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Public Power Has Its Drawbacks
By Richard J. McCann

James B. McClatchy, publisher of The McClatchy Company, has been beating the drums for creating municipal power utilities as the solution to California's energy crisis. Despite his assertions, however, relying on public power is not all sweetness and light. A new municipal utility cannot take advantage of the same cost savings that, for example, the Sacramento Municipal Utility District enjoys over Pacific Gas & Electric Co. In addition, municipal utilities have their own spotty record. While public power may provide benefits, we should pursue any nationalization with our eyes wide open.

Existing municipal utilities enjoy lower electricity rates for several reasons.

They finance their construction costs with 100 percent tax-free debt. Thanks to this subsidy from the federal and state treasuries, investment costs are about 15 percent less than for private utilities after accounting for tax differences. However, a 1992 change in the federal tax code largely foreclosed this cost advantage for new municipal utilities.

Municipal utilities can buy federal "preference" power priced substantially below what is available on the open market. This power is fully subscribed until at least 2025. Also, SMUD has its own hydropower system on the American River, which it built in the 1960s. Virtually no other low-cost hydro sites are available now.

We cannot put the restructuring genie back into the bottle. A new utility would have to go onto the open market and sign power-purchase contracts with the same merchant plant owners that have raised power prices in California. A new utility would not have existing generation capacity and contracts to soften the blow. The consequences of starting from scratch in acquiring generation resources in today's market can be seen in the 44 percent increase in rates in the Lassen Municipal Utility District, double what PG&E customers pay in nearby communities.

Municipal customers consume substantially more power on average than their private-utility neighbors. For example, SMUD residential customers use an average of 720 kilowatt-hours per month, while PG&E customers use 550 kilowatt-hours.

It is simple math: Higher usage means that the substantial fixed costs associated with running the utility are spread over higher consumption. As a result, even though the average monthly bills are about the same, the average rates in terms of cost per kilowatt-hour for municipal utilities are lower. Of course, we should ask whether encouraging higher electricity use with lower rates is the right choice given the impacts on the environment.

Another hurdle to creating a municipal utility is the change in how private utility systems are valued when acquired by public utilities. When SMUD was formed in 1949 by taking over PG&E's territory in Sacramento County, the value for PG&E's system was based on the original cost or "book" value of the assets. The accepted valuation method now is the replacement cost of the system - how much it would cost to build it new - which eliminates any cost advantage to acquiring such systems.

Public power has made its share of mistakes and greedy choices.

We can thank public power for building Rancho Seco nuclear power plant and damming virtually all of the free-flowing rivers in the western United States. SMUD is strong today only because it went through the substantial financial crush in the late 1980s of closing down Seco.

Richard J. McCann, Ph.D. economist, is an energy consultant with M Cubed, a private firm in Davis. He can be reached at rmccann@cal.net. This commentary was published March 23 in The Sacramento Bee. Reprinted with permission.

And today, the Los Angeles Department of Water and Power has extracted a half-billion dollars from the rest of the state by piling on to the higher power prices. LADWP avoided making refunds for these overcharges recently only because it is outside the jurisdiction of the Federal Energy Regulatory Commission.

Also, it may not yet be obvious, but PG&E ratepayers are unlikely to absorb the entire increase in market prices since last May. The California Public Utilities Commission or the state Legislature will force PG&E shareholders to eat some, if not all, of those costs as part of the original restructuring deal. Municipal ratepayers would have only themselves to pay off those debts, as happened with Lassen's 44 percent increase.

A municipal utility might make sense even after taking into consideration all of these factors. However, there are other models that can be just as effective. Forming cooperatives that do not require government action and that better accommodate individual choice is one such option. Changing the regulatory arrangement with PG&E, as has been done more successfully in Pennsylvania and Ohio, is another option.

Jumping to a conclusion while not examining all the facts will only lead us into yet another mess.