker-Johnson. Assistant Secretary for Science and Technology

NATIONAL BUREAU OF STANDARDS, Ernest Ambler, Acting Director

Preface

This report was sponsored by the Department of Housing and Urban Development (HUD) under the Modular Integrated Utility Systems (MIUS) Program, and it was administered by the MIUS team at the National Bureau of Standards (NBS)

.

Dr. Harold E. Marshall, Section Chief, Building Economics Section, NBS, provided the immediate supervision and guidance to the author. In addition, both

Dr. Marshall and Mr. John Ryan, Assistant Project Manager of the NBS-HUD-MIUS

Team, assisted with valuable suggestions and criticisms during the research and

review phases of this report. A complete draft was prepared by Mr. Bartter

before his departure from NBS in 1973. Mr. Joel Levy of the Building Economics

Section and Mr. Steve Webber of the Office for Energy Conservation handled the

final writing and editing of the paper in the author's absence. Special thanks

must be given to the persons listed in Appendix B, without whose generous time

and information this report could not have been written. Finally, recognition

is due to the secretaries of the Building Economics Section for their patient

and conscientious t3rping during several drafts of this report and other members

of the Building Economics Section for technical reviews.

The Department of Housing and Urban Development (HUD) is conducting the

Modular Integrated Utility System (MIUS) Program devoted to development and

demonstration of the technical, economic, and institutional advantages of

integrating the systems for providing all or several of the utility services

for a community. The utility services include electric power, heating and

cooling, potable water, liquid waste treatment, and solid waste management.

The objective of the MIUS concept is to provide the desired utility services

consistent with reduced use of critical natural resources, protection of the

environment, and minimized cost. The program goal is to foster, by effective

development and demonstration, early implementation of the integrated utility

system concept by the organization, private or public, selected by a given

community to provide its utilities.

Under HUD direction several agencies are participating in the HUD-MIUS

Program including the Energy Research and Development Administration, the

Department of Defense, the Department of Health, Education and Welfare, the

Environmental Protection Agency, the National Aeronautics and Space Administration, and the National Bureau of Standards. The National Academy of Engineering has provided an independent assessment of the Program.

This publication is one of a series developed under the HUD-MIUS Program

and is intended to further a particular aspect of the program goals.

Drafts of technical documents are reviewed by the agencies participating

in the HUD-MIUS program. Comments are assembled by one of the agencies into

a Coordinated Technical Review. The draft of this publication received such

a review and all comments were resolved with HUD.

i
Table of Contents

Page

PREFACE i

LIST OF FIGURES iii

LIST OF TABLES ill

EXECUTIVE SUMMARY 1

1. INTRODUCTION 2

2. ECONOMIC OBJECTIVES OF UTILITY COMPANIES AND DEVELOPERS 3

2.1 RESEARCH METHODOLOGY 3

2.2 CLARIFICATION OF TERMINOLOGY 3

2.3 THE UTILITIES o 5

2.4 THE DEVELOPERS , . . . 12

2.5 IMPLEMENTATION OF A MIUS 15

3. CONCLUSIONS AND SUGGESTIONS FOR FURTHER RESEARCH 23

3.1 CONCLUSIONS 23

3.2 SUGGESTIONS FOR FURTHER RESEARCH 23

APPENDIX A: CHANGES IN ELECTRIC POWER PRICES: IMPACT ON MIUS 25

APPENDIX B: LIST OF INTERVIEWEES 29

APPENDIX C: FLOW CHART OF MIUS DECISION PROCESS 32

SELECTED BIBLIOGRAPHY 35

ii
List of Figures

Figure Page

A-1 Regulated Monopoly: Average Cost Pricing (Appropriate for

1930 to 1968) 26

A-2 Regulated Monopoly (Appropriate after 1968) 27

List of Tables

Table Page

2.1 The Electric Power Industry: 1970 Generating Systems 4

2.2 Types of Developers and Examples of Developments Potentially

Suitable for a MIUS 6

2.3 Summary of Economic Criteria Relevant to Each Participant

In the Evaluation of a MIUS 8

2.4 Mechanisms and Means by which Participants Assume MIUS Roles 16

2.5 Likelihood Ranking of Methods of Implementation of a MIUS

with Development Examples 17

iii

EXECUTIVE SUMMARY

This report provides information from an initial investigation to the

Department of Housing and Urban Development-Modular Integrated Utility System

(HUD-MIUS) program about the economic decision-making process for implementation of a MIUS by utility companies, developers, and a combination of these

two groups.

Five participants and three roles are identified. The private utility

company, the public utility company, the private speculative developer, the

private non-speculative developer, and the governmental developer are the

participants; and the initiator, owner and operator, and ultimate consumer are

the roles they might play.

Information was obtained through informal telephone interviews from these

participant groups about their economic analysis of utility investment alternatives. The content of these conversations was synthesized into economic

criteria (see Table 2.3) which are perceived by each participant to be most

important in evaluating alternative utility investments. From the analysis of

these economic criteria and without reference to any legal barriers, the possible combinations of participants and roles in the implementation of a MIUS

are specified. These combinations are ranked, according to the degree of likelihood that each method will actually be employed, in Table 2.5.

The conclusions of the interviewer were that MIUS is most likely to be

implemented by a governmental body, such as a municipal utility or governmental

developer. It seemed to the interviewer less likely that MIUS would achieve

market acceptance and implementation in the private sector given the existing

institutional structure and no special incentive supplied by the government.

1
1. INTRODUCTION

This project is intended as a preliminary analysis of the decision-making

criteria that utility companies and developers might use in an economic evaluation of a Modular Integrated Utility System (MIUS) project. The MIUS program

is sponsored by the Department of Housing and Urban Development (HUD) and is

designed to provide improved community utility services. The MIUS system integrates into a single facility the essential utility services of electric power,

space heating and cooling, potable water, and liquid/solid waste treatment.

Other agencies cooperating with HUD in the program are the Energy Research and

Development Administration (ERDA) , the Environmental Protection Agency (EPA)

the National Aeronautics and Space Administration (NASA) , Department of Defense

(DOD) , Department of Interior (DOI) , Department of Health, Education, and

Welfare (HEW) and the National Bureau of Standards (NBS) . The National Academy

of Engineering (NAE) , under contract to HUD, has established the Integrated

Utility Systems Board (lUSB) to provide an independent assessment of the program.

The scope of this study is relatively narrow. For example, neither

technological nor legal barriers are discussed, both of which could be important in the adoption and implementation of a MIUS. Its purpose is to provide

a perspective to the officials at HUD responsible for implementation of the

MIUS program that will give them a view of the effect on entry into the program

of the economic interest of potential participants in MIUS, like utility com- panies and developers.

Chapter 2 is divided into five sections. Section 2.1 gives a brief description of the research method used to obtain information. The identification of the participants and their roles in a MIUS evaluation and implementation are explained in Section 2.2. Sections 2.3 and 2.4 give a brief

review of the overall operating philosophies and specific economic criteria

used by the utility companies and the developers respectively. Section 2.5 uses the information presented in this study to determine the most likely

method of implementation for a MIUS. Chapter 3 provides conclusions and makes

suggestions for further research.

Appendix A describes graphically and verbally how the prices of utility

services vary under changing demand and supply conditions. Appendix B lists

the interviewees who contributed the information for this report, and Appendix

C describes a flow chart that gives a starting point for additional study of

the economic and non-economic decision processes affecting the implementation

of a MIUS.

2
2. ECONOMIC OBJECTIVES OF UTILITY COMPANIES AND DEVELOPERS

2.1 Research Methodology

Informal oral interviews by telephone and by direct contact were the

research techniques used in this study. No reference is made to individual

conversations in the presentation of investigation results. Rather a synthesis

of the opinions expressed in the interviews has been presented. (See Appendix

B for a listing of the persons interviewed.)

The project progressed in the manner referred to by Coleman"^ as "snowball"

research, s'o named because initial leads suggest additional sources of information. Thus a chain of contacts is generated. The principal bias of this

method is that the information obtained is greatly influenced by the earliest

contacts and their familiarity with the subject as well as their network of

acquaintances and their implicit prejudices. However, an attempt is made to

draw useful insights from the small sample of interviewees, and the spectrum

of thought concerning the MIUS alternative which they present.

2.2 Clarification of Terminology

To discuss a MIUS alternative clearly and effectively, the participants

and the roles they might play in a MIUS decision process should be identified.

There are essentially five potential participants:

1. The private utility company (Up),

2. The public (municipal) utility company (Ujjj)

3. The private (non-governmental) speculative developer (Dpg)

4. The private (non-governmental) non-speculative developer (Dp^g) , and

5. The public (governmental) non-speculative developer (Dg)

The private utility company (Up) is considered to be an investor-owned

electric power generation firm. It was initially assiomed that since the

private utility segment of the electric power industry accounted for 77% of

the electricity produced in the United States, this group would be the best

market for the MIUS alternative. As the interviews progressed, however, this

view changed.

The public utility company (U-^) is a municipally-owned utility facility

which may provide the community with water and sewage treatment, solid waste

disposal, and in some cases electric power and/or steam. Table 2.1 shows the

breakdown of electric generating capacity into private (investor-owned), public,

federal, and cooperative power systems.

Developers are engaged in the development of some private and/or public

projects.^ They are faced with the need to purchase a source of one or several

utility services from a utility company. Either conventional utilities may be

James S. Coleman, "Relational Analysis: The Study of Social Organizations with Survey Methods," Human Organizations , XVII (4, 1958) pp. 28-36.

Also, George J. McCall and J.L. Simons, Editors, Issues in Participant Observation: A Text and Reader . (1969)

2Housing and non-housing developers are included.

3
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used or negotiations may be Initiated by either the utility or the developer to

build an on— site or off— site MIUS plant. Falling that, some developers might

undertake a MIUS on their own.

Developers can be classified In two ways. First, their legal operating

status may be either non-governmental (private) or governmental (public)

Second, their capital commitment to the development may be either speculative

(Investment-f or-profIt oriented) or non-speculative (owner-utilized and operated) . Speculative projects tend to have short-term capital commitments with

minimum Initial costs and high rates of return. Non-speculative projects are characterized by the Intent of the developer to use (In most cases occupy)

and be responsible for the operation and maintenance of the project over the

long run. Using these distinctions, a four-celled matrix of the types of

developers and examples of developments can be made as shown In Table 2.2.

The examples given do not exhaust the many types of developments. They are Intended simply to give a perspective of the possibilities.

The three principal roles relative to a MIUS alternative which these

participants may assume are:

1. The Instltutor of a MIUS.

2. The owner and operator of a MIUS.

3. The ultimate consumer of utility services provided by a MIUS.

The Instltutor is the organization which assumes the burden of obtaining

the financing, selecting the site, choosing the builder, and integrating the

available multi-utility expertise. In this role the participant is responsible

for all of the technical, legal, and economic details which must be coordinated in order to bring a functioning MIUS plant into existence. The owner

and operator is the person that assumes the day to day operations, maintenance,

accounting, and decision-making associated with providing the three, four, or five utility services included in a MIUS. It is conceivable that the owner and

the operator could be different participants, but this paper assumes they act

as one. The ultimate consumers in the MIUS network are the users of the

utility services.

2.3 The Utilities

Utility companies today are highly specialized, decentralized operations

whose main interest is providing their utility service to meet their particular service demand and promote the growth of their firms. The companies are,

for the most part, singular in function and it was the interviewer's impression based on the responses he received to his questions that they would be

reluctant to undertake a business venture which, albeit in a utility service

industry, is in reality quite foreign to them. Electric utilities know little

about the solid waste collection and disposal business. Yet utilities can

be expected to behave in a rational economic manner. If it can be demonstrated

that a MIUS is compatible with their present objectives and that it will provide economic rewards, then they might be interested in considering it as an alternative to simply providing their single service with conventional techniques. This conclusion is valid for both private and public utilities, but

differences in their philosophies and objectives do exist and will be noted

when the specific economic criteria are discussed.

5
TABLE 2.2

TYPES OF DEVELOPERS

AND EXAMPLES OF DEVELOPMENTS

POTENTIALLY SUITABLE FOR

A MIUS

Capital Coimnitment

Speculative Non-Speculative

L (Dpns^

e Non-Governmental Apartment Complex University

Research Complex

g New Town Apartment Complex

(Private) New Town

a Shopping Center Shopping Center

Industrial Complex

1 Tourist Complex

Medical Complex

S

t Governmental Public Housing

Military Complex

a State Institution

(Public) No Examples (prison, university)

t Medical Complex

Isolated Rural

u Community

s Municipality

These symbols are defined at the beginning of Section 2.2.

6
The following discussion treats objectives of the utilities as they were

explained to the author by practitioners In the field. Appendix A provides a more detailed explanation of the economic constraints on utilities and a theoretical discussion of the causes of changes in electric power prices over time.

Control is one of the objectives of private and public utilities. Control may be thought of as the jurisdictional authority of a utility company

to provide a particular service to a specific region without direct competition. As long as none of this monopoly power is lost, MIUS may be attractive

to the utilities. Control is lost if developers "go it alone" and construct,

own, and operate an on-site MIUS independent of utility company Involvement.

Utilities might be expected to oppose self-sufficiency of developers for any

utility service.

The economic criteria that comprise the objective function of utilities

in evaluating alternative investments such as a MIUS are listed in Table 2.3.

This table summarizes the principal economic factors in the MIUS decision process and matches them to those participants who give those factors significant

consideration in their analysis. Municipal utilities and governmental developers tend to regard the same set of criteria as relevant, and all of the private operators (U , D , and D )^ tend to regard a certain set as relevant.

Several factors a?e a?io shown^common to all participants. The remainder of

this section will explain the criteria that pertain to private and public

utilities, and Section 2.4 will discuss the criteria that pertain to each

developer.

Throughout the economic evaluation of a MIUS in comparison to conventional utilities, it must be remembered that the comparisons should be made using

aggregate data for up to five different utility systems against the data of a single MIUS.

The rate of return on an Investment is defined as the discount rate which

equates the present value of the stream of benefits to that of the stream of

costs. Utilities are concerned that a MIUS meets their required or "hurdle"

rate of return. Rate-of-return techniques do not always yield a unique rate

of return. Despite this drawback, this method of evaluation is almost universally computed in Investment analysis, and though no consensus was obtained

among the utilities surveyed for this report, a range of 6-20% was found as the desired minimum rate of return.

Financial measures are Important to utilities because they give an idea

of the present financial position of the firm. Liquidity measures are computed

to estimate the likelihood of the firm being able to meet its fixed obligations

and its ability to generate cash. Once a firm has examined its present financial

It would seem that all participants would give consideration to practically all of the criteria, but an attempt has been made here to indicate those

which the participants themselves in the interviews on which this report is

based have pointed out to be most significant to them.

2These sjnnbols are defined at the beginning of Section 2.2.

7
TABLE 2.3

SUMMARY OF ECONOMIC CRITERIA RELEVANT TO

EACH PARTICIPANT IN THE EVALUATION OF A MIUS

Criteria Up Urn D

pns

a

Rate of Return X X X X X

Financial Measures X X X X X

Life-Cycle Cost X X X X

Capital:

Amount of Commitment X X X X X

Duration of Commitment X X X X X

Availability of Financing X X X X X

Prevailing Interest Rates X X X X X

Location and Nature of

Development

Heat Balance X X X X X

Size X X X X X

Tax:

Property X X X

Income X X X

Depreciation Schedule X X X

Investment Tax Credit X X X

Availability and Cost of Labor X X X X

Reliability X X X X

Development Lifetime X X X X

Environmental Quality Standards X X X X X

Competitive Advantage X X X

Rate Structure X X X X X

Security Prices:

Stocks X X X

Bonds X X X X

Installation Time X

These symbols are defined at the beginning of Section 2.2.

8
status, it is then able to evaluate potential additional investments clearly

in light of these facts. Although financial measures provide useful information, they are insufficient when used alone to judge the firm's ability to

undertake new ventures.

Life-cycle costing of investment alternatives provides a very useful

measure of comparison. With this technique all relevant cash outflows throughout the lifetime of the project, including initial investment costs, operation

and maintenance costs, and replacement costs are computed and discounted by

some appropriate discount rate to determine a present value. Present value

techniques provide answers which contain a high level of information regarding

the magnitude and timing of benefits and costs relevant to an investment.

Utilities often use in their decision-making the rule of selecting the alternative with the lowest life-cycle cost. (Sometimes this is referred to in the

industry as minimizing the revenue requirements.)

The financial climate can significantly influence the utilities willingness

to implement a MIUS plan. The amount of the initial capital commitment and

the availability of financing for the balance of the cost of each investment

alternative are important economic criteria. Utilities, like most investors,

seek to commit as little capital as possible."^ In addition, financial institutions or investors in the market must be found that are willing to own (that is,

supply the majority of the necessary capital for) each alternative investment,

including a MIUS. Closely related to this is the interest rate (the cost of

credit) and the duration of capital commitment. Tight credit may make certain

investments impossible. The possible methods of financing available to private

utilities are mortgages, stocks, and bonds. (Federal incentives may also be

offered via financing assistance.)

Municipalities differ from private companies in that bonds offer municipalities financing at a much lower cost than the methods available to private

utilities. Through the issue of long-term, tax-exempt bonds, municipal utilities have a powerful instrument for financing.

The location and nature of a development involve considerations with

significant economic impact that should be taken into account in a decision

whether or not to select a given MIUS alternative. For example, the location

and nature will often determine whether a development satisfies the requirements of a proper heat balance. Heat balance here refers to the amount of

heat needed for space heating and air-conditioning relative to the amount

available as a recovered by-product from electrical generation. Many commercial and industrial plant operations have a more uniform heat requirement than

do residential developments. Hence, the inclusion of building areas for commercial application in a MIUS development would decrease the importance of the

seasonal considerations related to heat balance.

'The relation of the perceptions of the persons interviewed, which are reported here, to the Averch-Johnson argument that under certain conditions a firm in an industry where rates of return are regulated will overinvest in

capital in order to increase its allowed returns is not pursued here. A con- siderable literature has developed on the subject since the appearance of

H. Averch and L.L. Johnson "Behavior of the Firm Under Regulatory Constraint,"

American Economic Review, Vol. 52 No. 5 (December 1962), pp. 1052-69.

9
The nature of customers' needs and the degree of flexibility required by

foreseeable changes in needs of the development is another important consideration. Developments which most closely approach having a known constant demand

for utility services seem best suited for a MIUS system independent of utility

grids

Another important consideration with direct economic implications is the

size of a MIUS installation. The necessary size for economies of scale should

be computed for each of the utility services offered in a MIUS package. Megawatt generating capacity and British Thermal Unit heat demand are often used

as the measurement units in size determination. Discussions which the author

had with persons in utility companies suggest that a capacity from 15 to 20

megawatts was the minimum size for an economically feasible MIUS, and the

complete range of possible plant sizes went from 3 to 300 megawatts. No data

were recorded for the necessary British Thermal Unit demand. It is though

that a MIUS plant of optimal size requires the use of fossil fuels. Therefore,

one consideration is to have the development near or have available for it a source of clean-burning fossil fuel at a reasonable cost.

If the development has no conventional utility systems available (e.g.,

a new town or an isolated area) a MIUS may be ideal to meet the needs of that

development. On the other hand, if a development (e.g., an established city)

already has an operating utility infrastructure, this would probably result in

the utility company's decision against a MIUS due to the possibly prohibitive

costs of redoing the distribution system.

If utilities services are unavailable for institutional reasons, (a local

sewer moratorium) then the utility company might be biased toward providing a MIUS plant.

There are several tax considerations of importance to utilities in con- sidering investments. Private utilities are particularly interested in property taxes, income taxes, gross receipts taxes, depreciation, and investment

tax credits. Property tax rates are established by the local government in

which the utility operates and can vary depending on the type of facility that

is built, and where it is built within the region of local jurisdiction. In- come taxes are levied by the state and Federal governments, and they consume

50-60% of utility profits (before tax).

Depreciation plays a significant role in determining the willingness of

utilities to invest in new facilities due to the implicit tax savings. The

depreciable life of a project and the rate of acceleration of the schedule

used are important economic criteria.

The investment tax credit law allows utility companies a A% credit-'- on their state and Federal income tax for equipment purchased with an expected

life greater than 7 years. This forgiveness applies only to the plant and

equipment and not to the land or peripheral buildings. If legislators determined that the MIUS alternative would enhance the national welfare, they could

bias investment toward MIUS by increasing the investment tax credit for MIUS

relative to other utility systems, and thereby subsidize MIUS.

Non-utility companies get 7 or 8% investment tax credits.

10
Public utilities are not concerned about taxes in their decision-making

except as to how their decisions affect the tax rates of local taxpayers.

They also implicitly include tax considerations in their analysis by their

inherent ability to finance through tax-exempt bonds.

The availability and cost of labor for the operation of a multi-utility

plant must be considered. Since MIUS is a new approach to the utility business, most operators, both engineers and semi-skilled technicians, will initially be taken from specialized operations. There will be some costs Involved

in using persons not familiar with all of the utilities included in a MIUS

and with how they coordinate as a single operation. In addition, the negotiations that may be required with organized labor, both within the plant and

within the industry as a whole, to secure contracts that will permit their

members to transcend utility service boundaries could be prolonged and costly.

Perhaps, in the long run, a new labor union would be formed for integrated

utility system employees.

The lack of reliability is based on engineering technology but has potential economic costs. Since the MIUS is a new and complex system, when it is

installed the utility may have to undertake debugging expenses in excess of

those associated with a conventional facility. Repairs may be difficult to

make and costly. With a MIUS the expense of emergency backup services tied

into conventional service systems must be considered. Conventional utilities

might try to overprice these backup services to reduce the competition from

MIUS.

The lifetime of the development project concerns utility companies. Since

a MIUS is not a present transportable, its economic feasibility depends to a large extent on the time period over which possible cost savings can be realized. For this reason utilities must be certain that the development will be

operated for many years. Utilities are wary, because if a MIUS is installed

in a housing development that fails, the company that builds and operates the

MIUS suffers a loss.

The implications of environmental quality standards have economic significance in evaluating investment alternatives. If a MIUS can meet the regulations

of the Environmental Protection Agency at less cost than the aggregate cost of

bringing conventional utilities into compliance, then it may be an attractive

alternative. The potential benefits and costs to society of a MIUS should be

compared with those of a conventional system. Stringent Federal pollution

regulations might encourgage utility companies to build MIUS plants, assuming

they operate with less harmful wastes than alternative plants.

Private utility companies could be interested in a MIUS if it provided

competitive advantage over conventional methods. If from its cost savings,

energy savings, responsiveness to environmental standards, or simply its

uniqueness, a MIUS could bring new revenues to the company, it would be con- sidered as an alternative. Perhaps a utility company that pursued the implementation of MIUS approaches to utility services as a corporate policy could

open up a new market and increase th growth rate of the firm.

Changes in rate structure are important to utility companies. As demand

increases for utility services and the rates for these services go up, a MIUS

11
may offer smaller increases or even decreases in rates to those developers who

receive integrated utility plants. Thus utility companies under these con- ditions might be biased toward the MIUS alternative. Otherwise, developers

might decide to undertake a MIUS independent of the utility companies.

The market prices of stocks and bonds are normally important to a private firm. But since utilities are regulated monopolies, they have little

control over their profit rates, and therefore little control over the market

price of their securities. Only if management is seriously negligent does it

appear that corporate decisions significantly affect stock and bond prices.

Otherwise, these prices are primarily determined by regulatory actions specifically directed at setting the permissible rate of return to shareholders and

debtholders.

These are the major economic criteria that utility companies examine when

evaluating a MIUS against a conventional utility system. Next, the developer's

criteria will be discussed.

2.4 The Developers

Three types of developers were identified in Section 2.2. In the pri- | vate sector of the economy were both speculative (Dpg) and non-speculative

(Dpns) developers. In addition, there was the governmental developer (Dg)

Each of these types differs from the other in their economic objectives.

Therefore, this section will be organized by developer types to highlight

their differences in philosophy and economic criteria for decision-making.

Speculative developers are primarily concerned with getting a quick i return on their investment in the specific development they are promoting.

They are not in the utility business, and they are not interested in diffusing their energies and resources on utilities. Table 2.3 indicates that

speculative developers are concerned only with economic criteria that affect

their short-run-'- involvement in the development project. Thus life-cycle

costing of a possible MIUS investment is less important than the rate of

return, the amount and duration of capital commitment, and any possible bene- < fits or costs due to taxation. It appears that speculative developers seek ' to minimize the first cost of an investment, maximize their short-term return

(at least 25% per annum) , and to skim some excess money out of the financing

package to create some instant cash.^ With respect to taxation, incentives

| must be present for short-run benefits. For example, accelerated depreciation, property tax deductions from the utility system on-site, or investment i tax credit at the non-utility rate of 7 - 8% could be incentives for the

developer to provide utility services.

A proper heat balance is necessary, and the MIUS plant size must meet

the needs of the development. No concern was expressed for the availability

and cost of trained labor or for the long-run reliability of the system. (It

j is recognized that this might be the result of a bias in the interview technique) . Environmental quality effects are dealt with only as absolutely

Short-run in this study is considered from 5 to 7 years.

2This is done by building the development at a cost below the amount

of financing obtained, thereby creating a surplus that may be used to invest

in another project.

12
required by the Environmental Protection Agency. Otherwise, little attention

seems to be given to the national energy conservation objectives that MIUS

may help to meet."'"

Speculative developers would be int erested in a MIUS in some special

circumstances where a utility moratorium prevents them from pursuing their

project. For example, if Montgomery Village, a new town in Maryland, had a MIUS plant that would meet the demands of the projected finished town, the

developers would not be prevented from completing the town as they are today

because of a county sewer moratorium^. Commercial considerations are also

important. If a MIUS can offer the users of the development better, cheaper,

or more reliable utility services than conventional systems, then speculative

developers would be interested in these added marketable features. Aesthetics

are important, and therefore, an on-site MIUS plant would be desirable only if

it were carefully designed and placed to be as unobtrusive as possible. Finally, a major consideration among speculative developers is the time lag involved in getting utility services installed. If a MIUS requires a longer

time to become fully operational for a development than connecting with con- ventional systems, then the speculative developers may not be willing to absorb

the additional delay.

In summary, speculative developers will be reluctant to adopt a MIUS with

their limited resources and against the wishes of utility companies unless

good quality, guaranteed, reasonably priced services are not already available

locally. To be attractive, a MIUS must provide utility services that are quicker, cheaper, and less risky than services provided by conventional alternatives.

Private, non-speculative developers i^^pj^a) exhibit the economic objectives

of a typical firm in perfect competition.-^ Their analysis of alternative investments, such as a MIUS against a conventional utility, will reflect their

underlying primary objective of maximizing long-term profits.

Financial analysis is pursued in a more sophisticated manner than for

either private speculative or governmental developers due to the Inherent

pressures of competitive operations. Life-cycle costing of all the relevant

cash flows, the rate of return, and several financial measures are calculated

and compared. Capital considerations are evaluated by studying the amount

of capital required, the duration of its commitment, and the availability and

cost of financing. Because tax effects play a significant role in evaluating

Investments, property and Income taxes, depreciation schedules, and investment tax credits are carefully investigated.

Note that the Interviews on which this study is based were conducted in

1973. It is quite possible that more attention is given energy-conservation

measures in 1975.

2The Montgomery County Sentinel, Vol. 118, No. 49, Mongomery County, Maryland, in its Upper County Edition of Thursday, August 2, 1973, (P. 1 c. 1) quotes

Bill Hurley, Vice-President of Kettler Brothers, Inc., the developers of the new

town of Montgomery Village as saying "Montgomery Village will be 10,000 people

short of its original 30,000 population projection. .. Sewage is our biggest headache."

Perfect competition implies that the firm cannot by its Independent actions

affect the market price of its product. Such a firm can sell all of its product that it wishes at the established market price.

13
The location and nature of the development will be evaluated against the

size and heat balance specifications of a MIUS. The availability and cost of

personnel to operate an on-site utility plant is important. Reliability, too,

may be very significant for competitive firms. The costs of utility system

failures are particularly high for owner-occupied, non-speculative developers.

The development, though non-speculative, may not have a planned liftime long

enough to warrant a MIUS in which case the purchase of utility services from

conventional systems would be favored. Environmental quality effects are

important, particularly if a MIUS can incorporate the treatment of recycling

of some otherwise polluting waste from the development's operation (for example, excess heat or contaminated liquids or solids). Private, non-speculative developers tend to use better quality materials in construction, and since they own and occupy the development they might be expected to be more responsible

in operating and maintaining an on-site utility facility.

In summary, private, non-speculative developers will ultimately base

their comparison of a MIUS with a conventional utility system on long-term

profits to the firm. Given the increasing rate trend in the utility industry

and the suitability of many non-speculative developments for a MIUS, it seems likely that developers might select a MIUS to fulfill their utility needs.

Governmental developers (Dg) , such as local, state, and Federal agencies,

do not seek to maximize profits from a project. Often it may seem that governmental organizations have as a major objective to take the line of least re- sistance and minimize the criticism leveled at their actions. However, this is

not the entire picture. Government, the largest customer for the construction

industry, is facing up to the criticism and demanding increasingly strict performance criteria and cost controls from projects. Life-cycle costing particularly is being used on public projects, and the terms and duration of financing are carefully weighed. Tax considerations are usually not included

in the decision-making of governmental developers since they are not required

to pay income or property taxes.

The location of the development and nature of the development's needs,

especially the economic feasibility of heat balance profiles and size requirements, are crucial in a MIUS evaluation. The availability and cost of trained

personnel are also important to governmental developers. The proposed lifetime

of the development project must be sufficiently long to justify an independent

on-site utility plant. Reliability is important both as internal services are affected and as the environment could be affected from plant failures.

Governmental developers should base their decision-making on estimates of

overall net social benefits from their utility choice rather than of net private benefits, as would private developers. This viewpoint may be favorable

to MIUS in three ways. First, this implies a longer time horizon in their

commitment to a project. Second, local, regional, and national objectives

such as energy-conservation and pollution control are given greater emphasis

with governmental developers than with private developers. Finally, the

governmental developer (Federal, state, or local) might facilitate the removal

of institutional obstacles more successfully than a private developer.

This does not apply to the Federal government to the extent that, in

accordance with 0MB prescriptions, imputed property taxes are included in con- ducting a project evaluation.

14
In summary, governmental developers would probably have the greatest

potential number of development sites suitable for a MIUS. Given their longterm social objectives, these developers may be the first to study and implement MIUS on a large scale.

2.5 Implementation of a MIUS

It is useful to speculate on the most likely combinations of participants

and roles to implement a modular integrated utility system. In Section 2.2

five participants were identified in the MIUS decision interactions: the private utility company, the public utility company, the private speculative

developer, private non-speculative developer and governmental developer. In

addition three roles were identified: institutor, owner and operator, and

ultimate consumer. The mechanisms by which the participants can assume these

roles are shown in Table 2.4.

The participants and roles may also be described by the potential com- binations through which a MIUS might be implemented. Table 2.5 provides the

22 most probable combinations out of the 125 possible combinations. The methods

of implementation are ranked according to three broad degrees of likelihood:

most likely, likely, least likely. Likelihood refers to the probability that

MIUS plants will be built in the United States using one of these specific

methods of implementation. Both economic analysis and intuition with respect

to non-economic issues were used to give a rough intra-group ranking by listing

in order of likelihood within the three groups. The relative position of

adjacent methods in Table 2.5 cannot be rigorously justified; however, the

relative position of non-adjacent methods is thought to be reasonably accurate. The examples given are intended to add clarity, not to be exhaustive.

Note that the same development types could acquire a MIUS through several

different combinations as indicated by the examples. The remainder of this

Section explains the rationale for the rankings in Table 2.5.

It is most likely that MIUS will be implemented by a method that includes

governmental participation (indicated by boxes in the table). The majority of

the methods ranked as most likely in Table 2.5 include either municipal utilities (Ujjj) or governmental developers (Dg) • Governments (local, state, and

Federal) account for the largest portion of all construction projects in this

country. Local (city and county) agencies undertake projects suitable for a MIUS such as community colleges, hospitals, and performing arts-recreation

centers. In additon, an entire municipality may be considered for an integrated utility system. State agencies develop state universities, penal institutions, hospital complexes, and areas to attract research parks. On the

Federal level, public housing projects, military installations, agency offices,

and research complexes all provide possible sites for a MIUS. Governments have

some advantage in financing when compared with private developers due to taxexempt state and municipal bonds and income tax revenues. When all costs, private and public (social), are aggregated, the MIUS may be less costly than a set of conventional systems. Furthermore, as mentioned before, institutional

roadblocks to integrated utilities confront private developers, particularly

at the municipal level. Governmental agencies will not have such severe con- straints .

15
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16
TABLE 2.5

LIKELIHOOD RANKING OF METHODS OF IMPLEMENTATION OF

A MIUS WITH DEVELOPMENT EXAMPLES

Institutor Owner and

Operator

Most Likely

Ultimate

Consumer

Examples Line

Number''

b

D D

g g

pns

m

U

U

m

U.m

U

pns

U

m

m

U

D

pns

m

military, government

agency, prison, hospital,

public housing

housing, hospital,

industrial complex,

private university

government complex, public

housing

government complex, public

housing

municipality

research park, state

university, prison

research park, state

university, prison

^Line numbers are for reference in text only.

^The boxes indicate governmental involvement in that method.

17
Likely

Instltutor Owner and Ultimate Examples Line

Operator Consumer Number^

U.m pns new town, housing, hospital,

industrial complex

D u_m

pns

U

m

new town, housing, hospital,

industrial complex

isolated community, REA 10

D

pns

U.m

U.mnew town 11

pns m

D

pns hospital, new town 12

D

pns 'pns hospital, new town 13

U,mD

pns pns industrial complex,

housing, new town,

tourist complex

14

U pns Dpns industrial complex,

housing, new town, tourist

complex

15

^Line numbers are for reference in text only.

b„'xhe boxes

| [ indicate governmental involvement in that method,

18
Least Likely

Instltutor Owner and

Operator

Ultimate

Consumer

Examples Line

Number'

U_m

U

m

U

m

U.

ps

Ps

Dps

^ps

apartment complex,

shopping center

apartment complex,

shopping center

shopping center

16

17

18

ps ps shopping center 19

ps

pns

ps ^ps apartment complex, 20

shopping center

public housing: 21

"Operation Turnkey"

interface with conventional 22

grid

aLine numbers are for reference in text only.

^The boxes

| |

indicate governmental involvement in that method.

19
One method of implementation with great potential for MIUS is the municipality, indicated in Table 2.5 as line 5: ~ ' ^m^' method the

public utility company would institute, own and operate, and consume the MIUS

specifically for and within the municipality. Any municipality that is presently generating power could find it economically advantageous to consider a MIUS. There are about 700 such systems as noted in Table 2.1. There are many

reasons why this is an excellent market for MIUS. Municipalities have historically been engaged in multi-utility operations, and the size and heat-balance

requirements of a municipality are constant and well-defined by the definite

physical boundaries and zoning controls that characterize most communities.

This characteristic is important with a pre-set, fixed capacity MIUS. There

are an estimated 1400 municipal electrical distribution systems presently functioning in the country which purchase bulk power for resale only (see Table 2.1).

Therefore, the number of communities fitting the specifications of an efficient

MIUS plant are plentiful, assuming the water and sewer and solid waste distribution systems are already functioning and that municipalities hold the power

to allow additional work to be done as needed. Municipalities desire to retain

control of their generating capacity, solid waste, and water and sewer authority

rather than give it up to privat utilities. In addition, communities could

develop a local identity and support for pollution control and energy saving

based on self-interest. Financing, as mentioned before, is relatively cheap

and accessible through tax-exempt municipal bonds. Since municipalities have

the final utility approving authority within their region, a community with a large municipal MIUS may look favorably upon private speculative and nonspeculative developers desiring the rights to put smaller MIUS's on their development sites within the community. Municipalities have the utility needs

(residential, commercial, and industrial) required to achieve an economic heat

recovery utilization with a MIUS. Finally, municipalities have a long time

horizon which encourages proper consideration of life-cycle costs and concern

for responsible operation and maintenance of a MIUS.

Additional considerations for this method [U^^^ - Ujjj - \J^] should be mentioned. First, in the context of a new town, a municipality may be created,

thereby changing the legal status of the developer from private to public. This

would change the method from line 14 or 15 in the table [U - Dp^g ~

^pns-'

[Up - Dp^g - Dpj^g] for example, to line 5 [U^^^ " Ujj^ - U^j^] , thus acquiring the

advantages discussed above and making MIUS implementation more likely. Second,

a separate, quasi-public entity could be created within a municipality to

carry out the institutor phase of the development. This entity could use the

municipal powers of debt financing and enjoy a waiver of institutional regulations, yet be non-political in nature, thus hopefully incorporating some of

the efficiencies of private management. By this method, [Uj^/Opj^g - U - U^] > the ownership and operation of the MIUS would revert to public control after

the bonds are repaid.

Some drawbacks exist to the method [U^ - U - U^] • First, there is the

problem of modifying or replacing the existing utility system infrastructure.

Since the costs and inconvenience of installing a MIUS distribution system in an established city may be prohibitive, it is likely that municipalities with

urban renewal master plans that include massive reconstructions will be more

interested in a MIUS than static communities. Cities that are evolving master

renovation plans should include a MIUS in their considerations. Second, a risk

of municipal MIUS development is the potentially disastrous costs of a system

failure where the community relies solely on a single system for all its uti- lity services.

20
Another method of Implementation of a MIUS included in the most likely

group in Table 2.5 is the private non-speculative developer as institutor, owner and operator, and ultimate consumer [Dp^s - Dp^s - Dp^g]. Included in

this method are many types of private developments including industrial facilities, private housing projects, private universities, private hospitals, and

shopping centers. The economic basis for private non-speculative developers'

interest in a MIUS is based on the rising average costs of utility services.

To avoid the aggregated inflationary cost increases of the several conventional

utilities included in a MIUS, developers may choose the high first cost and the

relatively low life-cycle costs of an integrated utility system. Thus rapidly

rising costs for conventional utilities, other things equal, will encourage

private non-speculative developers to consider MIUS.

Finally, spurred by the pressures or incentives of a governmental development, utility companies could become involved in a MIUS facility. Included in

these methods are public housing projects, research complexes, and state institutions such as universities or prisons. These methods are shown as lines

6 and 7 on the table: [Uj^ - Um " ^g] t^p - Up - Dg].

The second group in Table 2.5, those methods that are ranked as likely means of implementation, are primarily combinations of private utilities (Up),

public utilities (U^) > and private non-speculative developers (Dp^g). Development types included are industrial complexes, private housing projects, new

towns, private hospital complexes, tourist centers, and shopping centers. Typically, these developments are cooperative efforts between the utility company

and the developer with the role of owner and operator being performed by the

utility company. Utility companies do not, for the most part, initiate these

negotiations for integrated utility development. As pressures from developers

become more demanding, each utility will have to establish a corporate policy

stating whether an integrated utility alternative is available, and if it is,

specifying the requirements that a development project must meet to be suitable

for a MIUS. Occasionally, private non-speculative developers may become so frustrated with utility company deliberations that they may offer to institute

a MIUS and then sell it to the utility company to own and operate. These

methods, shown in Table 2.5 as lines 12 and 13, offer the advantage of control

to the utility company without institutor problems and offer the advantage of

quaranteed, relatively cheap utility services to the developer without requiring

him to become a full-time utility company.

A similar circumstance occurs when a private non-speculative developer

builds a MIUS for a new town and then creates a municipal entity out of the

new town and a public utility plant out of the MIUS. This is shown on line

11 as [Dpn3 -V^-u^].

It is not as likely that the reverse of the combinations discussed in the

two preceeding paragraphs will occur. That is, a utility company would probably not institute a MIUS and then sell it to a developer to own and operate,

consequently relinquishing control. (These methods are shown as lines 14 and

15 in the table.) Instead, it is likely that utility companies will most often

institute, own, and operate the MIUS specifically for the development project.

This combination could be expected for housing projects, new towns, industrial

complexes, hospital complexes, and many other private non-speculative developments. These methods of implementation are shown as lines 8 and 9 in the

table: [U^ - U^ - Dp^sJ and [Up - Up - Dp^g].

21
Finally, under the Rural Electrification Act (REA) , the Federal government

has a mandate to provide electric service to isolated communities. A similar

procedure may implement MIUS facilities in inaccessible areas as shown by line

10 in the table: [D„ - U - U ].

g m m

The third group in Table 2.5 contains the methods of implementation of

MIUS that are least likely. These are primarily combinations of private utilities (Up), public utilities (U^^) , and private speculative developers (D-g).

Development types included are apartment and housing complexes and shopping

centers. Again, it is most likely that the method of implementation of utility

services for a speculative developer will incude the utility company in the

role of owner and operator, lines 16 and 17, rather than the speculative

developer as owner and operator, lines 18 and 19. As mentioned before, the

speculative developer is not interested in expending any of his limited energies

or resources by getting into the utility business.

If a speculative developer can only achieve his development objectives

through providing his own utility services, he may be forced to institute, ovm,

and operate a MIUS for his project. For example, the developers of Montgomery

Village, the new town in Maryland that was earlier described as faced with a sewer moratorium, planned to build their own sewage treatment plant. In

Table 2.5 this is the method on line 20: [D^^ - Dpg - Dpg].

If a governmental development needs utility services, yet the governmental

developer cannot or will not institute a MIUS for some reason, then an unusual

combination may arise. As indicated on line 21 in the table, a private nonspeculative developer may institute a MIUS and then sell it to a governmental

development to own and operate for its project. An example of this method is

"Operation Turnkey," used by HUD, where private developers built public housing

for the government to own and operate.

Finally, it is quite unlikely that a private utility company would build,

own, and operate a MIUS (line 22 in the table) as an incremental power source

to supply power only to the conventional power grid. If the utility company

is seeking a source to provide an incremental supply for their utility service,

they nearly always attempt to buy as large an additional facility as possible.

In the case of electric utilities in particular, temporary fluctuations in

demand are met through the "power pool" arrangements that exist in regional

networks. MIUS may duplicate service already available through the pool, and

a MIUS also conflicts with the desired size of incremental facilities. For

these reasons it is unlikely that utilities would use a MIUS to interface with

their conventional network system.

In the Montgomery County Sentinel article cited earlier, Mr. Hurley is

quoted as saying Kettler Brothers will build a sewage treatment plant capable

of treating one million gallons per day to serve 8,000 people at a first cost

22
3. CONCLUSIONS AND SUGGESTIONS FOR FURTHER RESEARCH

3. 1 Conclusions

This report covers an initial investigation conducted by informal telephone inquiries selected by successive recommendations of the parties interviewed. The conclusions of the interviewer were that MIUS is most likely to

be implemented by a governmental body, such as a municipal utility or governmental developer. It seemed to the interviewer less likely that MIUS would

achieve market acceptance and implementation in the private sector given the

existing institutional structure and no special incentives supplied by the

government.

3 . 2 Suggestions for Further Research

To extend the economic evaluation of MIUS as compared to conventional

utility systems, and to extend the conclusions of this report, two suggestions seem appropriate for further research. First, applications of economic

analysis to determine project feasibility would be useful. Potential MIUS

sites could be selected on the basis of their likelihood of implementation

and evaluated for their economic feasibility with real data. Several recom- mendations were made by interviewees to explore governmental developments

specifically, including military complexes, research facilities, state institutions, hospitals, and public housing projects. These suggestions are consistent with the conclusions of this report. Private non-speculative developments were also proposed for case studies. Once was an old plantation

(circa 1850) , a development that may be built as a tourist attraction outside

of Greenwood, Mississippi. The other is a facility called the Medical Area

Service Corporation (MASCO) which serves the Boston Medical Complex. This

operation provides utilities to the private hospital center, and it seems well

suited for a MIUS. Another recommended development that appears suitable for

a MIUS plant is a municipality. An entire municipality, preferably a new town

or a city undergoing substantial urban renewal, would offer a broad diversity

of utility needs and demand profiles. Many new towns are begun each year, as listed in the Blue Book of American Homebuilders . Two existing communities were suggested as potential case studies. They are Fort Wayne, Indiana, a city

of about 200,000 people that is presently undergoing a large renewal of its

central business district, and Burlington, Vermont, a city of about 100,000

that has expressed interest in a MIUS facility. (State or regional planning

offices can provide names of communities undertaking urban renewal projects,

so possible municipalities for a MIUS can be easily identified.) Finally, a large university or a university and an adjacent college town might be excellent

sites to test a MIUS. The installation would be relatively free of political

controversy, and careful, professional study of the operation could be made

by the university faculty. Both Ohio State University and Pennsylvania State

University with the community of University Park have been suggested. (A letter

inquiry by officials at HEW to universities and hospitals concerning the use of

integrated utility systems as a potential cost reducing mechanism did elicit

responses indicating favorable interest. This was done subsequent to the com- pletion of the investigation reported above, and is not included in its discussion. )

Aside from the research recommended below, a more controlled and carefully

documented version of the method used in this report could be implemented. Such

23
a report would include a list of the questions which were asked, would indicate

whether all interviewees were asked the same questions, would indicate how various terms were defined for the interviewees and would explain the extent to

which the interviewees had the opportunity to peruse the results and the interpretations of the comments they made. Statistical analysis of the responses to

such a survey might elicit significant differences among the classes of interviewees.

Thus to summarize the first recommendation for further research, potential

project sites should be identified, and researchers should gather and analyze

economic data to determine if a MIUS is economically feasible at those sites.

A second recommendation for further research is to explain the economic

and non-economic factors that interact in the decision process by utility com- panies and the developers in evaluating a MIUS against a set of conventional

utility systems. From such a study a detailed flow chart could be constructed

describing the order and interactions of all the decision factors — technological, economic, political, legal, and environmental — that enter into the selection of a utility system. Appendix C, a brief flow chart containing some of the

non-economic criteria, has been included to provide a starting point for this

proposed study.

24
Appendix A

Changes in Electric Power Prices: Impact on MIUS

To understand the possible responses of utility companies to MIUS as an alternative for providing utility services, it might be helpful to explain some

of the economic principles that underlie the provision of utility services in

the United States. The electric power industry, primarily composed of private

companies but also including public companies, will be discussed as a general

representative of all forms of utility operations in order to simplify the

discussion.

Electric utilities are "natural monopolies" (i.e., they have no direct

competitors in the region where they generate) and are therefore subject to

economic regulation to prevent socially Inefficient economic policies. Since

utilities have a franchise commitment to serve all customers in their area,

regulatory commissions have established "fair-return" or average-cost pricing

policies for utility companies to ensure lower prices and larger production

than would exist with an unregulated monopoly. Average-cost pricing sets the

price (or rate) charged equal to the average cost of production of power.

Average cost is defined as the total cost divided by the number of units produced. Average-cost pricing means that costs will just be covered, including

an allowance for a "fair return." Monopolists without regulation would attempt

to increase profits by restricting output and charging higher prices than under

competitive conditions.

Historically, the electric power industry has experienced declines in the

real price of power. Figure A.l illustrates this decrease in price. Two

factors in combination probably account for much of the decline in price.

First, the average cost curve has shifted downward (AC-j^ to AC2) due to technological change. Second, the demand for power has increased (D^ to D2) in the

range of decreasing average cost. Figure A.l shows that a new price, and

new quantity of electric service, result from a shift in average cost from

ACi to AC2 if demand remains on the curve D-j^. Furthermore, an extra decrease

to P3 and increase to result if demand shifts from to D2.

Consumers of electric power appear to have gained some benefits from decreasing prices over the period from 1930 to 1968. But since 1968, the factors

which had provided decreasing average costs in electricity production have

appeared to be overwhelmed by a substantial increase in the cost of capital,

by labor settlements with wage increases beyond those justified by Increased

productivity, and by the need to increase plant reserves. The result has been

an increase in average costs, as shown in Figure A. 2 by a shift from AC^^ to AC2

Given the large increase in demand during this same period (D^ to D2), both the

new price, P2, and quantity, Q , are higher.

Total cost is defined as the aggregate dollar expense needed to produce

each level of output quantity. Total costs include fixed costs and variable

costs.

2 Edwin Vennard, "Changed Economic Climate and the Impact on Rates and

Earnings," paper presented before the American Power Conference, Chicago,

Illinois, May 9, 1973, pp. 1-2.

25
Price

and

Cost

Quantity

Electric

Service

Figure A.l — Regulated Monopoly:

Average-Cost Pricing

26
Price

and

Cost

0 Q Quantity

^ ^ Electric

Service

Figure A. 2 — Regulated Monopoly After 1968
This trend of rising electric power prices after 1968 might provide some encouragement for large-demand customers to consider a self-sufficient MIUS

as an alternative to conventional sources. Moreover, MIUS is not solely a power generating facility. If the electric utility business is in fact re- presentative of all forms of utility services and average costs have increased

for all of the five possible utility services included in a MIUS, then the

MIUS concept may become cheaper than the separate conventional utility services.

28
Appendix B

List of Interviewees

Private Utilities

1. Arkansas Power and Light

9th and Lewis

Little Rock, Arkansas 72203

(501) 372-4211

Mr. Les Blades

2. Pennsylvania Power and Light

Allentown, Pennsylvania

(213) 821-5747

Mr . Bladwin

3. Potomac Electric Power Company

1900 Pennsylvania Avenue, N.W.

Washington, D.C.

(202) 872-2000

Mr. Benzinger (Mr. Derrick)

V. P. Generation

4. Salt River Project

Phoenix, Arizona

(602) 273-5900

Jim Guinane

Public Utilities

1. Burlington Utilities

Burlington Utilities

(302) 658-0300

Mr . Young

Chief Engineer

2. City Utilities

Fort Wayne, Indiana

(219) 423-7129

Carl Wall (Mr. Mendal)

General Manager

3. Edmonton Power

Edmonton, Canada

(403) 425-3117

Mr. W. R. Kirkland

General Manager

*These people were contacted twice.

5. *Southern California Edison

(213) 572-2001

Ed Myers

V. P. Corporate Communications

6. Southern Services

(404) 252-6112

Clarence Grune

7. *Union Electric Company

St. Louis, Missouri

(314) 621-2046

George Wagner

8. *Union Electric Company

St. Louis, Missouri

(314) 621-0711

Mr. Marting

4. Greenwood Utilities

Greenwood, Mississippi

(615) 453-7234

C. M. Mathews

Manager

5. Nashville Thermal Transfer Corp.

Nashville, Tennessee

(615) 255-1460

Carl Avers

29
Appendix B - continued

Developers

1. Disney World

Orlando, Florida

(305) 824-2222 Ext. 4395 or 4396

Mr. James Holt

2. General Development Corporation

Port Charlotte, Port Malabar,

Port St. Lucie, Florida

(305) 350-1111

Mr. Smidt

President of General Development

Utilities

4. Kettler Brothers

19110 Montgomery Village Avenue

Galthersburg, Maryland 20760

(301) 948-4000

Mr . Hurley

5. *Medlcal Area Service Corp. (MASCO)

Boston, Massachusetts

(617) 738-5000

Mr. Dave Elovltz

Executive V. P.

3. Gllette Company

Boston, Massachusetts 02199

(617) 261-8500

Mr. George A. Wallace

Facilities Engineer

Trade Associations

1. Electric Energy Association, Inc.

(Private)

1015 18th Street, N.W.

Washington, D.C.

(202) 223-2720 . . Scrlbner Allen

American Public Power Association

(Public)

2600 Virginia Avenue, N.W.

Washington, D.C. 20037

(202) 333-9200

Mr. Herbert Blinder

2. The Electrification Council

(Private)

Washington, D.C.

(212) 986-4100 Ext. 203

Mr. Robert A. Morris

National Assocatlon of Home Builders

(Developers)

1625 L Street, N.W.

Washington, D.C.

(202) 737-7435

Mr. Smithman

3. Canadian Elec. Association

(Private)

Montreal, Canada

(514) 935-7471

Mr. Campbell

*These people were contacted twice.

30
Appendix B - continued

Regulatory

1. National Association of Regulatory

Utility Commissioners

628-7326

Mr. Everette Kreeger

Secretary-Treasurer

2. District Public Service Commission

Washington, D.C.

(202) 629-5936

Mr. Norman Belt

Engineers

1. Gilbert Associates

Reading, Pennsylvania

(215) 775-2600 Ext. 710

Mr. Herbert Hollander

2. Charles T. Main, Inc. Consulting

Engineers

Boston, Massachusetts 02199

(617) 262-3720

Edwin Vennard

Other

1. Lowell Gas Company

Lowell, Massachusetts

(617) A58-1231

Bruce Tibblts

3. Federal Power Commission

Washington, D.C.

(202) 386-6483

Mr. Phillips

4. Federal Trade Commission

Washington, D.C.

(202) 962-0193

Mr . Garvey

3. Westinghouse

East Pittsburgh, Pennsylvania

(412) 256-2038

Mr. Robert L. Dunning

31
Appendix C

Flow Chart of MIUS Decision Process

(N) No

N

N

N

N

Enter:

Developer Approaches

Utility

Is MIUS philosophically,

psychologically feasible?

(Y) Yes

Does corporate policy find a MIUS compatible with present operations?

Enter Evaluation Phase

N Heat Balance?

Can costs be overcome to

redo distribution systems?

If it is an established municipality,

is there taxpayer support?

Is a MIUS compatible

with a "grand renewal plan"?

N

Is the MIUS

economically feasible?

Do pollution requirements

favor a MIUS?

Will external organized labor

renegotiate for a MIUS operation?

32
Appendix C - continued

N

Will Internal organized labor

renegotiate for a MIUS operation?

Y

Can municipalities be

persuaded to permit a MIUS,

thereby relinquishing some water

and sewer authority?

N

Can needed franchises be

secured to do multi-utility operations?

Can responsibility be delineated

between utility, developer, and municipality?

N

N

N

Can contingency utility

sources be secured?

Can additional organized

labor contracts be negotiated

with new utility unknowns?

Are energy sources available

for long-term MIUS operations,

Can a builder with the

technical expertise be found

within the budget constraints?

Can construction and

zoning problems be solved?

33
Terminate

MIUS Plans

N

Appendix C - continued

Can skilled labor be

secured to operate the MIUS?

N

Can financing be

secured?

Set Up Internal Cost Accounting System

Build the MIUS: Exit,

34
Selected Bibliography

Averch, H. and Johnson, L. L. "Behavior of the Firm Under Regulatory Constraint"

American Economic Review , Vol. 52 No. 5 (December 1962) p.p. 1052-69.

Coleman, James S., "Relational Analysis: The Study of Social Organization with

Survey Methods." Human Organizations , XVII (4, 1958), 28-36.

McCall, George J. and Simons, J. L., Editors. Issues in Participant Observa- tions; A Text and Reader . Reading, Mass.: Addison-Wesley , 1969.

McConnell, Campbell R. , Economics . Third Edition. New York: McGraw Hill,

1966.

Montgomery County Sentinel: Upper County Edition . "Kettlers Eye Total of

30,000," August 2, 1973.

U.S. Federal Power Commission. Federal Power Survey: 1970 . Washington, D.C.:

U.S. Government Printing Office, 1970.

Vennard, Edwin. , "The Changed Economic Climate and the Impact on Rates and

Earnings." Presented to the American Power Conference. Chicago: May 9,

1973.

USCOMM-NBS-DC

35
NBS-114A (Hf-v o

U.S. DEPT. OF COMM. BIBLIOGRAPHIC DATA

SHEET

1. ITIM.K A I ION OK KI.I'OK C NO. NBSIR 75-721

2. t IDV 'l Aci l i, 111 Nm.3. Kci I I'll 111 Al 1 I inn \, .

4. T111.1-: ANH .^I'lVI I ri.!;

Economic Objectives of Utility Companies and Developers

in Evaluating a MIUS

5. I'ul.li. alinii Datr November, 1975

6. 1 'it f or 111 111 g ( )rj;aii 1 /al full ' udi

7. Al- ril()K(Sl 8. I'rrl(iriniii>; Ori.'aii. Kc |iiiii Nu. NBSIR 75-721

9. P1:KI-0KM1Nc. ORCANI/A TION NAM1-: AND ADHKI-SS

NATIONAL BUREAU OF STANDARDS

DEPARTMENT OF COMMERCE

WASHINGTON, D.C. 20234

10. I'roicil/ Ta.sk/Work tiiiii No.

1 1. ( onlrai i (irain Nd.

12. Spoii.soring Orji.iii l/.ai iim N.imc- .iiid ( omplctc- AJdrcs-s (Street, City. Stale, ZIP)

Department of Housing and Urban Development

451 Seventh Street, S.W.

Washington, D.C. 20410

13. Type (if Kipori iV I'. riod

( ovcrcd Final Report

14. Sponsoring Agnu y ( ode

15. SUIM^LI-MICNTAKN- NOl1-:,S

16. ABSTRACT (A 200-word or less factual summary of most significant information. If document includes a significant

bibliography or literature survey, mention it here.)

This report provides information to the Department of Housing and Urban DevelopmentModular Integrated Utility System (HUD-MIUS) program about the economic decisionmaking process for implementation of a MIUS by utility companies, developers, and a combination of these two groups.

Information was obtained through informal telephone interviews from these participant

groups about their economic analysis of utility investment alternatives. The content of these conversations was synthesized into economic criteria which are perceived

by each participant to be most important in evaluating alternative utility investments

From the analysis of these economic criteria, the possible combinations of participants and roles in the implementation of a MIUS are specified,, These combinations

are ranked, according to the degree of likelihood that each method will actually be

employed

The conclusion of this report is that a MIUS is most likely to be implemented by a governmental body, such as a municipal utility or governmental developer.

17. KI-.V WORDS (six to twelve entries; alphabetical order; capitalize only the first letter of the first key word unless a proper ndme; separated by semicolons)

Economic incentives; housing development; integrated utilities; Tit-illties

18. AN AILAHILITY [x,. Unlimited 19. SECUR1T^ CI.A.SS (THIS REPORT)

21. NO. OF PACKS

For Official Distribution. Do Not Release to NT IS UNCL ASSIFIHD

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