Summer 2003

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Guest Commentary 

Reed Royalty is president of the Orange County Taxpayers Association (OCTAX) – www.octax.org. A version of this commentary was published as a letter to the editor of the Orange County Register on July 14, 2003.

In July, the city of Irvine went into the electricity business. Well, sort of. The city put a trailer on a patch of vacant land and hooked it to a portable generator from Home Depot. (No reports on whether there’s a sign on the generator that says “Irvine Municipal Utility District.”) The city thus formed a municipal electricity utility to serve the city’s Northern Sphere in the future.

In a special meeting, with scant public notice, the City Council rushed the alleged utility into existence. The council’s goal was to beat a deadline by which the California Public Utilities Commission (CPUC) was to decide whether to impose “exit fees” on municipal utilities formed to evade the high costs of electricity contracts the state unwisely signed during the energy crisis. Christina Shea, the only dissenting councilmember, called the tactic “a scam.” Gosh, the Orange County Taxpayers Association (OCTax) would never use such a pejorative word, but as a courtesy, we’ll defer to Ms. Shea’s judgment. “We are pretending we have a utility,” she said, “in order to create one.”

Situational ethics of the scam aside, OCTax thinks neither Irvine nor any municipality should be in the businesses of providing electricity, gas, or telecommunications.  Here’s why:

Municipal utilities are unfair to taxpayers and private investors. Governments unfairly enjoy many advantages over private, tax-paying vendors:  regulatory power (permits, licenses, fees) over competitors; power to condemn privately owned facilities; tax-exempt debt financing; ability to mask costs of service delivery in municipal bureaucracy, and free use of taxpayers’ assets (rights-of-way, tax revenue, municipal employees). Give OCTax a McDonald’s franchise with those unfair advantages, and we’ll sell burgers 23 percent cheaper than our competitors (or charge the same price and keep the excess profit), as Irvine’s consultant suggests the city may be able to do in the electricity market. Those artificially low rates (or the excess “profit” that the city might skim off for the city treasury) would be illusory. They would be subsidized by taxpayers, who would pay higher taxes for other services to make up for taxes not paid by the tax-exempt municipal utility.

Municipal utilities rarely work. The comfortable position of municipal utilities today, compared to private utilities, is not evidence of better management. Five years ago, the Los Angeles Department of Water and Power (DWP) was $7.5 billion in debt. Worse yet, DWP used accounting tricks to hide $4.8 billion of the debt from the public. Ironically, DWP was rescued by the state’s energy debacle: it was exempt from the state's amazing mismanagement of the so-called deregulation, so it was able to charge the state more for electricity than the private-sector providers, whom Governor Davis called “gougers.” Closer to home, the City of Anaheim’s municipal telecommunications utility failed after three years. Anaheim now is trying to figure out what to do with 50 miles of fiber that was buried in the city’s streets for the ill-conceived venture.

Municipal utilities saddle taxpayers with unjustified risk. Investors in a private utility knowingly and willingly accept risk, in return for expected dividends and capital gains. If the company fails, the investors eat the loss. If a municipal utility fails, bureaucrats pass the losses to taxpayers, who neither know of nor voluntarily accept such risk. Even if a municipal utility were financed by non-recourse revenue bonds, a failure would lower the city’s bond ratings, resulting in higher borrowing costs for taxpayers. Governments should not gamble taxpayers’ money by providing services that can be provided cost-effectively by the private sector.

For the time being, it appears that Irvine’s utility scam was for naught. Perhaps reacting to the scam, the CPUC voted on July 10 to exempt only utilities that served retail customers before February 2001 from the obligation to pay “exit fees.” This decision protects other electricity customers from having to pay Irvine’s share of the higher costs caused by the state. In addition, the CPUC decreased Southern California Edison’s rates, eliminating some or all of the supposed retail price advantage of a municipal utility compared to an investor-owned utility. OCTax hopes these developments will persuade Irvine to abandon its plans to enter the utility business.

In opposition to the public power measure on San Francisco’s November 2002 ballot, U.S. Senator Dianne Feinstein, a former mayor there, said, "San Francisco has enough trouble keeping the streets clean and safe without taking on this completely new and very complicated responsibility." San Francisco voters wisely rejected the measure. OCTax asks that the City of Irvine do the same.