As a medium sized user of Adwords to bring local traffic to clients and my own sites I have some bad news to report.
The new Google Adwords algo is messing up localised targeting if you rely on locality names (as the UK has to with our messed up IP ranges).
Here is a typical scenario:
Local ads: Broad match for many 'keyword locality' combinations, not getting anywhere near the impressions they used to (but still very good for CTR)
National adverts: 'keyword' and lots of negative 'locality' keywords (same as ones advertised for locally) so that they should not conflict with each other. Not so, national ads are showing even for terms that have been excluded.
This is really poor and makes delivering localised content more difficult - our ads have data appended to the URL to give us the locality. So with a local ad the visitor sees the local page, with a national ad they see the homepage.
Just to be certain, is this how your campaigns are laid out?
Keywords (not geotargeted terms) in IP targeted campaigns.
In the UK Google is poor at getting down to a local level using IP's. The only targetting using IP's is to make sure traffic is from the UK, so one of the 2 sets of adverts is for several 'keyword' with lots of negatives to get rid of conflicting local ads.
Geographic Keywords in national targeted campaigns.