This article is from Cal-Tax Digest, published
by the California Taxpayers' Association.
Cal-Tax Home Page | About Cal-Tax | Subscribe

Growing numbers of local governments are considering entering the utility business by forming their own municipal electric or telecommunications utilities. Known in some circles as "municipalization" (the opposite of privatization), this seems to be an offshoot of the "entrepreneurial government" movement, in which elected and appointed officials seek new, innovative ways to generate revenues without raising taxes. The problem is that these efforts place taxpayers at risk, misconstrue the role of government in the economy, and divert agencies from their primary purposes and functions.

Here are some municipalization activities Cal-Tax staff has observed in the past few years:

• Anaheim went into the telecommunications business, using city-owned fiber and contracting with Spectranet/First World to run the system. Spectranet/First World backed out when the company had financial difficulties and it became clear that they couldn't make enough money on the deal.
• Long Beach considered buying Southern California Edison's electrical system within city boundaries and operating it as a city electric utility. The city decided not to proceed with the plan.
• Lincoln, a fast-growing town near Sacramento, considered creating a new municipal electric utility to serve only new developments. A consultant, Competisys, attempted to broaden the plan to include cable and telecommunications services. The city narrowly rejected the entire plan.
• In Davis, west of Sacramento, a group of citizens has been circulating a petition to create a new municipal utility district to provide electric service. The district would condemn PG&E's electric system and put it to use as its own utility.
• Hercules (in the Bay Area) is considering a plan similar to Lincoln's - to create a new utility to serve only new developments. This utility would provide electric and telecommunications services.
• Palo Alto built a fiber-optic loop to provide telecommunications services to business customers, but it has not produced much business for the city. In 1999, residents succeeded in lobbying for a fiber-to-the-home trial, in which a small number of homes will receive ultra high-speed internet access via the city's fiber system.
• Palo Alto considered, but decided not to buy out a cable television co-op because the financial risks were too great.
• Voters in Alameda approved a charter amendment that allows the city to build its own cable television network to compete against a private cable company.
• Laguna Irrigation District, in Kings County, is considering condemning PG&E's electric system within the district and using it as its own electric utility.
• Modesto Irrigation District considered a similar proposal to condemn existing PG&E property, but decided to build its own electric system and to "cherry-pick" large customers who would be profitable to serve.

These are important developments that should concern all California taxpayers. There are several reasons why government takeovers of utility services are bad news for taxpayers.

First, the financial risk is large. Many of these proposals involve tens of millions of dollars of debt to finance hostile buyouts of private utility property. Even when the new utility is not taking over existing utility property, debt is involved to finance the building of new system infrastructure. Although the primary backing of the bonds is usually the new utility ratepayers, bondholders could demand recourse to general funds and taxpayers if the utility fails to meet financial projections. More likely though, is that ratepayers would be forced to pay higher-than-projected utility rates if the financial projections are wrong.

Second, when local governments get into the electric business, other government agencies lose. The county, school districts and other jurisdictions no longer receive property tax that would have been collected from the private-sector utility.

Third, taxpayers lose because subsidies and tax exemptions provided to government utilities cost money. Subsidies for government-owned utilities annually cost California taxpayers more than $1 billion.

And fourth, taking business away from the private sector is simply bad public policy. To be competitive, California's government agencies need to focus on core competencies and become leaner and more efficient - not to attempt new business ventures that cannibalize other agencies' tax revenues, put taxpayers at risk, and confiscate valuable private-sector property.