The following is a contributed article by Kenneth W. Costello, a regulatory economist and independent consultant who has worked for the National Regulatory Research Institute, the Illinois Commerce Commission, Argonne National Laboratory and Commonwealth Edison. For another perspective on public power, see today's opinion piece by Joy Ditto.
The battle between private and public power has persisted for more than a 100 years. The combatants on one side want more government involvement for different reasons — local control (sometimes labeled “energy democracy”), lower rates, advancement of a sustainable energy agenda and social justice, and so forth. More broadly, some in this group mistrust corporate power and capitalism in general — for example, profits just fill the pockets of Wall Street and serve no social purpose.
The combatants on the other side oppose government overreach in operating an electric power system — public ownership means cronyism, misconduct and waste. Local governments can’t even adequately provide basic services; how can we trust them to run a complex power system that requires sophisticated technical skills when politics will dominate their decisions? Of course, needless to say, privately-owned utilities will put up a vigorous fight to prevent a loss of customers and revenues.
In my opinion, these polarized views distract from the real issue. The nature of political debates these days is that each side distorts reality to accommodate their agenda. Taking a position on public power should come only after understanding how different each type of utility behaves, which depends on the incentives and constraints they face. For example, there is evidence that public entities tend to set prices that maximize their political support, rather than consumer welfare.
My main conclusion: Based on experiences across the country, even studies showing public power in a favorable light and costing hundreds of thousands or even millions of dollars will not change things because of the real-world obstacles that will stop public power in its tracks. Switching to public power, or even studying it, would miserably fail a cost-benefit test by being the wrong solution to whatever problem advocates of public power claim to exist.
Some evidence and observations
The evidence shows that public power can work and, overall, has performed satisfactorily in the U.S. The same can be said for private power. We can then conclude that neither private nor public power has exhibited fundamental failures to outright reject one ownership structure over the other. [At least in the U.S.; it’s a different story in some other countries where the privatization of utilities has reaped large social dividends.] Of course, one can point to bad apples under each ownership structure.
Real-world experiences have shown that the costs of switching to public power are high and the benefits are specious, highly uncertain, not well-defined and hard to quantify. Not surprisingly, public power advocates tend to exaggerate the benefits and understate the costs. These advocates have become increasingly vocal in several states, including California, Colorado, Maine and New Mexico.
Contrary to the proponents of public power, evidence doesn’t show that public power is greener than private power. For example, the Tennessee Valley Authority is one of the largest polluters in the U.S. Nebraska, which has only publicly-owned electric utilities, relies heavily on cheap coal power.
There is also no evidence that public power is more innovative and better able to acquire financing for, say, zero-carbon technologies than private power. In fact, public power may find it more difficult to gain acceptance of demanding higher rates to fund new investments in clean energy and other technologies to combat climate change.
For the country as a whole, municipal utilities, on average, have lower rates. But it is not because publicly-owned utilities are more efficient; in fact, municipal utilities typically are much smaller than privately-owned utilities, meaning they benefit less from scale economies. The lower rates for municipal utilities are largely attributable to their lower taxes, access to low-cost federal power, and the ability to issue tax-exempt bonds. In my home state, New Mexico, the average residential rate charged by municipal utilities is almost 3% higher than the average rate charged by privately-owned utilities (based on 2020 data compiled by the U.S. Energy Information Administration). We also see higher rates for public power in some other states.
One thing certain is that consumers and taxpayers bear the risk of bad management and other decisions by publicly-owned utilities that effect gross inefficiencies. For a municipality to establish its own utility, it will sell bonds to raise capital, then use the revenues from the operation of the utility as the primary source to service debt. In the event that the utility cannot meet its debt obligations with revenues collected from consumers because of incompetent management, it may as a last resort raise taxes to fill the gap.
A privately-owned utility has no such recourse. It will likely fail to gain a rate increase from the state utility commission — on grounds that it violates the longstanding regulatory principle of “just and reasonable” rates — to compensate for imprudent decisions. The equity owners of a municipal utility are the customers themselves, so the consequence of a poor decision would almost always fall on them.
The high costs of switching to public ownership
The costs and time to transform ownership from private to public can be prohibitive, with years of litigation and delay. This suggests that unless one can demonstrate that a serious problem exists or the benefits of public power are potentially high, it would be ill-advised to start the process or even study it.
The road to a new utility is steep and filled with pitfalls, a long and expensive journey that has stalled many municipalities (prime examples are Boulder, Colorado and Las Cruces, New Mexico) that have embarked upon it in recent decades. The community and the utility must set a price for the electric company’s property, a calculation that includes not just the value of poles and wires but also stranded assets, or investments made in capital assets like power plants on the assumption of needing to provide service for a certain number of customers.
The purchaser would have to assume the outstanding debt of the private utility, as well. These costs could total billions of dollars. For a market-traded company, the fair market value of equity is pretty settled at the share price. For Public Service Company of New Mexico, a medium-size utility, its current debt and fair market equity is around $5.5 billion.
Elaborating on the Las Cruces saga, in 1991, the city council passed an ordinance to create a municipal electric utility. The long, bitter struggle lasted almost ten years until the city council decided to pull the plug. One estimate is that the city spent $40 million in its unsuccessful pursuit after the private utility, El Paso Electricity Company, put up one roadblock after another, and market conditions changed to reduce the benefits from a municipal utility (e.g., deregulation of the electric sector). The city decided (wisely) it was better to spend money on basic municipal services rather than continuing to throw money on a hopeless venture.
One cannot also overlook the problem of self-regulation of publicly-owned utilities. A municipality, typically both owns and regulates the utility (exceptions are Wisconsin and, to a more limited extent, Florida). As a regulator, it has less incentive to exercise the level of vigilance of a disinterested state utility commission. Aggravated by political pressure, the municipality’s conflicting roles become further self-evident. In contrast, privately-owned utilities regulated by state commissions, with good reason, separate the role of utility management and regulatory oversight.
A last point is that switching to public power would cause a revenue loss for local governments. In many jurisdictions, privately-owned utilities are some of the largest property taxpayers.
Where Is the problem?
Notwithstanding a feasibility (or preliminary) study that shows the possibility of switching from private to public power, a more detailed and much more expensive engineering-type study would be required. But even then, if the study shows switching to public power can comply with engineering and other technical requirements, executing it after accounting for legal, political, financial and other obstacles seems highly unlikely given the experiences in jurisdictions across the country in recent years. These jurisdictions found the switching costs (e.g., purchase of the private utility’s assets at fair market value) and other obstacles prohibitive to move forward with public power.
I ask a fundamental question: what serious problem exists that would justify even spending taxpayer money on a study evaluating public power at this time? The burden should fall on the proponents of public power to at least demonstrate with reasonable evidence that a serious enough problem exists to warrant spending the resources and the time studying whether to do something that has no clear benefits and would highly unlikely happen.
I don’t believe that they can. Dealing with a climate crisis or social injustice — two contemporary rationales for public power — are issues that cities and states may deem to be serious enough to warrant additional action. But they can be dealt with more efficiently and effectively in other ways than by taking the massive step of converting private to public power.
In conclusion, I would outright reject switching from private to public power as a viable policy action to deal with whatever problem its advocates identify: it is extremely costly and arduous. It would be a waste of money to even study this topic presently. Couldn’t states and cities find better ways to spend their money? We have seen several examples where studies on public power, paid for by taxpayers, led nowhere. If public power advocates want to fund such studies, they should have the right to do so, but not with taxpayers’ money.